Sunday, July 27 2014

 Retail trade has always been one of the most dynamic
sectors of world business. Retail trade operators are developing intensively.
This trend does not pass by Armenia, where retail chains are also developing
dynamically. There are already over 10 retail chains in the country and their
number keeps growing. The process of development is accompanied by mergers,
acquisitions, entry of new players and withdrawal of old ones, which eventually
determines the dynamics of the retail trade market. Ameria Advisory Company has
conducted the second research in the retail trade sector in Armenia, with main
focus on fast moving consumer goods market (FMCG). According to the findings of
the research, in 2012-2013 the large retail chains reduced the coverage of
Yerevan’s FMCG market by 5 pct points. Now supermarkets and hypermarkets occupy
only 47% of the FMCG market in Yerevan versus 52% in 2012. The research
explains this by the fact that the residents of Yerevan considerably reduced
their FMCG expenses and started doing more shopping at minimarkets and food
stores. Furthermore, two years ago STAR, a major trade chain in Armenia,
quitted. This toughened the competition among the market participants, which
should keep placing their stake on the customer perception and innovation
management to enhance the customer loyalty and engagement. Below is ArmInfo’s
interview with Artashes Shaboyan, Senior Research Specialist at Ameria Group,
who shares his opinion on possible problems, trends in the retail trade sector,
as well as the steps that can help retailers to their boost sales.

 

Mr. Shaboyan, according to Ameria Advisory Company’s
research, the fast moving consumer goods (FMCG) market of Yerevan has shrunk
over the past 2 years due to the changes in consumer behavior. How and why has
the consumer behavior of the Yerevan residents changed?

 

Ameria conducted the first research in the retail trade
sector in 2012 and the second one in 2014. In both cases we studied the
households’ FMCG expenses in Yerevan. In nominal terms, over the past two years
the Yerevan residents’ monthly FMCG expenses have dropped by 4% in AMD terms
and by 6% in USD terms, having averaged 143.9 thsd AMD. In fact, the dynamics
is not so tangible but given the two-year rise in the consumer price index, the
Yerevan residents’ FMCG expenses dropped by 16% in real terms, and this is a rather
big figure. In fact, this is how much the residents have reduced physical
consumption of FMCG over the past two years. If the FMCG prices in 2014 were
the same as two years ago, the residents’ monthly expenses on FMCG with the
current physical consumption would be 126.1 thsd AMD instead of 143.9 thsd AMD.
Our research has revealed two reasons why the residents of Yerevan have started
spending less. The first reason is that over the past two years the household
incomes have not grown, to put it mildly. The income of some social groups has
not changed, and the income of others has declined to some extent. The second
reason is that the expenses on other goods and services (including gas and
electric power supply) have considerably grown. People had to spend less on
their food, detergents, personal hygiene means, alcohol and cigarettes.

 

Your research has found out that the residents of
Yerevan have started spending less on FMCG. In case of overall price boost,
people certainly have to tighten the purse strings. What goods do people save
on and what goods enjoy little demand?

 

In nominal terms, the monthly expenses on food and soft
drinks per household in Yerevan have dropped by 1%. In 2012 those expenses made
up 109.3 thsd AMD monthly versus 108.5 thsd AMD in 2014. The difference between
these amounts is not big. But as I have already mentioned, the situation
becomes absolutely different given the two-year tangible inflation – the
population spends the same amount but buys fewer goods, i.e. people save on food.
Over the past two years, food and
soft drinks have risen in price by 16.3%. So, the
Yerevan residents' expenses on food and soft drinks have fallen by 15%. By the
price calculation of 2012, the physical consumption of these goods in 2014
would be 93.3 thsd AMD monthly (instead of 108.5 thsd AMD). As regards alcohol
and cigarettes, their consumption would decline by 8% to 17.9 thsd AMD in
nominal terms and by 18% in real terms given the 12.1 inflation (to 16 thsd AMD
by the price calculation of 2012). The biggest decline fell on the households'
expenses on detergents and personal hygiene products. In nominal terms, the
expenses on the specified goods per household have fallen by 17% to 17.4 thsd
AMD monthly. In real terms, the expenses have fallen by 20% given the 4.2%
inflation and totaled 16.7 thsd AMD by the price calculation of 2012. So,
people have mostly saved on household goods, alcohol and cigarettes.

 

How have FMCG expenses changed for low-income and
high-income households? How have the households ensured the cost
optimization?      

 

We have classified the households into 5 groups by their
monthly incomes. The first four groups feature families whose monthly income
per family member is no more than 124.9 thsd AMD. Over the past two years, the
expenses of these groups have not changed so much as the expenses of the fifth
group, whose monthly income per family member is 125 thsd AMD and more. In
nominal terms, this group's FMCG expenses have risen by 11% to 210.2 thsd AMD
per month. The first group (families with no more than 30 thsd AMD monthly
income per member) has increased the FMCG expenses by 4% to 105.2 thsd AMD per
month. The second group (families with 30.1-45 thsd AMD monthly income per
member) has increased the monthly FMCG expenses by 3% to 128 thsd AMD. The
third group (families with 45.1-62.5 thsd AMD monthly income per member) has
decreased the expenses by 4% to 131.4 thsd AMD per month. The fourth group
(families with 62.6-124.9 thsd AMD monthly income per member) has increased the
expenses by 1% to 155.8 thsd AMD per month. The figures demonstrate that in the
first four groups the monthly expenses have undergone almost no changes given
the 5% deviations, which are admitted in statistical surveys. These families
had to reduce the FMCG expenses in order to pay for the electric power and gas
supply services. To ensure some cost optimization, people have started buying
cheaper goods, which have lower quality and lower brand popularity than their
expensive analogues. The fifth group also had to spend less, but not on the
FMCG but on trips or meals at the restaurants, for instance. It is much easier
for this group to scrape through, because in their case to optimize costs does
not mean to make two ends meet.

 

You say that over the past two years the residents
of Yerevan have started buying the FMCG at minimarkets and big food stores
rather than supermarkets and hypermarkets. Why have the residents’ buying
preferences changed so much? Are they displeased with the prices offered by the
large retailers or… ?

 

This is the most noteworthy fact revealed by our research.
The share of supermarkets and hypermarkets in the world retail sector was
prevailing and steadily growing before the crisis, but over the post-crisis
period the share of retail chains ceased growing and even dropped worldwide,
especially in the countries of Central and Eastern Europe. These countries
experience growth in the consumer demand for stores. In Armenia’s case the reasons are more mundane.  One of the reasons of shopping reduction at supermarkets is their
inconvenient location. As you know, in 2012 the STAR retail chain withdrew from
the market by closing all its supermarkets (over 30). STAR had supermarkets in
all the administrative districts of Yerevan. The geography of the current
retail chains is not so wide and people visit the nearby stores instead of
going to a remote supermarket. The second reason is that it takes people more
time and money to do shopping at supermarkets than at small stores. As a rule,
goods are cheaper at the small stores, because the assortment consists of
cheaper items. 

 

How do you think the
situation will change in the future? Won’t the large retail chains be driven
out of the market by small stores?  

 

I think the given market participants will shortly recover
their pre-crisis positions, because the current decline is not permanent and it
is only the consequence of the economic downturn. As soon as the global
financial crisis is over and new supermarkets are opened, the share of the
large retail chains in Armenia will go up again. The current retail chains are
making attempts to extend their geography. Furthermore, with the entry of the
new player Carrefour, especially if the latter ensures a wide geography in the
local market, the share of retailers in the aggregate public demand for
purchases will skyrocket. On the other hand, the wide chain of Carrefour will
aggravate the competition among the leading players.

 

What measures should the current retailers in
Armenia take to withstand the upcoming stiffer competition?  

 

According to the research findings, the residents of
Yerevan give high priority to the wide assortment of goods when choosing a
supermarket. The second important thing is the service quality, and the third
one is the adequacy of the prices to the quality of the goods.     

 

Each of the current retail chains has its own niche. Some
of them focus on wide assortment and raise the prices. Consequently, these
supermarkets offer their services to the category of the customers who have specific
requirements to the assortment. Other supermarkets make the service quality
their main trump card. Over the past 2 years some supermarkets have boosted
their sales due to low prices, because amid the declining personal revenues
they enjoyed big demand among the customers. These supermarkets lacked a wide
assortment of goods and the quality of their services was not that high.

 

Amid the toughening competition, supermarkets should
strengthen the three abovementioned factors and decide more precisely what
group of customers they should work for, what buying preferences the customers
have, what age group prevails in their customer base, etc. Our research has
demonstrated that youth prefer doing shopping at supermarkets rather than small
stores and stalls. The choice of the supermarket also depends on what exactly
the customer wants to buy. For instance, alcohol is usually bought at the
supermarkets and cigarettes are bought at the stalls. Elderly people buy fruit
and vegetables at the agrarian markets more often than at the supermarkets. To
withstand the competition, the large retail chains should find out what for the
customers visit their sales outlets. In addition, they had better speed up
efforts to maintain the customer loyalty and to attract new customers, because
a new player will soon launch activities in Yerevan.

 

I should mention that the research features the portraits
of the customers of each of the leading chains. The location of the supermarket
is of certain importance, as I have already said. Many communities of Yerevan
have lacked supermarkets since the withdrawal of STAR from the market, and the
residents have to do their shopping at the minimarkets and food stores adjacent
to their houses. So, the large retailers should pay attention to the correct
location of their supermarkets when expanding their chains. Our research also
includes data on how many supermarkets there are in the administrative
districts of Yerevan and whether they are in demand. Other factors such as
discount systems, advertising, brands, possible noncash sales and online
purchases are of no much significance yet. It should be noted that the price
level is a priority for the customers, who choose specific stores and
minimarkets.

 

You have mentioned that the price level is the third important
factor for the respondents. Won’t this approach change in the future, since the
customers start paying more and more attention to the cheapness of goods?

 

According to the previous research conducted by Ameria, 2
year ago the price level was the fifth important factor in the choice of the
supermarket. In 2012-2013 the given factor became more crucial, because as I
have already mentioned, the revenues of the major part of the population
dropped, whereas the prices went up. The future changes in the customers’
approach directly depend on the changes in the socio-economic condition of the
population. If it changes for the better, the price factor in the choice of the
supermarkets will become the fourth or the fifth important factor.

 

By our classification, for the first three groups of
households with relatively low incomes the price level is almost as important
as the wide assortment and the customer quality and the importance ratios of
the three factors in these groups do not differ very much, unlike those for the
households with relatively high incomes. It should be noted that the importance
of the factors in the choice of the supermarkets depends not only on the
incomes but also on the age and sex. For instance, middle-aged and elderly people
pay more attention to the prices than youth. To female customers prices also
matter more than to male ones.

 

Your research has revealed one more interesting fact: the residents
of Yerevan have reduced the expenses at agrarian markets and especially fairs.
Though the service quality here is lower than at stores, the agrarian markets
and fairs have a very important advantage for Armenians – one can
abate the price here. Given that the needy people have reduced their expenses
most of all, what's the dynamics of the needy people's expenses at the agrarian
markets and fairs? Why have the needy people sharply changed their approach to
the agrarian markets and fairs and where do they prefer doing shopping now?

 

Our research demonstrates that the agrarian markets are
mostly the preference of the older generation. 45-55-aged women constitute the major part of the customers. The youth do not visit
the agrarian markets and, as a rule, do not change their buying preferences in
the future. In other words, the agrarian markets are becoming irrelevant due to
the alternation of generation. A similar trend is being observed in other
countries as well. Furthermore, the attendance is seasonal here. In summertime the agrarian markets have more customers than in other
seasons, because in summer the preference is given to fresh fruit and
vegetables. I think if the current tendency goes on, the role of the agrarian
markets as trade outlets will diminish or they will become an attraction for
travelers. As regards fairs, the residents have reduced their expenses here
because the number of such outlets has sharply decreased over the past two
years rather than because people are reluctant to visit these outlets. In
addition, the fairs cannot withstand the competition with the stores where the
prices are much lower and various discount campaigns are launched from time to
time. Besides, it takes people too much time to attend fairs.

 

People are doing less shopping at the stalls and
hardware shops. Why?

 

The range of goods is too narrow here. In addition, the
stalls have sharply decreased in number due to the regulatory standards and
toughened requirements to them. As regards the hardware shops, I can say that
here the shopping is declining because the assortment is restricted to detergents
and personal hygiene means, whereas people are inclined to purchase everything
at single shopping. So, the problem is the narrow assortment again and the need
to save time. It is noteworthy that though the share of supermarkets in the
Yerevan residents’ FMCG expenses has dropped, nevertheless, on a single visit
to a supermarket customers spend more money and buy more goods than they did a
few years ago. In other words, people seek to spend less time on shopping.

 

How popular and applicable are the loyalty cards
provided to the customers by the supermarkets in Yerevan?  

 

During the public opinion poll, we asked the respondents
what for they need these cards most of all. Some of them need these cards to
accumulate bonus points, some respondents need them to make use of the
discounts, for others the loyalty cards raise their image, but most of the
respondents failed to answer this question. They did not know how to use the
cards or they did not know what mattered more to them – discounts, bonus points
or the image. This means that the customers are not well aware of the idea of
loyalty cards. To note, more people made use of such cards in 2012 than now not
least because of STAR’s withdrawal from the market. It should also be
noted that the loyalty cards are more popular with women than men.

 

So, what major problems can endanger the development
of the retail trade sector and what trends may hinder the regular business
course in the future? 

 

The key problem is the demographic condition of Armenia. The
given segment is population-oriented and the retail sector suffers a
quantitative and qualitative shortage of customers. The continuous reduction in
the country's population has a direct negative impact on the retail trade
sector. The major risks in the given segment are the steadily shrinking number
of the customers and and/or the insufficient growth of revenues of the
remaining customers. No matter how well the retail chains work and no matter
how much they enhance their competitiveness, the shortage of customers remains
an urgent problem. In the course of time, this problem will become even more
topical given the high migration rates.

 

Thank you for the interesting and informative
interview.