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Does Modern Grocery Expansion Lead to Industry Consolidation?

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Modern grocery retailers, such as supermarkets and hypermarkets, typically account for 70-90% of all grocery retail sales in developed countries. In this article, we have attempted to test whether there is a relationship between expansion of modern grocery chains and consolidation of industry sales among top companies in the industry, or if the opposite is true, and large FMCG companies in fact perform better in an environment where the retail channel is more fragmented.

Figure 1: Modern Grocery Retail and Country’s Development Level


Source: Euromonitor International (Retailing)

Modern grocery largest in developed countries

In developed countries, chained retail stores have become ubiquitous within the retail landscape and have pushed out many independent stores. While there are some differences between countries, the overall modern grocery share in developed countries typically falls in the 70-90% range. Modern grocery retailers are historically more established in North/Central Europe as well as the US - in 2014, modern retailing accounted for 85% of grocery sales in the US, 91% in Finland and 89% in the UK. At the same time, they are slightly less universal Asia Pacific - 80% of grocery sales in Japan, 71% in Singapore and 67% in Hong Kong.

The story gets more complex in emerging markets. Although the share of modern retailing tends to go up as countries become wealthier, there are many noteworthy differences between countries of similar development level in terms of expansion of chained retail. Latvia and Turkey, for example, have relatively similar levels of disposable income, but modern retail’s share differs significantly – 89% in Latvia and 37% in Turkey. In India, modern retail is virtually absent, accounting for under 2% of grocery sales, but is already well-established in China, at 65%. Government regulations, such as restrictions on foreign FDI in retailing in India, play an important role in some countries.


Co-evolution of modern grocery and large companies

We started with hypothesis that large retail chains should encourage the consolidation of FMCG markets. The idea is largely grounded in the notion that modern retail chains prefer to deal with fewer but larger suppliers, therefore as modern retailers grow, so do the top companies and this happens at the expense of market share held by smaller companies. Larger FMCG companies can typically offer better prices due to economies of scale and are generally easier to deal with for large retailers as they tend to have well organized logistics and marketing to make sure products sell, among other things.

On the opposite side, traditional grocery retailers are usually single unit stores and rely on distributors or wholesalers to get the products. The logistics tend to be complex, each store can have a different sourcing strategy from a nearby store, and may favour certain products over others. Because of the inherent fragmentation of such retail market, it can be more complex for a large FMCG company to reach many customers, and thus the share held by top companies should be lower.

Modern grocery and share held by top 10 companies

We looked at figures from eight industries– from alcoholic drinks to packaged food and toys and games – inspecting the relationship between industry consolidation (the share held by Top 10 largest companies) and the retail landscape (the percentage of grocery sales accounted for by modern grocery) in different markets. Shares of companies (not brands) were used for analysis, in order to account for multi-brand strategies usually employed by largest multinationals.

The results can be seen in figures below. Here, the x-axis lists modern retailing share as a percentage of all grocery retail sales. The y-axis denotes the market share held by the top 10 FMCG companies – a good proxy for industry consolidation. The trendline slope indicates whether the relationship is positive or negative. An upward slope indicates a positive relationship, ie largest companies benefit from modern retailing expansion. A negative slope signals the contrary - as the share of modern retailing gets higher, the share of sales among the top 10 FMCG players falls.

Figure 2: Modern Retail and Market Share Held by 10 Largest Companies


Source: Euromonitor International (respective Passport Industries)

Note: 80 researched markets depicted in the charts except for Pet Care (54 countries) and Toys and Games (32 countries).

The data seem to suggest that, more often than not, expansion of modern retailing actually leads to the opposite of expected effect – modern retail expansion actual lowers shares of the top 10 companies. In six industries out of eight - pet care, home care, tissue and hygiene, soft drinks, packaged food, alcoholic drinks - the combined share of the top 10 companies is lower in countries where modern retail is well established. One industry – beauty and personal care – shows no effect. And only one industry – toys and games – shows positive correlation – largest 10 companies have higher share in markets where modern retail is strong.

While unexpected at first, there is a good reason that explains this trend though – private label. When private label is included, expansion of modern retail is most often bad news for large FMCG (as most likely for all FMCG companies, depending or not whether they manufacture for private label). To account for the effect of private label, we added additional scatter plots that removed private label from industry market size. In effect, this lists market shares of only branded product sales.

Figure 3: Modern Grocery and Market Share Held by 10 Largest Companies (Excluding Private Label)


Source: Euromonitor International (respective Passport Industries)

Note: 80 researched markets depicted in the charts except for Pet Care (54 countries) and Toys and Games (32 countries).


When private label is removed, five industries showed positive relationship - packaged food, beauty and personal care, tissue and hygiene, toys and games and home care. Two industries showed very marginally negative relationship – soft drinks and pet care. And only one industry remained that showed strong negative relationship – alcoholic drinks.

Some industries, such as Tissue and Hygiene are especially affected by private label, and the slope turns from very negative to positive when private label is excluded.  Alcoholic drinks remains the only to have a strong negative relationship - so you could conclude that modern grocery helps to increase the variety of companies, not decrease. Although this result might be influenced by somewhat monopolistic nature of the industry in many emerging markets, where it is not uncommon for the top 10 alcoholic drinks companies to have a share exceeding 90%.

Private label is a key threat

One conclusion that might be drawn from this is that while modern retailers might be indeed be advantageous to the largest FMCG companies in some industries, the growth of private label is a potential threat that cancels out most of the benefits. It seems that modern retailers are keen to replace third party suppliers with their own private label products, and are succeeding in their efforts to do so.

Another thing to have in consideration is that not every industry relies on grocery channel to the same extent. Only 35% of beauty and personal care product sales globally are through grocery retailers, but nearly 93% of packaged food, and 97% of off-trade alcohol is sold through grocery retailers.



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