Is supermaketisation trend excluding the traditional retail markets?

Oct 18, 2020

Some foreign supermarkets have been unable to drive sales to pay suppliers and consequently exited the market

In the past few years, Uganda has witnessed a rapid increase of supermarkets in the urban centres and suburbs characterized by a change from stores trading in luxurious goods to supermarket brands stocked with fast-moving consumer goods (FMCG).

For convenience, this article adopts the word ‘supermarketisation' to describe the rapid rise of supermarkets or large retail stores in the country. Examples of these supermarkets brands include; Shoprite, Capital shoppers, Kenjoy, Quality among others.

This rise in the supermaketization trend can be attributed to the favourable investment climate, an increase in urbanisation, the rise of a middle class and changes in tastes and preferences amongst urban consumers. Supermarkets are also perceived to offer better product quality, safety, variety and customer service which in turn provides opportunities for producers and suppliers to expand their market and profits.

Research shows that, while this may be the case, it poses challenges for the traditional retailers who risk being excluded from the market. This notion is based on the idea of economies of scale where large stores are able to out-compete the smaller retailers because they can attain efficiency by vertically integrating their channels of distribution.

However, some foreign supermarkets in Uganda such as Uchumi, Nakumatt, and Tuskys have been unable to drive sales to pay suppliers and consequently exited the market whereas their local counterparts still trade on. Which shows that suppliers are vital towards the survival of a market in terms of the products they provide and the timeliness of the delivery of the products, otherwise customers can move to rival supermarkets where product quality and availability is guaranteed.

Perhaps one can argue that the local supermarkets are able to understand local tastes and habits and tailor their merchandise to the needs of local consumers which the foreign supermarkets may not accommodate. There is also the possibility that the foreign supermarkets are subjected to many costly regulatory requirements like providing NSSF for workers and taxation, which renders them uncompetitive relative to their local counterparts.

Regardless of the reason, however, competition in this instance is price-driven whereby supermarkets change the retail setting from the urban centres to the urban peripheries to exploit lower rents. In turn, consumer traffic is diverted from small retailers in urban centres. This trend is evident in developed countries but is yet to come to Uganda.

Research identifies factors which inspire the proliferation of large retail chains which include; increase in consumer income, possession of refrigerators and cars, and lower prices which the supermarkets offer. This implies that supermarketisation may not take effect without the existence of a market that supports high retail volumes. For instance evidence from Kenya,

shows that large retailers encourage the supermarket culture amongst low-income households and count on the initial high sales resulting from relocation to urban peripheries and to develop their potential consumer base through the perception of reduced prices.

Research further shows that as the household income rises, the expenditure also increases especially for non-staple foods such as fresh fruits and vegetables, and processed foods. Uganda's GDP per capita increased from $666.61 in 2017 to $800 in 2020 which could mean an increase in the purchasing power and demand for FMCG. Also, such increased demand for non-staple foods is often met by large retailers who have superior procurement systems and efficient channels of distribution, which lessen costs for retailers and buying prices for consumers as a result.

According to the National Population and Housing Census report (2014), 8.9% of Ugandans own cars in urban centres and 2.2% in the rural areas, which suggests that more Ugandans own cars can afford to buy in bulk and transport big quantities of goods, in a relatively shorter time, and a cost reduction for the retailer in turn.

Other key elements which determine consumer choices include; the convenience of accessing the stores in terms of distance, opening hours, one-stop-shopping and the affordability of the products. Supermarkets charge relatively lower prices than other retail stores because they buy in large quantities and thus their fixed costs are spread over many transactions. Yet, a small retail store can get away with charging higher prices because of ‘convenience' in terms of proximity to the customer, which shows the value of convenience that some people are willing to pay extra for.

Nevertheless, the traditional markets such as Nakasero, Nakawa and St. Balikuddembe are still the main retailers for food, due to the lower prices they offer for foodstuffs and their closer relationship with the customer in terms of understanding their needs and extension of credit when the need arises. On the other hand, supermarkets are associated with the demand for high-quality products to meet the changing consumer tastes and preferences, safety measures (such as hand-washing and sanitizers) due to the Covid-19 pandemic, and more shopping space compared to the traditional markets.

In conclusion, supermarkets and traditional retailers can co-exist in the market and their survival will depend on the better competitor to meet and satisfy the customer's needs such as; which retailer offers the best value for their money in terms of quality, safety and the least time spent shopping.

The writer is a research analyst at Economic Policy Research Centre

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