Penetrating the Food Retailing Industry in Hong Kong – An Examination
1.0 Introduction
Hong Kong is perceived to be a substantial market for all food products basically because of its growing population (over 6.9 million) and the ever-booming tourism industry (over 21 million visited Hong Kong in 2006). As such, food retailing and catering market has been also constantly changing in recent years as the result of the combination of the factors mentioned, demography and hospitality, that is. The food retail sector of the region comprises primarily of hyper/supermarkets and department stores, specialty stores and themed restaurants, convenience stores and traditional markets which include family-owned shops and wet markets.
Concentrating on the idea of the wet market, I believed opening up a restaurant that accepts ‘customised’ cooking would be plausible. As intended, the restaurant will be located beside one of the wet market in Wan Chai Street. Customized cooking restaurant will cook whatever raw ingredients that the customers will give them, however they want it cooked, for a fee. The freshest ingredients will come from the wet market. What I have in mind is a restaurant where people can take their freshly bought products and will have in-house chefs who will cook them the way the customers want it to be cooked.
This is proposed because of the recent food consumption trends in Hong Kong: food safety, increasing health consciousness, changing demographics and busy lifestyles, in addition to continuous arrival of tourists. Further, Hong Kong consumers are also reported as not generally brand conscious but are relatively price sensitive. There is also the perception of ‘clean and green’ consumerism whereby production environment, high food safety standards and non-GM food could be significant sources of competitive edge.
2.0 Classification of businesses
In Hong Kong, there are four primarily classification of business as already mentioned: hyper/supermarkets and department stores, specialty stores and theme restaurants, convenience stores and traditional markets which include family-owned shops and wet markets. Firstly, superstores are the combination of Western supermarket and traditional wet market style, epitomizing the ‘one-stop-shop’ experience. Product categories of hyper and supermarkets are extensive which reaches to over 20, 000, ranging from fresh food to electrical supplies. The advantages of these superstores are its strategic proximity being close to residential and business districts.
Specialty stores and themed restaurants are the recently emerging food retail segments. These stores and restaurants are generally aimed at niche markets including vegetarians and natural or organic food consumers or specific types of food such as beef jerky, almond biscuit and dried shredded squid. Specialty stores usually sell a certain type of good, of the highest grade and quality whereas themed restaurants are intended to bring other places flavors in Hong Kong. Stores and restaurants of this kind are known to be developed in order that the emerging food trend opportunities be captured and profit from such trends.
Convenience stores in Hong Kong primarily target the 15-35 age group as well as the consumers who are looking for convenience of location and shopping times. These stores are primarily characterized by the round-the-clock operation and limited choice of packaged food products. In Hong Kong, convenience stores have delicatessen counter, offering custom-made sandwiches and baguettes as well as racks offering fresh delivered or baked doughnuts from local doughnut shops. In other stores, there are self-service microwave ovens for heating purchased foods.
Finally, wet markets and family-owned stores are spread geographically within the region. Despite the modern outlook and the increasingly Westernized culture, Hong Kong still markets fresh food through wet markets at the retail level. Wet markets are usually characterized by small size, limited range of food products, ‘uncomfortable’ shopping environment and personal ownership. While family owned stores sell mainly fresh and processed foods.
3.0 Porter’s model analysis
3.1 Substitute products
Today, in Hong Kong, there are many food products vying for the attention of nationals and tourists, and these are all substitute products to one another. One theme, however, is evident: Hong Kong consumers are increasingly demanding healthier, fresher and higher nutritional food. As such, there is an increasing consumer preference for fruits, vegetables, poultry and low fat and low sugar content products. Likewise, consumer awareness has been also raised especially the origin of the products. Functional foods appeared to have the significance when it comes to consumption including whole/high fiber products and functional beverages include fruit juice with added supplements/vitamins, fermented drinks with good bacteria and soy milk. Functional foods target the ageing population.
Consumer preferences have also shifted to chilled and frozen goods specifically meat. This is because frozen products are thought to be safer and more hygienic. Working women, in addition, preferred this kind of food as food shopping become less common. Such situation was seen to be the driving force in the emerging significance of frozen foods in Hong Kong markets. There is also the increase confidence of Hong Kong consumers in traditional meat products therefore the opportunity for the promotion of new meat products. As such, in Hong Kong the level of competition with this kind of products means that there are many opportunities for the niche market. However, generally, people in Hong Kong prefer fresh foodstuffs.
Convenience foods have also been in boom recently particularly because of dual income families, smaller households, the ageing population and the busy lifestyles of Hong Kongers and migrants. The increasing demand was also been trickled to major supermarket chains where retail space for this ready-made meals was extended as well as for restaurants which now offer neatly packaged food-to-go. Instant noodles, cup noodles, frozen and canned meals and instant soup are among the popular food products that are purchased in convenience stores. Aside from the trend of healthy food, these products are known for its good taste and product convenience.
Snack foods are also increasingly becoming famous among the teenagers and young females who are employed. Changing lifestyles and increasing average incomes are seen to be the reasons behind the boom in snack food products in Hong Kong. As also related to food consciousness, samples of these products include nuts, fruit snacks, functional biscuits and healthy snack bars.
Organic and natural foods are also famous especially vegetables, fruits, fruit juices, fresh meat, eggs and baby food. Several food safety incidents were perceived to be the rationale behind this in addition to the change in diet towards healthy eating. In major retail food outlets in Hong Kong, a retail space was separately provided to organic products in most of their stores. Being true to the ‘one-stop-shop’ schema, retailers of natural and certified organic food set up a section of mixed grocery and fresh products and with a food hall for devoted for giving free taste.
3.2 Entry of new competitors
Since there are virtually no duties or tariffs impost on imports of food and beverages, penetrating the Hong Kong food retailing industry is relative easy. However, there are several considerations to this such as the control of various local food laws and regulations and specific local composition and labelling regulations. Some of the informations that the label should include are: name or designation of the product, list of ingredients, special storage conditions or instructions for use, name and address of manufacturer, nutritional panel and expiry date of the product in English or Chinese or in both languages. In presence of allergenic substances, it must be also declared as well as the labelling of food additives that shall inform about its functional class and its specific name or its identification number under the International Numbering System (INS) for Food Additives.
When penetrating the food retailing market in Hong Kong, particularly the commodity types, the most feasible way of entrant is through industry consolidation in export efforts. Even Australian Trade Commission believed that consolidation may improve the competitiveness of products because it supports bargaining power, pricing, quantity and quality consistency and brand building. With that said, consolidation could be on the basis of product category, producing region, industry association, interstate or nation-wide. For gourmet food products, an effective marketing strategy is through partner research. The focus must be on promoting food products with marketing package or a concept that provides a close interplay between consumers and products and not just on the product itself.
3.3 Competitive rivalry
Notably, Hong Kong is one of the freest markets in the world, making it extremely vulnerable for rivalries. Provided that there is minimal trade barriers for import, quality products are often competing on price basis. It has been noted by (2000) that the competitiveness of its wholesale and retail sectors suffers from the lack of a competition law to discourage price collusion and other anti-competitive practices. Highly concentrated food retailing, undermined suppliers and lack of differentiation of food products and consumers paying higher prices are the results of this. Nonetheless, Hong Kong nationals are after the value of their money that is why they are willing to pay for quality food products, Moreover, there is the wide presence of foreign food retailers in Hong Kong, exacerbating the conditions of more traditional, Hong Kong-originated food retail businesses.
3.4 Bargaining power of customers
According to a USDA Foreign Agricultural Service Report, Hong Kong’s relatively sophisticated shoppers are buying an increasing percentage of their groceries in the supermarkets, as opposed to traditional wet markets. Nonetheless, the consumers’ buying decisions is largely based on value for money. As already mentioned, Hong Kong nationals are, generally, not lenient to brands, and when faced with discount privileges of another brand or ‘out of stock’ situation, they will likely to take advantage. The moderate bargaining power of Hong Kong consumers are is also evident in their increasing demand for promotion package and discounts. They are very price sensitive, whereby marketing tactics including selling larger economy packs and enclosing complimentary samples are usually utilised as marketing strategy for stimulating sales volume. As such, the most direct and effective tool of marketing is through offering discounts. Various promotions too have varying impacts on the consumers with ‘Direct Price Cut’ as the most important factor in prompting to buy and ‘Free Gift/Coupon’ as the least effective. Hong Kong consumers are by far the most impulsive shoppers in the region who make unplanned purchases.
3.5 Bargaining power of suppliers
Suppliers to Hong Kong are generally from selected offshore countries. Major retailer players such as the supermarkets have strong bargaining power in the market, including the ability to charge a higher listing fee, demand tougher trading terms and gain special discounts from suppliers. Report states that the discount offered varies tremendously depending on the popularity of the products and the bargaining power of the supplying companies. What is happening is simply “in face of strong competition major supermarket stores very often offer discounts and tend to transfer the cost to suppliers by requesting lower prices for supplies. Given supermarkets’ strong bargaining power as they have many retail outlets, many suppliers have to give supermarkets special discounts which ordinary retailers do not enjoy” (2006,). However, the disadvantage is the incapacitation of local suppliers on specific product categories. In fresh fruit, for instance, there is no local production, and that local production is insignificant for snack foods and processed fruit and vegetables. For red meats, chilled and frozen and poultry local suppliers are important.
4.0 Macro environment
The Hong Kong wet market originated from the Chinese periodic marketing system. Traditional agrarian Chinese are highly self-sufficient in producing food and immediate necessities. These people had to resort to go directly to locations for exchange in order to satisfy all their needs. People met at special locale on specific dates, making possible the emergence of standard markets usually along the main street or in a temple courtyard. As (1988) puts it, these markets are “opened only periodically, typically, for a few hours in the morning once every three to five days and that people assembled to the market on market days to sell a chicken or duck, surplus eggs, such grains or vegetables as could be spared and to buy food or other goods that they needed but did not produce.”.
Today, the wet markets in Hong Kong have continued to be dominating the market and with strength relative on fresh food area. According to (1999), ‘such phenomenon is surprising because,based on the experiences in North America and Western Europe and given the well-developed economy of Hong Kong, one wouldhave expected supermarkets to dominate fresh food retailingand wet markets to be in retreat. The authors argue that consumers’ shopping and consumption culture,the effectiveness of wet markets in handling consumers’ needs,and the appropriateness of the simple technology used by wetmarkets are at the basis of this dominance.’
Because of the steady presence of other food business sectors, in more recent situation, wet market had experienced a gradual decline. There had been the indications of gradual decline in terms of patronage because of the concern with the shopping environment particularly when it comes to cleanliness and comfort. Small operators in wet market have also seen a decline by 41% from 1996 to 2001. As such, although wet markets have a significant share of the fresh food sector, market share alone is not by itself indicative of market power. Pricing behaviour is also persistent. There is the necessity then for wet market to address improvement needs in order for them to remain competitive.
(2003) puts it in this way: Apart from the fact that wet markets are an important competitive element in food retailing, wet markets can also be seen as an integral part of the cultural fabric of Hong Kong and one of the defining features that gives the city its unique character. Importantly, wet markets are also a large source of employment, not only for the actual wet market traders and their assistants, but the many goods and service providers who provide logistical and other support. Various surveys indicate that public and private wet markets enjoy considerable patronage, and substantial numbers of consumers indicate a preference for them. However, this preference is tempered by the concern over the shopping environment.”
5.0 Industry life cycle
6.0 Recommendations
Hong Kong is recognised as the ‘Culinary Capital of Asia’. In 2005, Hong Kong’s tourists spent US.25 billion in restaurants (excluding hotel restaurants), worth 17% of Hong Kong’s HRI business. Hong Kong has approximately 10,340 restaurants, as well as over 1,000 bars and other eating and drinking places. Chinese restaurants dominate the Hong Kong restaurant sector, accounting for 45% of the industry. Knowingly, there are two markets that will be needed to be penetrated: wet market and restaurant sector. The recommendations include:
Companies may consider the following: select a committed agent and work hard on building the relationship for the long term; use a qualified export packer for exports (if your volumes are too small to sell direct to an overseas importer), or team up with a producers’ association for collective export marketing and logistics while individual producers may still have its own identity for marketing its own brand in the domestic market; visit the market before exporting; work closely with buyers in the market as mutual trust is important. You may also learn how to engage in direct trade with mainland China from your business partnership with a Hong Kong company; brand building of your products over time including use of product promoters; innovative products and packaging; attending or participating in trade shows is another way of marketing your products. HOFEX is one of the most important food shows in the region; set up your own representative office in the market, you would therefore own the customer network (rather than depending on the ‘mercy’ of your agent). Once your presence in the market is well-established, you could even take on additional export business from others.
Most imports of food and beverages are channelled through import agents who normally distribute direct to retailers and catering end-users. Major supermarket chains buy many products directly from selected overseas suppliers. The two largest supermarket chains, Park’N Shop and Wellcome, are obtaining supplies of products by direct import and through local agents, however, it is generally the intention of both chains to by-pass the agents and go direct wherever possible for selected large volume product lines. The two major supermarket chains in Hong Kong have their own large warehousing facilities for the handling of perishable goods, repacking and distribution. Due to the lack of adequate central warehousing, processing and delivering facilities, the second tier supermarket groups and the local convenience stores are currently importing selected product items from overseas. As the trade continues to expand it is expected that some of these organisations will manage to develop their own facilities and purchase some of their requirements direct from overseas sources.
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