Supermarketisation CSQ

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Case Study Skills

2 aspects:

- Data Response: involves interpreting data givenand relating it to economic concepts 12marks

- Extracts: involves relating economic concepts tosituation/issue described in extract 18marks

KEY: APPLICATION TO ECONOMIC CONCEPTS!

Data Interpretation

Types of Data Displays:

Graphs/Chartso Line Graph

o Bar Graph

o Pie Chart

Tables

Types of Data:

Cross-Sectional: Cross-sectional data refers to datacollected by observing many subjects (such as individuals,firms or countries/regions) at the same point of time, orwithout regard to differences in time. Analysis of cross-sectional data usually consists of comparing thedifferences among the subjects.

Time Series: sequence of data points, measured atsuccessive times spaced along uniform time intervals.

Time series data often illustrate trends across timeo Common question: What is the trend?

Trend: line of best fit increasing,decreasing, fluctuating

Fluctuating: line of best fit is horizontal

How to read data:


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Titles, axes (of graphs), unitsTypes of Long Questions:

1) Explain factors that caused a change

2) Assess impact of policies/changes

Positive impact? Negative impact?

3) Assess policy: effectiveness? Appropriate?

Effectiveness: can the policy solve the problem?

Appropriateness: suitable to the current context? i.e. can it solve the

root problem without being outweighed by negative effects?

4) Assess data: Can conclusions be drawn?

Look at statistics in case study + data charts and tables to justify

whether a particular trend/issue/problem is occurring

5) Discuss an opinion

Argument supporting the opinion vs. counter-argument disagreeing

with opinion

6) Suggest & discuss recommendations

Suggest policies/solutions + evaluate strategies by explaining

limitations


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Question 1 Supermarketisation

What is the overall theme in the case study?

What is the main economic framework in the case study?

Extract 1:Singaporean tastes

One of the most affluent nations in Asia, the city-state of Singapore presents a small but

mature retail environment. Rising incomes and busier lifestyles have influenced shopping

and product preferences as the majority of Singaporeans prefer to shop in modern retail

outlets, seeking convenience and packaged foods in addition to high quality basic foodproducts.

The supremacy of modern grocery outlets is set to rise further. Singaporean consumers

have embraced modern retail outlets for their air-conditioned comfort, hygiene and user-

friendly layouts. They already make up around 70 percent in value of the grocery retail

market, with the balance going to traditional outlets including wet markets and provision

shops.

The market share of traditional retailers continues to be eroded by their modern

counterparts. Although traditional outlets are considered to have fresher produce and a

more personal service, they provide a limited product selection and a less comfortableshopping environment. The proportion of households spending the bulk of their grocery

money at traditional grocery shops and wet markets continues to fall, from 22 percent in

2002 to 14 percent in 2003.

Adapted from: KPMG strategic & commercial intelligence advisory on Grocery Retailing in Asia Pacific

Extract 2: An underdeveloped Indian grocery retail market

Some 98% of the US$248 billion retail industry in India still belongs to traditional small

independent or family-owned retailers. However, in common with most Asian countries,

such stores are steadily losing share to modern format self-service stores: the number of

traditional grocery outlets has grown by only two percent since 2001 while organised stores

have increased by 18 percent. Despite their advantages personalised service,

accessibility, understanding of customer needs their limited product range and lack of

promotional schemes mean that they will struggle to retain the progressively affluent and

sophisticated customers.

However, this level of growth in organised grocery stores is not without problems.

Organised grocery retailers face stiff competition from traditional-style grocers, who are

clearly still the preferred sources for the Indian masses, especially in smaller cities and

towns. Traditional stores are mostly owner-operated, and have low property and labour

costs.


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There are significant opportunities in this fragmented market for domestic and international

operators to establish a brand with a regional or national presence. But without more

consolidated power, modern retailers currently lack efficiency in sourcing, supply chain

management, infrastructure and technology systems.

Adapted from: KPMG strategic & commercial intelligence advisory on Grocery Retailing in Asia Pacific

Extract 3: Supermarketisation in China

"Supermarketisation" is transforming China's food sector into a modern retail system.

Modern supermarkets, convenience stores, hypermarkets - retail formats nearly non-existent

in China in the early 1990s - have now captured an estimated 30% of the urban food market

and are growing at rates of 30-40% annually.

The two main reasons for modern organised retailers unprecedented growth in China:

The way they sell to consumers: Supermarkets, engaged in fierce competition with other

types of outlets in Chinese economy, are eager to carry new products to meet consumer

demand for quality and product diversity. Some advertise exotic products to get customers in

the door.

The way they buy from suppliers: Supermarket chains employ centralised, high-volume

distribution systems that give suppliers a larger target with fewer distribution layers to

navigate. Procurement modernisation is increasing the advantage of suppliers that can

deliver quality products in a timely and price-competitive fashion. These factors should give

larger food suppliers a better chance to compete in the Chinese marketplace.

Supermarkets are bringing world-class procurement systems into China, establishing large,

centralised distribution centers that draw products from throughout China, and from

elsewhere in Asia, Oceania, the Americas and Europe. Multinational logistics firms are now

operating in China, whose WTO commitments mandate that the country open its market to

foreign companies engaged in wholesaling and distribution in 2004.

Adapted from: Asia Times Online June 24, 2005

Figure 1: Grocery Retail Sales in China by Segment (%

of Total Sales), 2004


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Questions

(a) Distinguish, with examples, between the fixed and variable costs involved in

the grocery retail industry. [4]

(b) (i) How far does the data demonstrate that supermarketisation has taken

place in China and India? [6]

Note: Data (statistics) can come from both extracts and data charts/tables

Requirements of question: data evidence that demonstrates supermarketisation; data

evidence that counters supermarketization and data is limited

Argument: The data demonstrates supermarketisation occurring in China and India.

India: the number of traditional grocery outlets has grown by only two percent since

2001 while organised stores have increased by 18 percent summarize in ownwords

China: hypermarkets have now captured an estimated 30% of the urban food market

and are growing at rates of 30-40% annually summarize in own words

Counter-argument: The data demonstrates that supermarketization is not taking place

India: 98% of the US$248 billion retail industry in India still belongs to traditional

small independent or family-owned retailers

China: Figure 1: interpretation?


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Data is limited

Figure 1: cross-sectional data does not show change in market share of

supermarkets over time

Data does not differentiate between rural vs. urban sectors of both countries rateof growth might be faster in urban vs. rural areas

Overall stand: Data demonstrates that supermarketization is occurring in China, but less so

in India, with the industry still largely dominated by small, traditional retailers.

(ii) Suggest possible reasons for the above change in China and Indiarespectively. [4]

Identify changes in China and India respectively.

China: supermarketization occurring, but less so in India

Reasons for supermarketization in China:

that the country open its market to foreign companies engaged in wholesaling anddistribution in 2004 Chinas openness to foreign direct investment (FDI) entails the

entry of new supermarket firms into the market (MNCs) which gives consumers

greater choice

Para 3: eager to carry new products to meet consumer demand for quality and

product diversity. Some advertise exotic products to get customers in the door

demand reasons supermarkets try to change tastes and preferences of

consumers towards their products through offering new and quality products

and advertising use of non-price strategies

Para 4: The way they buy from suppliers: Supermarket chains employ centralised,

high-volume distribution systems that give suppliers a larger target with fewer

distribution layers to navigate supply/cost reasons large supermarkets likely

to enjoy economies of scale in terms of technical EOS in its distribution

system can offer consumers lower-priced products as compared to small,

traditional stores pricing strategy

Reasons for Indias slower change:

their advantages personalised service, accessibility, understanding of customer

needs traditional-style grocers clearly still the preferred sources for the Indianmasses, especially in smaller cities and towns consumers tastes and


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preferences for traditional-style grocers remain unchanged no fall in demand

for such firms

Traditional stores are mostly owner-operated, and have low property and labour

costs without more consolidated power, modern retailers currently lack efficiency in

sourcing, supply chain management, infrastructure and technology systems traditional stores have a lower cost of production as compared to modern

supermarkets who have yet to reap economies of scale with a large size [likely

that DEOS outweigh EOS for large retailers]

Lack of branding by large retailers inability to make demand for its good

more price inelastic brand loyalty for traditional retailers still exist

ANY ONE reason for both countries 2m each

(c) Using information provided where relevant, discuss the possible cost

advantages supermarketisation entails. [8]

Question asks: does supermarketisation result in cost advantages? If so, what kind? If not,

why?

Definition of supermarketization:

"Supermarketisation" is transforming China's food sector into a modern retail system.

Modern supermarkets, convenience stores, hypermarkets - retail formats nearly non-

existent in China in the early 1990s - have now captured an estimated 30% of the urban

food market and are growing at rates of 30-40% annually.

Indication that not only is the firm growing in size, but the industry is also growing in

size as well both internal and external EOS are earned

But firms may also earn internal and external DEOS

Internal EOS

Choose most relevant

MUST explain HOW LRAC is lowered as output increases fixed cost spread over a

larger output or variable cost falls?

Similarly for external EOS and DEOS and internal DEOS

(d) Consider the possible strategies traditional retail stores in Singapore could

adopt to remain competitive. [8]

Consider context: The market share of traditional retailers continues to be eroded by their

modern counterparts. Although traditional outlets are considered to have fresher produce


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and a more personal service, they provide a limited product selection and a less comfortable

shopping environment.

Suggest possible strategies explain how these strategies enable the traditional

retail stores to compete i.e. earn at least normal profits to continue in the industry in

the LR

Explain limitations of these strategies

Possible Hints in case study.

Explain all these in light of above context.

To remain competitive, traditional retail stores can find ways of minimizing total cost

(achieving same level of cost advantages as large firms) OR maximizing total revenue

(demand-side strategies)

Minimizing Total Cost:

(i) Mergers horizontally or vertically allows the firm to earn economies of scale

Acquisition of downstream raw material supplier reduces mark-up of price

of factors of production lowers cost of production/transport cost (linking

processes under technical EOS)

(ii) Joint ventures purchase raw materials (for e.g. vegetable produce) in bulk

(iii) Reducing cost of production by improving efficiency of production processes or

reducing labour cost

Staff training increase productivity

Maximizing total revenue:

(i) Non-price strategies: Product Differentiation

Advertising (leaflets, etc.) makes demand for its good more price inelastic

consumers are less sensitive to changes in price of its goods slight rise

in price will not result in a more than proportionate fall in Qdd

Actual product differentiation

providing comfort, for e.g. air-conditioned stores, personalized service

creating brand loyalty

opening hours + store location

(ii) Price strategies offer lower prices as compared to large retailers

Limitations of strategies:


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(i) Joint ventures require cooperation of various small firms firms must have an

incentive to cooperate

(ii) Implementing non-price strategies also implies an increase in cost of production for

small retailers uncertain whether projected revenue from implementation of such

business strategies outweigh costs incurred

(iii)Small firms may not earn sufficient profits to implement strategies such as advertising

or provision of air-conditioned stores

(iv) Should small firms not have cost advantages difficult to lower prices

Best strategy to implement?

[Total: 30]

AJC Prelims 2007

Supermarketisation CSQ

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