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CHICAGO -- Against a backdrop of accelerating modern retail globalization, India retained its position as the world's most attractive market for mass merchant and food retailers seeking overseas growth, according to the 2006 Global Retail Development Index released by A.T. Kearney here.
The annual study, which tracks retail investment attractiveness among 30 emerging markets, also found Asia has overtaken Eastern Europe as the dominant region for global retail expansion, with 40 percent of the top 20 markets, vs. 35 percent for Eastern Europe. Powering Asia's charge are Vietnam, which raised five places in the 2006 rankings, to third place, and Asian Tigers such as Thailand, South Korea and Malaysia, all of which are in the top 15.
China dropped one more place in this year's ranking, falling to fifth. While China remains very attractive, the market is becoming increasingly saturated as international retailers rush to establish a presence and build market share. Grocers and convenience stores already have established positions on China's east coast and are moving west. New entrants include consumer electronics, DIY and apparel retailers.
Published annually since 2001, the GRDI helps retailers prioritize their global development strategies by ranking emerging countries based on a set of 25 variables including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product (GDP) growth and retail growth.
After ranking first in 2003 and 2004, Russia slipped to second place behind India in 2005 and remained there in 2006. Russia remains attractive, with a $180 million retail market that grew 19 percent in 2005. But with many retailers entering the market and regional players expanding beyond Moscow and St. Petersburg, the Russian window of opportunity is beginning to close.
"The Indian retail market is gradually but surely opening up, while China's market becomes increasingly saturated," said Fadi Farra, a principal in A.T. Kearney's consumer industries and retail practice and leader of the global retail development index study. "Similarly, Asia has dislodged Eastern Europe as the most attractive region. The learning is that timing is the most important source of competitive advantage for global and regional retailers in the globalization race. Knowing when to enter emerging retail markets is the key to success."
Fueling retail investor interest in India is this year's decision to allow foreign direct investment (FDI) of up to 51 percent in single-brand retailers. This has triggered market-entry announcements from retailers including Gap, Zara, UCB and Timex, among others. Wal-Mart has announced it will open an Indian office for market research, and Tesco has entered the market through a partnership with Home Care Retail Mart Pvt. Ltd., launching a hypermarket format called Magnet.
Not to be outdone, local retail conglomerates are rising to the challenge and racing to capture the best locations. Reliance Industries has announced a $3.4 billion investment to develop about 1,575 stores between December 2006 and March 2007.
"India is at the peak of attractiveness for retailers right now, with a $350 billion retail market expected to grow 13 percent this year," Farra said. "India's top five retailers together still account for less than two percent of the modern retail market."
China, by contrast, is showing signs of saturation, fueled by the growth of international retailers. Major players include Wal-Mart and Carrefour, which are well-entrenched, and Tesco, which entered the market in mid-2004 with a $250 million joint venture investment. Tesco owns about 50 stores in China currently and plans to open 15 stores per year in the future.
Neighboring Vietnam, ranked third, enjoys one of Asia's fastest growing economies, with GDP growth of 7.5 percent and a population of 84 million people who spent 16 percent more on consumer goods in 2005 than in 2004. Modern retail sales grew by 20 percent last year.
"Vietnam today is similar to India five years ago," said Farra. "It combines strong economic growth with a highly fragmented retail market comprised largely of 'mom and pop' shops. Ninety percent of Vietnam's retail outlets are neighborhood stores run by local businesses."
As in India, Farra said, the biggest hurdles to entering Vietnam's retail market are FDI regulations, high import taxes and difficulties obtaining licenses to open more stores.
Among the world's fastest growing retail markets currently is the Middle East, led by the United Arab Emirates (UAE) and Saudi Arabia. Modern retail sales grew 38 percent in the region from 2001 to 2005, second only to Central and Eastern Europe's growth rates and far ahead of other Asian markets, Latin America, Western Europe or the U.S.
"The most successful retailers enter early in high-potential markets, take their time to develop and are willing to experiment with a variety of store formats," Farra said, noting that, "they assemble a team comprised mainly of local nationals who know the market and the culture, and then give these local managers substantial authority to find the formula that works. If retailers only think about markets when they actually open, it's too late."
A copy of the 2006 GRDI study is available at http://www.atkearney.com.