IGD's SEVENTH annual Global Retailing conference, chaired by broadcaster Michael Buerk on 13th June 2006, focused on emerging markets and the challenges of global retailing. ECM summarises the day's conclusions.
As globalisation becomes a reality rather than a probability, retailers are questioning where their resources can be employed to best effect. IGD therefore centered this year's Global Retailing conference on emerging markets, particularly the rise of China, India and Russia.
Martin Pickering, chief consumer goods and retailing analyst and senior economist at the Economist Intelligence Unit, kicked off the day with a presentation outlining why these emerging markets are so attractive in the context of the global economic outlook. Pickering suggested that an understanding of today's economy is vital to understanding the future and therefore opened his presentation with a look at the largest global markets and where the purchasing power is currently held in 2006.
According to the Unit, the top ten markets worldwide account for 70% of global demand. Leading the chart is the US followed by Japan, Germany, the UK and France. China is in sixth place above Italy, Canada, Spain and Korea. However, when looking at the purchasing power (PP), a different pattern emerges. The two factors that combine to reveal a country's PP, population and income levels, are more favourable to emerging markets. Although the US still takes the number one spot, China tips Japan into third and India ousts Germany into fifth place. The UK and France manage sixth and seventh place, while Brazil, Italy and Russia bring up the rear.
While on the whole the emerging markets are strong in terms of population yet weak in terms of PP - and the converse is true of developed markets - there are exceptions when volume sales are evaluated for certain goods. For washing machines and televisions, China trumps the US while Indians buy more refrigerators and televisions than Germans.
In addition, these markets are growing fast. China's GDP grew by over 9% in 2006, compared to the US's less than 4% rise. However, the wealth in emerging markets is held collectively rather than individually.
A look at the Unit's forecasts for 2030 reveals that this gap between individual and collective wealth will continue to restrict the emerging markets. “Big populations yield big economies but income per head also counts. Even in 2030 income levels in the emerging markets will disappoint,” said Pickering.
Universally challenged
However, that is not to say that the emerging markets will not present a challenge to the developed markets' hitherto monopoly on wealth. The EU in particular has a fundamental problem with an ageing demographic and a restricted labour market while Asia, especially India, has a young demographic and a skilled labour force. It is likely that Latin America will not present much of a challenge, explained Pickering, as political unrest and an unskilled labour force will hold the region back. “It is important to avoid starry-eyed optimism. While the importance of the key emerging markets will increase, the OECD countries will still be the key market with the largest aggregate consumption and greatest ability to afford high-end products,” said Pickering.
Steve Barnes, business director at IGD, followed up this assessment with an evaluation of the opportunities and challenges presented by China, India and Russia. In terms of opportunity, the IGD ranks countries on the basis of hard measures, such as GDP, and soft measures, for example infrastructure and political stability. On this basis China, India and Russia are ranked as one, two and three respectively and as a group form the top priority for businesses looking to expand globally, above markets such as the US, Turkey and the Ukraine.
China, India and Russia account for 40% of the world's population with 1.3bn, 1.1bn and 143m respectively. An analysis of GDP growth reveals a 9.5% rise for China, an increase to the tune of 7.2% for Russia and 6% for India in 2005. Rapid urbanisation is also a feature of these three markets. Between 2005 and 2030 China is expected to grow its urban population from 41% to 61%, India is projected to change from an urban population of 28% to 41%, while Russia's urban population will comprise 78% - up five percentage points from the current level. Along with this urbanisation, said Barnes, the middle classes will expand quickly, although the size of this demographic is currently small, and they will provide the opportunity for retailers.
In India, 105 shopping malls are scheduled to open every three days between 2005 and 2007, and within 14 years the IGD estimates that China will be the second largest food retail market worldwide, while India is set to overtake the UK.
These markets do present a number of challenges however. First, the traditional street market format still dominates the retail scene in varying degrees in all three countries. In India, 98% of transactions are performed through the street market channel, in Russia this figure is closer to 84% and in China 80%.
Second, there is an enormous disparity of wealth across these countries. In China wealth is concentrated on the east coast, whereas in Russia the western cities see the most development. India's southern and western cities are the most urbanised.
Third, the infrastructure presents difficulties and burdensome bureaucracy and counterfeiting are rife in all three countries. Counterfeiting presents particular difficulties because widespread illiteracy means that price is the only indicator of genuine products.
All is not lost however, said Barnes. There are ways to overcome these challenges and capitalise on the opportunities that these markets present.
The first of the golden rules of retailing in emerging markets is to act local. Each market has its own peculiarities - in Russia, for example, the very rich are prepared to pay ludicrous prices for luxury items. One luxury supermarket successfully shifts packs of 16 strawberries for t42. In China food retailers must mimic local markets to survive - the Chinese arm of Carrefour has installed live fish tanks to keep fish competitively fresh. India, on the other hand, thrives on added benefits - in some supermarkets vegetables can be chopped and cooked in-store. More cosmetics companies should consider making their products more affordable by producing tiny packs and sachets, in much the same way that shampoo manufacturers do in Asia.
Second, retailers must consider the lack of reliable public transport when siting their stores. Out of town hypermarkets must be serviced by shuttle buses if retailers want customers.
Last, customers respond well to displays that provide strong branding. In India, tiny neighbourhood stores are often dominated by marketing from one major brand.
Local business for local people
Frans Muller, chairman of the management board Metro Group Buying, gave an insight into the potential of emerging markets through an exploration of the group's presence in several such countries. Muller described how the group has translated its cash and carry format to suit individual markets by taking a local and a very long term view, with the eventual goal of developing organic, sustainable profit.
The concept of local thinking is very important in every aspect of the organisation. Muller revealed that 90% of its produce is sourced locally and out of 7,500 staff in Russia, only 30 do not hold a Russian passport.
Meanwhile, according to Muller, the brand's concept is key to its success. The retail brand must be clear and robust yet flexible enough to adapt to the different requirements of each customer base. “You have to create a new story for each market, taking into account local suppliers and local governments,” he said.
The group operates on the basis of a clear, coherent concept with different formats, ranging from Junior (95% food) to Large (60% food), running alongside each other in every market. However, the group's competence varies by market. In Bulgaria, for example, Metro is known for specialising in fresh produce and fresh fruit accounts for 40% of sales.
Another important consideration is the lifecycle of development in a new market. Retailers have a tendency to be over-cautious in their expansion. “We had decades to build in Western Europe but in the emerging markets there is no time. Development must be now,” said Muller. He warned that development depends on creating the right concept for the market at the first instance. If the store is not right or not adjusting to the market, it would be wise not to multiply it because this may multiply the problem. Muller revealed that this year will see the group open its tenth store in Vietnam and the company plans to enter Pakistan in the first quarter of 2007.
Different strokes
Philip Clarke, director, international operations at Tesco, offered up an account of how the company manages its overseas business, citing six key parameters for success in emerging markets. First, flexibility is crucial: “Each market is different and must be approached in a different way,” said Clarke.
The second rule is to create a local business. This means compliance with local regulations, using local supply chains, local staff and creating a local display. “Tesco is trying to be local wherever it lands. We must not bring our prejudices with us, just our know-how,” explained Clarke. Focus embodies the third rule and, as Clarke emphasised: “This means focus on the customers. The ones who shop in your stores and the ones who shop with your competitors.” To this end, Tesco has just swapped its stores in Taiwan for Carrefour's presence in The Czech Republic to focus on Eastern Europe.
Next, Clarke suggested that a multi-format strategy has helped Tesco reach its enviable position in the market today. The company uses five formats, from express to hyper, to give access to every potential consumer. Fifth is capability, including both people and systems. The company strives to maximise the potential of its staff by providing training and promoting those who are the most capable. In terms of systems, Clarke explained that improvements to Tesco's computer systems, storage capacity and supply chain are releasing benefits to consumers.
“Big populations yield big economies but income per head also counts. Even in 2030 income levels in the emerging markets will disappoint.” |
Martin Pickering, chief consumer goods and retailing analyst and senior economist at the Economist Intelligence Unit |
Last but not least, Clarke stressed the importance of the brand. The retail brand and its associated private label business enables the company to build important relationships with consumers. Tesco has test kitchens in every country to ensure compliance with local palates.
Clarke revealed that Tesco does not assess a market's success on finance alone but manages its global operations using a scorecard system that evaluates the business on the basis of four pillars: customers, operation, finance and people. Tesco sets targets in each category for individual countries and these are reviewed four times a year and graded on a traffic light scale.
Clarke described Tesco's operating model as better, simpler, cheaper and the motto has clearly served the business well. In the last three years the retailer has entered Japan, China, Turkey and the US. “We're always looking for new opportunities but we have to be realistic and not overstretch ourselves. We're not about planting flags. We've been looking at India. There are still opportunities and we're looking for them.”
In it to win it
For those who want to stay closer to home, Mark Parry, retail partner, transaction services at PriceWaterhouseCooper, was on hand to set out the advantages and disadvantages of European expansion. Parry pointed out that the retail scene is far from homogeneous.
By and large, independent retailers enjoy a larger share of the market on the Continent. For example, while in the UK the top five food retailers garner an 87% share of the market, in Spain this figure is just 42%. The split between independent retailers and retail chains leaves a lot to be desired in the UK - when the Bullring shopping centre was completed in Birmingham there were only ten independent retailers present, while the comparable Plaza Norte Centro Commercial in Spain opened with 60 first-time businesses.
Discounters are also receiving mixed messages from the various European countries. The Germans are famed for their love of discounters and this is confirmed by the heavy presence of both Aldi (with 4,078 stores) and Lidl (with 2,565 stores) in Germany. These two major discounters hold just 320 and 390 stores respectively in the UK and 670 and 1,200 in France.
Private label is an area of distinction when it comes to the UK market. The top five UK supermarket giants command a high penetration for own label goods. Sainsbury's tops the charts with a 51% value share for its own labels, while Somerfield at the bottom of the scale still commands a 34% share. In France it is a different story with the percentage of private label goods sold by Casino coming in at 40% and the lowest, Auchan, at 25%. The German discounters rely on private label goods but supermarkets command a very low percentage, just 11% for Edeka.
Basket prices also vary hugely. Identical goods that would total €15.06 at a French Lidl cost 25% more in the UK, 20% more in Spain and 10% more in Germany.
Parry pointed to three main areas of difference between EU member states that could provide concern for retailers planning cross-border expansion: people property and regulation.
In terms of people, Spain has the lowest minimum wage, with just €3.50/hour, and France has the highest with €8/hour. Meanwhile, the UK has experienced the steepest rise in wages in the last five years, rising €2.30/hour since 1999. However the minimium wage does not tell the whole story. High social charges imposed by continental governments make UK labour costs competitive even when compared to Spanish wages. Stricter employment law, such as the maximum 35 hour week in France, said Parry, makes labour in the UK appear even cheaper.
In terms of property, the most obvious variable is rent. The average prime city rent in the UK is €382/sq ft, way above the German average of €225, €176 in France or €149 in Spain. However, this does not give the full picture. Lease lengths and covenants are more onerous in the UK while red tape is more onerous in continental Europe.
In terms of regulation the UK is considerably less prohibitive. Until recently in France retailers were not allowed to advertise on television. French, German and Spanish retailers cannot adopt flexible opening hours or pricing freedom and Spain and France even prevent mid-season sales.
Despite these differences, Parry is confident that the percentage of foreign retailers in each of these markets is on the up. The UK has already seen an 11% rise in foreign-owned retailers since 1995. This has happened by both acquisition, such as AS Watson's purchase of Superdrug, and organic growth, exemplified by Zara's march across UK high streets. UK retailers are also exporting their brands. According to Parry, these differences can be easily overcome as long as retailers do their homework and create different retail models for different markets.
Supply and demand
Suppliers are also affected by the trend towards globalisation and are having to adjust their business accordingly. John Pattullo, chief executive - Europe, Middle East & Africa DHL Supply Chain, advised that the implications of globalisation is that global capabilities of suppliers become key. End-to-end management of supply chains, said Pattullo, can help greatly in the safe, timely delivery of goods.
Dow Famulak, executive director of Li & Fung Limited, explained how supply chain management now encompasses a wider ambit, including customs clearance, consolidation of shipping and forwarding as well as raw ingredient sourcing and manufacturing. Suppliers must take a flexible approach and be prepared to offer a full service, said Famulak. Bert Swartsenburg, managing director - European Buying Desk at Royal Ahold, was also keen to encourage collaboration between suppliers and retailers. By relying on suppliers to provide more complete services, the retailer can gain more control over procurement and production as well as the more traditional areas of retailer concern - distribution and customers - and thus make cost savings.
This collaboration between suppliers and retailers is an encouraging take on the traditionally cut-throat relationship between the two parties. James Edwardes Jones, consumer analyst at Execution Limited, offered up the reality behind the supplier-retailer relationship. Jones pointed out that branded suppliers' margins can be almost double that of the retailer - in the case of Coca Cola its latest reported operating margin was over 25%, whereas Morrisons garners less than 5%. Returns, too, are considerably higher for suppliers than manufacturers. This is exemplified by the better returns offered to shareholders of suppliers than those who hold shares in retail chains.
However, retail chains can counter this with private label products. A YGX survey of 2,465 UK grocery shoppers found that shoppers perceived retailers' brands to be far better value than their branded equivalents and often perceived the quality of own label products to be better too. Other opinions to emerge from this survey were that retail brands were more trustworthy, just as innovative, more relevant and less excessively profitable.
Phillippe Guyard, sales vice president of Danone Group, suggested how suppliers could overcome this competition. Branded products should avoid over-exposure through advertising and instead concentrate on their point of difference. Clear brand positioning reinforced by strong values is the way to win over consumers, according to Guyard. For example, Danone achieves this with a consistent, healthy, nutritional positioning across its brand portfolio, as well as promoting social responsibility by supporting relevant charitable campaigns.
Brands must also concentrate on innovation for products, promotions and branding while working with retailers to ensure that both benefit from promotional activity. Promotions should be targeted and customised to encourage conversion and trial rather than opportunistic purchasing, and in-store marketing should be clear and original. Joint business planning and sharing consumer insights can also enhance retailer-supplier cooperation.
Carrefour has taken these mantras of local and flexible to its heart to transform its strategy and, hopefully, profits. José Luis Duran, ceo of Carrefour, painted a depressing picture of the retail scene in the West, with price deflation rife through competition with discounters. As a consequence, Carrefour now describes itself as a generalist with a million square metres of non-food space opening every year in France. The group has even just opened a non-food website.
Carrefour has also learned to be more flexible - its pricing strategy is now determined as locally as possible, even by catchment area in France. This makes mass media advertising impossible but local leafleting, said Duran, is essential. In Spain, a trial of non-leafleting for non-food saw sales dive 6%.
Non-food also has the greatest potential in terms of developing penetration - only 25% of the 25m customers who walk though Carrefour's doors each week buy a non-food item.
Service is key to shifting non-food however. In Spain the group has more people on the shop floor and is more successful because of it. Carrefour is also expanding globally, opening eight stores per year in Italy and increasing its number to 13 in Brazil. Duran also revealed that Carrefour's multi-format strategy used to be too rigid and it has now been made more flexible.
The message of the day was clear: success belongs to those suppliers and retailers who think local, act global.
- See the related articles link to the right of the page for in depth reports on the C&T industry in India, China and Russia from ECM and SPC.