Barcelona, Spain: Emerging Markets – Opportunities in Cross Border Retailing – a first-ever global retail research volume from IMAGES Multimedia, was released today at the World Retail Congress in Barcelona.
Unveiled in the presence of the cream of branding, marketing and retailing honchos from across the globe, “Emerging Markets – Opportunities in Cross Border Retailing” is a world-class presentation of the retailing opportunities – both existing and unmasked – in each of the BRIC nations – Brazil, Russia, India and China.
This crisp, 180-page research publication includes invaluable data and analyses from Goldman Sachs, PricewaterhouseCoopers, AT Kearney, Li & Fung Research Centre and IMAGES F&R Research on the growth projections, make up and trends in the retail industries in each of the BRIC nations.
The BRIC countries have all made an impressive impact on the global economy in these early years of the twenty-first century, as each country in its own unique way experiences sizeable build-up in economic wealth even while fighting protectionist trade barriers from the developed world. Statistics show that within five years of the formation of the BRIC concept, India and Russia have expanded their economy considerably while China clearly leads the pack with its high GDP growth and understandably the most stable political scenario, as per the findings in the book.
Stock markets around the world have been outdoing themselves over the past several years with floods of foreign capital to help build and grow stock exchanges from relative anonymity into household names. BRIC funds, or mutual funds composed of securities from the emerging economies of Brazil, Russia, India and China, have been the subject of a lot of talk lately. As a result, the BRIC markets have enjoyed huge increases in economic activity and stock market interest. Investors who were early in putting their money into these countries and their markets have enjoyed handsome rewards.
Investing in BRIC Retail Markets
As far as retail opportunities in emerging markets go, the undoubted leaders are the BRIC nations of Brazil, Russia, India and China. Not only are these countries outrunning the developed world with their slew of economic reforms, but they have also managed to stay ahead of other emerging markets with their already sizeable retail markets. And considering the saturated markets of the developed economies, the global investor can ill-afford to ignore the growth of organised retail in these countries.
In India, the Retail sector is the second largest employer, after Agriculture. Growth of the Russian retail market has also seen impressive. This unprecedented growth is due mainly to the fact that the Organised retail markets in these countries are still in an infancy stage but are growing very fast. BRIC markets are in general fragmented with a large number of private owners and neighbourhood ‘mom & pop’ stores. Therefore, as disposable income rises in these countries, aided by second stage economic reforms, an increasing trend towards urbanisation and changing consumption patterns are fast leading to the growth of the retail industry in these nations.
The small share of organised retail (just 4.6% in the case of India) and the highly fragmented nature of most BRIC retail markets, leave plenty of room for new entrants and also for market consolidation. Early movers have been able to and will continue to reap the rewards here; and as early movers produce tangible results, retailers that are not as yet in the BRIC markets will need to address this sizable opportunity — and quickly, recommends Emerging Markets – Opportunities in Cross Border Retailing.
EXECUTIVE SUMMARY
BRIC Opportunities
BRAZIL
The Brazilian grocery market is consolidating rapidly as supermarket and hypermarket chains strive to acquire good locations, achieve economies of scale and increase their leverage with suppliers. However, with no group yet accounting for more than 10 percent of the market and the top five still claiming just around 25 percent, there is potential for still greater consolidation in the future.
Brazil has been a favoured FDI destination too. In retail, F&G was the most attractive segment for FDI in Brazil till recently, with over US$5 billion invested. The growing segments ripe for entry include: cosmetics and personal care, consumer electronics and food and beverages — such as juices, soft and alcoholic drinks.
RUSSIA
Russia’s food retail market is extremely fragmented, and it is only in the cities of Moscow and St Petersburg that significant consolidation has taken place. About 70-80 percent of the organised shopping centre developments are concentrated in these two major cities. On a countrywide basis, the top five grocers capture a combined share of around 9% of the modern grocery distribution. There is also a marked absence of hard discounters in this highly price-sensitive land — thereby creating a huge opportunity area.
The main investors in Russia happen to be European countries. With the majority of foreign investments directed towards retail and wholesale trade, more than in other BRIC countries, Russian retail attracts a large portion of FDI. As far as retail categories are concerned, besides grocery development, cosmetics and personal care hold much promise with an annual growth rate of 15 percent. Currently there is also an absence of value retail brands in Russia.
INDIA
The Government of India seems to be on a gradual, but definite path toward allowing foreign retailers into the country. And when it finally opens the floodgates, the peak time to enter will quickly pass — giving retailers that enter now a distinct edge. Moreover, apart from the metropolitan centres, retail formats in India’s tier-II and III cities too are growing, thanks to the expansion of the IT/ITES and BPO industries, which are instrumental in creating consumption demand for high-end lifestyle products by employing large numbers of youngsters.
The current policy prohibits FDI in retail trading, except for ‘Single Brand’ product retail subject to a maximum 51 percent foreign equity, and 100 percent FDI in wholesale trade alone. India offers huge opportunities across all retail categories and formats, with the largest opportunity waiting in the F&G sector, which is less than one percent organized at the moment. Developing retail agribusiness ventures, among others, is advised.
CHINA
Domestic retailers are now scrambling to enter tier-II cities to consolidate their positions before global retailers establish themselves in these areas too. With growing urban as well as rural incomes, national as well as international retailers are set to cash in on the shopping boom.
China’s implementation of WTO requirements, together with continued liberalisation and deregulation has lead to increased investor interest. FDI typically occurs through foreign companies where the foreign partner must hold at least 25 percent ownership. With a fast saturating metropolitan scenario, opportunity today lies in tier-II cities and in rural hubs, although it remains to be seen how the whole of China integrates in to the free enterprise mode and still manages to continue with the present political system.
Market Trends, Challenges & Opportunities
1. Across BRIC countries, the food and grocery (F&G) segment is clearly driving retail growth. For eg, retail food sales dominate the total retail market in Brazil, accounting for almost 54 percent of the total retail sales, while Russia is the fastest growing retail food sales market in the world, with the potential to again double in size by 2008.
2. The prevalence of English as a language of communication to a very great extent facilitates material sourcing and business communication. While India and Russia pose no problems in this regard, Brazil and China present communication problems for foreign companies.
3. The importance of governments that are quick on decision-making and passing liberal trade laws cannot be emphasised enough. In China, for instance, being a non-democratic country makes it easier for foreign investors to do business sans bureaucratic red-tapism (in comparison to a democratic country like India), the obvious reason being that the political establishment is not directly accountable to the people.
4. Growing urbanisation and metropolitan saturation is leading to the expansion of retail formats and investment opportunities towards tier-II cities and rural hubs across all four countries.
5. Continued economic reforms together with the growth of organised retail (especially in the F&G segment) has led to growing rural incomes, triggering off far-reaching, social impacts. The upcoming ‘Golden Quadrilateral’ plan for roadways in India, which is to connect the four cities of Delhi, Kolkata, Mumbai and Chennai, will have massive economic and social repercussions on rural and semi-rural clusters along the vast network. In China too, the government plans to create a rural retail network covering 70 percent of all villages by 2008.
6. Apart from F&G, personal care, consumer durables and electronics seem to be other popular consumption segments, especially among the rising middle classes with their rising incomes and changing consumption patterns.
7. ‘Localisation’ of goods and services is extremely important for all global companies planning an entry into the BRIC markets. These are all very vast and diverse nations with multiple traditions and aspiration levels that need to be tackled intelligently.
8. A non-economic, intangible market factor among these emerging economies happens to be a rising sense of national pride that needs to be very sensitively addressed by all foreign companies intending to set up businesses here.
9. Another common challenge across all BRIC markets is the near absence of infrastructure problems.
Eye on India
India’s imminent urbanisation process has implications for demand for housing, urban infrastructure, location of retail, and demand for consumer durables.
The on-stream infrastructure development will drive growth in the transportation sector, spur demand for vehicles, increase real estate values along the “Golden Quadrilateral” corridor, and potentially boost construction of suburban homes as people escape congested cities. Plus, it will open up thousands of villages en route to a global audience and effectively integrate them with the growing Indian economy.
• Growth of the Retail market, to a great extent, is the dependent on the size of the country’s consuming class and the rate of growth of GDP, especially disposable incomes.
• India is the world’s second most populous country and its GDP growth is likely to surpass that of China by 2015.
• It is estimated that India’s GDP will surpass that of the US before 2050, to make it the world’s second largest economy.
• Reflecting on the robust growth in India’s GDP, consumer expenditure (in current prices) grew at a relatively high pace of nearly 10 percent per annum over the past two years.
• India’s advantage lies in the fact that it has the largest young population in the world – over 890 million Indians are below 45 years of age. The median age for India is 25 years as compared to 28 years for Brazil, 33 years for China and 38 years for Russia.
• There are more English speaking people in India than on the European continent.
• The retailing industry in India, estimated at USD 270 Billion in 2006, is expected to double to USD 440 Billion by 2010.
• The size of the organised retailing market in 2006 stood at USD 12.4 Billion in 2006, thereby making up a mere 4.7 percent of the total retailing market.
• Of the total retail market, food and grocery retail is by far the single largest block estimated to be worth a whopping Rs.642,200 crore, but more than 99 percent of this market is dominated by the neighbourhood mom & pop stores.
• Clothing, textiles and fashion accessories constitute the second largest block.
• For the year 2007, the India Apparel Report 2007 expects growth of organised retail to touch 40 percent. From 2008 onwards (until at least 2010), organised retail is expected to register around 45 percent YoY growth in India.
• Total retail in India, which registered 5.7 percent YoY growth from 2004-2006, to range between that and 6 percent YoY growth over the next 3-4 years.
• With these growth percentages and following from our estimates for 2006, the future estimates* for organised retail in India: 2007– Rs.77,000 crore; 2008 – Rs.111,500 crore; 2009 – Rs.162,000 crore; and 2010 – Rs.235,000 crore. (*estimates based on 2006 prices).
• In terms of formats, the energy in terms of new investments is expected to be driven towards the supermarkets and hypermarket segments.
• All new players – Reliance Industries, Bharti Retail/ Wal-Mart, AV Birla Group – have shown interest towards developing these two formats, along with wholesale, cash & carry outlets, while India’s largest retailer – Pantaloon Retail India Ltd. – has a continuous store rollout schedule for its Big Bazaar hypermarkets and Food Bazaar supermarkets.
PLANS OF KEY PLAYERS IN INDIA
• Pantaloon Retail: Expansion into all possible formats of retail across categories and segments. Approximately 30 million sq.ft by FY10. Turnover expected to touch Rs.30,000 crore ($6.67 billion) by FY10-11.
• Reliance Retail: About Rs.30,000 crore ($6.67 billion) investment to set up multiple retail formats with expected sales of Rs.90,000 crore ($20 billion)-plus by 2009-10.
• RPG: Planning IPO, 450-plus MusicWorld stores and 50-plus Spencer’s Hypers covering 4 million sq.ft area by 2010.
• Lifestyle: Rs.450 crore ($90 million) investment in next five years to expand on Max Hypermarkets and value retail stores, Home and Lifestyle Centres.
• K Raheja Corp.: Operates Shoppers’ Stop, Crossword, Inorbit Mall, Home Stop and Hypercity. To open 55 hypermarkets across India by 2015.
• Subhiksha: 750 stores and Rs.650 crore ($145 million)-plus estimated sales by March 2007.
• Piramyd Retail: 1.75 million sq.ft of retail space and 150 stores in next five years.
• Trent Ltd.: To open 27 more stores across its retail formats, adding one million sq.ft of space in the next 12 DLF malls.
• Trinethra: Recently acquired by the AV Birla Group, Trinethra (with two formats – Trinethra and Fabmall) plans 220 stores with a projected turnover of over Rs.300 crore ($667 million) this fiscal.
• Vishal Group: Plans include an IPO and investment close to Rs.1,250 crore ($278 million) by 2010, targetting 220 outlets, taking its cumulative retail space to five million sq.ft and sales turnover to Rs.5,000 crore ($1 billion).
• Bharti Retail: With back-end tie- up with Wal-Mart, Bharti is pumping in Rs.31,500 crore (US$ 7 billion) in creating a nationwide retail network, including 100 hypermalls and several hundred small supermarkets.
This first-ever research volume on global retail in available for a cover price of USD 200 on www.indiaretailing.com.
