Retail Sector in Pakistan

Retailing in Pakistan: Historical Perspective

  • Historically, buyers and sellers met at marketplaces.
  • Evolution: marketplaces -> huts -> shops.
  • Pakistan: transitioned from small retail clusters to large wholesalers and shopping malls.
  • Retail revolution: home to international brands (Next, Mothercare) and wholesale chains (Metro, Makro, Carrefour).
  • Retail giants like Marks & Spencer are expressing interest.
  • Debenhams has already started operations in Pakistan.
  • Factors of change in the retailing environment:
    • Education: enhanced knowledge, standard of living, and increased products/services.
    • Disposable income.
    • Consumer lifestyle.
    • Increase in consumer goods: required more retailers and better marketing.
    • Government rules: vocational training for medical store owners.
    • Changes in technology.
    • Changes in housing.
    • Urbanization.

Consumerism & the Pakistani Landscape

  • Pakistan's economy is demand-driven: ~90% of GDP by expenditure is consumption.
  • Nominal size of the economy was low until the 2000s; majority of the population was poor (57% under $2 per day).
  • Early 2000s: Increase in consumer spending due to improving economic conditions.
  • Significant increase in foreign inflows (remittances) has helped keep consumerism high.
  • Per capita income tripled in the last 15 years.
  • Households living below $2 per day reduced from 57% to 7%.
  • Households living between $2-10 increased from 42% to 87% in the last fifteen years.
  • Emergence of an affluent class: households living above $10 per day constitute 7% of the population (vs. 1% in 2001-02).
  • Middle class is rising and driving renewed consumer demand.
  • 2001-14: car ownership increased from 2% to 6%, two-wheeler owners jumped from 7% to 41%.
  • Similar trends in white goods and mobile phone segments.
  • 2008 balance of payment crisis: adversely impacted manufacturing, creating growth opportunities for retail businesses.
  • Retail and service businesses are picking up due to easier dealings and shorter payback periods compared to manufacturing (cumbersome tax policies).

Facts About the Pakistani Retail Environment

  • Euromonitor: retail value RSP excluding sales tax for Pakistan during 2018 has been PKR 6,474.8 billion with an YoY growth of 8%.
  • Approximately 2 million retail outlets in the country.
  • ~800,000 outlets represent FMCG channels (kiryana, pan shops, department stores, medical-cum-general stores).
  • Retail is the 3rd largest sector in Pakistan (after agriculture and manufacturing) and the second largest employer (16% of the total labor force).
  • Apparel segment has grown significantly in recent years.
  • From textile giants (Gul Ahmed, Nishat) to retail fashion houses (Khaadi, Generation), the retail clothing business has seen striking proliferation.
  • Pakistan had a designer lawn market worth Rs. 9.6 billion with around 128 eminent players in 2017.
  • Local lawn market (branded and unbranded) is approximately Rs. 11-12 billion.

Retail Consolidation

  • Trade in Pakistan:
    • Traditional trade: Kiryana stores, neighborhood stores, Jodia Bazaar (approximately 80% sales).
    • Local Modern trade: Agha’s, Naheed, Imtiaz, Best way, HKB, EBCO.
    • International Modern Trade (IMT): Metro & Carrefour (Hyper star).
  • IMT is gradually changing the retailing landscape.
  • IMT is skewed towards urban areas (4-5 major cities with expansion plan of maximum 8 cities).
  • Impact on urban shoppers is there but not to a great degree due to purchasing power and transportation problems.
  • Impact on retailers: impacted retailers in the adjoining areas of IMT but not really otherwise.
  • FMCGs are happier with the traditional trade because the IMTs are more demanding in terms of slotting fees and other merchandising requirements.
  • IMTs will evolve (50% Traditional-50% IMT) as in the case of Thailand and other Far East Asian countries.
  • IMTs have contributed towards higher purchase because of:
    • Offering various deals
    • Offering options of bulk buying
    • Upsizing (Metro shopping cannot be worth less than Rs. 2000)
    • Accessibility
    • Convenience
    • People end up buying more because of the ambiance and other environmental factors.

Retail Landscape Categories

  • Hypermarkets: Hyper Star in Karachi and Lahore.
  • Supermarkets: Imtiaz.
  • Cash & Carry: Metro (sellers to wholesalers).
  • Drug and Pharmacy stores: Time Medico, medicine banks, and cosmetics shops.
  • High-frequency stores: small retail shops, neighborhood stores, mini markets, convenience stores, traditional ‘kiryana’ stores, and specialty stores (category killers).
  • Non-retail category: wholesalers and institutional stores such as CSDs.

International Chains (IMT’s)

  • Metro
    • Announced operations in Pakistan in January 2006.
    • First store in Lahore in October 2007.
    • Customers: Traders, HORECA (Hotels/Restaurants/Cafes), Companies and Institutions.
    • 60% of revenues from sales to wholesalers, 40% to end shoppers.
    • Nine stores in the four major cities of Pakistan (potential for smaller cities like Multan & Rawalpindi).
    • Retailers/End shoppers prefer Metro due to the huge assortment of goods and good deals.
    • Initially, rates at Metro were cheaper compared to company vans causing retailers to only purchase from Metro. Companies resolved this issue by bridging the gap.
  • Carrefour (Hyper Star)
    • Hypermarket in Lahore and Karachi.
    • Opened by Majid Al-Futtaim (MAF) Group.
    • Planning to open 10 Carrefour stores in the next five years in major cities of Pakistan.
  • SPAR
    • Dutch food retail chain SPAR International made its debut in Pakistan.
    • 1,000m² supermarket in Karachi.
    • Includes bakery, butchery, dairy selection, food-to-go counter, fruit and vegetable section, a pharmacy, and health and beauty sections.
    • Country is set to become one of the fastest-growing retail markets in the world (population over 200 million).

Pakistan's Grocery Retail Landscape (Modern vs Traditional Trade)

  • Modern Retail Value has increased gradually over the years from 77 Billion PKR in 2013 to 206 Billion PKR in 2018
  • Traditional Retail Value has also increased gradually over the years from 2,259 Billion PKR in 2013 to 3,647 Billion PKR in 2018.
  • Modern Retail Outlets number has also increased gradually over the years from 489 # of outlets in 2013 to 579 # of outlets in 2018.
  • Traditional Retail Outlets number also increased gradually over the years from 436,506 # of outlets in 2013 to 578,193 # of outlets in 2018.

E-commerce Websites Revolutionizing Retail

  • Retailers
  • Delivery/Pickup Services
  • Suppliers of Physical Goods
  • Supplies of Physical Stock
  • Suppliers of Digital & Non-Stocked Goods
  • National Order, Delivery, Technology & Loyalty Program
  • Private Label Data & Insights
  • Customers
  • P&G
  • Dawlance
  • بازار, Tajir, bookve.pk, daraz

Retail KPI’s

  • Sales per square foot
    • Formula: \text{Total net sales} / \text{Total square foot}
    • Measures how effectively you’re using the area.
    • Insights into store and merchandise layouts.
    • Products at eye level are more popular, smaller consumable items by the register.
  • Average transaction value:
    • Formula: \text{Total sales from transactions} / \text{Total distinct count of transactions}
    • How much customers spend each time they make a purchase.
    • Encourage customers to increase average purchase through merchandising strategies.
  • Customer retention rate:
    • Formula: ((\text{Total distinct customers at end of period}) - (\text{Total new distinct customers acquired during period})) / (\text{Total distinct customers at start of period}) * 100
    • Turning one-time customers into repeat customers.
  • Foot traffic and digital traffic:
    • Formula: \text{Total store entrances OR Total sessions}
    • How well users know your brand.
    • Success of marketing campaigns.
    • Improve strategies to generate more visits.
  • Inventory turnover ratio:
    • Formula: \text{Total cost of inventory sold} / \text{Average inventory cost}
    • How fast inventory moves.
    • Insight into seasonality.
    • Discount or discontinue items sitting for long periods.

Retail Store Layouts in Virtual Retailing

  • Conventional retail outlets: grid based, free form, or racetrack.
  • Virtual retailing: gained acceptability during the pandemic.
    1. The Tree or hub: (grid in conventional retailing)
      • Customers navigate the online store through a hierarchical structure from product category to product subcategory and lastly End product.
      • Provides the home page button which facilitates users need to pass through a hub or use the back-forward bar in order to visit the product categories.
    2. The pipeline: (freeform in conventional retailing)
      • Provide consumers freedom to move in any direction.
      • Customers can have access to their desired products at once by utilizing the multiple links provided at each search outcome webpage of the store.
      • Provides the home page and the search button.
      • More appropriate for browsing and easy store navigation
    3. The guiding pathway: (racetrack in conventional retailing)
      • Racetrack layout uses two online corridors on each web page and customers are guided by the system to navigate through specific paths in the store in order to reach the products.
      • Direct access is possible only to the neighboring categories.
      • Does not provide any of the aforementioned buttons.
      • Forces customers to reach only neighboring product categories at once.

E-commerce websites: a new intermediary

  • Retail market in Pakistan is at $151 billion and growing at over 8% per annually (according to Ali Mukhtar, the General Partner of Fatima Gobi Ventures).
  • Market with over 2 million stores remains fragmented and inefficient.
  • Tajir was Founded in 2018 by Babar Khan, and Ismail Khan, makes it easy for the mom-and-pop stores in the country to procure inventory for their stores through its Urdu-only app-based marketplace.
  • 91% of retail in the country flows through small, family-owned convenience stores.
  • Through Tajir’s application, storeowners can order inventory whenever they want, receive on-demand delivery, enjoy transparent, competitive prices, and choose from the largest selection of products available.

Challenges Faced by the Retailers

  • Smart Shoppers:
    • Marketing has become rather sophisticated, and the true essence of marketing lies in understanding the consumers and gaining the insight.
    • Rising inflation has given rise to the era of frugality.
    • Price conscious consumers are trading downwards and looking for more deals.
    • Another set seeking more emotional engagement and the time conscious set seeking for online and home delivery solutions.
    • Fair trade and ethical sourcing movements are also heralding a reawakening of consumers' consciousness of the system that supplies them.
    • Principles of color, music, layout, size of trolley, display can actually make a huge dent on the shoppers’ wallet.

Retailing Research

  • Retailers can ask the following questions:
    • Who are my core shoppers? How should I define them?
    • Who are my loyal shoppers? What can I find out about their loyalty?
    • Are my core shoppers also my loyal shoppers?
    • Are my core and/or loyal shoppers buying my core/key categories?
    • How can I increase my number of core shoppers?
    • How can I increase the loyalty of my core shoppers meaning they visit my stores more and purchase more?
    • What % of category buyers are shopping in my chain/stores.
    • In general, how can I increase my buyer conversion of categories meaning % of category shoppers who shops in my stores also buy the category in my stores?
    • Which categories drive retailer growth?
  • Retailers should be able to identify average time spent by shoppers on each category, which indicates how much he/she buys.
  • Important aspects of store layout such as what categories should be placed at the front or what categories should be located at the right side of the store.
  • It is the general tendency of people to drift towards the right when they enter the store.
  • An important issue in retailing research is the lack of availability of current data.
  • Nielsen conducts retail census survey every 3-4 years in Pakistan.
  • Another important issue in retail audit in Pakistan is the “coverage of the retail universe”.

For the Manufacturers

  • Manufacturers need to conduct in-store research in order to identify how people are purchasing brands, how many people actually looked at their brand or looked at it long enough to read what it says.
  • Research should help them identify which retailers drive total market growth, what kind of shoppers are buying at which retail outlet and where are the retail opportunities for their brand.

Retailing and Experientialism

  • Retailers have a challenging role to play in today’s environment.
  • They are not only supposed to sell goods but also provide the right kind of environment to the shoppers.
  • Take the example of bookstores which are not just selling books but also feature on coffee shops and lounge chairs.

Role of the government

  • Retailing also does not receive a lot of government support in terms of infrastructure, finance, and security.
  • There are more than five thousand utility store departments in Pakistan and due to poor management, operational inefficiencies and corruption, their “utility” remains restricted.
  • Retailers pose a lot of challenges to the government as well, primarily because of their unorganized and informal method of doing business.
  • In order to evade taxes, the retailers are reluctant to adopt new technology and work on the “parchi system basis”.
    This leads to the inability of the government to track the exact volume/amount of sale that takes place each year.

The Ever-Demanding Manufacturer

  • The plethora of SKUs and variants of the same brand and the ever-increasing demand of the manufacturers for frontal displays certainly makes the life of the retailers difficult.
  • Retailers are also benefitting from this situation because they are gaining additional discounts, slotting fees etc.
  • The process for locking shelf space is dependent on determining the market share of that particular brand which is calculated by multiplying weighted distribution with share of shelf. These figures are usually provided by Nielsen store level audit data.
  • Under estimation leads to the unavailability of stock which means lost sales for the company and over estimation results in investment blockage from the retailers’ perspective.
  • As for secondary spaces, such as a gondola, there is a competitive war between the manufacturers to acquire the space by providing a higher percentage to the retailer.

Key Trends and Development within the Retail Industry

  • Increasing Awareness & Consumer Spending Drive Growth
  • Socioeconomic factors such as rapid urbanization and the growing middle-income group drove consumer spending.
  • A youth-dominated population led to rising awareness of and demand for brands, paving way for the impressive growth of modern grocery retailers, apparel and footwear specialist retailers, health and beauty specialist retailers and internet retailing.
  • Many foreign and local retail players entered the market, and future sentiment regarding growth in the upcoming years remains largely optimistic.
  • Outlook
  • With one of the youngest populations in the world, the median age in Pakistan was below 24 years in 2018.
  • Also, disposable income was the highest ever in the history of the country.
  • Millennial shoppers spent more and saved less, demanding local and international brands, and switching from unbranded to branded products in search of quality and class.

The Rise of Food Entrepreneurship:

  • Pakistan is a consumption-based economy that loves food with expenditure on food nearly 50% of all household budget.
  • Data also suggests that the growth in food outlets in Pakistan is faster than the world average – 3% against 2.5% for latter.
  • The dining out culture came in the 90s with the then fancy Pizza Hut (1993), KFC (1997) & McDonald’s (1998).

Modern Grocery Retailing Grows Faster Than Traditional Grocery Retailing

  • Although the larger part of the overall grocery retailing still comprises traditional retailing, modern retail outlets are growing faster than traditional retail outlets.
  • More mass consumers are choosing to buy from larger supermarkets and hypermarkets due to better product variety and the convenience offered by modern retailing channels.
  • One of the biggest drivers of this trend has been the growing propensity to spend amongst the middle-income group in the country, which allows for bulk monthly shopping and cash transactions at modern retail outlets as opposed to credit-based purchases from nearby traditional grocery retailers.
  • In urban centers, the top-up and filling (traditional shopper) are shifting to pantry stock up (modern shopper).

‘Mall-Scaping’ the Country

  • The modern retail sector in Pakistan is well represented with sprawling malls and plazas in major urban cities with the growth not extending to second tier cities.
  • The country now has some of the largest shopping malls in the region. Recent ventures such as Emporium Mall by Nishat Group, Lucky One by Younus Brothers, Packages Mall by Packages Ltd., and Dolmen Mall Clifton by the Dolmen Group are internationally comparable not only in size but also as per mall specifications, services, and infrastructure.
  • The trend of extravagant stores known as concept stores have been opened by well-known fashion retailers such as Sapphire, Breakout, Khaadi.
  • Increased footfall to stores.
  • Another emerging trend is that of anchor-tenant, which is when one of the first and larger stores in a shopping mall drives retail traffic. Carrefour is one such example.

New Digital Retailing Establishments Emerging in Grocery & Non-Grocery Retailing

  • New digital retailing outlets emerged both as parallels of existing brick-and-mortar outlets and as separate digital-only establishments.
  • In branded non-grocery retailing, digital outlets serve as a means to reach otherwise unserved consumer niches in far-away areas which are beyond the geographical reach of traditional branded stores.
  • Consumers looking to buy branded apparel, footwear, electronics, etc. will be better served through the online retailing format.
  • Whilst internet retailing is expected to continue to grow in the forecast period, it will remain a challenge to convert consumers who rely on a sensory experience for decision-making, and thus prefer a store-based retail experience. Moreover, the growth of this channel requires strong awareness amongst the masses to evolve their habitual purchasing behavior to switch to online retailing. Thus, a multi-channel or omnichannel strategy remained ideal for retailers over the review period.

Physical Retail Landscape

  • People do not typically travel to city centers or out of town to shop.
  • They still mostly visit outlets located near residential neighborhoods.
  • Physical space is limited and hard to obtain for retailers as many outlets are located in dense urban neighborhoods.
  • Stand-alone retail outlets are prevalent for reasons of flexibility and ease of establishment and their proximity to consumers.
  • Non-grocery specialist retailers prefer to be located in clusters in commercial areas in urban centers as this positively impacts their business.

The path to 2020: taking a long view of retail market entry

  • Pakistani retail market is currently one of the emerging markets and in the long run, it could turn out to be quite attractive for global retailers.
  • While poorer than India, Pakistan does have educated, English speaking citizens who are supportive of market-oriented policies.
  • Pakistan has relatively favorable demographics and a sizable English-speaking middle class.
  • Foreign retail investment in Pakistan will most likely focus on non-food in the medium term, centered on the international clothing, jewelry and health and beauty categories which are so keenly sought after by the country’s young and rising middle class.

Retail overview

  • Pakistan’s retail scene faces the longest haul towards modernization.
  • Planet Retail estimates that only around 8.4 percent of the country’s grocery retail sales are generated by modern businesses. This should grow to just 9.0 percent by 2020.
  • Modern retail infrastructure in Pakistan is limited to the largest cities such as Karachi, Lahore, Rawalpindi/Islamabad and Faisalabad.
  • On a national level hypermarkets and superstores account for far less than two percent of national food retail sales.
  • In the grocery arena, key players include neighborhood store giant Utility Stores at the retail end and Metro Group at the wholesale end of the spectrum.
  • In convenience store retailing, decent petrol station networks are already operated by Western giants Shell and Chevron (Caltex).
  • Utility Stores, Pakistan’s undisputed grocery market leader, concentrates on neighborhood stores.
  • Germany-based Metro Group opened its first Pakistan store in late 2007 and has since expanded its network to nine outlets. The company has announced plans to build a network of 20 outlets in the medium term.
  • There are several specialist chains available, including Karachi-based chicken producer and chicken store operator K&N.
  • Consumers in Pakistan enjoy the services of a good number of global foodservice operators, such as McDonald’s, Domino’s Pizza, Dunkin’ Brands, Nando’s, Subway and Yum! Brands. The latter is present via its KFC and Pizza Hut brands.

Seasonality & Retailing Strategies

  • Eid-ul-Fitr (Early June 2018)
    • Shopping season ranges between May & June 2018.
    • In terms of retailing strategy, the months before and after the Eid holiday are punctuated by a large number of sales.
    • Retailer strategies include introducing special consumer promotions and discounts and piling up inventories before the start of the season.
    • Consumers of all ages are targeted.
  • Ramadan (May - June 2018)
    • Shopping season ranges between May & June 2018.
    • In terms of retailing strategy, advertising efforts are increased, and consumer promotions are implemented.
    • Inventories are also piled up in anticipation of Ramadan.
    • In this season the main focus is on food-related products and groceries.
  • Black Friday (25th November 2018)
    • Shopping season ranges between middle to end of November 2018.
    • In terms of retailing strategy, internet retailers offer huge discounts and value deals to celebrate Black Friday.
    • The Black Friday sales have recently become a phenomenon but are mainly limited to internet retailing.
    • Black Friday sales are mainly targeted towards price-conscious consumers, and those who many otherwise be hesitant to shop online.

Cash and Carry

  • Cash and carry outlets are important from the wholesale point of view. They also facilitate the establishment of independent small grocers.
  • For consumers, cash and carry outlets are positioned as providers of convenience with value while for businesses they are positioned as a cost-effective alternative.
  • Metro was the leading cash and carry operator in the country in 2018.
  • Membership is open to both consumers and businesses and is easy to obtain.

Payments and Delivery

  • Cash is the primary method of payment.
  • Mobile payments are growing rapidly for money transfers and utilities bills payments but not for transactions at retail outlets.
  • Delivery infrastructure is dominated by a small number of private companies. It is reliable, used frequently by consumers and trusted for all sorts of transactions.
  • The primary method of payment is cash-on-delivery because of low penetration of credit cards and lack of trust in online payments.

Challenges Presented by Pakistan’s Retail Environment

  • Imtiaz being a major player in market and such larger players hold a greater bargaining power as a customer to companies- discount and direct customer.
  • Small retail suffers as the major companies focus on providing discounts to large retail players.
  • Coverage issues is another challenge faced by these retail outlets.
  • Karachi on its own has reached a saturation point which means only specific and particular channels such as IMTs or LMTs are growing which means that provides higher bargaining power to these players.