Study: International Retail Expansion Quickening
CHICAGO - Mass merchant and food retailers are investing in new international markets at a faster pace in 2004, according to management consulting firm A.T. Kearney's 2004 Global Retail Development Index (GRDI), an annual ranking of retail investment attractiveness among 30 emerging markets.
This year global retailers have announced plans to open their first stores in 16 countries, one-third more than the 12 countries they entered in 2003. While still below the pace of the 19 new markets entered in 2002, the increased international expansion indicates a renewed interest by the world's major retailers in developing new markets.
In A.T. Kearney's "Voice of the Retailer" survey, which consists of in-depth discussions with key global and regional retail players conducted as part of the GRDI analysis, two-thirds of respondents reported retail expansion plans had increased in 2004.
Driving the increased intensity of investment is a combination of higher excess capacity and regulatory constraints in home markets, rising consumer spending power in emerging markets, and a higher level of retail activity driven by new countries joining the World Trade Organization and the European Union.
Yet local and smaller regional retailers are looking to capitalize on these trends, as well. Many local retailers are expanding to smaller markets within their home countries, introducing new store formats, and lobbying for government protection of home market retailers.
"Last year's slowdown in international expansion by global retailers gave local and regional players the chance to catch up by developing more sophisticated supply chains, crafting new retail strategies, and anticipating the future expansion plans of their global challengers," said Josh Chernoff, A.T. Kearney v.p. and co-leader of the firm's consumer industry and retail practice. "The result is a much more competitive landscape for global retailers looking to enter new markets."
According to A.T. Kearney's research, the most attractive country destination for retail investment continues to be Russia, which tops the GRDI for the second consecutive year. Eastern Europe remains the most attractive region for retail expansion, with five Eastern European countries are among the top 10. In 2004 the 10 countries mass merchant and food retailers should look to enter immediately are Russia, India, China, Slovenia, Croatia, Latvia, Vietnam, Turkey, Slovakia, and Thailand.
The GRDI enables retailers to address the timing of international expansion by ranking emerging countries based on a set of 10 variables including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth. The 30 countries are divided into three tiers based on their scores: countries retailers should enter immediately, countries to consider entering, and countries that are a lower priority at this time.
Russia remained atop the GRDI for three reasons. First, the risk of investing in the country declined as it made slight progress toward political and economic stability and moved closer to joining the WTO. Second, Russia continues to experience strong retail growth and sparse retail market saturation outside of Moscow and St. Petersburg. Finally, retailers are quickly expanding across the country.
Many of the EU's more mature Eastern markets -- such as Poland, Hungary, and the Czech Republic -- reached their peak on the GRDI in 2003 and have fallen to the bottom half of the index this year, due to the entrance of multiple international retailers and consolidation among local retailers. The recent expansion of the EU makes smaller countries such as Slovenia and Latvia attractive expansion opportunities for international retailers this year, but the window of opportunity will quickly close as new players rush in.
International retailers with longer time horizons should look further east to what A.T. Kearney calls the New Eastern Europe. This region includes countries larger than many of the EU's recent entrants, such as Ukraine, Bulgaria, and Romania, and offers relatively untapped markets for international retailers and the safety of a three-year time horizon before possible EU membership. Gains in political and economic stability and maturing consumer tastes are expected to fuel the expansion of western-style retail concepts in the region.
A.T. Kearney also advised retailers to enter the Indian market. Despite restrictive foreign direct-investment rules and regulations preventing foreign ownership of retailers, India rose to second place on the 2004 GRDI. China had similar rules prior to joining the WTO, and global retailers that developed joint ventures and franchise operations with local entities gained a significant first-mover advantage and a better understanding of the market.
The 2004 GRDI additionally points to a second wave of retail investment opportunities in emerging markets that centers on discounters. Discount retailers are not present in most emerging markets, and international retailers initially choose to emphasize value, product assortment, or branding when entering new countries.
After this first wave of investment, the retail market in these countries begins to consolidate among a few key local and international players and become more mature.
It's at this point, according to the study, that hard discounters should begin entering countries. Consumers will have become more comfortable with modern retail concepts and begun thinking in terms of price-driven buying decisions. In some of the mid- and low-tier countries on the GRDI, hard discounters are the only retailers posting positive year-over-year sales growth.
This year global retailers have announced plans to open their first stores in 16 countries, one-third more than the 12 countries they entered in 2003. While still below the pace of the 19 new markets entered in 2002, the increased international expansion indicates a renewed interest by the world's major retailers in developing new markets.
In A.T. Kearney's "Voice of the Retailer" survey, which consists of in-depth discussions with key global and regional retail players conducted as part of the GRDI analysis, two-thirds of respondents reported retail expansion plans had increased in 2004.
Driving the increased intensity of investment is a combination of higher excess capacity and regulatory constraints in home markets, rising consumer spending power in emerging markets, and a higher level of retail activity driven by new countries joining the World Trade Organization and the European Union.
Yet local and smaller regional retailers are looking to capitalize on these trends, as well. Many local retailers are expanding to smaller markets within their home countries, introducing new store formats, and lobbying for government protection of home market retailers.
"Last year's slowdown in international expansion by global retailers gave local and regional players the chance to catch up by developing more sophisticated supply chains, crafting new retail strategies, and anticipating the future expansion plans of their global challengers," said Josh Chernoff, A.T. Kearney v.p. and co-leader of the firm's consumer industry and retail practice. "The result is a much more competitive landscape for global retailers looking to enter new markets."
According to A.T. Kearney's research, the most attractive country destination for retail investment continues to be Russia, which tops the GRDI for the second consecutive year. Eastern Europe remains the most attractive region for retail expansion, with five Eastern European countries are among the top 10. In 2004 the 10 countries mass merchant and food retailers should look to enter immediately are Russia, India, China, Slovenia, Croatia, Latvia, Vietnam, Turkey, Slovakia, and Thailand.
The GRDI enables retailers to address the timing of international expansion by ranking emerging countries based on a set of 10 variables including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth. The 30 countries are divided into three tiers based on their scores: countries retailers should enter immediately, countries to consider entering, and countries that are a lower priority at this time.
Russia remained atop the GRDI for three reasons. First, the risk of investing in the country declined as it made slight progress toward political and economic stability and moved closer to joining the WTO. Second, Russia continues to experience strong retail growth and sparse retail market saturation outside of Moscow and St. Petersburg. Finally, retailers are quickly expanding across the country.
Many of the EU's more mature Eastern markets -- such as Poland, Hungary, and the Czech Republic -- reached their peak on the GRDI in 2003 and have fallen to the bottom half of the index this year, due to the entrance of multiple international retailers and consolidation among local retailers. The recent expansion of the EU makes smaller countries such as Slovenia and Latvia attractive expansion opportunities for international retailers this year, but the window of opportunity will quickly close as new players rush in.
International retailers with longer time horizons should look further east to what A.T. Kearney calls the New Eastern Europe. This region includes countries larger than many of the EU's recent entrants, such as Ukraine, Bulgaria, and Romania, and offers relatively untapped markets for international retailers and the safety of a three-year time horizon before possible EU membership. Gains in political and economic stability and maturing consumer tastes are expected to fuel the expansion of western-style retail concepts in the region.
A.T. Kearney also advised retailers to enter the Indian market. Despite restrictive foreign direct-investment rules and regulations preventing foreign ownership of retailers, India rose to second place on the 2004 GRDI. China had similar rules prior to joining the WTO, and global retailers that developed joint ventures and franchise operations with local entities gained a significant first-mover advantage and a better understanding of the market.
The 2004 GRDI additionally points to a second wave of retail investment opportunities in emerging markets that centers on discounters. Discount retailers are not present in most emerging markets, and international retailers initially choose to emphasize value, product assortment, or branding when entering new countries.
After this first wave of investment, the retail market in these countries begins to consolidate among a few key local and international players and become more mature.
It's at this point, according to the study, that hard discounters should begin entering countries. Consumers will have become more comfortable with modern retail concepts and begun thinking in terms of price-driven buying decisions. In some of the mid- and low-tier countries on the GRDI, hard discounters are the only retailers posting positive year-over-year sales growth.