Carrefour, translated into English, means crossroads. And that is where the global retail sector is right now, according to the chief executive of the world’s second biggest retailer.
José Luis Duràn opened last week’s World Retail Congress with a resolutely downbeat speech describing a sector facing unprecedented issues. “We are seeing the emergence of structural challenges in retail, the scale of which we have not seen in decades, or even in our lifetimes,” he warned. ”Never before has the industry faced so many challenges at the same time.”
Duràn was not alone in setting out a gloomy prognosis. That is not to say the second gathering of global retailers in Barcelona was three days of hand-wringing – there was optimism about the emerging markets and intense discussion on how innovation and best practice can help retailers deal with tougher times.
However, there is no doubt that the backdrop to the event was the structural issues described by Duràn, which are changing the retail landscape and creating huge uncertainty in the economies of the developed world.
He highlighted the return of inflation after years of deflation, pressure on the supply of raw materials and the growing costs of doing business as key issues that are “creating volatility and confusion – for our customers, for our teams, for our partners”. He stressed that these were not cyclical problems, but issues that are here to stay.
Duràn’s keynote speech on the opening morning was followed by a panel session of other leading retailers who were equally downbeat about the wider picture. Ikea chief executive Anders Dahlvig said the housing market was hurting the store group in some of its most developed markets. “At present, growth is at a lower rate – or even going down – in some of our markets, such as the US, UK and Germany,” he said.
Dahlvig also highlighted the impact of rising energy costs and said that, in addition, Ikea is facing the challenge of focusing consumers’ attention back to their homes when their discretionary spend is increasingly being diverted to must-have electronics and holidays.
Of course, it is the US that caught the cold ahead of the other markets, but there is no light at the end of the tunnel as far as Paul Charron, chairman emeritus of US fashion giant Liz Claiborne, was concerned.
“We are seeing downright pessimism, even fear, in America,” he said. “In the past, the strength of consumer spending has been enough to carry us through troubled times, or at least mitigate the downside. Not today. It is a stretch to think the US consumer will return to normalcy by increasing her spending at retail.”
Charron warned that, while some in the US hope for recovery to start in the second half of this year, he believes the second half of 2009 is “a more realistic time frame”. And that, he said, will lead to casualties because, in his opinion, the US is overshopped. “There are too many outlets looking for too few customers,” he said.
So how do you deal with it? Duràn said Carrefour is focusing on making its brand work harder by developing a “single-brand, multi-format” approach. Those stores that trade under other fascias are being converted to the Carrefour brand.
Other priorities at Carrefour include focusing on product and service innovation, using technology to understand customers better and developing closer relationships with farmers and small suppliers, which Duràn said was particularly crucial, because growing shortages of core staples such as grain were forcing retailers to rethink their sourcing strategies.
And tougher times can actually lead retailers to take a long, hard look at the business. “A downturn is an opportunity not to be missed,” Dahlvig said. “It is an opportunity to create motivation for efficiency measures and get focused on the right things commercially. It also enables us to distance ourselves from the competition.”
He added that the slowdown in the world’s mature retail markets would accelerate the shift in focus to opportunities in developing markets. Ikea, for example, hopes to break into the Indian market, if it can get around the challenges of the country’s strict inward investment rules.
Duràn also highlighted how innovative products will still win consumers over, citing the Apple iPhone, Nintendo Wii and Nespresso as products that have captured the imagination of shoppers, despite the straitened times.
Nonetheless, the consensus was clear that, for all the developed Western markets, harder times lie ahead and big changes to how the retail sector works will be inevitable. That does not mean the end of retail as we know it, Duràn argued; just that retailers will need to be better at what they do and make sure their employees are fully engaged. “The best retailers will grow and thrive,” he said. “We have to find our action plan and develop winning strategies that will require the mobilisation of all our assets.”
It was not a debate for the faint-hearted. But these are issues that no retailer will be able to avoid. And it also proved the premise of the whole event – that the biggest issues facing retailers today are global, not local.
Sustainability: at the tipping point
“Do it or die,” and “Do it properly or don’t do it at all” were the overriding messages from retailers and sustainability experts speaking at the World Retail Congress.
There was a consensus that the issue of sustainability has reached a tipping point in the minds of consumers. Retailers can no longer turn a blind eye and survive.
Kingfisher chief executive Ian Cheshire said: “It’s a big and complicated issue, but it is in consumers’ heads in a way it wasn’t five years ago. And they want our help as retailers. We don’t have an option of parking it in the corner.
“Unless you are doing it for real, don’t bother at all. You can do some serious brand damage if you try to do something that isn’t very well thought through. You have to make your commitments tangible and able to disclose.”
Cheshire was quick to point out that putting sustainability at the core of business is an opportunity to add to the bottom line. He said the UK’s ethical market had doubled in the past five years and represented “myriad opportunities”. Of Kingfisher’s efforts, he said: “I’m very sure we’ve delivered far more bottom-line gain out of this than costs.”
Greenpeace international executive director Dr Gerd Leipold said such attitudes would not have existed three or four years ago, but he was sceptical that any real progress is being made yet.
He said: “In spite of all the talk, the reality is that we are still moving away from it [sustainability] at a frightening rate.” However, he believes retailers are well-placed to make a difference. “They are in touch with customers and also have relationships with suppliers,” he explained.
United Nations Global Compact executive director Georg Kell acknowledged that some good efforts have started, but said that cost-efficiency pressures and short-term thinking are cancelling out much of the work being done. He added that there is a great deal of fragmentation and called for businesses to work together.
This call was echoed by Wal-Mart senior director of global supply chain initiatives James Stanway. In order to help drive down both cost and energy usage in the supply chain, he said a standardised product disclosure mechanism is needed across manufacturing and retailing.
He explained that it is burdensome for suppliers to respond to multiple retailers’ demands for compliance and data, and was adamant that co-operation does not have to impede competition in the sector. “It still allows retailers to pursue varying strategies,” he said.
Alliance Boots corporate social responsibility director Richard Ellis said larger players should be willing to share data and expertise. “Most suppliers and retailers are not of a size to employ energy experts, so it is helpful for us to share that knowledge,” he said.
However, concern was also voiced that it was not just better product innovation and more efficient supply chains that needed to be discussed, but the total level of consumption.
In future, it may well be those retailers that move from simply selling products to offering more services that excel.
Emerging markets: new era of international retail
We are seeing the start of a rebalancing of the global economy that will fundamentally change the landscape of international retailing, the Congress heard. Emerging markets will become increasingly important to Western retailers and, in turn, those countries will produce increasingly sophisticated international retailers themselves.
As the US recovers, it will evolve into more of an exporting economy and China will increasingly seek to import more.
Testament to the strength of the Indian opportunity, Bharti managing director Rajan Bharti Mittal revealed to the Congress that he has set a retail sales target of US$10 billion (£5.09 billion) within five to seven years. The Indian group is opening stores in conjunction with Wal-Mart.
Deloitte director of global research Dr Ira Kalish said that, as the middle classes grow in emerging markets, non-food will become increasingly important. And, in China, there will be more investment inland as industry shifts away from the more developed, coastal conurbations. However, Kalish warned that, in India, society is “not developing human capital fast enough to meet demand”. He added that, in Russia, strong economic growth and consumer spending is pegged too closely to the high price of oil.
William Fung, managing director of sourcing giant Li & Fung, warned that control of property could pose difficulties in emerging markets as local entrepreneurs and others who have spotted the value in real estate buy up as much as possible. “We’re in an era of a land-grab,” he said.
Spar International managing director Gordon Campbell pointed out that opportunities exist outside the big emerging markets – the so-called BRIC countries of Brazil, Russia, India and China – and cited Egypt, Saudi Arabia and Vietnam as examples.
Kalish agreed that the high price of oil is driving economic growth and consumer spending in the Persian gulf and that Vietnam is developing in a similar way to China – although, at present, it is 20 or so years behind.
According to a panel debate of luxury brand leaders, the emerging markets will be the real future earnings driver for upscale players too. Estée Lauder group president Patrick Bousquet-Chavanne said the luxury market was not immune from the global credit crunch and the only places in the world experiencing a boom are the emerging markets of India, China and Russia. “I believe it is very likely that it will be a big share of earnings for all of us in the future,” he said. Consumers in those countries are becoming much more brand-aware, particularly the younger generations.
Mark Olbrich, director and supervisory board member of Polish retailer Komex SP.Z.0.0, urged retailers not to ignore the second wave of opportunities in the original emerging markets of central Europe. “A developed market now exists,” he said, but it is still incomplete because “there is no strength or depth yet. It is still an extremely attractive and unsaturated market”.
According to Olbrich, consumer purchasing power is rising “on a whole-society basis”, rather than just the top 10 or 15 per cent you see in markets such as India. He added that early bird opportunities also still exist in markets such as Romania and Ukraine. He described Ukraine in particular as “the next juicy plum”.
Sir Philip Green & Mickey Drexler: survival of the fittest
Both inducted last week into the Retail Hall of Fame, Arcadia and Bhs owner Sir Philip Green and J Crew chairman and chief executive Mickey Drexler found they had much common ground when they hit the stage together at the World Retail Congress.
The debate opened with a discussion of how retailers would fare in the economic downturn. Green warned that the tough conditions would expose who the good and bad retailers are. He said: “You don’t have to be Einstein to have made money over the past 10 years. Now we’ll see who can keep it. It’s pretty dark out there; now we’ll see who’s got the lights.”
He said it was not a case of cost-cutting or job losses, but a question of who could keep evolving their business models. Drexler agreed. “You can’t compete on price alone; you’ll be killed,” he said.
The exceptional retailers are the ones who have an extraordinary curiosity, know their customers well and keep their original vision in the long term, he argued. There are too many mid-market chains and, if a business really wants to differentiate, it cannot compromise on quality.
Green criticised how easy it has been to raise finance for retail deals in recent years and described the market as a case of “the blind leading the blind”. He thought that one of the big problems with the retail industry is that not enough of the people running retailers have a financial interest in their company. He said that today’s corporate culture had “taken away visionary people” and that a new generation was needed that believes in retailing with a passion.
Green also said that he admired Drexler because he talks as if he is the private owner of J Crew, despite not holding all the shares. He added that, in public companies, people often spend too much time trying to please the crowd and too little running the business.
Both Green and Drexler have a very hands-on approach to managing their businesses. Green said you need a “feel and touch for the people and merchandise and, most important, you need constant contact with the customer”. Green “walks the stores” every day and Drexler holds open office hours every week. “It’s amazing what you learn when there are no barriers,” he said.
Drexler also attends many staff interviews, even for younger and junior staff. He said he hires for attitude, not qualifications, and looks for “high energy and passion”. Green said he interviews many of the buyers himself, but, rather than trawl through CVs, he gets out a wad of cash and instructs them to go out and buy “what’s missing in my shops”. He quipped: “Some of them I don’t see again.” Talking about retailers he admires, he cited Zara as an example of a business he would like to own, but joked he had no plans to buy it.
Drexler said: “I admire people who, over the past 10 or 15 years, have continued to build a good business, improved earnings and have happy people working for them.”