Emerging markets globally have retail potential, but could any be the new China? By Tim Danaher

In recent years keen attention has been focused on the potential of the exponentially expanding Chinese retail market. And with good reason, given the consumer spending growth potential in what is now the world’s second largest economy.

But the excitement about China may have dazzled retailers into neglecting other emerging markets, according to a report jointly produced by Deloitte and Planet Retail. The study - Hidden Heroes: Emerging retail markets beyond China - examines 10 markets that have little in common, except that they have all attracted the attention of some of the world’s most forward-thinking retailers.

As Deloitte global consumer business research director Ira Kalish points out, countries such as Russia, Brazil and India are already very much on retail’s radar, but others such as Egypt, South Africa and Colombia are not. He adds that in Colombia, for instance, partly thanks to the government’s relative success at tackling the drug trade, the scene is now set for economic growth and greater stabilisation. Meanwhile South Africa’s growing economy and burgeoning black middle class have contributed to its appeal as a retail destination.

Vietnam, too, has not been at the forefront of retailers’ minds. The report describes it as “resembling China 20 years ago” - having formerly been a communist nation, and with a per capita income roughly half that of China today. Yet it is experiencing very rapid economic growth, averaging 8% a year over the past decade, and has attracted some international retailers - such as Casino of France and Metro of Germany - whose arrival has forced the local players to raise their game.

The choice of emerging market depends greatly on the individual retailer. Certainly many of the global food retail giants such as Carrefour and Walmart are already well-established in places such as Brazil and Mexico. But from a non-food perspective Kalish says Brazil is particularly attractive, and non-food players such as Leroy Merlin, C&A and Zara are already seizing the opportunity. Kalish says: “The big non-food players are starting to become saturated in their own markets.” Going into emerging markets will soon become an essential means to grow their businesses, he adds.

Modernising the markets

Despite the big differences between the markets covered in the report, there are clear threads that run throughout them. The first is that they are serving the underserved. In large parts of all 10 countries, the modern retail that is arriving is replacing markets where either independent or informal retail have previously been the norm.

In Vietnam the Saigon Co-op has introduced consumers to the modern retail experience, but even in a more developed market like Mexico, Walmart de México has introduced low-price Western-style retailing to many towns. Many of the emerging markets featured are vast land masses, and retailers such as Magnit in Russia have prospered by reaching out beyond the big centres to remote cities where there is a real thirst for modern retail.

But just getting into these underserved markets is not enough. First-mover advantage, the report says, is key. However, this is defined not as being the first modern retailer into a particular market. Rather, it is about pioneering new retail channels, best practice and merchandising techniques, which enable the retailer to offer a point of difference that customers in those countries aren’t used to.

It particularly highlights the work done by India’s Pantaloon in expanding into a wide array of retail ventures in the country’s fast-growing economy, and Bim’s trailblazing in the Turkish discount channel as two examples of “foresight and commercial bravery that have led to a number of retailers in emerging markets defending their territory in an impressive fashion”.

Knowing customers in markets like these is absolutely key and in reality that means understanding and meeting the needs of consumers who have low incomes. Bim and Walmart de México are two examples of retailers that have thrived thanks to targeting their operations at lower-income shoppers. This success is set to continue in spite of future economic growth in the countries and the end of the global recession, as value will remain vital.

Diverse offer

Developing a successful private label offer is essential if retailers are to reinforce these value credentials. And many of the retailers highlighted have done this successfully in the emerging markets in which they operate. This doesn’t just have the benefit of being able to seem to offer greater value but is also a positive from a margin perspective.

While most prevalent on the food side, increasingly these retailers are turning to private label in non-food areas such as home improvement and electricals, further helping the development of their brands and broader offers.

Another trend prevalent among those retailers doing well in the emerging markets is format diversity. With the exception of Bim, all the retailers highlighted in the report as doing a particularly strong job in their markets have more than one store format. This doesn’t only help them understand what works and what doesn’t, but also enables them to meet the needs of a wide range of customer groups and different shopping occasions.

Not all of them will work, but having a wide range of formats provides insulation against those that are not working. Competition in these markets will inevitably intensify as their attraction develops further for overseas retailers.

But with the benefits of first-mover advantage and their intelligent understanding of customer needs, those retailers that have moved early and decisively will be well placed to defend their territory from the attentions of incomers.

Emerging Markets

Brazil

Inhabitants 193.2 million

GDP £1.15 trillion

Consumer spending £707bn

Retail sales, net £550bn

The Brazilian grocery sector has an especially high international presence - four out of the five food players are part of international retail groups. Walmart in particular is now building on its operations - in 2009 it said Brazil was one of its top priority markets for further investment. Carrefour’s presence was also boosted in 2007 by its acquisition of hypermarket Atacadão.

Multiformat retailer Grupo Pão de Açúcar, in which France’s Casino has a 34.8% stake, will be the largest retailer in Brazil after the acquisition of consumer electronics retailer Casas Bahia, resulting in a 1,500-strong store portfolio.

But despite widespread foreign interest the Brazilian market is still fragmented. No player yet accounts for more than 10% of the market, signalling significant potential.

India

Inhabitants 1.2 billion

GDP £956bn

Consumer spending £517bn

Retail sales, net £348bn

The Indian retail sector is one of the least concentrated in the world, with the top five retailers holding about 2% of the market. The country has proved a tough challenge for foreign retailers, and local players dominate. Multi-format retailer Pantaloon has emerged as a major player and is expanding aggressively and Tesco and Walmart are both present. And yet some of the largest players have hit problems during the global financial crisis and have been unable to achieve ambitious plans. The report anticipates a probable readjustment in the market, with some players falling victim to over-expansion and crippling debt.

Mexico

Inhabitants 108 million

GDP £592bn

Consumer spending £413bn

Retail sales, net £180bn

Walmart’s arrival into Mexico in 1991 forced domestic retailers to step outside their traditional regional retailing and start competing with each other. Walmart de México is by far the dominant retail force, operating a mixture of formats including hypermarkets, discount stores, supermarkets and clothing shops. It has unveiled an “unprecedented investment plan” for 2010 to open 300 units. Trailing far behind is the largest local retailer Soriana, which mainly operates hypermarkets. The third, OXXO, operates nearly 8,000 convenience stores.

Vietnam

Inhabitants 88 million

GDP £64bn

Consumer spending £42bn

Retail sales, net £27bn

There are few major retail chains in Vietnam, and the top five grocery players have a combined market share of less than 3%. The leading local grocer is the state-owned Saigon Co-op. Until recently the only major foreign entrants were Casino, through its 70% stake in Vindemia, and Metro Group, each with only a small number of stores. But interest is increasing following Vietnam’s deregulation of foreign involvement in the retail sector. Malaysia’s Parkson department stores have entered the scene, as have Dairy Farm’s supermarkets.

Indonesia

Inhabitants 234.5 million

GDP £406bn

Consumer spending £243bn

Retail sales, net £148bn

The top five grocery retailers in Indonesia hold a combined market share of less than 5%, but have ambitious expansion plans which should result in increased market dominance - albeit at the expense of small local players. In terms of domestic brands, department store retailers Matahari and Ramayana and convenience store players Alfa Mart and Indomaret are the most high profile within the sector. However, foreign retailers will become increasingly important. Carrefour is the country’s second largest retailer, operating 60 hypermarkets and 15 supermarkets.

Russia

Inhabitants 140 million

GDP £957bn

Consumer spending £470bn

Retail sales, net £346bn

The global financial crisis has hit Russia hard and will continue to do so. Leading domestic retailers, which are receiving government support, are likely to take over some of their smaller counterparts and in 2009 all of the country’s retailers cut their capital expenditure for long investment projects and are developing their small-store formats. Foreign retailers such as France’s Auchan and Real - owned by Germany’s Metro Group - may benefit from this and establish positions in new regions. But it’s not all rosy for retail’s international brands - Carrefour opened its first hypermarkets in mid 2009 but withdrew at the end of the year. Ikea is also having difficulties.

Colombia

Inhabitants 45 million

GDP £170bn

Consumer spending £87bn

Retail sales, net £47bn

The grocery retail sector in Colombia is one of the most sophisticated in Latin America. International retailers such as Carrefour and SHV Makro entered the country in the late 1990s, while France’s Casino now has a 54.8% share in the country’s largest grocer Éxito. As such, retailing in Colombia has undergone a massive modernisation process, and yet traditional stores have still managed to maintain market share thanks to services such as credit and small-quantity sales of bulk products.

South Africa

Inhabitants 49.8 million

GDP £222bn

Consumer spending £132bn

Retail sales, net £68bn

By African standards, South Africa has a mature and developed retail market, solely occupied by domestic retailers and all of its leading grocers - including Shoprite, Pick n Pay, SPAR, Massmart and Metcash - run a pool of hypermarkets. But the market is about to be shaken up following the September 2010 announcement that Walmart has made a preliminary, non-binding proposal which could, if successful, lead to the retailer making a cash offer for Massmart.

Egypt

Inhabitants 78 million

GDP £136bn

Consumer spending £96bn

Retail sales, net £52bn

There is a lack of large modern players in Egypt - the top five grocery retailers hold a combined market share of less than 2% - and it will take decades for supermarkets to extend their reach throughout the country. Hypermarkets have arrived in the major cities of Cairo and Alexandria, often as part of shopping malls. Progress is likely to be slow in terms of making significant inroads in the market, but it holds potential. Carrefour in particular is expanding relatively quickly, driving the trend towards hypermarket shopping.

Turkey

Inhabitants 71 million

GDP £434bn

Consumer spending £308bn

Retail sales, net £149bn

The major trend in Turkish retailing has been the rise of discount stores ever since the economic instability of the early 2000s. Bim is one retailer to have benefited, and now has more than 2,600 stores compared with just 21 at the end of 1995. Other major players include Sok (owned by Migros Ticaret) and Dia, owned by Carrefour. Turkey has emerged as an important market for major foreign grocers, with Metro Group, Carrefour and Tesco all present. The entry of DSGi, Kesa and most recently Best Buy illustrates that the market has become a priority for non-food retailers.