Tesco vs. Small Grocery Stores in Bangkok, Thailand

Introduction

Commodities are one of the most stable opportunities for retailers. They are considered to be a profitable opportunity and can be started with a relatively low investment. In areas where people have high purchasing power, the local grocery or convenience store is a lucrative business venture. High-traffic areas increase the potential for these ventures. The local grocery store is an honored tradition in many parts of the world. However, there is a newcomer to the basic commodities scene that threatens to eliminate the traditional way of life for the local grocer — the supermarket or hypermarket.

The draw of the local grocer is based on convenience. People do not have to drive to the mall. However, the hypermarket offers a different type of convenience. It offers a wider selection of products and can provide considerable price competition to the local grocer. All around the world, the hypermarket is threatening to drive local grocery stores out of business. Thailand is no exception, and the hypermarket is quickly becoming the new way to shop.

Big chain grocery stores often stem from domestic companies, but they can also be represented by huge global giants like Wal-Mart. This study explores the problems being faced by grocers in Bangkok, Thailand, as a result of the entry of the giant Tesco Lotus. The central problem is how the small, local grocer can compete when a giant such as Tesco Lotus moves next door.

In the past, the local grocery store owner had a captive audience. Any venture into basic commodities was considered destined for certain profitability. This is no longer the case, especially with the entrance of the hypermarket into the retail commodities market. This is a trend affecting small grocery stores not only in Asia but globally. The question for the future is how small grocers can maintain their hold on the local customer when faced with the invasion of giants such as Tesco Lotus.

Tesco Lotus was founded in 1998 as a joint venture between the Charoen Pokphand Group in China and Tesco, already a giant British supermarket chain. In 2003, the CP Group sold its shares in Tesco Lotus (Tesco PLC 2011). Tesco Lotus stores offer the consumer many advantages over the local grocer. The local grocer finds it hard to compete on price due to the purchasing power of the hypermarket chain. Tesco stores are often set in retail malls, which gives shoppers the ability to get everything they need in one stop. They often contain bakeries, pharmacies, and other amenities such as food courts. They have large parking lots, as opposed to the limited street parking available to the local grocery store. They have more space and tend to carry general merchandise across a number of categories beyond food commodities, including clothing, shoes, electrical equipment, appliances, school supplies, automobile parts, and more — items the local grocer would not have the space to stock.

Tesco Lotus keeps its stores at a constant temperature of 27°C. It offers its own branded credit cards and has also opened gasoline stations that carry convenience-store items, as well as smaller versions of the larger chain called Tesco Lotus Express Stores. The number of Express Stores continues to increase, creating direct competition for local convenience store chains. Tesco Lotus Express Stores have the advantage of brand recognition associated with the Tesco Lotus name. Convenience stores such as 7-Eleven may be able to compete given their established brand identity, but small independent convenience stores do not have this advantage. Although 7-Eleven is the older established brand, anything associated with Tesco Lotus represents a threat to its business as well.

Tesco Lotus has been a source of controversy among consumer groups. The company has a reputation for aggressively pursuing those who speak poorly of it. In 2008, Tesco Lotus sued a columnist for criticizing the company in a news article (MacKinnon 2008). This and other similar actions gave Tesco the reputation of being a corporate bully and drew harsh public criticism. The media maintained its right to freedom of speech. Criticism by the journalist stemmed from Tesco's strategies to limit its tax liability. The article claimed that the company was bad for the economy because it drove out local businesses and did not wish to pay its fair share of the tax burden.

The future of the independent grocery store hangs in the balance. Expansion in the grocery store business is a result of population growth, and demand continues to increase with every new consumer who enters the market. In Thailand, small grocers and convenience store owners historically led market expansion. However, over the past decade the entrance of the hypermarket has changed the profile of grocery retail not only in Thailand but across all of Asia. The number of convenience stores also grew substantially, increasing from 1,500 to 7,800 between 1999 and 2010 (Salsburg & Tuchinda 2010).

Although the small convenience store sector expanded, the entrance of the hypermarket took a large chunk out of its market share. Many of the hypermarkets that entered the Thai market are foreign-owned. They may not lead in number of stores, but they do lead in revenues, capturing the largest percentage of sales from local competition. The three biggest foreign-owned chains are Tesco, Big C, and Carrefour. Leading convenience store players, including Makro and 7-Eleven, are also among the major chains. Together, these major players generated a combined total of THB 473 billion ($14.4 billion USD) in 2010, out of total grocery store revenue of THB 580 billion ($17.6 billion USD) (Salsburg & Tuchinda 2010). This means that the large chains captured nearly 82% of revenue, leaving only 18% to be divided among local small grocery stores.

These figures highlight the dilemma faced by the small grocery store owner in Thailand. The big stores move into an area and quickly achieve market saturation and dominance. It is not that local grocery stores are doing something wrong; it is simply that the hypermarket has more to offer customers and the smaller store cannot compete at the same scale. This phenomenon is not unique to Thailand. In the United States, Wal-Mart had much the same effect that Tesco Lotus and other big chains are beginning to have in Thailand. This research explores the impact of big chains on the small grocery store and examines ways for the small grocery store to survive in the shadow of the hypermarket.

The aim of this study is to examine the problems faced by small grocery stores when a giant like Tesco moves into their vicinity, with a primary focus on stores in Bangkok, Thailand. Tesco is rapidly expanding its foothold in Bangkok, and the negative impact on small grocery stores is being felt throughout the city. The study explores the economic impact of the Tesco chain on local businesses and examines strategies that local businesses can use to survive the invasion of the hypermarket.

This study has implications for a number of stakeholders throughout the retail grocery business. The first group of stakeholders is the small retailers themselves — those who have the most to lose as they struggle to find a way to compete while hypermarkets slowly consume their revenues. The next layer of stakeholders includes investors and consumers. Investors have a stake in the outcome of the study, as they will use this information to determine the best investment decisions for future stability. Consumers are also stakeholders because of changes in their shopping habits, the prices they pay for groceries, and the convenience that local grocers offer. If smaller grocers succumb to larger hypermarkets, it will mean significant social change for the Thai people — a form of cultural and economic westernization.

This study explores three hypotheses that serve as its foundation:

Hypothesis 1: Local grocery and convenience store businesses are negatively affected by the presence of foreign hypermarkets.

Hypothesis 2: Government regulations have not been effective in protecting local businesses.

The Tesco Effect on Local Retailers

Hypothesis 3: Local businesses can survive and compete with the help of tactics such as joint ventures and consolidation.

The following research questions are explored in addition to the hypotheses:

1. Are small grocery store owners in Thailand seriously affected by the entrance of hypermarkets like Tesco?

2. Are there any other factors affecting the profits of local businesses, in addition to the invasion of foreign hypermarkets?

3. How can local businesses survive and compete with large retailers?

This research project uses a mixed-method approach to address the hypotheses and research questions. It examines relevant literature and employs both quantitative and qualitative methods for data collection and analysis. The quantitative component consists of a questionnaire distributed to grocery store owners located close to a Tesco Lotus across 40 different locations in Bangkok. These two research methods allow for examination of the issue from both the grocery store owner's perspective and the consumer's perspective, with results compared for similarities and differences in order to help small grocery store owners in Thailand regain their competitive advantage and survive into the future.

Since its entrance into the local market in Thailand, Tesco and other large hypermarkets have come under attack for undermining the growth and survival of small local businesses. Consumer groups and local business groups have complained that Tesco has had an overall negative impact on the economy. The rationale is that when local businesses close, it means a loss of jobs and tax revenues that are no longer being pumped back into the local economy. Many of these criticisms stem from Tesco's attempts to limit its tax liability (MacKinnon 2008).

When Tesco moves into an area it is often met with severe backlash from local businesses, consumers, and the press. When it was announced that a Tesco would be built in Mae Sai, protesters sent a coffin and a petition written in blood to company executives (Crispin 2008). Tesco stores have been the targets of grenades, rockets, and gunfire by local interest groups (Pumas 2007). The question that must be asked is why such a violent reaction occurs when the corporation enters an area. This research must also determine whether the apparent fears of local residents are grounded in fact or whether they are an overreaction to the effect that Tesco will have on their community.

At first glance, it would seem that the protesters have reason to be concerned. Siamwalla & Poapongsakorn (2003) found that traditional grocery stores in Bangkok have been closing at a rate of 8.5% per year since 1997. According to the study, those that remain experienced a 7% decrease in annual revenues. This loss was attributed to the expansion of super chains and hypermarkets and to resulting changes in consumer behavior.

Purchasing power is the key advantage that large hypermarkets have over smaller grocery stores. They can negotiate discount prices from wholesalers. As wholesalers adjust their prices downward to accommodate the volume sales generated by the hypermarket, they share some of the burden with local retailers — including entrance fees, advertising costs, and limited product placement on shelves. However, these larger hypermarkets also drive increases in revenue for wholesalers due to the larger volumes of goods being moved.

Another effect of hypermarket entry is difficult to measure. The lower prices of hypermarkets allow some businesses to purchase needed goods at lower prices, having a positive impact on their revenues. From this standpoint, the entrance of the hypermarket is bad for some businesses but good for others. Consumers also benefit from greater purchasing power. This greater purchasing power translates into more goods and a wider variety of goods being purchased for the same amount of money.

The smaller grocery store is at a disadvantage in many ways. Aside from lower purchasing power, smaller grocers must adopt more sophisticated technology in order to compete with larger competitors. With shrinking revenues, raising capital for human resources and new technology becomes more difficult (Kaibori 2001). Smaller grocers also have difficulty borrowing funds from banks due to poor credit, a lack of experience in fundraising, and insufficient collateral. The problems facing smaller grocers can be summarized as follows:

1. They must buy products from suppliers at higher prices because they purchase in smaller quantities.

2. They must handle all activities in their shops — buying, selling, accounting, hiring, and maintenance — whereas larger companies assign these functions to skilled specialists.

3. They have restricted advertising capabilities and do not have the funds to advertise through mass-scale media channels.

4. They may not use their personnel and capital resources efficiently. Worker turnover is high because of low wage rates compared to larger retailers.

Advantages of Being a Small Retailer

5. They lack the ability to use information technology and modern systems, while large retailers have better-trained staff for handling new technologies (Kaibori 2001).

These five disadvantages result in operational inefficiency in the small retail grocery store. Addressing these issues would go a long way toward finding resolutions to the problems encountered by small retail grocery establishments.

Aside from the difficulties facing the small retail grocer, Thailand also offers many opportunities. As mentioned earlier, population growth means a larger consumer base from which to draw. In addition, Thailand has become a major tourist destination, bringing high purchasing power into the local economy. Growth in retail has been steadily increasing in pace since 2001, according to the Department of Internal Trade and Ministry of Commerce (Edoardo 2010).

Having examined the problems faced by small retailers and the advantages that large hypermarkets hold, one must ask whether the small retailer possesses any advantages over the larger hypermarket. If the small retailer can identify these advantages, they can be leveraged as possible solutions to the problems at hand.

The first advantage identified by Lowry (2000) is that small traditional grocery stores can adapt to their environment more easily and more quickly than larger corporations. They also have insight into the local market that is not available to larger chains. The larger chains tend to take a "law of averages" approach to their marketing strategies. Local stores can take advantage of their knowledge of local customs and traditions to leverage their place in the community. They can focus on community bonds and traditional ties that enhance their role of social responsibility. They can specialize their products to meet the specific needs of the local community. This ability to adapt to local market conditions is a key advantage of being a small store.

This adaptability extends to the ability to utilize an untapped human resources pool that is not available to the hypermarket chain. The hypermarket must comply with corporate rules and hiring practices. Small grocers know their employees more intimately than managers of larger chains. They can recruit unskilled workers and train them to be skilled professionals (Lowry 2000). They can build relationships with employees and offer benefits beyond wages alone. In this way, small local grocery stores can play a major role in building the community around them by providing jobs to people who might otherwise be unemployable.

According to the Office of Small and Medium Enterprises Promotion (OSMEP) (2002), small grocery stores face less government oversight than larger corporations. Bigger companies must comply with far more regulatory requirements. This differential was designed to ensure the growth and survival of the local Thai culture and traditional economy. Several additional advantages that smaller grocery stores hold over their larger competitors include:

1. Family-run businesses may be able to cut costs and keep prices low because family members often take a share of profits in lieu of higher salaries, dramatically reducing human resources expenses.

2. Traditional grocery stores can hire workers at lower wages because most workers do not have specialized skills or work part-time. They are not required to meet the hiring criteria imposed by corporate standards.

3. Rental costs tend to be lower because most traditional grocery stores are located in rural or suburban areas, outside major urban shopping districts, and they require less floor space.

4. Traditional grocery stores have the opportunity to build close personal relationships with customers, which is a key component of repeat sales.

5. They know local consumer behavior much better than larger businesses, which gives them a precise focus even if their geographic reach is limited (Lowry 2000).