Michael Nicholson is commercial director of EAC, a major consumer products distributor in Taiwan. Nicholson, who came to Taiwan from the UK six years ago, has regular contact with manufacturers, distributors, wholesalers, and retailers, as well as consumers. In the following interview, he discusses the growing complexity of local food retailing.
What are the differences between traditional wet markets, supermarkets, and hypermarkets?
Michael Nicholson: Hypermarkets make profits by selling large volumes of merchandise in a short amount of time. Supermarkets attract customers by adding value, such as offering specialty goods or convenient one-stop shopping. Both market formats are playing significant roles in the modernization of food retailing here.
At one point, supermarkets were believed to be the format that would replace traditional wet markets, but sales haven't grown as expected because supermarkets do not add enough value to the products. For instance, the variety and quality of fresh foods offered in supermarkets just aren't sufficient to draw consumers away from wet markets. Supermarkets are also less convenient because they don't have parking.
On the other hand, hypermarkets are able to attract customers because they are set up in ways that resemble wet market operations, particularly in the fresh food sections. The hypermarket format is actually a big, clean, controlled wet market. That's why you see tanks of live fish and people wearing rubber boots washing down the floor with hoses inside the stores. The floor layout and design of Taiwan's hypermarkets would never work in Britain. But for local consumers, the stores have done a good job of using wet market ideas, like open bin displays, to generate excitement.
Excitement is the key to successful food sales. Just go to a supermarket and a hypermarket and compare the expressions on people's faces. The consumers are having a good time shopping in hypermarkets, they are bringing money and having fun. Supermarkets are rather dull in comparison. The wet market is different from both of these because the vendors there offer their regular customers friendship and trust. The hypermarkets offer a store image and brand names, whereas the traditional market offers friends and neighbors.
The hypermarket assortment of vegetables and general merchandise, combined with parking, comes close to offering consumers one-stop shopping. These stores are able to offer lower prices because they have better distribution and economies of scale--they are adding the value sought by consumers.
Convenience plus time-savings equals the added value that draws customers away from traditional markets. Hypermarkets have successfully generated the perception that their goods are relatively less expensive. If you have a clean store, positive price perceptions, and excitement generated by the store environment, then more consumers bring more money to the store.
Why do supermarkets have problems staying competitive?
Supermarkets came into the Taiwan market with a different view of what is meant by "fresh." In supermarkets, fresh food is processed food--it's cut up, dated, and packaged--while in a wet market the food is unprocessed and unrefrigerated. This means carrots with a little dirt on the outside, leafy vegetables with a few damaged leaves that the consumer can pull off before purchase.
The biggest problem for supermarkets is that the cost-to-profit ratios in the marketplace are all wrong. People are trying to run full- service supermarkets when most of their customers live within a few blocks of their stores. Supermarkets simply don't have the drawing power to generate the high customer flow necessary to pay the costs of the services provided. There are also few shopping centers or malls which create the organized customer traffic flows necessary to sustain the costs of modern supermarkets. So finding a good location for a supermarket is very difficult here.
On the other hand, traditional wet markets have always provided a place where people can interact with other people, where the relationships between vendors and consumers have developed sometimes over generations. Wet markets are integral parts of the community. They are fun, and they provide fresh food. The produce is fresh from the farm--warm meat, butchered as you wait, chickens that have been killed today. You can talk to the people who killed and plucked your chickens, and they have real knowledge about the chicken meat you are buying. This builds trust.
Consumers don't feel that supermarkets offer fresh food, because they chill the merchandise. Supermarkets try to add value by improving fresh food, cutting and packaging it into forms that can save time for consumers. But many older consumers don't see these steps as being necessary.
On the other hand, many younger people aren't very comfortable in wet markets, but feel more relaxed shopping in modern markets. The big difference is that traditional markets offer person-to-person relationships, and modern supermarkets and hypermarkets offer a person-to-brand or person-to-store relationships.
What are the latest food market trends?
The overall trend for modern stores--supermarkets, hypermarkets, and convenience stores--is to get larger. For instance, 7-Eleven is increasing the floor space of some stores by 10 to 15 percent.
The number of hypermarkets will probably increase for another year or so, and then begin to level off. Currently, there are 41 hypermarkets islandwide, and by the end of 1997 there will be more than 50. The new ones will be larger. For example, Carrefour Taiwan has two types of stores--the small-scale blue stores and the large- scale green ones. The company has found the large stores to be more successful. In terms of sales, a single blue store matches the combined sales of eight supermarkets, and a single green store has the sales of 10 to 12 supermarkets. By the end of this year, total hypermarket sales volume will be equivalent to the sales volume of roughly 500 to 600 supermarkets.
What is the impact of increased competition?
Supermarkets and hypermarkets are beginning to reduce the broad range of products they carry. For the last few years, hypermarkets have had an easy ride because there was little competition, but with the entry of Price Costco, Casino, and others, older hypermarkets will be forced to compete harder for the dollars that their regular customers still spend in other stores. For example, a customer may be spending 70 percent of her food budget in your store, but the other 30 percent in wet markets, convenience stores, and other modern markets. Hypermarkets are starting to adjust their range of products to satisfy regular customers by providing 100 percent of their food-basket needs. More market research and better coordination and cooperation with distributors will be necessary to tailor merchandise to suit customer demands.
How have manufacturers reacted to changes in the marketplace?
So far, manufacturers have not been overly cooperative, but this is to be expected. The same pattern of resistance occurred in the UK, the US, and Australia as retailers gained more power in the distribution channel. Sooner or later, manufacturers realize that because retailers are closest to the consumer, they understand their needs best. Retailers cannot survive in a competitive marketplace unless they respond to consumers, a perspective which is new to some of the older manufacturers. You simply cannot hold too broad a merchandise assortment when it's not needed, because it will sit on the shelves and reduce turnover.
The Taiwan market still restricts imports, and this hinders the development of modern markets. Local manufacturers don't want to see tariffs liberalized because the power will shift to retailers, causing prices to fall and their profits to decline. In the long term, local food manufacturers will have to modernize their operations and learn to work with the new food retailers to survive. At the same time, brand names are becoming more and more powerful as consumers look more carefully for value.
What can traditional markets do to survive?
Wet markets have limited options on what they can do to improve their current position. The options are privatization or investment. Privatization of the markets can make things worse, unless the rules are well thought out and well planned--you have to make sure that the new methods of operation are an improvement.
The best solution is the simplest: city governments should invest in cleaning up the wet markets. Basically, consumers want to have a clean, safe environment in which to buy produce. Traditional markets offer consumers, especially older consumers, a shopping environment that is deeply rooted in tradition. Why not simply give people a clean, well-lit place to talk and trade? Cleaning the markets would greatly improve their image. But a one-time cleanup is not effective. What's needed is a management that knows how to keep the environment clean, and does so on a daily basis. This would create a new image for wet markets in the minds of consumers.
--interview by Charles V. Trappey