Southeast Asia’s retail landscape has evolved significantly over the past two decades. Historically, this region has been dominated by traditional trade channels such as wet markets and mom-and-pop stores.

Also referred to as ‘warung’ in Indonesia and ‘sari-sari’ in the Philippines, these small stores have been the cornerstone of grocery retail by providing basic necessities for local daily life.

However, in recent years, the region has observed a shift in its retail landscape. These findings are explored in detail in Boston Consulting Group’s (BCG) latest report, Revolution and Reinvention: The Future of Retail in Southeast Asia. 

With surging middle-income growth and urbanisation, modern, organised retail outlets—sprawling hypermarkets exceeding 5,000 square metres (sqm) with over 15,000 stock-keeping units (SKUs)—have become a hallmark of suburban life, selling everything from tomatoes to televisions.

These large retail formats have been a game-changer for pricing and value. High sales volumes have traditionally enabled these mega-retailers to procure goods at lower prices, resulting in savings that are often passed onto consumers in the form of better value deals.

Death of the Hypermarket

Despite the once promising value proposition and market share of large format stores, hypermarkets and supermarkets are now on a decline—mirroring a trend already observed in Europe a decade ago.

Several factors are contributing to this change, including the scaling of e-commerce and food delivery services, increased urban densification, and shifting consumer consumption patterns and values.

As a result of these changes, the operational model of traditional large format stores is also under strain due to their expansive inventories and high overhead costs.

This burden was made heavier by the impact of Covid-19, which shifted shopping behaviours towards online platforms and convenience-driven options within an accelerated timespan.

As volumes decline, these retailers struggle to keep consumer footfall high enough to support their existing business model. Current inflationary pressures further exacerbate this situation, undermining their low-price advantage.

Convenience Is King

As Southeast Asia’s retail landscape undergoes profound shifts, convenience stands out as a pivotal value proposition, with the rise of small formats and digitalisation leading the charge in captivating consumer interest.

Small format grocery retail—stores occupying less than 500 sqm or 10x smaller than your typical hypermarket—have emerged as an attractive model for increasingly time and cash-strapped consumers.

Despite their smaller footprints, small formats appeal to consumers through their pricing strategy. These stores often mirror, or even undercut up to 30 percent, the price positioning of larger modern trade players.

Additionally, convenience is their main value-add as these stores can usually be found in neighbourhood locations, serving as local solutions for quick, affordable shopping.

The sustainability of the small format model lies in its operational methods. These stores often streamline their offerings, carrying ~3,000 stock keeping units (SKUs), which is 5 times lesser than what is found in traditional large formats.

Additionally, they have a no-frills service model with minimal in-store labour, basic shelving and refrigeration, and fewer product categories, with a focus on long shelf-life products.

By limiting their range and size, small format retailers can maintain relentless cost efficiency due to their reduced capital expenditure (capex) and operational expenditure (opex). Their lean approach also enables them to pass on savings to customers while maintaining sufficient margins to sustain and grow their businesses.

Today, small format grocery retail is the fastest growing retail format in Southeast Asia, appealing to consumers who favour smaller, more frequent purchases.

With a 7 percent annual growth rate from 2018 to 2022, small formats outpace other retail channels like hypermarkets, which saw a 4 percent decline, and supermarkets, that only grew 2 percent, to carve out a significant and expanding model in the market.

In Indonesia, incumbents are responding to the emergence of fast-growing small format challengers by amplifying their own efforts to uphold industry standing. Key players such as Indomaret and Alfamart are making strategic strides by expanding their store footprint to rural areas.

Specifically, Indomaret is bolstering its presence with the addition of 1,500 new stores this year in non-Java areas, while Alfamart’s expansion includes 900 more outlets in the same areas. By year’s end, both incumbents are projected to operate over 40,000 stores collectively outside of Java, ensuring deeper market penetration in less urbanised locations.

Digitaliation is also reshaping the landscape. A regional survey conducted by BCG involving 9,000 participants indicates an online usage spike of about 50 percent in the past two years following the outbreak of Covid-19, relative to pre-pandemic figures.

Embracing this online shift allows businesses to not only offer integrated solutions but also foster deeper connections with consumers wherever they may be.

In sync with this trend, Alfamart has revamped its digital platform, Alfagift, which has skyrocketed in popularity, boasting nearly 20 million downloads, making it one of Indonesia’s top applications.

Staying Relevant in a Changing World

As Southeast Asia’s retail landscape continues to evolve, embracing strategic adaptation is key for retailers wanting to thrive. A clear network strategy is important; targeted footprint expansion will allow retailers to reach consumers in both urban and rural areas, ensuring that growth is achieved in a focused yet sustainable manner.

Furthermore, the digital era demands a bold presence. Retailers must enhance their digital presence and ramp up technology investments. In a world where consumers are increasingly seeking omnipresent engagement, an integrated and engaging online platform is no longer a luxury, but a necessity.

This involves not just a website or mobile app, but a comprehensive digital strategy encompassing marketing, sales, customer service, and a suite of convenient services such as instant delivery and online payment options.

Finally, current inflationary pressures and changing consumer behaviours underline the importance of a strong orientation towards value in both product offering and portfolio.

Beyond products, customers are also seeking value in the form of affordable prices, high quality offerings, and a satisfying yet convenient shopping experience. In response, retailers must craft a portfolio that meets these demands while offering cost-effective and appealing selections.

The future of retail in Southeast Asia remains dynamic, presenting both substantial opportunities and critical considerations for those aiming to build enduring businesses.

As we look to the coming decade, it is evident that the disruptive forces at play will continue to intensify and influence entire operational frameworks. To remain relevant, retailers must proactively embrace change and align their business models with emerging trends to arise as competitive players in this transformative era.

Jason Moy is a director and partner at Boston Consulting Group, a multinational consulting company. Jasryn Ng is a principal at Boston Consulting Group.