Taking the field

As globalisation becomes a reality rather than a probability, retailers are questioning where their resources can be employed to best effect. Georgina Caldwell reports from IGD's seventh annual Global Retailing conference which focused on emerging markets and the challenges of global retailing

Emerging markets, particularly the rise of China, India and Russia, were a key focus at IGD's conference this year. Martin Pickering, chief consumer goods and retailing analyst and senior economist at the Economist Intelligence Unit (EIU) outlined why these emerging markets are so attractive in the context of the global economic outlook.

According to the EIU, the top ten markets worldwide account for 70% of global demand. Top is the US followed by Japan, Germany, the UK and France. China currently lies in sixth place above Italy, Canada, Spain and Korea. However, when looking at 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 in 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 the sixth and seventh slots, followed by Brazil, Italy and Russia.

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 example, 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. Looking ahead to 2030, EIU says the gap between individual and collective wealth will continue to restrict the emerging markets, with disappointing income levels predicted Pickering.

That's not to say that the emerging markets won't 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 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, evaluated the opportunities and challenges presented by China, India and Russia. In terms of opportunity, IGD ranks countries on the basis of hard measures (eg GDP) and soft measures (eg 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 1.3 billion, 1.1 billion and 143 million 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 5% from the current level. The middle classes will also expand quickly.

In India, 105 shopping malls are scheduled to open every three days to the end of 2007, and within 14 years 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. Firstly, 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%. Secondly, there is an enormous disparity of wealth across these countries. In China wealth is concentrated on the east coast while in Russia the western cities see the most development. India's southern and western cities are the most urbanised. Finally, 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.

Local interest

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 €42. In China food retailers must mimic local markets to survive, while India thrives on added benefits. 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. Secondly, 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. Customers also respond well to displays that provide strong branding. In India, tiny neighbourhood stores are often dominated by marketing from one major brand.

Frans Muller, chairman of the management board Metro Group Buying, offered 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. Brand concept is key to success. It 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.

Also important is the lifecycle of development in a new market. Retailers have a tendency to be overcautious 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.

Different strokes

Philip Clarke, director international operations at Tesco, gave an account of how the company manages its overseas business. He cited six key parameters for success in emerging markets: be flexible: create a local business, which means compliance with local regulations, using local supply chains, local staff and creating a local display; focus on customers; give access to every potential consumer; capability, including people and systems; and of course the importance of the brand. Tesco manages its global operations using a scorecard system that evaluates the business on the basis of four pillars: customers, operation, finance and people. Targets are set for each category and are reviewed four times a year. 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,” said Clarke.

Advantages and disadvantages of European expansion were examined by Mark Parry, retail partner transaction services at PriceWaterhouseCoo-pers. The retail scene is far from homogeneous, he said. 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%. 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 4078 stores) and Lidl (with 2565 stores) in Germany

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 leads 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.

People property and regulation are the three main areas of difference between EU member states that could provide concern for retailers planning cross-border expansion, said Parry. 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/sqft, way above the German average of €225/sqft, €176/sqft in France or €149/sqft in Spain. However, 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 provided retailers do their homework and create different retail models for different markets.

Supply & 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 the global capabilities of suppliers becomes key. End-to-end management of supply chains can help greatly in the safe, timely delivery of goods, he said.

Dow Famulak, executive director of Li & Fung Limited, explained how supply chain management now encompasses a wider scope, including customs clearance, consolidation of shipping and forwarding as well as raw material sourcing and manufacturing. Suppliers must take a flexible approach and be prepared to offer a full service, said Famulak. Bert Swartsenburg, md, 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 such as distribution and customers, thus making cost savings.

This collaboration between suppliers and retailers is an encouraging take on the traditionally cutthroat relationship between the two parties. James Edwardes Jones, consumer analyst at Execution Ltd, said that the reality behind the supplier-retailer relationship is 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, he said, 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 2465 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 vp of Danone Group, suggested how suppliers could overcome this competition. Branded products should avoid overexposure 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. Danone for example, 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 its profits. Carrefour ceo José Luis Duran 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 25 million customers who walk though Carrefour's doors each week buy a non-food item. Service is key to shifting non-food. 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.

The message of the day was clear: success belongs to those who think local and act global.