Emerging Markets Fuel Growth
Studies predict that in little more than a decade, over half the world’s population will have joined the consuming classes. Emerging markets will account for nearly 50 percent of the world’s total consumption, up from 32 percent today. China and India will account for two-thirds of the expansion.
In the past five years, the world’s leading retail brands—U.K.’s Tesco, German giant Metro, America’s Walmart, and France-based Carrefour—grew their revenues 2.5 times faster in developing countries than in their home markets. 2013 will see international retail hitting its stride as many of the world’s most valuable brands are staging entries into smaller countries to ride the wave of the global shopping boom.
While retail naturally goes where customers are, for many companies global expansion is being initiated by slow growth at home. Retail sales forecasts for the next five years put compound annual growth rates in North America at 4.1 percent, and 2.4 percent in Western Europe.
Contrast that to projected growth rates for retail sales of 13.9 percent in China, and 10.6 percent in India, and it’s clear why retailers from mature markets, such as the U.S., Japan and the Eurozone, make up 80 percent of those taking the calculated risk of crossing borders. Interestingly, almost half of that expansion comes from international fashion brands. Growth in e-commerce and mobile commerce currently outpaces physical retail in countries large and small. In all markets, a brick and mortar presence combined with the speed and agility of an e-commerce channel gives a retailer great advantage.
Thanks to the internet, there’s an international awareness of the top global brands. Many consumers from emerging economies are already shopping them, comfortable with e-commerce, mobile commerce and willing to endure often lengthy delivery times. This is especially true in emerging markets.
Although infrastructures vary in effectiveness depending on the country, and internet access is not yet universal, the world’s consumers want to buy anytime, in any way, from anywhere.
Riding the wave of the shopping boom in Brazil
Despite a slight cooling this past year, Brazil’s middle-class economy continues to strengthen. Retail spending has increased 9 percent per year for the past five years, with a slight drop in the forecast for 2013. The fact that the country that will be hosting the Olympics in 2016 has helped spur international bets on long-term growth.
Currently the most attractive market in Latin America because of its economic growth, high consumption rates, large urban population and dynamic retail landscape, Brazil is the place to be for many of the world’s most valuable retailers. However, the country is not without obstacles to foreign investment, such as high taxes, duties and challenging logistics. French retail giant Carrefour, a brick and mortar presence in Brazil since 1975, recently halted its new e-commerce channel to restructure, due to fierce local competition for the fast-growing young demographic. The country has 80 million internet users who spend USD $10.6 billion online per year, attracted in great part by the lower prices on appliances and consumer electronics.
Any e-commerce entrant must contend with Brazil’s biggest pure player, B2W, which is owned by Lojas Americanas department stores. U.S.-based Amazon.com introduced Kindle and its digital bookstore last year, holding back on physical book sales for the time being, while Magazine Luiza, Brazil’s leading consumer electronics leader, has launched an e-commerce channel, encouraging its customers to open their own digital Luiza stores on Facebook.
Both Carrefour and Walmart, which entered Brazil in 1995, found an already sophisticated grocery market compared with other fast-growing economies. France’s Casino grew its market share by acquiring control of leading local grocery powerhouse Pão de Açúcar.
In fashion apparel, Brazilians still value the social experience of shopping in stores like those of local department store chain Hering. Spain’s Mango and Zara have successfully rolled out stores in the country, while the U.K.-based department store Debenhams plans to follow its Brazilian e-commerce success with a brick and mortar store.
Beauty sales in Sao Paulo will get a boost from France’s Sephora, after parent company LVMH succeeded in growing awareness by acquiring Sack’s, Brazil’s leading online beauty retailer. And L’Occitane plans to triple its store count. The U.S. cosmetic company Avon may find its door-to-door dominance challenged by Brazilian newcomer Natura, already a top cosmetic brand in Latin America following a successful direct-sales model.
Rising consumer spending in India
The tremendously diverse culture that is India, made more complicated by its restrictions on foreign direct investment, is still a high-potential market in the eyes of top retail brands. It’s home to the world’s second-largest population—1.2 billion people—with a large and growing middle class. Forecasts for retail growth are 15 to 20 percent over the next five years, based on strong macroeconomic conditions, rising disposable incomes and rapid urbanization.
More than half the country’s population is under the age of 25, a huge potential market for internet retailers. As many as 121 million Indians have internet access, and more than half of them access the web via their mobile phones. The number of transactions made online has been growing: in the past year, the value of online business in India was estimated to be worth about USD $10 billion. With almost 900 million mobile subscribers, and 200 million more expected next year, market watchers expect m-commerce to skyrocket.
India’s recently relaxed limits on foreign investment may help both domestic and foreign retail brands, and it’s certainly encouraging the world’s largest players to give the market serious consideration. Foreign retailers already in the market with plans for expansion include Carrefour and Metro Group, both operating wholesale centers without partners; U.K.’s Tesco, with a minority stake in Star Bazaar supermarkets; and Walmart, a partner in India’s Bharti Enterprises national chain of wholesalers.
Under these new foreign investment rules, Indian retail brands have the option of exploring more of such partnerships. Executives at India’s leading hypermarket Shoppers’ Stop are considering teaming up with a foreign partner to expand technology and sourcing capabilities. Meanwhile, U.K.’s Sainsbury is looking at India, and Marks & Spencer plans to increase from 30 stores to 80 by 2016.
Spain’s Zara, with nine stores in India, is poised to take advantage of an apparel boom that could grow 9 to 10 percent year over year for the next five years. Gap hopes to enter the market, too, where it will have healthy competition not only from Zara, but also from one of the most valuable brands in India, fashion retailer Provogue.
Luxury retail saw 20 percent growth last year, with high-end malls sprouting brands like Burberry, Gucci and possibly Longchamp and Prada in the future. The wealthy class also uses the internet extensively and regularly shops online, seeking out premium brands such as India’s multichannel jewelry and wristwear brands, Tanishq and Titan.
As in most markets as shopping is changing, brands will need a multichannel strategy and an ability to adapt to local markets while actively managing customer expectations, along with the patience and persistence needed to build trust.
A market reaching its peak: China
While inflationary pressures are driving up rent and labor costs significantly, China’s retail outlook remains positive, with a double-digit rise in annual sales expected, and plenty of growth opportunities in second- and third-tier cities.
China’s own brands are thriving, increasing in brand value this year. In fact, some domestic retailers boast more market share than global players. Suning, a household appliance giant with a footprint of 1,000 stores in flagship, neighborhood, specialty and boutique formats across 300 cities, plans to expand further, while eyeing markets overseas. Belle, the top retail brand for women’s sportswear, operates nearly 12,000 retail outlets on the mainland with nearly 200 in Hong Kong and Macau.
Contemporary, aspiring Chinese consumers continue to be wooed by domestic and foreign retailers alike. They comprise the world’s largest luxury goods market with $12 billion a year in sales and growing, spent on the likes of Dior, Cartier, Escada, Chanel, Hermés, Gucci and Versace. Young and affluent Chinese are boosting growth in consumer electronics and luxury goods, as well as the automotive, real estate, banking, and service sectors. The sale of luxury goods is expected to outpace the growth of any other category in China.
Gap has increased its store count in China to 45 after planting its flag in Hong Kong. Banana Republic may follow suit. J.Crew has taken off in Hong Kong through its partnership with Lane Crawford stores.
However, only 1.4 percent of urban households make more than USD $15,000 a year, and only 11 percent make USD $5,000-15,000. Without social safety nets, these families save prodigiously and love a bargain. Enter discount retailer Walmart, which operates 370 stores in 140 Chinese cities in various formats. Its clean, bright aisles are considered upscale compared to the prevailing discount format of jammed, dirt-cheap shopping stalls. Hindering its big box model, there’s no free parking infrastructure and a ban on free bags.
So, despite its size and attractiveness, China remains a battlefield for some retailers as they struggle with real estate (prime locations are reserved for domestic retailers), suppliers, regulations, as well as local shopping behaviors and expectations. Carrefour scaled back its China operations due to problems securing suppliers. Tesco, Germany’s OBI and U.S.-based The Home Depot have folded their store operations.
Conversely, U.S. office supply retailer Staples has fared quite well by doing its research and adapting its brand to local tastes. The stores fly colorful promotional banners, feature a broad mix of merchandise including refrigerators, washing machines, car floor mats, shampoo and mosquito repellent.
Online sales are up in China, creating an opportunity for multichannel brands to offset any losses. China’s USD $23 billion online retail market is expected to reach USD $81 billion over the next five years as the country’s infrastructure improves and online behaviors evolve. Only 34 percent of the population uses the internet currently.
360Buy, China’s homegrown version of Amazon, owns 16 percent of the e-commerce market. Carrefour, Tesco and Walmart are attempting to steal online share, while Walmart owns a controlling stake in e-commerce firm Yihaodian, giving it an extensive logistics network. Other foreign retailers are close behind, such as Germany’s consumer electronics chain Media Markt.
Macy’s acquired a USD $15 million stake in China’s VIPStore, parent company of luxury fashion retailer Omei.com, which will host Macy’s offerings and fulfill its orders. Japan’s Uniqlo, launched an e -commerce business in China last year. U.S. handbag retailer Coach also intends to open an online store to test the waters.
Entering the Chinese market carries an extra risk that makes it harder to protect a brand’s sovereignty: the prevalence of counterfeiting and trademark squatting, or legally registering someone else’s famous trademark, as happened recently to Hermès and continues to happen in the headline-making case of Apple.
All retail is local
For the most part, the world’s best retail brands should be well positioned to capitalize on the bountiful opportunity of emerging markets. The arc of their evolution has taken them through boom, bust and digital revolution, leaving them wiser, more agile, more in tune with consumers and ready to take on challenges.
Their push for globalization won’t be obscuring local tastes, preferences and ways of life as some fear. Instead there will be mutual influence and benefit. Population density and differences will change the environments of physical stores, online customer service and business models. Consumer issues such as the lack of cars, tinier refrigerators, smaller homes and unreliable electricity will shape the brand’s offer.
And some things still haven’t been changed by technology. Word of mouth carries great weight in emerging markets where families and friends live in close proximity. Brands are being pressured to get things right the first time—location, price, convenience, in stocks, assortment, service—and keep the bloom on the rose until they can begin to build brand equity and market share according to local needs. And one of those needs might be additional product information, since the in- store phase of the consumer decision journey tends to be longer in emerging markets, where shoppers visit multiple stores, multiple times, to collect buying details.
Emerging consumers around the world do share one thing in common. Studies show that across cultures they are concerned with value and how well their needs are met. Luckily, those are things that brand-led companies do best.