Issue 5, 2011. October-November

   

SUPERSIZE MARKETS: GEORGIAN GROCERY CHAINS COMPETE FOR NEW DEMAND

Georgian shoppers - especially in Tbilisi - are no stranger to the supermarket phenomena as supermarket chains expand into neighborhoods across the capital. While the volume of new grocery stores appears unsustainable, CEOs argue the potential for even more stores is huge.

Nick Clayton

Goodwill hypermarket in Vake


Tbilisi, the supermarket capital

Over the last decade, Georgia, traditionally a country of sprawling bazaars and corner shops has increasingly become a supermarket nation. This presents huge opportunities for retailers and challenges for farmers as food consumption patterns change.

A frenzy of new Georgian grocery store chains has hit the capital, with brands like Goodwill, Ioli, Nikora, Populi and Smart supermarkets competing for customers. The battle is fought block by block, with nearly identical shops opening within meters of each other.

Populi, the biggest supermarket chain, opened 20 stores over the past two years, and plans to increase its 44-store network to 65 sites around the country by next year. Nikora, which specializes in selling its own fresh food products, runs more than 70 shops nationwide, while dozens of smaller supermarket competitors such as Big Ben, Ioli and Salve operate 3-6 stores and Goodwill operates three massive hypermarkets in Tbilisi and Batumi.

Newcomers, like Smart Retail and Nikora's line of supermarkets, are also moving into the market even as existing brands expand.

From the farm to the aisle

However, as Georgian food retailers continue to grow, the country's food producers have largely stagnated. Despite the fact that more than half of Georgia's population works in the agricultural sector, the industry only represented 9 percent of Georgia's GDP in 2010 — down from 14.8 percent in 2005. Meanwhile, Georgia imports about 80 percent of its food products, making up a large proportion of its $1.3 billion annual trade deficit.

A 2006 report on agricultural development in the former Soviet Union indicates integrating local farms into supply chains for large retailers was essential for meaningful agricultural development in the Commonwealth of Independent States.

The report, prepared by a large Russian think tank, found that smaller farms were consistently left out of retailer supply chains due to their inability to produce sufficient volumes, resulting in retailers passing over local production for imported food products of similar quality.

Samson Pkhakadze, general director of Smart Retail, estimates that about 28 percent of the products on Smart's shelves are local.

However, he noted that figure includes a high percentage of products from foreign companies who have distributers in Georgia, but produce their goods elsewhere. The rest of Smart's produce is directly imported.

"We are looking for companies who will invest in (Georgian) agriculture," he said. "We will help those companies; if they invest in agriculture, then we will find shelves for their products."

Investment is exactly what the sector needs, according to the Economic Prosperity Initiative (EPI)'s "Value Chains Assessment" report produced by USAID. The report's researchers looked at ways to increase the overall value of Georgia's agricultural sector from producer to processor to retailer.

Among Georgia's agricultural products, it evaluated fresh Georgian vegetables as "underperforming and [having] significant weaknesses" including a need for investment, greenhouses to increase yields, a lack of proper logistical structures to get the produce to market and the inability to keep the produce in cold storage, leading to high margins of waste.

The EPI report found that processed fruit and vegetable products face similar difficulties as the country's canneries are currently only operating at 15-20 percent capacity. And, as with fresh produce, processed food production in Georgia is restricted by a lack of cold storage, and a need for better training of local growers on international food safety standards.

Populi has gone local largely by producing its own goods. Part of Populi's 1,100 strong workforce is involved in producing and packaging its own commodity products such as rice and sugar and the company is expanding its private brands to include toys, cleaning supplies and other consumer goods.

Populi Customer Relations Manager Khatia Jambazishvili said the company continues to lead in the supermarket category because they are "everywhere".

Although any Tbilisian can attest that Populi is indeed unavoidable in the capital, the chain's reach in the regions remains limited. Of its 44 existing locations, 41 are in Tbilisi.

Jambazishvili said this is largely because of differences in demand between Georgia's urban and rural customer bases, as the latter continues to prefer shopping in open markets and has a lower average disposable income.

That is something that Pkhakadze, hopes to change. Smart is the newest arrival to Georgia's supermarket scene and hopes to have five stores operational by the end of 2011. Although Smart's first two stores opened in Tbilisi, Pkhakadze said Smart's goal is to bring "new format" shopping to the regions.

Currently, he said, 90 percent of the Georgian retail market is made up of "old format" businesses - market vendors, corner shops and kiosks. That presents a major opportunity for growth.

"The upside potential is huge. The market penetration of modern supermarkets is around 10 percent, so there is an ocean of opportunities," he said, "especially in the regions."

One way Smart intends to exploit that potential is to open small trade centers outside Tbilisi that would centralize multiple services such as pharmacies and banks within its stores. Smart also plans to open traditional supermarkets and roadside convenience stores throughout the country.

Smart Retail is owned by Wissol Petroleum Georgia, the country's largest chain of filling stations. As Georgia gains a greater role as a regional transit and distribution hub, Pkhakadze said he hopes to capitalize on the increasing demand for one-stop-shop locations for truckers and travelers passing through. Wissol/Smart are also in the process of completing the country's first highway rest area near Gori.

From quantity to quality

Jambazishvili said Populi has undergone major changes as the company has transitioned from being the only chain of its kind to one of several vying for a market that continues to be wide open.

"We had an absolutely different strategy in those days; we rebranded two years ago and we're now paying more attention to customers, not just our assortments," she said. "The first strategy was to open a large number of stores, now we're working on quality."

Populi now operates a customer hotline, which Jambazishvili said gets around 100 calls per day. This is part of a wider move by the company's new management to gather market research.

"We are conducting a lot of research at the moment. As you know, the Georgian market is not transparent enough and is highly fragmented, so very often we ask our customers to help us improve things and learn more about the their expectations," she said.

Both Populi and Smart have brought in scores of foreign consultants, primarily from EU countries, to modernize and standardize their brands and operations. Pkhakadze said that the consultants have been key for adopting best practices to ensure that Smart does not re-invent the wheel.

Every detail - from layout ergonomics to background music playlists - has been pored over with outside experts.

Jambazishvili stressed the rivalry for business is making Populi stronger, encouraging new innovation to win clients. Its move toward locally produced products, for example, is part of Populi's strategy to produce cheaper goods as the competition multiplies.

In the end, she said, Populi has benefited from its growing base of rivals, which has pushed the company to continually reinvent itself.

"[The competition is] really good for us," she said. "[It's] why we can never relax."