Global retailing is all about building local scale in the right markets while developing as wide an international coverage as possible. Most developed markets across the world are saturated with enough options available for consumers. As a result, retailers are looking at emerging markets for future expansion. There is a flurry of activity internationally as retail power-houses are trying to tap new markets that offer huge potential. A number of new formats are emerging, power houses are competing for a larger market share and consumers are demanding more than the best. Fuelled by the demand, the retail industry has gained a momentum that is unprecedented.
After taking into account the increasing importance and potential of international retailing, retailers across the world have made international expansion an integral part of their overall strategy. In fact, size has become the keyword in international retailing. The larger the size of the operations, the better are the chances of successful survival in this vicious war of winning over the global consumer.
A research on retail investment attractiveness among 30 emerging markets, carried out by AT Kearney, placed India, Russia, Ukraine, China, Slovenia, Latvia, Croatia, Vietnam, Turkey and Slovakia, in the top 10.
Expanding to new horizons
A number of factors are taken into consideration by investors while assessing the potential of a new or an existing market. These include:
High political and economic stability
Good quality infrastructure
Low level of retailer competition
The potential for future growth.
While many markets display a large number of these criteria, none have them all therefore no perfect market opportunity exists. For example:
The US benefits from a high level of political and economic stability, good quality infrastructure and a considerable retail market. However, it is a highly competitive market and while it is likely to be attractive for some investors, it would require a large-scale investment or acquisition for a retailer to enter the market.
On the other hand, Bulgaria has a low level of retailer competition, and high future growth potential, but the market remains relatively small in global retailing terms, and this limits the size of the opportunity.
Consumer driven market
Running a retail chain was a lot simpler till two decades ago, the market was essentially driven by manufacturers and retailers served as the link between the consumer and the producer. The supply demand curve was essentially lop-sided as the demand existed but the supply was limited. Over the years, the situation has altered, the demand has increased and at the same time a phenomenal increase is visible in the supply as well. Consumers are becoming more informed and discerning. With the variety that is now offered to them, they have an upper hand even in the supply demand chain and largely, the market is now a buyers market.
As retailers consolidate operations in their home base and venture out to capitalise on global market opportunities, the biggest challenge that lies ahead is to efficiently locate, understand and serve those individuals who are most likely to purchase their products on an ongoing basis, and to carry out the activities in such a way that it does not effect their returns adversely. In fact with the increasing competition, running a retail business is rapidly becoming a complex science. Resulting from this, retailers who are sharing the same markets can have a wide performance gap. Some retailers are performing extremely well and have high investment returns, while in the same market, where the demand undoubtedly exists, the rest are struggling to survive because of depleting profit margins and rising costs.
This clearly indicates that retail success is not dependent on a specific product offering or product mix, retail format, a particular management system or a unique business model. The key to success is a focus on customer satisfaction and on ensuring that those business strategies are implemented that will meet the changing needs of consumers. In the current times a retailer can be successful only if there is a consistent effort to meet the changing demands and expectations of consumers.
At the same time, what has complicated the situation even further is the fact, that the consumer spending pattern has changed world over. The retail market can basically be segregated into mature markets including North America, Western Europe and Japan and emerging markets including Latin America, Africa and Asia. The spending pattern in both the markets is quite varied. The changing economic scenario in developing countries has largely contributed to the changing consumer demands in emerging markets. There is a visible increase in demand for products that were once branded as luxury items, undoubtedly encompassing the entire portfolio of consumer durables and electronics. This has further augmented the need for companies to upgrade productivity and to develop innovative business strategies that anticipate and meet the demands of the new economic environment, which is both volatile and highly unpredictable. At the same time consumers are welcoming international brands with a wider product offering and better quality standards. There is an increase in demand for products branded as lifestyle items as consumers now aim for a better living standard.
On the other hand, the current spending trends in certain developed markets like the US reflect a moderate growth in the spending capacity. The predictions indicate that spending for health insurance, prescription drugs, and vitamins will increase significantly, leaving less disposable income for other discretionary spending. Consumer spending at the start of the millennium indicated modest growth for discretionary items such as apparel and personal services. Currently, as consumers aim for stability the spending pattern indicates an increase in demands for housing facilities. Spending has also increased significantly for education and contributions to retirement and savings plans are rising moderately.
In Britain, though a number of new retailers have entered the arena, 69 per cent of shoppers will purchase new products or different brands as a result of promotional activity. This clearly reflects that advertising and promotions have a large impact on consumers. In Central and Eastern Europe, supermarkets are the most favoured format of stores despite the large number of western players entering the region with hypermarket or discount formats. This is mainly due to their convenient locations. As a result, it becomes imperative for other formats to focus on elements such as pricing to increase their market share.
According to a recent research study, India now presents the most lucrative investment opportunity for international mass merchants and food retailers looking to expand overseas. India's retail market, totaling approximately $330 billion, is vastly under-served and has grown at an average rate of 10 per cent during the last five years. It is also one of the most fragmented retail markets in the world. In fact, the combined market share of the top five retailers totals less than two per cent. This further stresses on the advantages that international retailers would hold in the market. In fact, retailers who missed the opportunity to capture the first-mover advantage in China, would now have an opportunity to make up for it in India.
While some countries around the world have started considering retailing as an integral part of their social infrastructure, India still has to realise the benefits of organised retailing that accrue to the society at large. US retailers, including Wal-Mart and Chico's FAS, are increasing purchases of clothing and jewellery from India. In fact, Wal-Mart is boosting purchases from India by 30 per cent to touch approx $1.5 billion this year. This basically stems from the realisation that India has a strong manufacturing base, particularly in textiles, mainly because of cheap labour costs. The quality of textiles sourced from the country is also amongst the best in the world.
According to a market study on the food and grocery retail, the country's overall retail sales now account for almost 44 per cent of its GDP. Food retail sales make up for close to 63 per cent of total retail sales. Besides, the food and grocery sector now accounts for 14 per cent of total organised retail, after clothing and textiles that stands at 36 per cent and watches and jewellery that stands at 17 per cent. At the same time organised retail, accounts for just about 1.6 per cent of the total retail sales in the country, estimated at approx Rs 18,000 crore.
As of now, while Chennai has some five organised food and grocery retail chains, other big cities such as Delhi, Bangalore, and Mumbai average only two or three such chains.
Also, most food retail players have been region-specific as far as geographical presence is concerned. Take the example of FoodWorld, Nilgiris, Margin Free, Giant, Varkey's and Subhiksha, all of which are more or less spread in the Southern region; Sabka Bazaar has a presence only in and around Delhi; names such as Haiko and Radhakrishna Foodland are Mumbai-centric; while Adani is Ahmedabad-centric. This is because there is so much potential to extract from individual regions, that players are in no tearing hurry to spread out.
At the same time, over the past few years the Indian retail scenario has matured and provides a better support system for international retailers though there is still scope to grow. At the same time, the lack of appropriate infrastructure, FDI restrictions in retail and high import duties create the obvious disconnect.
Impact on local retailers
With the retailing business becoming increasingly global, small retailers find it hard to survive the onslaught of the large retailers. Also, chain stores enjoy cost advantages over a single store retailer because of the benefits offered by economies of scale. Leveraging advantages of better prices and an efficient distribution system, corporate chains can sell at far lower prices than smaller retailers. At the same time, in case of large retail chains, mostly all the stores have the same merchandise and services, and the offerings of individual stores may not be compatible to the needs of the local market. Thus, along with the advantages of chain stores, there are certain considerable disadvantages as well.
Local retailers offer merchandise and services that are not easily available at these large corporate chains and are thus still able to flourish. On the other hand, it has been observed that whenever large discount stores open in a particular area, consumers are attracted to the community from the surrounding areas, which in turn also brings more business to the existing retailers in that area.
The journey has just begunâ€¦
As retailers expand beyond geographical boundaries and tap the potential that newer markets offer, it is essential to understand that this is just a glimpse of what the future holds for consumers. Global retailers are now strategising their operations to foray beyond their existing territories and are leaving no stones unturned to reach consumers far and wide. At the same time, consumers are thirsting for information to take advantage of the retail war. It is essential for retailers to understand the pulse of the consumers if they want to emerge as winners in this war. As customers gear up to capitalise on the advantages that this retail revolution would bring, retailers across the world need to gear up if they want to sail on this high wave.