Expanding Opportunities for Global Retailers the 2010 A.T

Expanding Opportunities for Global Retailers The 2010 A.T. Kearney Global Retail Development IndexTM Figure 1 The 2010 Global Retail Development IndexTM

Change Market Country Market Time in rank 2010 attractiveness risk saturation pressure GRDI compared rank Country Region (25%) (25%) (25%) (25%) score to 2009

1 China Asia 50.6 85.8 32.9 86.6 64.0 +2

2 Kuwait MENA 75.4 94.3 56.2 24.5 62.6 N/A

3 India Asia 35.4 51.3 62.2 97.8 61.7 –2

4 Saudi Arabia MENA 65.3 86.5 50.7 31.0 58.4 +1

5 Brazil Latin America 73.5 74.3 46.6 36.9 57.8 +3

6 Chile Latin America 71.8 92.3 27.5 38.3 57.5 +1

7 United Arab Emirates MENA 79.1 100.0 18.8 32.0 57.5 –3

8 Uruguay Latin America 67.7 74.3 58.6 23.1 55.9 N/A

9 Peru Latin America 43.4 54.6 72.2 49.2 54.9 +9

10 Russia Eastern Europe 63.5 55.1 32.0 61.8 53.1 –8

11 Tunisia MENA 45.3 77.1 61.3 26.3 52.5 +3

12 Albania Eastern Europe 30.4 30.2 82.2 61.7 51.1 N/A

13 Egypt MENA 30.9 45.5 85.7 41.6 50.9 +2

14 Vietnam Asia 12.3 49.4 50.2 89.1 50.2 –8

15 Morocco MENA 31.8 60.6 56.0 46.9 48.8 +4

16 Indonesia Asia 40.9 46.6 59.9 47.5 48.7 +6

17 Malaysia Asia 54.9 67.5 15.6 48.9 46.7 –7

18 Turkey MENA 64.6 52.5 40.5 28.9 46.6 +2

19 Bulgaria Eastern Europe 49.7 60.8 18.8 56.7 46.5 +2

20 Macedonia Eastern Europe 41.7 28.0 60.8 52.2 45.6 N/A

21 Algeria MENA 26.1 21.3 96.0 38.2 45.4 –10

22 Philippines Asia 35.6 35.6 72.7 37.0 45.2 +3

23 Dominican Republic Latin America 41.2 27.4 69.8 35.4 43.5 N/A

24 South Africa Sub-Saharan Africa 52.4 73.0 25.2 16.0 41.7 N/A

25 Mexico Latin America 64.3 69.6 11.1 20.9 41.5 –13

26 Colombia Latin America 45.0 44.0 48.8 21.9 40.0 +2

27 El Salvador Latin America 43.8 43.1 55.3 15.9 39.5 +2

28 Romania Eastern Europe 46.0 61.8 0.0 49.4 39.3 –5

29 Bosnia and Herzegovina Eastern Europe 27.3 30.2 21.4 77.4 39.1 N/A

30 Guatemala Latin America 29.3 30.5 70.4 11.9 35.5 N/A

Notes: MENA = 0 = low attrac- 0 = high 0 = saturated 0 = no time Middle East and On the radar Lower tiveness risk pressure North Africa; screen priority Scores are rounded Key 100 = high attrac- 100 = low 100 = not 100 = urgency To consider Legend tiveness risk saturated to enter

Sources: Euromoney; Population Reference Bureau; International Monetary Fund; World Bank; World Economic Forum; Economist Intelligence Unit; Planet Retail; A.T. Kearney analysis s the dust settles from a turbulent 2009, retailers in developed markets face a changed landscape that features fewer stores, Aheavier discounting and more fickle shoppers. In contrast, retail in most developing markets quickly got back on track after the recession. Desirable real estate is still difficult to obtain, competition remains strong both from domestic and foreign players, and the middle class continues to grow. If global retailers ever questioned the wisdom of balancing their domestic holdings with investments in developing markets, the recession certainly reaffirmed its value.

Retailers in developed markets are cautiously pects. The oil-rich Middle East continues its optimistic about 2010 after an extraordinary year explosive growth, thanks to largely urban popula- marked by the collapse of major retailers (such as tions and relatively underpenetrated organized Circuit City in the United States and Quelle in retail markets. Latin America, meanwhile, has Germany) and financial lenders (such as CIT shown resiliency throughout the downturn. As Group in the United States). Most retailers pruned one retail executive says, “Global expansion is not their store footprints, cleaned up their invento- for the faint-hearted. If you get it right, you will ries, reduced corporate overhead and revamped be able to balance your portfolio and compensate management with a laser focus on profitable for the low growth rate in your home market.” growth. Survivors emerged with improved pro- This changing competitive environment high- ductivity and balance sheets. lights the need for companies to compare different Retail executives have learned again that their markets for entry prospects—which A.T. Kearney’s core markets are not the powerful engines of 2010 Global Retail Development Index™ (GRDI) growth they would like—United States and can help them do. The annual study ranks the top European GDP growth in 2010 is expected to 30 emerging countries for retail expansion, based hover around 3 percent and 1 percent, respec- on 25 macroeconomic and retail-specific variables tively. Today, reliance on developing countries for (see figure 1). This year we include for the first future growth is no longer a “nice-to-have,” but time the findings of a survey of roughly 60 execu- is a necessity. Although developing giants China tives from global retail companies, who were asked (10 percent expected GDP growth) and India about their company’s international expansion (8 percent) continue their rapid expansion, Asia- plans and their lessons learned (see sidebar: What Pacific is not the only region with bright pros- Are Retailers Saying? on page 6).

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 1 Small Countries, Big Opportunities This trend is highlighted by our window-of- The top of the rankings, where Kuwait sits in 2nd opportunity analysis, which compares this year’s place, highlights one major trend in this year’s growth opportunities to those from the recent GRDI: the success of smaller countries. The global past. A country’s window of opportunity opens recession has truly changed the landscape and has when the government opens their doors to foreign left some small but more “insulated” markets in a investment, real estate is still inexpensive, modern relatively better position. The newcomers to the formats are evolving, consumers are beginning to rankings this year include several smaller markets, spend disposable income on branded products, including Albania, Macedonia, Dominican Repub- and there is little competition. The window closes lic, and Bosnia and Herzegovina. The implications when competition is fierce, consumers desire for retailers are clear: When expanding, a portfolio more specialized retail formats, and real estate of countries both small and large may offer the best prices are high and still going up. A closed window path to success for global retailers to “go global.” can still mean there is solid retail entry potential

Figure 2 The GRDI window-of-opportunity analysis

Opening Peaking Maturing Closing

Highgh prioripriorityt Poland (1995) Vietnam (2010) China (2003) China (2006) Russia (2003) India (2010) India (2003) Vietnam Russia (2006) Russia (2010) (2006) Colombia (2010) India (2006) China (2010) Kuwait (2010) South Africa (2010) Poland (2000) GRDIGRDI China (1995) prioritypriority Hungary (2005) Hungary (2010) Russia (1995) India (1995) Slovenia (2010) Guatemala (2010) Czech Republic (2010)

Poland (2005) Poland (1990) Loww pprioritriority

Definition Middle class is growing; Consumers seek organized Consumer spending has Consumers are accustomed consumers are willing to formats and greater exposure expanded significantly; to modern retail; discretion- explore organized formats; to global brands; retail shopping desirable real estate is more ary spending is higher; government is relaxing districts are being developed; difficult to secure; local competition is fierce both restrictions real estate is affordable and competition has become from local and foreign retail- available more sophisticated ers; real estate is expensive and not readily available

Method Minority investment in local Organic, such as through directly Typically organic, but Acquisitions of entry retailer operated stores focused on tier 2 and 3 cities

Labor Identify local skilled labor Hire and train local talent and Change balance from Use mostly local staff strategy for management positions balance the expatriate mix expatriate to local staff

Source: A.T. Kearney analysis

2 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney in a country, but retailers need to be more thought- GDP growth of 8.7 percent, and forecasts call for ful about their entry strategy and operations in GDP growth of more than 10 percent in 2010.1 order to turn a profit. As demonstrated in figure 2, Retail sales increased 8.2 percent in 2009 and Vietnam’s position in this analysis is near its peak, should grow by more than 9 percent this year as similar to India and Russia in 2006. consumer confidence recovers, urbanization continues and the middle class keeps expanding. The 2010 GRDI Findings For the first time since 2002, China is first place The following highlights the major findings of in the GRDI. the 2010 GRDI, including the top opportuni- The retail market is highly fragmented, but ties for global retailers to invest in developing consolidation through organic growth by foreign markets (see sidebar: About the Global Retail players and mergers and acquisitions (M&A) Development Index on page 16). remain major trends. The top 20 retailers’ market share increased from 4.9 percent in 2004 to Asia-Pacific 8.6 percent in 2009, leaving plenty of opportu- China and India remain among the leaders in the nity for new entrants to capitalize on Chinese GRDI. These large, growing markets still present consumerism. Demand for luxury products remains major retail opportunities, and they will for strong, and analysts expect China to become the decades to come. While opportunities remain in world’s largest luxury market by 2015. Global both countries’ largest cities, retailers are also luxury brands continue investing; for example, expanding to smaller but faster-growing cities. LVMH opened another flagship store in Shanghai Retailers are strengthening supply chain operations in 2010. to spur profitable growth while refining merchan- Chinese consumers are becoming more posi- dising capabilities and internal organizations to tive about the economy and their personal take advantage of their scale. finances. The Consumer Confidence Index rose Throughout Asia-Pacific, the post-recession from 86 in March 2009 to 108 in May 2010. outlook is bright, with domestic demand and Although 75 percent of consumers still seek exports increasing, retail sales stabilizing and con- better value in their purchases, only 46 percent sumer confidence improving. Aggressive expan- say that saving money on groceries is impor- sionary fiscal and monetary policies further bolster tant. Such an attitude plays to the strengths of retail. Grocery still accounts for almost two-thirds modern outlets such as hypermarkets. Private of total organized retail sales, but the proportion labels are growing rapidly, albeit from a lower of spending on food is declining annually as con- base and despite consumer skepticism about qual- sumers increase discretionary spending on cloth- ity. Some major foreign retailers have expanded ing, transportation, communications, appliances quality-focused private labels, such as Carrefour’s and recreation. Hypermarkets and convenience Harmonie brand. stores are the formats of choice, but local competi- Existing foreign and local leading retailers will tion is fierce. maintain their aggressive store expansion plans. China: full speed ahead, again. China’s $585 Wal-Mart opened 52 new stores in 2009 to sur- billion government stimulus package spurred pass Carrefour (22 new stores in 2009). RT-Mart 1 All monetary amounts are in U.S. dollars unless otherwise noted.

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 3 opened 20 stores and large Chinese grocer Wumart Vietnam. Pressures regarding currency apprecia- opened 323. Other large international retailers are tion continue to mount. Lastly, despite the invest- pondering entry into China, including U.S.-based ment, infrastructure is still underdeveloped. For Macy’s, which is contemplating opening its first example, only 15 percent of perishables are trans- Chinese store, and Germany’s Metro Group, ported via refrigerated vehicles, leading to an which announced plans to open a Media Markt annual loss of 30 percent of total output. consumer electronics store in October 2010. India: immense potential. India, a GRDI Retailers continued to enter tier 2, 3 and 4 leader last year and from 2005 to 2007, takes 3rd cities in 2009. As China’s middle class expands place this year. Despite the slight dip, India outside of tier 1 cities, this trend shows no sign of remains quite attractive for retail (see figure 3). slowing. While foreign and domestic players have India’s GDP growth dipped to 6.7 percent in crowded tier 1 cities, rent and labor costs remain 2008-2009, but is expected to reach 7.2 percent more reasonable elsewhere. In China, “smaller” in 2009-2010 and between 8 and 8.5 percent municipalities still represent millions of shoppers. beyond that. The retail market is worth about Bulgari opened its first Chinese store in tier 2 $410 billion, but only 5 percent of sales are Shenyang; luxury brands such as Armani, Gucci, through organized retail, meaning that the oppor- Cartier, Dunhill and Burberry are also expanding tunity in India remains immense. Retail should into smaller cities. continue to grow rapidly—up to $535 billion in In terms of store format, hypermarkets have 2013, with 10 percent coming from organized experienced the strongest growth, particularly for retail, reflecting a fast-growing middle class packaged foods, snacks, drinks and ambient prod- demanding higher-quality shopping environ- ucts, sectors where foreign players have the largest ments and stronger brands. market share. Supermarkets, dominated by local Store growth and consumer insight have been players, remain the biggest format but are losing the focus for the past few years. The market is share to hypermarkets, especially in large cities. maturing, as most retailers are now focusing on Convenience stores are also growing fast, par- profitable growth. Several domestic retailers filed ticularly forecourt retailers. China Petroleum & for bankruptcy or exited the market during the Chemical Corporation has expanded to 30,000 downturn, including Subhiksha and Magnet, outlets and China National Petroleum Corporation while others optimized their operations, includ- has 17,500. Department stores still face sluggish ing store labor, rent renegotiations and strategic growth, which has leading players such as Parkson cost management. Expansion plans did not slow, and Bailian Group offering frequent discounts however: Bharti Retail strengthened its position and promotions. in northern India by opening 59 stores, Bharti Despite the bright outlook, there are some Wal-Mart is expected to open 10 to 15 wholesale cautions. The government stimulus focused on locations in the next three years, and Marks & infrastructure rather than domestic consumption, Spencer is considering plans to open additional crowded out small and medium enterprises, and outlets in the next few years. heightened worries about inflation and real estate Established retailers are tapping into the bubbles. Labor rates are rising, while exports face growing retail market by introducing innovative competition from lower-cost regions such as store formats, such as community shopping, village

4 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney malls and destination shopping stores. For example, model in India to improve productivity and the Future Group set up a first-of-its-kind community- quality of goods by launching a direct farm pro- family shopping center in Bangalore. Another inno- duce sourcing system. vative concept, “wedding malls,” devoted to nearly Foreign players continue to demonstrate every aspect of weddings, are making a splash in strong interest in India—most major hyper- the Indian market. market retailers either have a presence or are While rising commodity prices hit Indian studying the market for entry. In apparel, Zara consumers in all segments (including cereals, (owned by Spain’s Inditex Group) opened its grains, fruits and vegetables), retailers launched first store in 2010, while Polo Ralph Lauren and a wide range of private labels. More profitable for Diesel are expanding. retailers, these brands are gaining customer accep- Desirable real estate is a lingering challenge tance in categories beyond staples. Future Group for retailers. Mall rental rates are lower because of plans to add 10 to 15 new private-label categories an oversupply of space, but there is still a lack of every year; this year, it expanded its Tasty Treat quality street locations. Given these challenges, label to the breakfast cereal, noodle and soup many retailers see tier 2 cities as the next frontier. categories. Beyond private labels, Wal-Mart is Customers in these locations are proving simi- working to change the agricultural supply chain lar to those in tier 1 cities, meaning that retail

Figure 3 2010 GRDI country attractiveness

UAE On the radar screen Kuwait 95 Saudi To consider Chile Arabia Lower priority China Tunisia Size of bubble indicates South Africa net retail sales, 2009 75 Uruguay Brazil Malaysia Mexico Morocco Bulgaria Romania 55 Vietnam Russia Peru Turkey India Colombia El Salvador Indonesia

(0 = high risk; 100 low risk) Egypt

35 Philippines

Country risk (economic and political) Guatemala Bosnia and Macedonia Albania Herzegovina Dominican Republic Algeria

15 25 30 35 40 45 50 55 60 65 70 75 Market potential* (0 = low potential; 100 = high potential) * Based on weighted score of market attractiveness, market saturation and time pressure Source: A.T. Kearney analysis

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 5 What Are Retailers Saying?

As part of this year’s GRDI, we of these markets as part of their 30 percent selected a developed surveyed 60 global retail executives, firms’ plans for short-term inter- country as one of their top three representing all sectors, sizes and national growth. Executives hope countries to target for expansion geographies (see figure A). The per- to take advantage of the tremen- (see figure C). While most of those spectives and comments of these dous growth and strides made in focused on targeting other emerging executives help confirm our rank- organized retail, while applying the markets were exploring regionally ings, offer insight into what criteria lessons from other retailers that (53.6 percent), a large number retailers use to select new countries, have already entered these markets. (46.4 percent) were also looking examine past lessons, and identify Expansion is a two-way street. outside of their region. emerging competitive trends. Expansion is no longer about retail- There are already a few examples Five main themes emerged ers from developed markets moving of retailers from emerging markets from the survey. into developing markets. Now, retail- going global. Malaysia’s Parkson BRIC: still a center of growth. ers from developing markets are Corporation has expanded into Our survey shows that Brazil, Russia, expanding regionally, thanks to their Vietnam, and Chile’s Falabella chain India and China—known collec- unique insights into local business has entered Peru and Colombia. tively as the BRIC nations—remain and culture. Ninety-two percent of Some respondents state that their the highest priority markets for retail respondents from emerging markets next move will be into Europe or expansion (see figure B). Nearly 80 say they plan to expand beyond their North America; China’s A.S. Watson percent of respondents named one home markets, and of those, nearly already has more than 1,600 stores in Europe, for example. This trend, if continued, will shift Figure A: The 2010 GRDI survey respondent profile the global competitive landscape. Retailers in developed markets will Geography Annual revenue have to pay attention to these shifts 3.6% 1.8% and ensure that they are prepared to Asia-Pacific 5.4% < $1B 7.1% Western Europe 8.9% $1B–$10B handle intensified competition in North America $50B–$100B their home markets. As one German 32.1% Eastern Europe $10B–$50B 14.3% 41.1% 25.0% Central Asia > $100B grocery executive tells us, “Do not Middle East underestimate the pace of develop-

30.4% 30.4% ment of developing market retailers. They learn fast and move faster.” Control is everything. The ability Retail sector Percent of revenue from home market to maintain control over brands and 1.79% 1.8% 1.79% Apparel 1.8% 0%–10% decision making is a central factor as 1.79% 3.6% Other retail 31%–40% 3.57% 3.6% retailers enter new markets. Nearly 3.57% Grocery 11%–20% Luxury 61%–70% 65 percent of our respondents—par- 5.36% 25.00% 10.7% Discount 32.1% 41%–50% ticularly those from large retailers— 8.93% Convenience 91%–100% Footwear 10.7% 21%–30% prefer expansion via organic growth Books 51%–60% 23.21% 25.00% or acquisition so they can maintain Department store 17.9% 17.9% 81%–90% Home complete authority, rather than improvement/DIY Source: A.T. Kearney analysis franchises or local joint ventures

6 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney

Figure B: Respondents say China, India, Brazil and Russia of entering a new market, ambitious remain top targets for expansion compared to a survey we conducted in 2005, when executives said they Percentage of respondents selecting as top three expansion target sought profits within five to seven China 39.3 years. Of course, reality rarely India 30.4 matches those high expectations— Brazil 19.6 consumers are more difficult to sat- Russia 17.9 isfy and competition is fiercer than United States 12.5 anticipated, and executives say this Indonesia 10.7 means flexibility and the ability to United Arab Emirates 10.7 adjust are key. One South Korean department store executive notes Singapore 8.9 this when discussing his company’s United Kingdom 8.9 expansion plans: “The cost of under- Vietnam 8.9 standing local customers’ needs, the Source: A.T. Kearney analysis retail business environment, competition, and regulations was much higher than initially planned.” Figure C: Emerging market retailers are looking beyond The business environment holds their own borders plenty of surprises. Our survey indi- Do you plan to expand globally? If yes, where do you plan to expand? cates that the number one lesson retailers have learned from expand- Yes Emerging market 7.7% No Developed market ing globally is that the business environment has a lot more “surprises” 28.2% than they expected. Our respondents offered up 71.8% 92.3% three main pieces of advice on how to manage this risk: Source: A.T. Kearney analysis • Test the market. Use less risky channels, such as wholesale or that do not involve majority own- owning single-brand retailers. e-commerce, to learn about the ership. However, local regulation Web-based ventures are also gain- market and consumer acceptance often dictates the terms by which ing prominence. American Eagle of your brand through less risky a retailer can enter and do business Outfitters, House of Fraser and channels. within the country. This may cause J.Crew have used the Internet to • Look beyond statistics when study- some retailers to forgo an opportu- access and test new markets while ing a market. Spend time in the nity rather than lose control over the minimizing investment and risks. market to fully understand con- brand—Swedish furniture retailer Retailers expect fast success— sumers and competition. IKEA canceled its plans for a store and unique challenges. Many • Use local partners where it makes in India because of regulations pre- respondents expect their companies sense. Seek sources of high-quality venting foreign companies from to be profitable within three years local talent

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 7 models translate well—even increasing profitabil- have the company’s highest growth. Domestic ity because of lower operating costs. Spencer’s leaders offer tough competition, including super- Retail, More (owned by Aditya Birla Group) and market chain Saigon Co.op, which plans to open Shoppers Stop (owned by K Raheja Group) 100 new stores by 2015. already plan to expand. Indonesia: a high-growth market. Indonesia Regulations pose another challenge to retail moves up to 16th place in the GRDI this year, up growth in India, particularly the foreign invest- from 22nd. Indonesia accounts for more than one- ment restrictions for multi-brand retail, which will third of Southeast Asia’s total retail sales, and its probably not change anytime soon. As a result, sales are expected to double by 2015 on the heels cash-and-carry formats will thrive, as foreign com- of economic growth, an expanding population, panies are allowed full ownership. Wal-Mart and rising incomes and more organized retail. Sales Metro have already successfully entered through through organized retail outlets will grow 20 per- this route, and Carrefour and Tesco plan to follow. cent in the next five years, due to a growing mid- Vietnam: lower rank, but continued strength. dle-income population and food retail market in Vietnam’s retail industry continues to grow, with large cities such as Jakarta, Surabaya and Bandung, consumer spending expected to rise above the and the province of Bali. With more tourism and current level of 70 percent of income. Retail sales an expatriate population, demand for imported in Vietnam—14th in the GRDI this year, after Western foods is growing. Large retailers such as finishing 6th in 2009 and 1st in 2008—will Carrefour Indonesia, Matahari Putra Prima Tbk, rise to $77.8 billion in 2010 and $85 billion by and Hero Supermarkets have increased sales by 2012. Vietnam’s relatively high GDP growth and selling private-label products, offering store pro- younger population—57 percent are younger than motions and expanding to less-saturated regions. 30—are major factors behind the rebound and Malaysia: oversaturation and overexpansion. success of the retail sector. Malaysian retail suffers from overexpansion, and On January 1, Vietnam opened doors for the country drops from 10th to 17th place in the further multinational retail investment. Foreign GRDI. Some of the shopping malls that satu- companies may now open wholly owned busi- rated major cities now have occupancy problems, nesses without a local partner, in line with com- and the downturn forced some retailers to curb mitments to the World Trade Organization. While expansion plans. New malls will be smaller and small, independent shops still dominate, several suburban, to serve the rising population of sec- foreign firms including Germany’s Metro Cash ondary cities. & Carry and Japan’s FamilyMart have entered Multinational retailers are growing through Vietnam. South Korea’s leading department store convenience stores. Carrefour plans to open 100 operator, Lotte Shopping, has joined with a local such stores, focused on private-label sales; Tesco retailer to spend $5 billion developing 30 depart- plans to augment its profitable hypermarkets. ment stores and supermarkets over the next 10 The Philippines: signs of growth. A strong years in Ho Chi Minh City and Hanoi, along retail outlook leads the Philippines to 22nd place. with tier 2 cities Da Nang, Can Tho, Haiphong The growing outsourcing industry and remittances and Hue. Malaysia’s leading retailer Parkson is from overseas workers have bolstered spending. also expanding in Vietnam, where its operations The national election may lead to more govern-

8 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney ment spending and business investment, while the recent price fluctuations, but a 2009 government Retail Trade Liberalization Act will increase retail plan aims to diversify the economy and attract competition, both domestic and foreign. investors. As oil prices rise and the global econ- An increasing number of dual-income, middle- omy recovers, Kuwait’s GDP per capita could class families and young professionals are stimu- increase 49 percent by 2014. lating urban retail sales—today, roughly half of Local entities continue to dominate grocery. all retail sales are concentrated in Manila. Outside The government-funded Union of Consumer major cities, the Philippine retail sector remains Cooperative Societies (UCCS) has exclusive access dominated by small, independent shops and to residential zones. Non-organized retail still grocers called sari-sari stores, which account for plays a role with small grocery and convenience 90 percent of the country’s outlets. stores. However, large international retailers have made inroads around Kuwait City. Carrefour Middle East and Africa entered in 2007, Groupe Casino joined UAE’s The Middle East and North Africa (MENA) Retail Arabia and Kuwait’s Tamdeen in 2009 to region exhibits the most exciting retail growth blend the international hypermarket experience opportunities today—eight MENA countries with local knowledge under the Géant banner. make it into the Index this year. Specialty retailers are also entering. Those The impact of the downturn varied, as fiscal new to the region, such as Destination Maternity, stimuli offset the damage. Overall, the region has have entered Kuwait as part of regional expansion, proven resilient and appears poised to recover. while others with MENA footprints have focused Retail sales are rising, driven by higher disposable on Kuwait. H&M opened seven stores in Kuwait incomes, urban population growth, a strengthen- (its second MENA market) since signing a 2006 ing middle class and infrastructure investments. franchising agreement with M.H. Alshaya, while New regional and international brands are Claire’s and The Body Shop have opened nearly rushing in. Local retailers such as Saudi Arabia’s 30 stores each. Panda and EMKE Group, from the United Arab Shopping centers host the spectrum of inter- Emirates (UAE), have begun expanding. Inter- national retailers, and Colliers International pre- national retailers have followed, mostly through dicts Kuwait will soon have the Gulf region’s partnerships using a franchise model, due to gov- third-largest supply of retail space. The 2011 ernment regulations and a desire to gain local completion of The Avenues mall in the Al-Rai knowledge. Some of these local partners, such as industrial area will open more space for inter- the UAE’s Al-Futtaim Group and Chalhoub Group, national brands. Already housing Carrefour and have created retail business models by franchising IKEA, The Avenues’ final phase will add a luxury numerous international brands across the region. section, a European-themed mall and a traditional Kuwait: an impressive debut. Kuwait makes Arabic market (souk). an impressive GRDI debut by placing 2nd on the Saudi Arabia: boosting retail with a stable Index. Kuwait is small compared to other GRDI economy. Saudi Arabia moves up one spot to 4th leaders, but the country’s urbanized, wealthy con- place, as it remains relatively sheltered from the sumer population has solid purchasing power. recession. With the Gulf region’s largest economy, Kuwait’s reliance on oil has made it vulnerable to Saudi Arabia and its 28 million people present

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 9 growth opportunities for international retailers. market for international retailers, particularly in The hypermarket and supermarket sectors health and beauty and consumer electronics. have changed significantly over the past six years In particular, Dubai should maintain its place as foreign players have entered and local players as a regional retail hub with its modern retail have expanded. Groupe Casino and Carrefour infrastructure, greater ease of doing business rela- entered in 2004, and EMKE Group introduced tive to other countries in the region, and attrac- its Lulu hypermarket in 2009. Domestic competitive urban consumer base. Dubai is a symbol of tion is strong, with local retailer Al-Azizia Panda luxury; many retailers open stores there not just United Company expanding through two acquisi- to increase revenues, but also to build their tions since 2008, including a takeover of Groupe brands. Bloomingdale’s opened its first store out- Casino’s single Géant operation. As the market side of North America in Dubai in early 2010. develops, consolidation opportunities for dis- Abu Dhabi, relatively underdeveloped in retail counters and private-label expansion are likely with fewer international brands than Dubai, in mass grocery. represents the next wave of retail development in International apparel retailers have entered the UAE, particularly in luxury goods. It fared Saudi Arabia through local partnerships over the better during the recession, has a fast-growing past decade. The Inditex Group launched its first tourism sector and features local consumers with Saudi stores in 1999 and now has more than 95. high spending power. The Gap Inc. plans to open approximately 50 Tunisia: now is the time. Tunisia climbs three stores by 2012. spots to 11th place. It has a diversified economy, Government regulations still constrain inter- strong domestic demand, high per capita incomes national retailers. Saudi Arabia’s foreign invest- and an economy growing 3 percent per year. In ment rules require a minimum of 25 percent local 2009 the government passed new regulations to capital. The government also regulates hours of spur the modern retail industry, allowing fran- operations during religious periods, often requir- chises to operate for the first time under the same ing stores to close or dim lights during prayer regulations as other businesses. International retail times. Nevertheless, international retailers will be remains limited to a few major grocery players, so pivotal toward shaping this vibrant market. this market has potential. UAE: a few steps back. The UAE drops from Hypermarkets and supermarkets are trans- 4th to 7th place in the Index this year. Retail sales forming the landscape. In 2001, Carrefour part- growth slowed in 2009, as the downturn led to nered with Ulysse Hyper Distribution for its first a decline in tourism and decreased demand for North African store. Following the “Carrefour luxury goods. The closing of BinHendi Avenue, Market” concept’s global success, the company the luxury extension of Deira City Centre, high- converted its Champion brand stores to the lighted department stores’ woes. As grocers re- Carrefour banner in 2009; the company now focus on the local economy, it is an opportunity operates in Tunisia under a single-banner, multi- for value brands and discounters. format strategy. IKEA and Landmark Group also Still, with a mostly urban population of 5 mil- plan to enter Tunisia. lion, a high rate of retail sales per capita and high Egypt: large and largely untapped. With per capita wealth, the UAE remains a vital growth a population of nearly 80 million, 13th-place

10 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney Egypt is a regional powerhouse. Egypt struggled non-grocery European and U.S. franchises. For through the downturn, its GDP falling as exports example, Fnac, owned by France’s PPR, signed and tourism declined, but 6 percent growth is a franchise agreement with Aksal Group to open expected in 2010. The small share of modern its first MENA store in Morocco in early 2011. retailing, little consolidation and growing con- South Africa: coming onto the radar. By sumer demand make Egypt attractive for large regional standards, South Africa—entering the global retailers. GRDI in 24th place—has a developed economy Modern grocery sales are on the rise as with strong financial and retail sectors. Globally, hypermarkets and supermarkets have expanded. South Africa is an emerging market. Host to the Spinneys entered in 2006, competing with 2010 FIFA World Cup, with a positive long-term Carrefour and some local retailers, and it recently economic outlook, large population and an English signed a 20-year lease agreement with Egyptian language base, South Africa is attractive for foreign Centres, owned by Fawaz Alhokair Group, for retailers. The country’s retail sector is projected its third store in Cairo and fourth in Egypt. Metro to grow 60 percent in five years, to more than Group plans to open 10 to 20 Makro stores focused $100 billion. on wholesale retail, which thus far has been limited A strengthening middle class is leading to urban areas. Elsewhere, small neighborhood domestic players to target certain markets. Mixed grocery stores remain the format of choice. retailers such as Woolworth’s are targeting the Traditional outdoor markets are giving way high end, while ShopRite and Massmart domi- to shopping centers, where many foreign non- nate hypermarkets and supermarkets. Last year, grocery retailers are expanding. Inditex Group, U.S. retailer Safeway agreed to expand its private- which entered Egypt in 2008 with Pull and Bear label “O Organics” and “Eating Right” brands to and Bershka outlets in Cairo, plans to open a South Africa through ShopRite stores. Although Zara store. Saudi retailer Al Sawani Group plans the country’s leading modern grocers have to build 25 fashion stores in Cairo and Alexandria. expanded quickly, traditional trade channels still Morocco: a MENA hub. Morocco moves up to account for 45 percent of sales, as most people 15th place from 19th in the Index and is expected live in townships and rural areas. to achieve 5 percent annual growth over the next International brands have entered depart- few years. Morocco, with a population of 30 ment stores and shopping malls in well-developed million, offers a relatively strong mid- to long- areas. Shopping centers in Capetown and term opportunity for developing or expanding Johannesburg feature footwear and apparel makers a MENA footprint. It avoided the worst of the Timberland and Guess and luxury brands Gucci downturn thanks to a diversified economy and its and Tag Heuer. The apparel, accessories and retail sales are growing modestly. luxury goods sectors should continue to shine as In 2009, Carrefour partnered with Label’Vie consumer spending stabilizes. to open its first hypermarket in Morocco. These modern outlets are transforming and shaping Latin America local markets and the way consumers purchase Four Latin American countries rank in the top 10 groceries. They are concentrated near high-income of this year’s GRDI, as retailers embrace trends populations, in small malls that also contain toward organized retail formats, higher personal

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 11 incomes and an improving business environment government, new president Sebastián Piñera has that is drawing in foreign investors. Intra-region announced plans to improve the business envi- expansion will remain popular as local leaders ronment, increase investment incentives and raise enter other Latin American markets. annual growth to 6 percent. Smaller Latin American countries enter the Chile has a modern and competitive retail GRDI this year, including the Dominican sector. Local retailers such as Falabella and Cencosud Republic and Guatemala. Most retailers see these S.A. already have a strong presence in other Latin smaller markets as jumping-off points in a regional American countries such as Argentina, Colombia, approach. Brazil and Peru, and both have plans to expand Brazil: retail nears its peak. Brazil, in 5th further. The case for local partnerships and an place, came out of the global recession with little understanding of local consumers is particularly damage and GDP retraction of only 0.2 percent, strong in Chile. Wal-Mart has opened new stores one of 2009’s top performances. For 2010, growth and increased sales since entering the country in of 4.5 to 6 percent is expected. Inflation is under January 2009 by acquiring the local chain D&S. control and GDP per capita and consumer spend- In addition, the retail sector has had a signifi- ing is on the rise. cant impact on retail banking, as the top four Despite recent consolidation, Brazil remains issuers of credit cards in 2009 were retailers, attractive to large retail chains. Tier 2 cities in the controlling 77 percent of the market. These retail- northeast and the center-west regions present the ers have maintained customer loyalty by devel- biggest opportunities as competition there is not oping customer rewards programs that offer as fierce. Apparel, home goods and furniture are significant discounts and promotions. Internet wide-open segments for international players. retail in Chile is also on the rise and offers an In late 2009, Grupo Pão de Açúcar acquired interesting potential entry approach; the country Casas Bahia to form a new retail leader, trans- has the strongest infrastructure and Internet forming the local landscape. In 2010 Ricardo penetration in Latin America. Eletro and Insinuante merged to form the second- Uruguay: small but well-positioned. Uruguay, largest chain. Carrefour and Wal-Mart follow as one of South America’s smallest countries, enters third and fourth largest, respectively; a merger is the GRDI for the first time at an impressive 8th common speculation among the media. Major place. Uruguay benefits from its location between retailers plan almost $8.5 billion in investment Buenos Aires and Brazil’s southern region. in the next three years, including over 300 new Additionally, 94 percent of its population is stores in 2010. urban, making it accessible to retailers. Uruguay’s Brazil is host to the 2014 World Cup and main southern region includes Montevideo, its 2016 Olympic Games. These events have led to largest city, and the states of Canelones and infrastructure investments, including large com- Maldonado, representing more than 56 percent of mercial centers and shopping malls, with 19 new the population. shopping malls scheduled to open in 2010 alone. Uruguay’s small size, location and similarities Chile: an emerging regional leader. Chile’s to neighboring countries could serve international expanding economy highlights its 6th place rank- retailers as a test market. Groupe Casino entered ing in the Index. After two decades of a center-left Uruguay (by acquiring supermarket chains Géant,

12 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney Disco and Devoto) and Argentina in early 1998 ing, since most retailers are not passing the increase before moving into Brazil and Colombia in late on to their customers. 1999. The apparel sector has only seen limited Mexico’s retail opportunity is demonstrated entry by international chains from Brazil, Argentina by leading local retailers that are expanding into and Chile. new formats and cities. Small and discount stores Peru: rising fast. Peru jumped nine places to represent 60 percent of Walmex’s expansion plans land at 9th place in the Index. Peru managed (worth $1 billion), and 50 percent of Soriana’s a positive GDP growth of 0.6 percent and has the store openings. Both companies are targeting lowest inflation rate in the region. With only 10 densely populated urban areas with heavy foot percent of retail sales from shopping malls, Peru is traffic. Retailers are also planning expansion into frequently compared to Chile 10 years ago. The smaller cities, as tier 1 and tier 2 cities show some dominant domestic players plan massive invest- signs of saturation. Retailers have significantly ments over the next few years. increased their role in the financial services mar- Peru has two different economic regions: kets in recent years, with leading retailers such as large developed economic areas with a high con- Walmex, Elektra and FAMSA running significant centration of products and services, and a less banking operations. This has increased access to developed, agriculture-based interior region. Lima credit for traditionally underserved populations. and its surroundings represent 30 percent of the Colombia: slow and steady. Colombia is country’s population. Its retail sector is dominated slowly moving up in the GRDI rankings, moving by shopping malls with local and international up two spots to 26th place. Consumption has franchises. Banks and retailers are making initial steadily increased and the retail market has grown efforts to increase consumer credit and private more dynamic as international retailers enter. label sales. Outside of Lima, retail is dominated by Additionally, Colombia’s business environment small grocery stores and local franchises, while has improved tremendously, rating first in Latin large Peruvian and international chains have made America in 2010 for ease of doing business, few in-roads. according to the World Bank. Mexico: a complex environment. The second As in the rest of the region, the crisis slowed largest market in Latin America falls 13 spots to down consumption, but not enough to discour- 25th place after its economy declined 7 percent in age investment from retailers such as Carrefour, 2009. However, analysts predict growth of 3 to 4 Falabella and Almacenes Éxito. However, the percent for 2010. central bank changed interest rates of store credit High unemployment, a reduction in remit- cards to control inflation, which might have an tances from the United States, inflation and lower impact on consumption. oil prices hampered consumer confidence and consumption. Grocery retailers took a less severe Eastern and Central Europe hit and will recover faster; the leaders (Walmex Russia drops from 2nd to 10th place in 2010, but and Soriana) generated profits last year. Based on it remains at the forefront of Eastern Europe. historic trends, the recent 1 percent increase in the Meanwhile, the Balkan countries of Albania, value-added tax (from 15 percent to 16 percent) Bosnia and Herzegovina, Bulgaria and Macedonia should have a limited impact on consumer spend- climb up in the rankings. While these smaller

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 13 countries remain well behind Western Europe in in key regions, such as Paterson earlier this year. terms of GDP per capita, the EU enlargement The remaining attractive retail M&A targets are rounds in 2004 and 2007 have accelerated their limited mainly to geographic niches. economic development. A new retail anti-monopoly law caps regional Plenty has already happened in 2010. Schwarz market share at 25 percent, restricts marketing Group’s Lidl discount chain purchased the Plus activities from manufacturers, and encourages the discount stores of Bulgaria and Romania, and sale of basic local products. Retailers will have to Slovenian chain Mercator has expanded to Albania, align operations to the new policy, yet this will Bulgaria and Montenegro. Growth opportunities have little long-term impact on the marketplace, in Eastern Europe remain immense, but a one- as modern trade remains limited and the under- size-fits-all approach won’t cut it. A customized lying economics positive. approach is required, rather than the standard Albania: a small market with a positive out- regional one, to enter the diverse Balkan retail look. Albania debuts in the GRDI in 12th place, markets. While there may not be immediate driven mainly by its unsaturated market. Albania urgency to enter the Balkans, global retailers is still relatively poor, with a per capita GDP of should closely monitor this bloc of close to 40 about $3,370; by 2014, real GDP is expected to million people. grow by 30 percent, which make it a country to Russia: making a drop. While it dropped watch in the longer term. eight spots in rankings this year, Russia (10th) So far, the fragmented food retail market is remains Eastern Europe’s highest-ranked country. shaped by mostly small independent shops and Slower GDP and retail growth rates and increas- open markets of self-grown products. The top ing market saturation contributed to the decline, three grocery retailers together operate fewer than yet the retail environment in Russia has not 30 stores. changed dramatically. Russia remains Europe’s Bulgaria: retail investment continues. largest consumer market, with rising disposable Bulgaria rises two spots to 19th place in the Index. incomes and an expanding middle class, and it Bulgaria remains in the early investment phase, offers massive growth opportunities for retailers with a limited number of domestic retailers. Since with a long-term approach. joining the European Union (EU) in 2007, for- Foreign retailers such as Metro Group and eign retailers have entered to secure a good market Auchan are driving the development of big-box position. Carrefour chose Bulgaria as a key Eastern stores, and some have established smaller stores in European market, opening its first hypermarket cities to increase penetration. Organic expansion in 2009, and Slovenia-based Mercator soon fol- in Russia, however, is difficult, costly and slow. lowed. Germany’s Metro, Schwarz and Rewe Carrefour struggled with its entry and expansion, groups have shares of 5 to 10 percent each, and are eventually selling the leasing rights of its two now the market leaders. Purchasing power differs hypermarkets and withdrawing from the market. greatly between Sofia, the capital, and rural areas. But, as Auchan has shown with its 40 Russian Urban retail growth will be driven by hyper- hypermarkets, endurance can pay off. X5 Retail markets, cash and carry and discount, whereas in Group and Magnit remain the local market lead- smaller cities and towns modern supermarkets ers, with X5 growing by acquiring local players will succeed.

14 EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS | A.T. Kearney Macedonia: regional entry point. Macedonia market concentration remains low, limited mainly debuts in 20th place, due to low market saturation to cities and big towns. and strong possibilities. Macedonia has the Bosnia and Herzegovina: its time is coming. Balkans’ smallest population, GDP and retail Bosnia and Herzegovina enters the Index for the market, so it is attractive as a regional entry first time in 29th place. Leading Balkan retailers market. Retail market volume reached $3.5 bil- Mercator, Agrokor and Delta Maxi have entered lion in 2009, but annual real GDP growth rate in in recent years. After the 1990s ethnic war, the the next five years is expected to be only 2 percent. country is still supervised by the international The market is relatively underdeveloped, with community, and it remains split in two highly only a few Balkan retail players that have minor autonomous zones. Leading retailers have estab- operations. The local leader is Tinex with 37 lished separate legal entities while managing key stores, followed by Veropoulos and TUS Trgovine, functions centrally. each with eight stores. Romania: a saturating market. Romania, the Riding the Retail Wave region’s largest population and retail market, falls After a wave of bumpy economic conditions, from 23rd to 28th place as its market becomes global retailers are ready to go back on offense. saturated. Since reaching economic stability in While the world’s biggest developed economies 2000, real GDP growth has ranged from 5 to 8 slowly resume their growth trajectories, developing percent per year, before falling during the recent economies in Asia, Latin America and the Middle economic downturn. Its economy should resume East appear poised for remarkable growth. Global its pre-downturn rates after 2010. Despite the retailers will have to prepare for more difficult eco- presence of a significant number of international nomic conditions and increased competition— retailers, such as Metro, Schwarz, Carrefour, while understanding that emerging markets are Delhaize, Intermarché, SPAR and Auchan, food more vital than ever to their long-term success.

Authors

Hana Ben-Shabat is a partner in the firm’s consumer products and retail practice. Based in the New York office, she can be reached at [email protected]. Mike Moriarty is a partner in the firm’s consumer products and retail practice. Based in the Chicago office, he can be reached at [email protected]. Deepa Neary is a consultant in the firm’s consumer products and retail practice. Based in the New York office, she can be reached at [email protected].

The authors wish to acknowledge the contributions and insights of their A.T. Kearney colleagues around the world who helped write this paper, especially Danilo Almeida, Guilherme Barreto, Michael Deng, Pramod Gupta, Ivan Kotov, Nithya Rajagopalan, Helen Rhim, Fabiola Salman, Peter Schmidt and Smriti Tankha.

A.T. Kearney | EXPANDING OPPORTUNITIES FOR GLOBAL RETAILERS 15 About the Global Retail Development Index

The annual A.T. Kearney Global market is already mature, indicating ers worldwide) and one point for Retail Development Index ranks an opportunity. tier 3 retailers (all others). Countries 30 emerging countries on a 100- Population (20 percent): A zero with the maximum number of point scale. The higher the rank- indicates the country is relatively retailers have the lowest score. ing, the more urgency there is to small, representing limited opportu- Modern retail sales area per enter a country. We selected coun- nities for growth. urban inhabitant (20 percent): A tries from a list of 185, based on Urban population (20 percent): zero means the country ranks high three criteria: Zero means the country is mostly in modern retail area per urban inhab- • Country risk: 35 or higher in rural; 100 indicates the country is itant, close to the average Western the Euromoney country-risk mostly urban. European level. Modern formats are score Business efficiency (20 percent): stores predominantly selling food • Population size: 2 million or Parameters include government (hypermarkets, supermarkets, dis- more effectiveness, burden of law and count and convenience stores). • Wealth: GDP per capita of more regulations, ease of doing business Market share of leading retailers than $3,0002 and infrastructure quality. Zero (20 percent): A zero indicates that GRDI scores are relative and means the country has poor busi- the market is highly concentrated will change over time depending ness efficiency, while a score of 100 with the top five competitors (local on the comparison set of countries. indicates high efficiency. and international) holding more Scores are based on the following Market saturation (25 percent). than 55 percent of the retail food four variables: Share of modern retailing (30 per- market. A 100 indicates the market Country and business risk cent): A zero indicates a large share is still extremely fragmented. (25 percent). Country risk (80 of retail sales made through a modern Time pressure (25 percent). percent): political risk, economic distribution format within the aver- The time factor is measured by the performance, debt indicators, debt age Western European level (200 CAGR (2004 to 2009) of modern in default or rescheduled, credit rat- square meters per 1,000 inhabitants). retail sales weighted by the develop- ings and access to bank financing. Modern formats include stores pre- ment of the economy in general The higher the rating, the lower dominantly selling food (hyper- (CAGR of the GDP and consumer the risk of failure. markets, supermarkets, discount spending from 2004 to 2009) and Business risk (20 percent): busi- stores and convenience stores), and the CAGR from 2004 to 2009 of the ness cost of terrorism, crime and those selling mixed merchandise retail sales area weighted by newly violence, and corruption. The higher (department stores, variety stores, created modern retailing sales area. the rating, the lower the risk of U.S.-style warehouse clubs and Data and analysis are based doing business. supercenters). on the United Nations Population Market attractiveness (25 per- Number of international retailers Division Database, the World Eco- cent). Retail sales per capita (40 (30 percent): The total score is nomic Forum’s Global Competitive- percent): A score of zero indicates weighted by the size of retailers in ness Report 2008-2009, national that the retail sector (total annual the country: three points for tier statistics, Euromoney and World sales of retail enterprises excluding 1 retailers (among the top 10 retail- Bank reports, and Euromonitor taxes) is still underdeveloped. A ers worldwide), two points for tier and Planet Retail databases. score of 100 indicates that the retail 2 retailers (within the top 20 retail-

2 The threshold for countries with populations of more than 35 million is more flexible due to the market opportunity.

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