Retail Evolution - Positioning for Modern Trade Growth by etssetcf

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									        Retail Evolution
        P o s i t i o n i n g f o r M o d e r n Tr a d e G r o w t h

       M                    VI takes a look at what causes retail markets to modernize and the different paths that mar-
                            kets take as modern trade (chain retail) evolves. We also highlight the triggers and rates of
                            change as the market shifts from largely traditional trade to modern trade dominated. In par-
                 ticular, we describe how certain markets modernize as a result of foreign-owned, global players entering,
                 while other markets have developed primarily due to local players accelerating modern trade growth. In
                 a number of markets we've studied, a hybrid approach dominates—with global and local players grow-
                 ing in parallel directions.

                 India, Poland, Brazil, and South Korea provide interesting case studies of markets evolving rapidly. No
                 doubt, government regulation has played a significant role in promoting domestic retailers. But will
                 this trend continue? If foreign direct investment (FDI) restrictions are loosened or consumer purchas-
                 ing power and shopping patterns change, which market evolution pattern will take hold and why?

                 Lastly, we will discuss the core capabilities successful retailers will need in developing markets. The
                 growth of modern trade operators—whether global or local—will depend on their ability to leverage
                 relevant capabilities while adapting to market conditions and changing consumer tastes.

                 Part I: How Markets Modernize                                         Smart suppliers manage this balancing act by accurately
                 According to a recent in-depth study, MVI research                    tracking (and often predicting) the pace at which key
                 shows that retail markets tend to modernize from large-               transitions or market evolution shifts are likely to occur.
                 ly traditional trade to modern trade dominated along a
                 predictable continuum. As markets modernize, the                      Three overarching factors affect the speed and nature
                 share of traditional trade as a percent of total trade                of market transition. They include (1) consumer trends
                 declines slowly; suppliers, however, will continually                 and purchasing behaviors in the market; (2) factors
                 need to adjust the amount of resources allocated to                   related to modern retail consolidation; and (3) disrup-
                 manage the traditional trade versus the modern trade.                 tive factors such as the economy, special interests, and

        Figure 1: Comparing Macro Economic Indicators
                                       Retail Trade in                         2004 Gross Formal Retail
                        2004 Chain    South-East Asia            2004 Formal    Domestic    Sales as a
         Markets        Retail Sales Non-Chain Chain             Retail Sales Product (GDP) % of GDP

         India               5,720          98%          2%           78,785           661,046              12%
         China             93,638           80%         20%         346, 808         1,649,387              21%
         South Korea       21,527           85%         15%          114,812           681,469              17%
         Indonesia         12,326           75%         25%           35,216           257,872              14%
         Philippines         6,131          65%         35%           12,513             85,136             15%
         Thailand          16,988           60%         40%           28,314           163,492              17%
         Malaysia           10,229          50%         50%           15,737           117,776              13%

                                                                                                  In current USD millions
                                                  Source: IMF, MVI retailer database, various national statistics agencies

2   Selling Global Leaders l Quarter 1, 2007
government regulation, e.g., FDI.        Figure 2: Poland's Top 5 Retailers
Our research suggests that these
consumer trends, retail consolida-         Rank          Home Market              Retailer                 2005                     2006E
tions, and disruptive factors heav-           1          Germany                  Metro Group         3,994,556,017            4,272,466,503
ily influence retailers' growth
                                              2          Portugal                 Jeronimo Martins    1,658,944,856            1,894,170,703
strategies as well as the formats
they are most likely to develop to            3          United Kingdom           Tesco               1,639,857,024            1,911,520,454
sustain growth over the long                  4          France                   Carrefour           1,331,946,849            1,469,145,926
term. As markets evolve, retailers
                                              5          France                   Casino (Rallye)     1,236,584,778            1,305,869,861
adjust their formats and
operational strategies to cater to                                                                                                   In current USD
differing shopper needs and                                                                         Source: MVI retailer database, company reports
trends-and thereby maximize retailers' reach in an            • Markets that have grown through a hybrid of
evolving market.                                                 global and local players; and
In India's case, consumer trends have been the great-         • Markets that have modernized driven almost
est influencer in forcing modern trade to develop. A             entirely by local retailers.
significant demographic transition is now underway
with a large, young, working population (median              Part II: Global, Local, or Hybrid?
age of 24); more nuclear families in urban areas; an         Case Study - Global: Poland's retail industry mod-
increase in the number of working women; and                 ernized quickly following the opening of the market
emerging opportunities in the service sector.                in 1991; almost all the major retailers in the country
Urbanization, higher household disposable income,            are now global operators. Lack of entrepreneurship
and convenience one-stop shopping are other                  and exposure to anything "foreign" during the
factors that are fueling this modern trade growth.           communist era left little capability and structure for
                                                             local players to grow. The market was liberalized
Retail consolidation will slowly help drive modern           quickly following 1991, opening up opportunities
trade growth as well. We estimated the Indian retail         for international retailers to move into this market.
industry to be worth about USD286 billion at the             In addition, Poland's proximity to European retailers
end of 2004; yet India remains one of the most               looking for expansion opportunities allowed the
fragmented retail sectors in the world with only 2%          market to be flooded with strong global operators
of total sales deriving from the modern trade. Figure        (such as Metro Group and Tesco) looking to
1 presents a snapshot of retail trade and gross              establish market leader positions (Figure 2).
domestic product (GDP) across India and some of
its neighbors in Asia, and highlights the tremendous         The Polish government was also instrumental in
opportunity for consolidation and growth. As that            facilitating this shift as regulations for FDI and store
happens, India is likely to see a significant trend          opening procedures were streamlined to encourage
toward modern trade as retailers invest in data,             investment. With the
technology, and infrastructure to exploit and                current FDI restrictions in place, India is not likely
escalate potential growth. (Figure 1)                        to take the same path to modernization. However,
                                                             even if these restrictions are lifted, the complexity
Disruptive factors (particularly government                  and remoteness of the geography, diverse cultures,
regulation) are unquestionably the key "reason"              and variable laws from state to state will make it
foreign players have not played an influential part          challenging for global players to thrive as easily as
in triggering retail consolidation in India. However,        their counterparts in Poland.
there is no one path to modernization; markets are
not dependent on global retailers as catalysts for           Today, global operators dominate in Poland despite
modernization. However there are many markets                some local operator presence; this dynamic is due in
where global retailers act as key catalysts, and, in         large part to favorable policy toward international
fact, capture the lion's share of the modern trade.          operators and a stable, high-growth market environ-
To understand India's potential future, it is useful to      ment. Poland's attractiveness as an investment
look at examples of three market types, and why              market is also aided by its accession to the European
they've modernized the way they did:                         Union (EU) and Euro-Zone by 2009. While Poland
• Markets that have grown the modern trade                   is well on the path to establishing itself as a modern
   through global players entering the market;               trade dominated market, one still-emerging market

                                                                                       Selling Global Leaders l Quarter 1, 2007                   3
Figure 3: Brazil's Top 5 Retailers                                                                                             Brazil's domestic "price champi-
                                                                                                                               ons" (in particular, the Pao de
    Rank    Home Market              Retailer                                    2005                     2006E                Acucar group, Brazil's leading
     1      Brazil                   CBD - Pao de Acucar Group              6,007,912,154             7,335,696,371            retailer) have also been experts in
     2      France                   Carrefour                              4,860,004,674             6,479,014,466
                                                                                                                               consumer understanding and rel-
                                                                                                                               evant format development, allow-
     3      Brazil                   Casas Bahia                            4,722,420,979             6,617,136,411            ing them to reach a broad seg-
     4      USA                      Wal-Mart                               2,137,681,057             4,407,499,496            ment of Brazil's population with a
     5      Brazil                   Lojas Americanas                       1,833,449,147             2,069,625,133            more relevant retail offering than
                                                                                                                               global competitors.
                                                                                                           In current USD
                                                                          Source: MVI retailer database, company reports       Casas Bahia has been an
                                                                                                                               interesting example of a retailer
Figure 4: South Korea's Top 5 Retailers                                                                                        leveraging local market under-
                                                                                                                               standing to grow. A large,
    Rank        Home Market                     Retailer                         2005                     2006E                non-food retailer that sells
     1          Germany                         Metro Group                 3,994,556,017            4,272,466,503             primarily in Brazil's smaller and
                                                                                                                               more remote towns, Casas Bahia
     2          Portugal                        Jeronimo Martins            1,658,944,856            1,894,170,703
                                                                                                                               has a dominant market share in
     3          United Kingdom                  Tesco                       1,639,857,024            1,911,520,454             selling furniture and electronics
     4          France                          Carrefour                   1,331,946,849            1,469,145,926             to Brazil's lower income shop-
     5          France                          Casino (Rallye)             1,236,584,778            1,305,869,861
                                                                                                                               pers in these markets.
                                                                                                                               Similar to Brazil among the
                                                        *Tesco has a joint venture with a local operator, Samsung Co. Ltd.
                                                                                                            In current USD     emerging modern trade markets
                                                                          Source: MVI retailer database, company reports       is China. The Chinese government
                                                                                                                               has championed opening up the
                                      exhibiting similar traits is Vietnam. In the post-com-                market to foreign operators, but with limits. At the
                                      munist era, the Vietnamese government has                             same time, the government has worked to aid local
                                      opened its doors to foreign players in a similar                      players to compete effectively with global
                                      manner to Poland, particularly as there is a                          players. Additionally, most local players are regionally
                                      dearth of modern trade; in fact, less than 10% of                     focused, which gives them a significant advantage in
                                      retail trade now occurs through modern chains.                        knowing local regulation as well as local consumer
                                      This—combined with its geographic adjacency to                        tastes and shopper preferences.
                                      hubs of modern retail activity (Indonesia,
                                      Thailand, Malaysia, and China)—makes modern                           Case Study - Local: India's retail trade sector is mod-
                                      trade dominance by global players far more likely.                    ernizing gradually through its local operators such as
                                                                                                            Pantaloon and Foodland. For now, FDI restrictions
                                      Case Study - Hybrid: Modern trade evolution has                       are helping local operators along in this evolution.
                                      been propelled by a mixture of global players and                     Will that change when FDI regulations are loosened
                                      local retailers in Brazil (Figure 3), largely due to the              in the retail sector? MVI believes that this will sig-
                                      Brazil government's legacy behavior that historical-                  nificantly impact the development of this market.
                                      ly protected local businesses, keeping the market                     Our research shows several instances of markets
                                      open with a heavy regulatory hand. In addition,                       developing modern retail trade sectors through
                                      Brazil's vast, diverse geography; varying degrees of                  local operators despite liberal FDI policies.
                                                                                                            Examples include South Korea (Figure 4) and Chile.
                                      base infrastructure to support the modern trade;
                                                                                                            Both countries have encouraged local chain growth
                                      and disparate consumer income levels give local,
                                                                                                            because of two significant reasons: (1) the difficult
                                      small scale operators an inherent advantage in
                                                                                                            and intensely competitive real estate market as a
                                      operating successfully. Therefore, while foreign                      result of few dispersed but densely populated urban
                                      retailers have experienced success to a certain                       centers and (2) complex government relations
                                      degree—particularly in areas where the country's                      requiring a high degree of local understanding to
                                      infrastructure allow the retailer to build scale and                  manage operations. Local players in these markets
                                      efficiency—they have been impeded by the lack of                      have been more adept at navigating these chal-
                                      standard infrastructure and variable legislative reg-                 lenges. Local retailers have also been able to do a
                                      ulation across Brazil's states.                                       better job of catering to shopper needs. At the same

4           Selling Global Leaders l Quarter 1, 2007
time, these local "factors" have worked to limit glob-        result Tesco shortens the executional learning curve
al operator penetration in-market.                            most retailers face when entering a new country.
Wal-Mart's exit from South Korea and Carrefour's
                                                           Part III:
exit from both Korea and Chile are examples of
                                                           The Core Capabilities Required for Growth
global players incapable of making inroads versus
able local competitors. Key shopper dynamics come          A core takeaway from studying market evolution is
into play as well. For instance, South Koreans tend        that, regardless of whether the retailer driving the
not to travel long distances to purchase food prod-        modern trade is global or local, the capabilities they
ucts-no matter how low the price. They are also less       need to do that are largely the same! In addition to
likely to shop at different stores as a result of          the overall management outlined in the Tesco
advertising largely due to difficult traffic conditions.   example in Part II, a great modernizing retailer will
All of this makes store location extremely important.      require capabilities in six core areas to win in the
                                                           changing environment (Figure 5).
Therefore, Wal-Mart's and Carrefour's inability to
leverage the "right" local connections to secure the       Finance
best available real estate strongly influenced their       A retailer is best served having an operating model
recent market exits.                                       with two key financial criteria:
While these countries' geographic peculiarities have       • Generates enough cash flow to fund its
helped local retailers to thrive, these operators have        expansion; and
used this advantage to build core capabilities as well.    • Remains relatively low debt.
In South Korea, for example, local operators have
                                                           Retail is a cyclical and relatively low margin business.
successfully leveraged relationships with indigenous
                                                           High levels of debt and interest greatly impede a
suppliers to procure and offer the right products at
                                                           retailer in growth mode and can make running the
the right price.
                                                           operation difficult. Most great retailers remain rela-
Any study of the Korean retail landscape should            tively conservatively financed.
trigger a pivotal question: "Why is Tesco successful       Operations
where others have not?" As a global player, Tesco has      The retailer is able to manage the complexity of
proven very successful at being adaptable in complex       getting merchandise from factory to shelf. Indian
markets such as Korea and Japan. Our analysis              conglomerate Reliance Industries Ltd. is aiming to
suggests there are three or four core reasons:             get to this state through integration of an entire
• Format strategy - Tesco is comfortable running a         supply chain from farm to store, particularly with
   wide variety of formats, and it leverages whatever      staple food commodities. Many great local retailers
   format represents the best opportunity to enter a       (e.g., HEB and Publix, two US regional grocery
   market. For instance, its entry into both Japan         chains, and 7-11 in Japan) optimize their market
   and the US (in 2007) will largely be through con-       position through a best-in-class supply chain, which
   venience-oriented formats rather than its core          gives them a significant competitive advantage in
   supermarket/hypermarket portfolio. Few global           speed and store conditions.
   retailers beyond Tesco are comfortable entering a
   new market with a format that was not the one                                             Figure 5: Retailer's Strategy Driven by Six Areas
                                                           Brand is all about a relevant
   they "grew up" with; thus Tesco's flexibility here                                                                     Pricing
                                                           and impactful connection to
   makes its market success prospects much higher.
                                                           the shopper. It is imperative
• Utilizing local partners - Tesco understands better      for retailers to have a system-
   than most retailers how to partner successfully.        atic understanding of their
   The retailer is adept at allowing competent local       shoppers and be able to exe-
   partners to guide or teach Tesco to understand          cute, both in and out of the                         Finance             Brand
   local consumers, manage the complexity of navi-         store, based on that knowl-
   gating government and real estate regulation, and,      edge. In addition, the ability
   where strong nationalistic sentiment exists, lever-     to tailor a portfolio of for-
   age a brand that resonates with in-market con-          mats to meet different                                      Operations
                                                                                              Measurement                                    Execution
   sumers (like Samsung, a Tesco partner in Korea).        shopper/consumer needs is
• People development - Tesco believes its core com-        very helpful-especially in
   petency is teaching people how to run a store, and      geographically, culturally,                                              Source: MVI research
   that is the primary focus on entering a market. As a    and economically diverse

                                                                                    Selling Global Leaders l Quarter 1, 2007                          5
                    markets like India. Pantaloon is one of the Indian              scale; however, our research shows that retailers who
                    retailers that has begun to develop the data and                understand this and work proactively with suppliers
                    analysis capabilities to do just that. As India's infra-        to optimize their mutual business tend to grow faster
                    structure develops to support modern trade, the                 than the market.
                    retailer will be able to do that more consistently. As
                                                                                    In-store execution should come together as a result
                    the market evolves, both retailers and manufacturers
                                                                                    of the right brand message and effective operations
                    will require the capabilities to consistently under-
                                                                                    that facilitate having the right merchandise in the
                    stand what motivates shoppers and consumers, in
                                                                                    right place. Often the simplicity of the message and
                    order to bring together a successful retailer strategy
                                                                                    the operation generally results in superior in-store
                    that serves both constituents well.
                                                                                    execution, and this largely depends on people devel-
                    The intermingling of finance and brand is pricing;              opment and training. Relentless focus on execution
                    the right price doesn't necessarily mean the lowest,            details is the final differentiating factor for success.
                    especially in some categories such as apparel, where
                    a low price may be perceived as poor quality. Also, a           These six success criteria should help determine
                    rigorous understanding of which items are impor-                future market winners (especially in the Indian race
                    tant to be low priced for competitive purposes ver-             to modernization-irrespective of whether they are
                    sus which items can be margin enhancers, is one of              the world's largest global competitors, or intensely
                    the key criteria strong retailers use to grow in                focused and capable local players).
                    a market.
                    When discussing people, the discussion is incom-                For more information on market evolution
                    plete without the right measurements in place. As               and developing markets, please email
                    people are trained to execute at the store, retailers  or
                    will have to have the right set of measures to ensure           To learn more about applying this research or work-
                    great delivery to the shopper. In addition, the focus           ing with MVI's Consulting team, please call Phil
                    of high capability in-market retailers' corporate               Bonanno, Chief Solutions Officer, at 310.318.9124.
                    measures are usually geared toward selling to the               E-mail:
                    consumer than on buying efficiencies and leveraging

                               About MVI
                              MVI's Retail Market Research, Analysis and Consulting Leadership
                              For nearly 20 years, Management Ventures, Inc. (MVI), a WPP Group Company, has provided
                              comprehensive strategic retail insight and training focused on the top global retailers, based on
                              robust data-driven research.
                              As the largest worldwide retail research and consulting organization, its renowned analysts build
                              knowledge and share insights while tracking the strategic and tactical developments of over 800 retailers
                              in 130 countries. Channels covered in the Americas include Mass Merchandisers, Grocery, Warehouse
                              Clubs, Value Discounters, Chain Drug, Office, DIY, and more. Channels covered by MVI in Europe include
                              Discounters, Cash & Carry, Hypermarkets, Supermarkets, Convenience, and more.
                              We help suppliers and manufacturers understand how different retailers grow, guiding them in aligning
                              their business more closely and profitably for mutual success. This valuable insight can be accessed
                              online, onsite, or in a classroom setting in the form of retail training events: interactive workshops, industry
                              forums, or supersessions.
                              Financial services organizations, ad agencies, and marketing companies also attribute part of their growth
                              to partnering with MVI.
                              MVI's global headquarters are located in Cambridge, MA USA with field offices nationwide as well as a
                              major hub in London, UK.

6   Selling Global Leaders l Quarter 1, 2007

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