Supermarkets

Since the inception of Agora’s journey in 2001, the Bangladeshi supermarket sector has taken a steady and assuring stride forward. After 12 years and 105 stores, the domestic industry now stands at around BDT 1500 crore. As Bangladesh shifts towards the middle income status, all the advantages that associates, such as higher income per capita and urbanization, will further expedite the industry’s profitability.
A closer look
According to the BSOA (Business Supermarkets Owner’s Association) currently there are 105 supermarkets in the country. In spite of this, the industry is largely dominated by three major players – Shwapno (45 Outlets), Agora (13 Outlets) and Meena Bazar (18 Outlets). Once a key competitor, Nandan, now holds just two stores.

In terms of distribution network and competitive prices, Swapno has entrenched itself as the market leader, whereas, Agora and Meena Bazar are viewed as market leaders in terms of quality and services.

Source: Rahimafrooz and LankaBangla Primary Research
With rapid urbanization, the industry is expected to grow by almost 15 times its current size by 2021. Positive economic externalities in terms of generating employment via SMEs, higher food safety and security, price stability, and inclusive business development are expected to accompany this growth.

Source: Rahimafrooz and LankaBangla Primary Research

Industry drivers
The key cost and revenue drivers of the industry are listed below:
Change in Social Structure
Change in per Capita Income
Change in Taste and Fashion
Consumer Awareness
Change in Social Structure
Change in per Capita Income
Change in Taste and Fashion
Consumer Awareness

* Change in social structure: The steady rise of nuclear families, coupled with the influx of women in the workforce means less and less time to go shopping. Thus, making all the necessary commodities available under one roof is a prime factor.

* Change in per Capita Income: Par capita income has increased to above USD 1,000/- in 2013 and is expected to grow further. Income growth in urban areas has also seen progress. This change in socio-economic structure has given rise to a new breed of middle-class who are willing to spend their higher disposable income in supermarkets rather than wet market, since it carries a level of status.

* Change in Taste and Fashion: Globalization through internet penetration, international trade, and myriad number of international television channels have exposed consumers to new ideas. Shopping from supermarkets, long considered a Western concept, is slowly being accepted by mainstream consumers in Bangladesh.

* Consumer Awareness: Due to widespread media coverage over usage of formalin and chemical contaminated consumable products; consumers are more aware of possible health repercussions of consuming these products. As are result, many conscious customers are slowly shunning the traditional wet markets.

Industry analysis a. Porter’s Five Forces Model
Bargaining power of Suppliers
Threat of New Substitutes
Threat of New Entrants
Bargaining Power of Buyers
Competition within industry
Bargaining power of Suppliers
Threat of New Substitutes
Threat of New Entrants
Bargaining Power of Buyers
Competition within industry

Competition within the industry | Medium | Threat of new entrants | Low | Threat of substitutes | High | Bargaining power of buyers | Moderate | Bargaining power of the suppliers | Low, but varies for larger companies |

From the model it is conclusive that stiff competition exists amongst the major firms which are backed by the rich capital of their respective parent companies. Such superfluity acts as a barrier to entry for new firms. Recently, several e-commerce platforms have stepped up to offer essential commodities with zero cost home delivery facilities. In the long run, as they gain traction, strong competitors might arise from amongst them.
The present scenario is such that a customer might visit the store at the month’s start, but the same person might prefer the wet markets to meet immediate needs, provided no supermarket exists in close proximity. Reasonable pricing, credit facility (from retailers), and convenience also drive customers to these wet markets. But even with this looming threat, buyers have little influence over price, since, they only procure in small quantities. Suppliers have a similar minimal impact on the supermarkets’ profitability.

b. Supermarket SWOT Analysis

Below is a thorough analysis of the internal and external environment of the industry.

STRENGTHS * Major players have deep pockets allowing investment in supply chain infrastructure, outlets and promotion. * Bulk buying to some extent allows lower costs and deeper discount for consumers. * The sector demand is increasing as the growing middle-class prefer the convenience of supermarkets. * As the sector enters its second decade, a certain level of sector specialization has developed with a local supply chain model and efficient middle management. | WEAKNESSES * Due to huge number of items sold, supermarkets have to rely increasingly on middle-men and Dhaka based market hubs, especially for perishables. * Although some supermarkets have 10-20 outlets, most other players have less outlets to benefit from bulk buying. * Although the contract farming model has been tried by major supermarkets like Agora and Meena Bazaar, it has not seen much success as yet. | OPPORTUNITIES * Urban consumers are more conscious of the prevalence of contaminated perishable and protein items e.g. Vegetable, fruits and fish; allowing supermarkets to capture higher market share. * Increasing capita income has made consumers less price sensitive and more focused toward product quality. * Some major supermarkets are starting to build a robust contract farming model which has prospect for scalability and is replicable. | THREATS * Political unrest and frequent disruption by law enforcement agencies disrupt supply chain and hamper cost competitiveness. * Rapidly increasing real-estate rental costs will add to total expansion costs and deter supermarkets to expand. * Supermarkets’ market share constitute only 2% of the total market and mainly concentrated in urban areas. Intense price competition among existing players may hamper sector growth. |

Raw material procurement

a. Storage
Land Lease
Market Intel
Transportation
Farmer
1
Marketplace
3
Storage
Bazar
SM Agents
4
7
6
8
Small Retailers
Consumers
Traders
Consumers
5

Storage
Land Lease
Market Intel
Transportation
Farmer
1
Marketplace
3
Storage
Bazar
SM Agents
4
7
6
8
Small Retailers
Consumers
Traders
Consumers
5

Supermarkets Value Chain – Indirect Sourcing

When a direct sourcing chain is not maintained, as depicted in the diagram above, several intermediaries take a chunk of the profits, leaving a reduced amount for the supermarket and the farmers. Typically, a 30 percent margin exists between the original producer and the end consumer. Supermarkets, via this model, command about 10 to 12 percent of this margin and farmers get about 3 to 4 percent. The rest 14 to 15 percent is taken by the intermediaries, which are about 4 to 8 in number. Except for the bigger players, who have investment to help them sustain, this anomaly has led to the closure of many smaller superstores. Sharp rise in overheads – rent, utilities, salaries and maintenance costs have also contributed. Furthermore, the market growth is also affected as higher prices mean a significant portion of the middle class is remaining untapped.
In case of direct sourcing model, the number of actors in the value chain decreases to 3. This enables the supermarkets to command a higher profit margin, usually in the range of 12 to 18 percent. Naturally, it also translates to higher return for the farmers (3 to 6 percent). The rest goes on to provide competitive prices to the consumers. As for Agora, it regularly surveys wet markets so that it can match their prices. At Agora, perishables and commodities are charged at the market rate, or lower. But, proteins (fishes and meats) are still charged higher than the conventional wet markets.
In the direct sourcing model, the supermarkets have to employ rural buying agents, contract farming or co-operative models, forward purchase, transportation risks and also deduct the suppliers’ credit. Additionally, they also have to deal with post-harvest loss. A more streamlined value chain, however, would mean a larger share of the margin for both parties. Compared to India where supermarkets command a margin of almost 30 percent, Bangladesh can only entail around 12 percent.

Central Storage
Transportation
1
Distribution Hub (Sorting Center)
Farmer
Contract or Co-Op
3
2
Consumers
Supermarkets (Direct sourcing model)
Central Storage
Transportation
1
Distribution Hub (Sorting Center)
Farmer
Contract or Co-Op
3
2
Consumers
Supermarkets (Direct sourcing model)

An example of the cost saving that direct sourcing offers can be found in the table below. It shows figures from Agora’s direct sourcing of fruits and vegetables.

*Based on averaged out sales data from Nov’12 to Jun’13

Due to the complexity of procuring different products and impending supply chain uncertainty, many supermarkets depend heavily on local wholesale market hubs including Kawran Bazaar, Shym Bazaar, Krishi market and Babu Bazaar for perishable and essential commodities. For Supermarkets in Dhaka, these centers act as the middle-men. For the value chain of Kawran Bazar to be enhanced, the best practices of handling foods, transportation techniques (using plastic crate boxes to reduce in-transport damage), and credit facilities have to be brought forward. If the assembled markets work via a stronger co-operation with the farmers, then the margins would improve for both parties and the unwarranted inefficiencies in the market will dissipate.

Way forward

As of now, the supermarket industry captures only 2 percent of the market. Increasing awareness about food contamination, rise of income levels, and the expansion of urbanization is likely to have a constructive impact on the future of the supermarket industry. If the number of players can be decreased, the existing chain of operation will become more robust. The private sector players in conduit with the development sector may establish a sourcing firm which will cater to producing essential commodities and perishables. Supermarkets will place weekly order with the sourcing firm which will in turn buy in bulk and supply to individual outlets. Large scale buying will allow firms to cut down the middle-men, and ensures higher revenues for farmers and lower prices for the end clients. The sourcing firm will also engage in grading the quality of the commodities. This development, along with each shop’s ambience, product quality, and convenience factors will lure customers into shopping at the supermarkets in Bangladesh. The large portion of customers, who are generally more price sensitive, will then see an added incentive to shop at the city’s finest.