Hong Kong Grocery Market: Supermarket Chains, 759 Store and Best Mart 360°
Supermarket chains play an important role in Hong Kong for taking care of citizens’ daily grocery needs. Today, two large supermarket chains, namely Wellcome and ParknShop have taken a lion’s share of the market, making it difficult for smaller scale businesses to come and compete. Against this backdrop, two discount grocery store chains – 759 Store and Best Mart 360º – are carving out their own spaces by providing differentiating offerings and low-price options to consumers.
- Wellcome and ParknShop are the two biggest supermarket chains in Hong Kong. A 2016 report by USDA’s Foreign Agricultural Service on Hong Kong retail food market showed that these two supermarkets accounted for about 75% of retails sales amongst all grocery retailers in 2015.
- 759 Store is a successful discount grocery store chain competing with supermarkets primarily in categories of snacks and staple food.
- Best Mart 360º entered the market after 759 Store and is in the process of applying for an initial public offering (IPO) in Hong Kong to fund its expansion.
Hong Kong Grocery Market Overview
Hong Kong, with its population of 7.43 million, has a very high daily demand for groceries, food and snack items,and other household necessities. The three major sources that fulfill this demand are:
- Traditional wet markets that supply mainly food items such as fresh produce, meat and live poultry. These markets serve residents in their surrounding neighborhoods.
- Supermarket chains owned by large conglomerates, which offer a wide range of products such as staple food, snacks, beverages and household necessities.
- Independent grocery stores, which offer mostly basic items and often not fresh produce. These are, typically, small in size and family-owned.
Supermarket chains, with their more comprehensive offerings, area popular choice of Hong Kong’s citizens as they are one-stop shopping places where everything from food to household goods can be bought.Also, supermarket chains have a wide network of outlets and are therefore accessible for both spontaneous or planned shopping trips.
According to Hong Kong’s Census and Statstics Department, total retail sales in the city amounted to HK$446 billion (US$57 billion) in 2017. Of this amount, supermarkets accounted for HK$52 billion (US$6.6 billion) or 11.7% of total retail sales. Also, supermarkets’ sales grew at a rate of 6.5% from 2013 through 2017, much faster than the overall retail market which recorded a negative growth of 9.8% in the same period.
Source: Census and Statistics Department, Hong Kong/Coresight Research
In terms of retails sales of food items, supermarkets have surpassed traditional wet markets. The 2016 USDA Report on Hong Kong’s retail food market by USDA’s Foreign Agricultural Service revealed that food retail sales in supermarkets have exceeded sales in traditional wet markets since 1998.
In this report, we will take a look at:
- supermarket chains in Hong Kong;
- how two large supermarket chains have been grabbing the lion’s share of the city’s grocery market; and,
- two new players, 759 Store and Best Mart 360º, which have emerged as alternatives to supermarkets for food and snack items and household care goods.
Two Large Supermarkets Take Over
Dairy Farm International Holdings’ Wellcome and A.S. Watson Group’s ParknShop are the two supermarket chains that have taken a lion’s share of the grocery market for long. The 2016 USDA Report revealed that these two chains accounted for around 75% of all grocery retails sales in Hong Kong in 2015. Another 2013 report on Hong Kong’s grocery market by the city’s Consumer Council showed that Wellcome and ParknShop accounted for 33.9% and 28.6%, respectively, of Hong Kong’s grocery market sales.
A Wellcome Supermarket chain’s outlet in Hong Kong
Source: Link Asset Management Limited
A ParknShop Supermarket chain’s outlet in Hong Kong
Source: Link Asset Management Limited
The substantial market share of the two big supermarket chains is reflected by the number of their branches in the city. Both have more than 200 outlets each, which is far more than the number of stores any other chain has.
Source: Company websites/Coresight Research
Wellcome and ParknShop enjoy economies of scale as their parent companies are both large conglomerates with multiple operations in Hong Kong. Dairy Farm International Holdings owns the pharmacy chain Mannings, the catering group Maxim’s and operates 7-Elevenconvenience stores in the city. A.S. Watson, on the other hand, owns the pharmacy chain Watsons, the beverage brand Sunkist and the electrical appliance stores Fortress. Wellcome and ParknShop, therefore, are able to enjoy economies of scale from their parent companies’ large-scale businesses.
Against this backdrop, the emergence of discount grocery store chains 759 Store and Best Mart 360º and their success in gaining a foothold in Hong Kong’s grocery market is worth noting. In the following sections, we will discuss how 759 Store and Best Mart 360º strategically made their ways into the grocery market and competed against others upermarket giants for market share.
759 Store Emerged to Compete with Supermarket Giants
- Store, founded in 2010, competes with the supermarket duopoly by:
- offering low prices that results in quick turnover with lower profit margins;
- selling unique Japanese and Korean snacks that incumbent supermarket chains do not offer to the market;
- later expanding into the staple food category and developing private labels; and,
- developing a membership scheme to enhance customer loyalty.
A 759 Store outlet in Hong Kong
Source: Company website
Details of these strategies are given below.
759 Store’s strategy is to achieve quick turnover with lower profit margins and it has maintained low profit margins since its founding. The Annual Reports of CEC International Holdings Limited—parent company of 759 Store—which is listed in the Hong Kong Stock Exchange, show that gross profit margin of the group was 33.4%, 34% and 35.1% for the years ended April 30, 2016, 2017 and 2018, respectively.
To illustrate our point, the Coresight Research team visited 759 Store, ParknShop and Wellcome on September 27 and discovered that the prices of a 408-ml bottle of Tai Wo Soybean Milkat these places were HK$6 (US$0.77), HK$7.2 (US$0.92) and HK$8 (US$1.02), respectively. As seen in this example, 759 Store offered the lowest price for the same product sold.
Tai Wo Soybean Milk
Source: Coresight Research
759 Store once even sold a can of Coca-Cola at HK$2.7 (US$0.34), just $5 cent higher than the wholesale price of HK$2.2 (US$0.28) set by supplier Swire Coca-Cola in 2011—making headlines at the time.
Selling Unique Japanese and Korean Snacks
759Store started by selling snacks and beverages, especially those from Japan and South Korea. However, its low-price proposition strained its relationship with local distributors and suppliers. Wishing to maintain its pricing autonomy, 759 Store changed to adopt a self-import approach by procuring products directly from overseas suppliers. Japan is the first country from where it began to import unique snack products, marking the success of its self-import approach.
Because 759 Store continued its merchandising activities in Japan even when many merchants had stopped sourcing from the country after the 2011 Tohoku earthquake and tsunami, it successfully cultivated close ties and relationships with Japanese suppliers and distributors. The chain then proceeded to establish more partnerships with suppliers in Japan, South Korea, Europe and Thailand, building an extensive overseas supplier network. Its reliance on local suppliers has reduced significantly over time and Japan and South Korea are its largest product supply sources.
According to the 2017/2018 Annual Results Announcement of CEC International Holdings Limited, more than 80% of 759 Store’s products were procured directly from overseas, of which the places of origin were mainly Japan and South Korea (nearly 50% of the total direct import) and it had only three local supplier partners in the last fiscal year.
Source: 2017/2018 Annual Results Announcement of CEC International Holdings Limited
Self-import ensures a steady supply of 759 Store’s products from overseas suppliers, making it a renowned Japanese and Korean snacks retailer. Many of its Japanese and Korean snacks are unique in Hong Kong and are not sold at other grocery retail chains, attracting customers with product differentiation.
Hot-selling snacks from Japan that are sold at 759 Stores: White Peach Jelly, Grape Jelly, Corn Potage Snack
Expanded into Staple Food Category and Private Labels
759 Store then proceeded to widen its offerings to include staple food such as rice, noodles, cooking oil and seasonings. It also began developing private labels to boost revenues.
Although staple foods are not as fast moving as snacks, the steadiness of demand makes them a steady source of revenue and higher selling prices make them worth investing in. 759 Store has been actively developing its staple food category in recent years with promising results. As revealed in the 2016/2017 Annual Report of CEC International, Thailand Jasmine Rice recorded the highest sales growth in the 2016/2017 fiscal year with peripheral rice products such as rice noodles and rice bran oil being listed in bestsellers in the same year.
Private Labels have contributed considerable revenue to 759 Store. The chain sources snack and food items from reputed manufacturers from China and South Korea to produce its branded products, which include frozen food, household cleaning and personal care items. CEC International’s annual report for 2017-2018 says that revenue generated from the sales of self-built brands or exclusive brands amounted to 31.5% of 759 Store’s total revenue in the last fiscal year.
Private label products of 759 Store: Fresh Udon, Bamboo Facial Tissues
759 Store has a membership scheme that offers further discounts to customers. We visited outlets of 759 Store, Wellcome and ParknShop on September 27, and saw that members of 759 Store could buy a pack of De-ma-e instant noodles (sesame oil) for an average price of HK$4.1 (US$0.52) while non-members had to pay HK$5.4 (US$0.69). The same product sold for HK$4.4 (US$0.56) per pack on average at Wellcome and ParknShop. Members of 759 Store could thus enjoy a higher discount.
According to the 2017/2018 Annual Report of CEC International, there are1.2 million active 759 Store members, which means that around one in every seven Hong Kong citizens had paid regular visits to 759 Stores.
A pack of De-ma-e instant noodles (sesame oil)
Best Mart 360° Joined to Heat Up the Competition
Best Mart 360º, founded in 2013, is another successful grocery store chain in Hong Kong. The chain, which sells a mix of snacks, beverages and household care goods, is currently applying for an IPO on the main board of the Hong Kong Stock Exchange. According to its prospectus filed to the Hong Kong Stock Exchange in June 2018, Best Mart 360º recorded revenue of HK$1.08 billion (US$138 million) for the year ended March 31, 2018. This revenue figure is impressive considering that the chain has only 71 stores.
A Best Mart 360° store in Hong Kong
Source: Hong Kong Tourism Board
Focus on Confectionary and Packaged Snacks as Key Products
Best Mart 360° concentrates on selling confectionary and snacks items with a few household care items on its shelves.
According to the company’s prospectus filed to the Hong Kong Stock Exchange, confectionery sales accounted for HK$358 million (US$45.7 million) in the year ended March 31, 2018. This amount is 33% of Best Mart 360°’s total revenues in the period.
Generally speaking, the product range available at Best Mart 360° is not as wide as 759 Store’s and its product profile revolves primarily around confectionary and snacks.
Source: Application Proof of Best Mart 360 Holdings Limited
Sourcing Merchandise from Both Local and Overseas Suppliers
Best Mart 360° maintains a balanced profile of local and overseas suppliers for product supplies and the chain relies mainly on parallel imports for its products procured from overseas suppliers. In the year ended March 31, 2018, Best Mart 360° had purchased 41% of its products from importers in Hong Kong,and Japan (at 16.1%) and the US (at 15.6%) were its largest overseas supply sources.
Source: Application Proof of Best Mart 360 Holdings Limited
Two years after its founding, Best Mart 360° introduced its own membership scheme in 2015 to maintain customer loyalty. By offering incentives and promotional offers such as reward points earning and member price privileges, the chain has been able to accumulate around 880,000 members in the last three years. Revenue derived from Best Mart 360° members as a portion of the total revenue has grown significantly over the past three years, and are 17.3%, 25.8% and 40.3% for the years ending March 31, 2016, 2017 and 2018, respectively, according to its prospectus filing.
Best Mart 360°’s September issue of discount items for members
Source: Company websites/Coresight Research
*Number of outlets/stores was based on the latest available figures from the respective retailers as of the date of this report.
Supermarket chains are an integral part of the daily lives of Hong Kong citizens as they offer a convenient and comfortable shopping environment in which they can shop for daily necessities. Yet, Wellcome and ParknShop have taken a major share of the grocery market, making it difficult for new entrants to come and compete.
Though discount grocery store chains 759 Store and Best Mart 360° serve as alternatives to the two giants, their product range cannot be compared to large supermarket chains. While 759 Store and Best Mart 360° have been carefully expanding their stores to make fast-moving snack products more accessible to consumers in every neighborhood, the notoriously high rents in Hong Kong renders a less certain future for this expansion path.
It remains to be seen whether more energies can be infused in Hong Kong’s grocery retail market by using digital, customer loyalty drivers or other innovative strategies.