Shrinking Supermarkets: A Recipe for Success?

Taiwan’s chains are focusing on providing hyperlocal services in smaller spaces.

Taiwan’s supermarkets in recent years have been morphing into a hybrid type all its own in response to the growing trend for consumers to prioritize convenience and service over huge product selection.

In the past, Taiwanese consumers might patronize a department store once a month, a hypermarket once a week, a supermarket daily, and convenience stores as much as three times a day, says James Hsieh, CEO of Chuan Lian Enterprise Co. and president of its PX Mart, Taiwan’s leading supermarket chain.

But the conventional lines have been blurring as supermarkets increasingly adopt a “hyperlocal” strategy of establishing smaller stores in a larger number of convenient neighborhood locations. Leading examples of this trend are PX Mart’s iMart and the 24-hour Carrefour Markets.

In its future expansion in Taiwan, Carrefour will emphasize its 24-hour supermarkets rather than larger hypermarts. Photo: Sonia Su

A January 2018 report by market research provider Euromonitor notes that smaller neighborhood supermarkets have “carved out a significant niche catering to the needs of local residents, and posted the fastest growth in outlet numbers.” The report said that “in tandem with the convenience trend, supermarkets are predicted to become smaller to ensure they remain the favoured format amongst consumers.”

Carrefour, the only retailer in Taiwan with both hypermarkets and supermarkets (it also has an e-commerce platform) is basing its expansion plans mainly on supermarkets, in part because of the difficulty of finding suitable sites for the larger hypermarkets. The company plans to open 20 new supermarkets annually in Taiwan, adding to its current 56, says Carrefour Taiwan spokesperson Marilyn Su. At that pace the number will soon surpass the total of 64 hypermarkets currently in operation by all retailers throughout Taiwan.

Now accounting for but a small proportion of its overall business, Carrefour’s 24-hour supermarkets aim to provide customers with the same services found in its larger stores, Su says. Drawing comparisons with France, Carrefour’s home country, she notes the particular importance in Taiwan of meeting customer expectations.

“If you can satisfy Taiwanese customers, [then] you can satisfy French shoppers,” she explains. “Taiwanese people are more demanding, especially about service. Some of my French friends tell me they like to complain, but when they shop in Taiwan they don’t find anything to complain about.”

Unlike supermarkets’ long history in the United States and Japan, they have only been a major part of the Taiwanese shopping experience for the past several decades. Although supermarkets have gradually gained increased customer acceptance, many consumers still exhibit a strong preference for traditional “wet” markets in search of freshness.

Taiwan now has close to 2,000 supermarkets, according to Nielsen market research. Considering that quantity – in addition to the more than 10,000 convenience stores – is there still opportunity for more? While Taiwan’s convenience store industry is “extremely mature,” the supermarket sector “still has a good deal of room to grow,” former Chuan Lian CEO Hsu Chung-jen, who has been called the “godfather of Taiwan retail,” told Nikkei Asian Review in 2016.

At the same time, the sector has been undergoing consolidation. PX Mart added 53 locations overnight through its NT$450 million (US$13.9 million) acquisition of the Taiwan stores of Japanese supermarket chain Matsusei (Songqing) in 2015. In addition, as Douglas Klein, then general manager of Swire Coca-Cola, told Taiwan Business TOPICS in 2015, “independent supermarkets used to be a very significant part of the market, [but] that’s not the case anymore.”

Besides striving to increase profitability at existing stores, for example, PX Mart plans to acquire more struggling independent supermarkets rather than focusing on opening new stores. Since each store requires an area of at least 200 to 250 ping (7,200 to 9,000 square feet), finding that amount of space for new stores in downtown areas is difficult. A more feasible option is to take over independent supermarkets, especially family-owned enterprises where the younger generation is not interested in carrying on the business.

For the 10 consecutive years since Euromonitor began recording such data, PX Mart has held onto the No. 1 spot among Taiwan’s supermarket chains in terms of retail value. The company has long been known for strong leadership. Before taking the reins in July 2017, succeeding Hsu Chung-jen, James Hsieh had run 7-Eleven’s parent company President Chain Store Corp. and 85°C Bakery’s parent Gourmet Master Co.

Following PX Mart in total retail value on the Euromonitor list are Wellcome, Simple Mart, Market Place by Jasons, and Carrefour Market, in that order in both 2016 and 2017. Wellcome (around 240 stores) and Jasons (23) are both part of Hong Kong’s Dairy Farm group. The Hong Kong-based city’super brand (eight stores in Taiwan) is not included in the Euromonitor list because it does not make its sales data available.

Simple Mart (638 stores, mostly in southern Taiwan) is a joint venture of Taiwan’s Mercuries & Associates and Japan’s Sumitomo Group. Euromonitor reports that Simple Mart – whose stores are somewhere between a supermarket and convenience store in both size and type of location – has been one of the fastest growing supermarket chains in the region.

Despite its consistent lead, PX Mart is closely watching the evolution of the competition, having itself sought to diversify into smaller, urban spaces – both with iMart and the Matsusei acquisition. Hsieh’s goal for PX Mart is to surpass the 1,000-store level by the end of this year.

Unmanned stores

A current hot topic of discussion in the retail industry is whether the introduction of staffless shops – or what Carrefour’s Su refers to as “life-sized vending machines” – can help enhance efficiency and profitability. The Hsinchu-based Industrial Technology Research Institute (ITRI) has been developing the technology for an unmanned super-market and plans to open a trial venue on its campus by the end of this year. In the convenience store sector, 7-Eleven debuted a staffless store at its headquarters in early 2018 and currently has two in operation.

“The value of opening the unmanned store in Taiwan is to apply artificial intelligence, big data, and robot tech to increase the accuracy of consumer demand forecasting, create new business opportunities, [and] reduce the cost from hoarding goods, food waste, and labor,” Chen Yu-yi, a senior ITRI researcher specializing in digital technology application, said in an email.

Taiwan has the technical capacity to develop the needed AI sensors and display and self-service technologies, Chen said, and its supermarket operators could also benefit significantly from the cost savings. On the other hand, he cautions, the relatively low use of mobile payments in Taiwan presents a hindrance to innovation.

According to the January-to-June 2018 Nielsen Media Index, although 93.4% of survey respondents aged 12 to 65 accessed the internet during the previous four weeks, only 7.7% of them used mobile payments. In contrast, what the Financial Times describes as a “cashless revolution” is underway in China, where the business volume came to a reported US$98 billion last year.

Instead of emphasizing fintech, supermarkets in Taiwan have sought to build a “local lifestyle ecosystem, offering a broader range of services to satisfy consumers’ daily needs,” MIC’s Chang told Taiwan Business TOPICS by email. She cited such initiatives as “ready-to-eat food sections, grocery home delivery, laundry pick-up services, taxi-hailing services, ticketing services, and all sorts of collection and delivery services.” A recent PX Mart initiative to improve service was its opening of “in-store pharmacy counters,” adds Chang.

Delivery is important, especially for elderly shoppers, who may not be able to shop frequently. “Senior shoppers have very different needs,” Hsieh of PX Mart was quoted as saying in the 2017 Kantar Worldpanel Asia report. He noted that the age group accounts for a significant segment of his company’s regular customers.

At Wellcome, the Wellcome Delivers service for online customers offers home delivery within two hours of the order. And both Carrefour and Lafe Market “have separately cooperated with Honestbee, a Singaporean company that operates an online grocery and food delivery service,” according to Chang.

Internally, Carrefour trains its employees to follow what is called the “Only YES” policy, implemented three years ago by previous Carrefour Taiwan CEO Rami Baitiéh, now with the company in Argentina. Lawrence Chun-chao Wang currently heads Carrefour Taiwan as the first Taiwanese CEO in its 30 years of operation.

The policy is part of an internal 15-point “Customer 5-5-5” grid, with five points accorded for each of the three categories of safety, convenience, and welcoming services. During his store visits, Baitiéh would test associates on how well they knew these points.

“Between lazy associates and lazy customers, we prefer lazy customers,” Su says, sharing an anecdote to illustrate that the occasional “demanding” customer can be worth going out of one’s way to satisfy. The story involves a regular customer who would request that fish be filleted for him, even scrutinizing it for bones afterward. After one such inspection turned up some fish bones, the customer did not return for some time.

“But when he did come back, he made a point of talking to the team and thanking them for their effort to remove the bones,” said Su. “He explained that his father had fallen ill and he needed to cook fish for him. At that moment, our team started to understand the importance of ‘only yes.’ While some customers can be hard to deal with, most of the time their intentions are good.”

If chain supermarkets are paying more attention to customer satisfaction, one reason may be the recent slow-down in their pace of sales growth. From 12.7% in 2016 the rate of growth fell to 5.4% in 2017, according to Nielsen retail statistics. Furthermore, the average single purchase amount dropped from NT$1,203 in 2016 to NT$1,008 in 2017, the 2018 Nielsen Consumer Shopping Behavior Research Report found.

Despite that dip, the total retail sales of Taiwan’s supermarkets reached nearly US$6.5 billion in 2017, up from US$6.2 billion in 2016, and the amount is predicted to surpass US$7 billion in 2018, according to Euromonitor.

As the food supply chain becomes increasingly complex, supermarkets such as PX Mart and Carrefour Market are also seeking to pay more attention to the role of the farmers. For example, PX Mart is providing shoppers with more information about the produce on dis-play, including the source of supply.

“High-intensity farming has done farmers no good: they are not earning more money and there is growing distrust from consumers on food safety,” Hsieh told Kantar. “It’s a lose-lose situation, with farmers and consumers both victims of this unhealthy cycle. As the middleman, PX Mart needs to figure out a way to connect the dots and build a system where everyone can benefit.”

In an effort to incentivize farmers to cease using environmentally damaging pesticides, PX Mart pays farmers twice the regular price for certain organic crops such as red beans. Hsieh says PX Mart is now considering launching similar initiatives for more types of fruits and vegetables in view of the importance of deepening consumer trust in the healthfulness and safety of the products.

Carrefour’s Su calls attention to the “invisible costs” that come with providing sustainable foods, especially for such staples as milk and eggs. In early July, Carrefour held an event at its Dazhi hypermarket to promote its social enterprise collaboration with the local brand Hsu’s Ranch, named after a farmer whose mission is to ensure that cattle are looked after by an on-site veterinarian. While one liter of milk usually sells in the NT$70-80 range, the price for this brand is about NT$120.

At a Carrefour Market, a display promoting the dairy products of Hsu’s Ranch, which boasts that it coddles it cattle.  Photo: Sonia Su

In addition, Carrefour Taiwan earlier this year became the island’s first supermarket to pledge to discontinue sales of eggs from battery-farm hens. “Having campaigned in Europe to ensure that all of the own-brand eggs that it sells are the product of non-cage farming systems by 2025, Carrefour is now taking action in Taiwan,” the company said in a press release.

“Starting in 2019, Carrefour Taiwan will only sell eggs under its own brand from free-range hens; in 2020, Carrefour will sell eggs from free-range Carrefour Quality Line hens; Carrefour Taiwan will work with suppliers and clients to extend the development of cage-free eggs and aim to reach 100 percent cage-free eggs by 2025.”

When Taiwan consumers are asked in surveys how they choose which supermarket to visit, according to Nielsen, the top five features mentioned are attractive promotions, location, pleasant shopping experience, ability to quickly and easily find needed products, and VIP card benefits.

Supermarket chains in Taiwan are also ramping up their alliances with American partners. PX Mart recently launched an American-themed promotion, selling U.S.-sourced products such as beef, fruits, and vegetables. Besides its international product offerings, for which customers can write in to request products not already available, Carrefour will be working with Google Cloud and Tesco to improve internal administration efficiency and build global purchasing alliances, Su said.

Although the challenges of physical space and competition always remain, Taiwan’s supermarkets are learning, evolving, and going above and beyond what may be expected of these stores.