Coriolis Chart Watch Q1 2004

Chart Watch is an online publication featuring a brief view into our latest thinking on the evolving food and fast moving consumer goods industry. It is sent to subscribers four times per year.

Top Line:  The Asian-ification of New Zealand cuisine will be the defining trend in the food industry over the next twenty years.   In 1991, there were about 100,000 Asians in New Zealand - by 2021 there will be over 600,000.

So what?  To understand the implications of this population shift we first we need to know what is a supermarket It may sound like an obvious question, but it isn't.  In self-service, the big box and the shopping cart we discussed the three innovations that led to the modern supermarket, but we didn't define one.  According to the ANZSIC classifications, a supermarket is:

Supermarkets (G511010) This sub-class consists of units mainly engaged in retailing groceries, fresh fruit and vegetables and fresh meat from shops with 10 or more persons engaged (full time equivalents) which also have a delicatessen department.

According to ACNielsen, there were 361 "key account" supermarkets in New Zealand as of June 2003. Yet according to Statistics New Zealand as of March 2003 there were 445 supermarkets in New Zealand.

Number of Supermarkets in New Zealand

Units, actual, 2001-2003

Source: ACNielsen; Statistics NZ; Coriolis analysis

Look how fast the 'other' are growing - they've added almost 40 supermarkets in the past two years, while key accounts have only added 8 supermarkets.  Looking closer at the situation by region: 

Number of Supermarkets by region in New Zealand

Units, actual, 2003

Source: ACNielsen; Statistics NZ; Coriolis analysis

So we've got 84 missing supermarkets, primarily in the Auckland and Wellington regions.  A supermarket seems like a large thing to go missing - where are these stores?  From our research, we believe that most of these other supermarkets are in fact stores specialising in servicing an Asian clientele.

All to often manufacturers and conventional supermarkets manifest a subtle Western or European bias and ignore or rationalise the relevance of Asian supermarkets.

We don't believe this is the result of overt or covert racism, but rather follows from a natural tendency to take the easy way out. We regularly recruit for intercept interviews and focus groups. From experience, we know how difficult it is to recruit people for research when English is their second language. We expect the same is true when it comes to developing advertising, selling new accounts or launching new products.

However, with over seven percent of the New Zealand population now Asian, ignoring this major segment of the population is generally not a wise business decision. 

Unlike previous major waves of immigration from Holland, Yugoslavia or Polynesia, these new arrivals are bringing their brands and retail formats with them.   And with one in five households visiting an Asian supermarket at least once a month, these retail formats are proving to be popular across a wider population as well (cited in a recent New Zealand Herald article).

This is not just happening in New Zealand, its happening in all the Western countries where Asians are migrating.  There is a constant flood of articles on this growing worldwide trend:

From the Baltimore Sun:

"Except for the Oriental script above the doors outside, Han Ah Reum Inc. could be any bland
grocery with freezer aisles and predictable produce. But step inside this pan-Asian supermarket -- whose name means "bountiful" -- and you will find different worlds. Amid the beat of techno music, an American mother searches the aisles of the Catonsville store for the only food that her newly adopted Chinese daughter will eat. An Indian family selects yucca and coconuts from an array of south Asian produce. And a vegan, Jeff Rasmussen -- who doesn't eat dairy, meat, seafood or egg products -- said "the freshness of the fruits and vegetables is consistent, and the prices are unbelievable."

From the Washington Post:

"Just inside the main entrance of Super H Mart in Fairfax, three adventurous sophomores from nearby Paul VI Catholic High School find their first free sample of the day. At the Mo Mo Rice Cake & Espresso Bar, Kylie Rasmussen, Kate Welle and Sasha Peters try a gelatinous, green tea-flavored rice flour confection. "Oh my God. These are really good," says Welle, after a bold bite. All agree with a nod and collective nervous giggle."

From the AFP:

"A food fight is brewing in Canada as Asian supermarkets blossom. Local chains and newcomers are planning major expansions throughout the country from Western bases close to their Asian suppliers, to cash in on bustling ethnic food sales. But Asian mom and pop stores, not mainstream grocers, have the most to lose, industry watchers say."

From the New York Times:

"To Angela Huang, a 31-year-old Taiwanese-born landscape planner, nothing symbolizes California's Asian-American culture more than a kitchen cabinet overflowing with empty plastic grocery bags from 99 Ranch Market. For it is among the wide, gleaming aisles of 99 Ranch supermarkets — with the mushroom and fungus buns, the marinated pigs' ears, the 100 percent natural white gourd juice and vast tanks of live fish — that Ms. Huang and her friends feel most at home."

What's driving this global trend?

There are four general forces that are driving this development:

First, we are in the middle of a major migration of Asian people throughout the globe.

Second, Asian cuisines use fundamentally different building blocks to Western meals.

Western supermarkets are currently merchandised to sell European staples. Significant changes would be required to increase the focus on Asian foods.

As an example of the scale of the issue, less than a third of New Zealand's rice imports are sold through ACNielsen defined key account supermarkets. 

Third, the generic or stereotypical Asian consumer is really made up of a wide variety of ethnic groups and cultures, each demanding their own flavours and brands. As the following chart shows, New Zealand's Asians come from a wide range of ethnicities.


To date, the conventional supermarkets have not shown the initiative or committed the resources and people to develop the required specialist knowledge needed to address this complex market.

Fourth, Asia has a rich and vibrant food industry full of strong companies with strong brands. You may never have heard of Pantainorasingh's Sweet Chili Sauce, but from the shelf space it gets in the local Asian supermarkets, I'm not the only one buying it.

New Zealand is Unique...

The unique structure of the New Zealand grocery industry is also strengthening this trend.  The presence of Pak'N Save in the New Zealand market has had a distorting effect on pricing structures. Pak'N Save sells it core shelf-stable grocery range at very low margins, forcing other retailers to lower their margins in an attempt to match prices.

To compensate for the low margins on shelf-stable grocery, New Zealand supermarkets are taking higher margins across their perishables departments. These margins have opened a competitive window for Asian Supermarkets and other specialist competitors such as the Mad Butcher, Bakers Delight and Fruit World. 

To get a quick feeling for what was happening with pricing, we did a 'quick-and-dirty' pricing survey.  The supermarkets we surveyed were:

     -  Lim's Supermarket on New North Road

     -  Tai Ping Super Store on Dominion Road

     -  Pak'N Save Mt Albert

     -  Foodtown Mt. Eden.

And here is what we found:

Comparative Supermarket Price Survey

Sample Basket, Thursday 25th March, 2004

Clearly conventional supermarkets have a cost and price advantage in branded, packaged goods.

And It's no surprise that Asian Supermarkets have very competitive pricing on Asian groceries.  What is surprising is the price advantage Asian supermarkets are achieving across fresh meat and fruits and vegetables.

One hundred packets of instant noodles for $4.99 at Tai Ping. Chicken drumsticks for $3.99 a kilo at Lim's. A bag of bean sprouts for 89 cents.  At these prices, it's not just lower income immigrants that are shopping there.  As the Herald article above pointed out, twenty per cent of shoppers now visit an Asian supermarket at least once a month.

So why are Asian supermarkets growing?

By doing the basics of retailing well:

   - they offer what their customers want
   - in a convenient location close to home
   - often fresher and better quality
   - at the lowest prices around

This doesn't sound that hard does it?  But the fact that a bunch of independent owner-operators can not only survive, but thrive would seem to reflect unfavourably on the major supermarket groups. 

Implications for manufacturers

All the signs are that Asian supermarkets will continue to grow and chains have already begun to emerge.  There is an opportunity for Australasian manufacturers to wholeheartedly embrace the growth of Asian supermarkets.  In a low growth market there are very few real opportunities for growth.  Research the market, hire some Chinese speaking reps, and get in there with products these customers want. 

The growth of Asian supermarkets has three key implications for manufacturers:

1. Pricing pressure in some categories

Asia is a low-cost producer of many food and consumer packaged goods.  Fresh garlic provides an excellent example of what can happen.  Locals with good connections back home can often import products and put them on the shelf at prices highly competitive with local brands and products.

So the first implication for manufacturers is to understand the landed cost of the closest Asian equivalent product to yours.  Is it cheaper? By how much?  The last time I walked around a Tesco hypermarket in Thailand a lot of the prices looked very competitive by Australasian standards and there are no real barriers to stop many of these items coming here.

In addition, have a look at what is happening to the prices and consumption of more distant substitutes. 

For example, if you're a dairy company, what's happening in the soy milk segment? You may need to do some digging, because Asian supermarkets don't appear in that data you buy from Aztec or ACNielsen, and Foodtown or New World don't even sell fresh, unpasteurised soy milk.

Take it a step further: are there any items you could make in your existing facilities that someone else is currently supplying into this market? 

2. The growth of parallel imports

What is often not known and not readily revealed by some global CPG companies is that they sell many of their products cheaper in the low income countries of Asia than they do in Australia and New Zealand.  There are some very good reasons for this, but it creates the opportunity for arbitrage.

In the Auckland stores we visited, parallel importing of shelf-stable grocery and CPG lines was common.  There seemed to be few global CPG manufacturer that did not have parallel imported lines on the shelves of one of these stores.

This sequence of shots should give you a feel for the scale of the situation:

Lipton Tea (Unilever)

Nabisco Wafers

Nestle beverages

Campbells Soup

Colgate Toothpaste

Danone biscuits (Danone owns Griffins)

Knorr stock (Unilever Bestfoods)

Some of you will remember the waves caused by parallel importing of major grocery brands during the brief visit by Cost-U-Less to the New Zealand market.  This problem isn't going to go away.  In many ways it mirrors the long battle CPG manufacturers in the US market had to offer regional pricing and the consequential growth of retail diverters as a response.  Diverting is where a retailer in buys more that then need when a manufacturer offers them a special deal, then on-sells this to another retailer.  As a US example, a baked bean manufacturer gives a special price in Texas to battle a growing Mexican import and a local supermarket buys extra to get the best volume discount and then on-sells part of their order to a supermarket in New York.  Global diverting is the logical next step and a growing trend.

So the second implication for manufacturers, global ones at least, is to understand how your Asian operations are pricing the same products.   This may be as simple as an email requesting their current list prices.  Because the world of retailing is becoming more and more global.  Imagine for a minute if Tesco bought Coles tomorrow.  How you would explain your local pricing structure to Tesco who regularly buy the same or similar products for their operations throughout Asia.  One of the biggest revelations in many transnational retail mergers and acquisitions is the substantial difference from country to country in the price of branded packaged goods.

3. An opportunity for growth

The rapid growth of the Asian population and the corresponding rise of supermarkets specialising in meeting their needs offers a chance for those companies with the vision to seize the opportunity.  But I can count on one hand the sales reps I have met from major FMCG companies who either are Asian or who speak an Asian language.  Here are a few representative quotes from our recent foodservice report:

"Coca-Cola have a Chinese speaking rep. I wish others did."

Owner-operator, Sandwich Bar, Auckland South

"The Toops guy used to be so good - he used to come out all the time. He used to have lunch out here. He was much more patient than any of the others. He had an Asian wife, so he understood our needs. He was a rep to a lot of Asian businesses. It was good, but he is no longer there."

Owner-operator, Ethnic restaurant, Wellington region

While these comments are from people in the foodservice sector, I don't doubt the manager of the local Tai-Ping (New Zealand's third largest supermarket chain) would say much the same thing about the FMCG reps that come to visit him.

So the third implication is for FMCG manufacturers to develop a plan to target this seven percent of the population and these 84 non-key account supermarkets. 

When was the last time you did market research specifically with Asian consumers? Is there anything about your products, packaging or communication you need to change?  Are there new products you can make with your existing equipment that target this segment of the market?  If you're a multinational, maybe you should consider importing Asian-specific products made by another division of your company.

When was the last time you talked to the key decision maker at an Asian supermarket?  Because the relationships that are being made today will be hard to break - and if you're not making these relationships with the Pak'N Save of tomorrow, who is?     

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