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ArmInfo’s Interview with Artashes Shaboyan, Senior Research Specialist at Ameria Group
by Gayane Isahakyan
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.