Retail Global Expansion-GRDI 2011 (1)

8/12/2019 Retail Global Expansion-GRDI 2011 (1)

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Retail Global Expansion: A Portfolio of OpportunitiesThe 2011 A.T. Kearney Global Retail Development IndexTM

10TH ANNIVERSARY 20022011


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Figure 1The 2011 Global Retail Development IndexTM

GRDIscore

71.5

65.5

64.7

63.0

61.3

61.2

59.5

58.2

58.0

57.8

52.6

52.5

52.151.8

51.7

51.1

50.8

49.4

49.3

47.5

47.2

45.6

44.3

43.1

42.4

42.2

40.9

40.7

39.3

39.1

+4

+6

+3

13

5

3

+1

2

+8

N/A

+1

1

4

N/A

0

2

+4

7

N/A

4

+3

9

+2

N/A

2

N/A

5

N/A

11

Region

Marketattractiveness

(25%)Country2011rank

Countryrisk

(25%)

Marketsaturation

(25%)

Timepressure

(25%)

Changein rank

compared to 2010

Latin America

Latin America

Latin America

Asia

MENA

Asia

MENA

Latin America

MENA

MENA

MENA

MENA

Eastern EuropeEastern Europe

Asia

Asia

MENA

Asia

MENA

Asia

Asia

Latin America

Asia

Latin America

Latin America

Sub-Saharan Africa

Latin America

Latin America

MENA

Eastern Europe

Brazil

Uruguay

Chile

India

Kuwait

China

Saudi Arabia

Peru

United Arab Emirates

Turkey

Lebanon

Egypt

AlbaniaRussia

Kazakhstan

Indonesia

Morocco

Philippines

Tunisia

Sri Lanka

Malaysia

Mexico

Vietnam

Colombia

Argentina

South Africa

Panama

Dominican Republic

Iran

Bulgaria

100.0

85.0

84.3

28.9

80.4

49.5

70.9

39.8

87.6

83.8

56.3

22.1

19.976.2

29.2

38.2

22.6

26.2

37.5

8.4

53.9

74.6

8.4

45.7

60.4

46.9

44.3

39.5

33.5

45.1

1

2

3

4

5

6

7

8

9

10

11

12

1314

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

79.4

73.8

100.0

59.9

80.6

76.5

80.7

61.5

88.9

65.5

43.0

49.5

48.349.1

30.1

53.0

72.9

54.3

75.2

52.6

64.0

67.5

35.0

54.0

26.6

89.3

47.3

0.0

3.4

56.2

42.9

63.6

30.3

63.1

57.3

31.0

50.6

72.0

12.6

45.0

57.5

85.5

79.630.9

87.5

54.5

52.8

66.1

63.0

86.5

18.0

16.3

48.8

35.8

44.2

15.2

44.5

74.2

89.2

4.9

63.9

39.6

44.3

100.0

27.1

87.7

35.7

59.5

42.9

37.0

53.8

52.7

60.551.0

60.1

58.8

54.8

51.0

21.3

42.4

52.7

23.8

85.1

36.9

38.4

17.2

27.6

49.0

31.0

50.2

Sources: Euromoney; Population Reference Bureau; International Monetary Fund; World Bank; World Economic Forum; Economist Intelligence Unit; Planet Retail; A.T. Kearney analysis

Notes: MENA = Middle East and

North Africa; Scores are rounded.

0 = high risk

100 = low risk

0 = low attractiveness

100 = high attractiveness

0 = saturated

100 = not saturated

0 = no time pressure

100 = urgency to enter

On the radar screen

To consider

Lower priority

L e g e n

d

K e y


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RETAIL GLOBAL EXPANSION: A PORTFOLIO OF OPPORTUNITIES | A.T. Kearney 1

This year marks the 10th edition of the Global Retail DevelopmentIndex (GRDI). Since its rst publication in 2002, much has changedin the developing world: The population has grown 11 percent,from 5 billion to 5.7 billion, retail sales per capita have risen by more than90 percent, from $2,000 to $3,850, and retail sales space has expandedby more than 200 percent, from 40 million to 130 million square meters.As the retail giants made big investments to enter new marketsexperiencing both successes and failuresthey learned that retailexpansion is a portfolio game: An optimal mix of countries, formats andoperating models is the key to success.

The 2011 Global Retail Development Indexreects dramatic changes in the global economyand the different ways in which developing coun-tries have been affected.1 Some developing marketshave emerged from the recession stronger thanbefore, while others succumbed to the politicalupheaval that economic distress brings. Today, asleading international retailers are rewarded fortheir exibility and long-term outlook in the faceof short-term uncertainty, it is time to focus ona portfolio of countrieswith different levels ofrisk, at different stages of maturity and with dis-tinct consumer prolesto balance short- andlong-term opportunities. The GRDI is an annual study that ranksthe top 30 developing countries for retail expan-sion worldwide(see gure 1). The Index analyzes25 macroeconomic and retail-specic variables,both to help retailers devise successful globalstrategies and to identify emerging market invest-ment opportunities (see sidebar: About the GlobalRetail Development Index on page 5). The GRDI

is unique because it not only identies whichmarkets are the most successful today but also which markets offer the most potential in thefuture. For the third time, the GRDI includesa Retail Apparel Index.

To mark this 10th anniversary of thestudy, a retrospective captures the insights andlessons learned from the past decade. Please visit www.atkearney.com/GRDI to downloadGRDI: A 10-Year Retrospective .

Stability and TurmoilIn 2011, some developing markets are explodingand changing the balance of power. China recentlyovertook Japan as the worlds second biggest econ-omy, while India is expected to grow even fasterthan China in the long run, given its youngerpopulation. These developing markets now drivethe agenda in global arenas; the recession hasaccelerated the shift in global production andconsumption from west to east, north to south,developed to developing.

1 A.T. Kearney uses a proprietary classification method to categorize 170 countries as developing; analysis is based on prior year (2010) data.


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However, while Asia leads the global recovery,South America has made the biggest jump in theIndex this year, thanks to its continued growthand a lack of investment fatigue that has affectedsome traditional chart-toppers. Brazil leads ourrankings this year, with an expected GDP growthof 5 percent over the next few years, a large andmostly urban population, surging retail sales andsignicant investments planned for the upcomingOlympics and World Cup. Uruguay ranks 2nd onthe Index, and as gure 2 shows, that countrys window of opportunity is nearing its peak phase. Political unrest in the Middle East and North Africa (MENA) region has dominated the head-

lines in 2011. While it may affect immediate plansof entry to some countries (particularly Tunisiaand Egypt, where the leaders were ousted), webelieve the regions extraordinarily young andincreasingly outspoken population could, eventu-ally, lead to greater economic stability and moreglobal integration. Even more important, Kuwait,Saudi Arabia and the United Arab Emirates(UAE), which still rank in the top 10, have notexperienced the turmoil of some of their neigh-bors and are expected to remain stable. Globalretailers generally prefer longer term expansionstrategies. Economic and political tensions mayaccelerate or decelerate retailers entry and expan-

Opening

Definition

Methodof entry

Laborstrategy

Peaking Maturing Closing

Source: A.T. Kearney analysis

Consumers seek organizedformats and greater exposure to global brands; retail shoppingdistricts are being developed;real estate is affordable andavailable

Organic, such as through directlyoperated stores

Hire and train local talent andbalance the expatriate mix

Middle class is growing;consumers are willing toexplore organized formats;government is relaxingrestrictions

Minority investment in localretailer

Identify local skilled laborfor management positions

Consumer spending hasexpanded significantly;desirable real estate is moredifficult to secure; localcompetition has becomemore sophisticated

Typically organic, butfocused on tier 2 and 3 cities

Change balance fromexpatriate to local staff

Consumers are accustomed to modern retail; discretion-ary spending is higher;competition is fierce bothfrom local and foreign retail-ers; real estate is expensive

and not readily available

Acquisitions

Use mostly local staff

Low priority

High priority

Poland (1990)

India (1995)

China (1995)Hungary (2005)

Slovenia (2011)

Czech Republic (2010)

Kuwait(2011)

Hungary (2011)Russia (1995)

India (2011)India (2003)

Uruguay (2011)

China (2003)

Russia (2006)Vietnam(2006) India (2006)

GRDIpriority

priorit

GRDIriority

PPoland (2005)

Poland (2000)P

Turkey (2011)

S

Colombia (2010)

u

China (2011)

Russia (2010)

China (2006)

2006

Brazil (2011)

Kazakhstan (2011)

Vietnam (2010)

5

T

Poland (1995)

K

Russia (2003)

wau

South Africa (2010)S

K

Figure 2The GRDI window-of-opportunity analysis

usRH

H

Dominican Republic (2011)hiCD


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About the Global Retail Development Index

The annual A.T. Kearney GlobalRetail Development Index ranks30 developing countries on a 100-point scalethe higher the ranking,the more urgency there is to entera country. Countries were selectedfrom a list of 200 based on threecriteria: Country risk: 35 or higher in the

Euromoney country-risk score Population size: 2 million or more Wealth: GDP per capita of more

than $3,0004 GRDI scores are based on the

following four variables:

Country and business risk

(25 percent)Country risk (80 percent): politi-cal risk, economic performance,debt indicators, debt in default orrescheduled, credit ratings and accessto bank nancing. The higher therating, the lower the risk of failure.

Business risk (20 percent): businesscost of terrorism, crime and violence,and corruption. The higher the rating,

the lower the risk of doing business.

Market attractiveness(25 percent)

Retail sales per capita (40 percent): A score of zero indicates that the retailsector (total annual sales of retailenterprises excluding taxes) is stillunderdeveloped. A score of 100 indi-cates that the retail market is alreadymature, indicating an opportunity.

Population (20 percent): A scoreof zero indicates the country is rela-

tively small, representing limitedopportunities for growth.

Urban population (20 percent): A score of zero means the countryis mostly rural; 100 indicates thecountry is mostly urban.

Business efciency (20 percent):Parameters include governmenteffectiveness, burden of law and reg-ulations, ease of doing business andinfrastructure quality. A score of zeromeans the country has poor businessefciency, while a score of 100 indi-cates high efciency.

Market saturation (25 percent)

Share of modern retailing (30 per-cent): A score of zero indicates a largeshare of retail sales made through amodern distribution format withinthe average Western European level(200 square meters per 1,000 inhab-itants). Modern formats includestores predominantly selling food(hypermarkets, supermarkets, dis-count stores and convenience stores)and mixed merchandise (departmentstores, variety stores, U.S.-style ware-house clubs and supercenters).

Number of international retailers(30 percent): The total score is

weighted by the size of retailers inthe countrythree points for tier 1retailers (among the top 10 retailers

worldwide), two points for tier 2retailers (within the top 20 retailers

worldwide) and one point for tier 3

retailers (all others). Countries withthe maximum number of retailershave the lowest score.

Modern retail sales area per urbaninhabitant (20 percent): A score ofzero means the country ranks high intotal retail area per urban inhabitant,close to the average Western Euro-pean level. Modern formats are storespredominantly selling food (hyper-markets, supermarkets, discount andconvenience stores).

Market share of leading retailers(20 percent): A zero indicates thatthe market is highly concentrated

with the top ve competitors (localand international) holding morethan 55 percent of the retail foodmarket; 100 indicates the marketis still extremely fragmented.

Time pressure (25 percent)The time factor is measured bythe compound annual growth rate(2006 to 2010) of modern retail sales

weighted by the development of theeconomy in general (CAGR of theGDP and consumer spending from2006 to 2010) and the CAGR from2006 to 2010 of the retail sales area

weighted by newly created modernretailing sales area. Results are from zero to 100,

with 100 indicating that the retailsector is advancing quickly, thus rep-resenting a short-term opportunity.Data and analysis are based on theUnited Nations Population DivisionDatabase, the World EconomicForumsGlobal CompetitivenessReport 20092010 , national statis-tics, Euromoney and World Bankreports, and Euromonitor and PlanetRetail databases.

4 The GDP per capita threshold for countries with populations of more than 35 million is more flexible due to the market opportunity.


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Those investments are attracting an inux offoreign capital and major international chains.The United Kingdoms Debenhams plans toenter through a partnership or brand licensing, while Burberry entered Brazil in 2010 and nowoperates two stores. Based on media reports,other possible entrants in the next few yearsinclude Swedens H&M, Japans Uniqlo and theUnited Kingdoms Topshop. The main barrier forforeign apparel companies is the seasonal differ-ences between the northern and southern hemi-spheres and high import taxes. Partnerships withlocal producers have helped address the latterproblem, but these can take time to set up andrequire greater oversight.

Chile-based retailer Cencosud, Mexican bev-erage company FEMSA and French cosmeticsgiant LOral have operated in Brazil for years, butare now planning to expand via acquisitions tostrengthen their positions against new entrants.Cencosud is planning to enter markets where itdoes not currently operate to compete with largerchains such as local leader Po de Acar andCarrefour. Competing in Brazil isnt easy for for-eign retailers, as the major hypermarket playershave found. Early in 2011, Carrefour announceda $722 million loss due to accounting adjust-ments, while Wal-Mart has faced resistance fromlocal associations due to its aggressive pricing.Drug stores are facing intensied competitionafter Droga Raias IPO and the merger of DrogariaSo Paulo and Drogo. Germanys Otto Grouphas recently announced plans to enter througha majority stake in one of its partner companies,in the hopes of replicating its mail-order successin Russia. Uruguay: Riding Brazils coattails. Uruguayclimbs to 2nd place this year, following a 6.5 per-cent compound annual growth rate (CAGR) since2006, including 8.5 percent growth in 2010

both in large part a result of Brazils growth.Uruguay is relatively small, with a population of3.4 million, and nearly 95 percent of the popula-tion has easy access to urban areas. The countryslimited scale and positive macroeconomic condi-tions make it an appealing choice for retailersseeking more contained markets, in which theycan exercise greater control and test conceptsbefore entering other South American markets. Uruguays economic success has been tied his-torically to Brazil and Argentina, and as such ithas beneted from Brazils recent growth. Formerpresident Tabar Vzquezs growth plan hashelped Uruguay achieve real GDP growth, diver-sify its economy and streamline its public sector. As a result, poverty and unemployment decreasedsignicantly while public consumption grew in2010. A recent J.P. Morgan report cited an inuxof foreign investment, a tourist sector boom, realestate bargains, strong export growth and strongappreciation in Brazils real as factors that willattract many outside investors. Additionally,Moodys Investors Service issued a two-notchupgrade on Uruguayon the verge of investment-grade territoryciting progress in the nationsdebt and scal indicators. However, there are afew cautions with Uruguay, including its agingpopulation and the consequent pension pressures. The market for large and international retail-ers is concentrated in Montevideo and its sur-roundings. Local brands, with the exception ofFrance-based Groupe Casino, control most shop-ping mall and supermarket environments, andhypermarkets are still limited due to governmentrestrictions on store size in local neighborhoods.Tackling the dynamics of the Montevideo marketand seasonal demand in tourist areas are criticalsuccess factors. The pressure to enter the market isnot particularly high today since there has notbeen signicant investment in retail real estate,


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but Uruguay is one to watch as the infrastructurecatches up to the markets potential. Chile: Growing retail power. Chile rises threespots to 3rd place, after a strong recovery fromthe 2009 recession. It is now considered one ofLatin Americas most competitive and promisingretail markets. Chiles retail sector is projected togrow 10 percent in 2011 as aresult of increased middle-classpurchasing power and a younger,urban population. Governmentincentives to stimulate retail con-sumption, led to a 5.2 percentGDP growth in 2010 and anexpected growth of 6.1 percentin 2011. However, these incen-tives will decrease throughout2011, as the government con-tinues to redirect spending toinfrastructure development fol-lowing the 2010 earthquake.Chiles political environment is considered fairlystable, and President Sebastin Piera, a billion-aire businessman, is planning structural reform toincrease market competitiveness. The nation of 17.1 million has a heavily con-centrated market, with the top ve grocery retail-ers commanding almost 60 percent of sales. Asa result, entering this market is fairly difcult, andacquisition is the most viable route for the grocerysector. In 2011, in the apparel sector, Gap, Inc.announced plans for its rst South American storethrough a franchise partner in Santiago.

Peru: Retail space needs to catch up. Perumoves into the 8th spot, up one position from2010. Peru (population 29.5 million) experienced5 percent year-over-year GDP growth for the pastve years. As with most countries in this region,large cities drive economic activity, in this case thecapital, Lima.

Strong retail growth has intensied thedemand for retail space. Investments in commer-cial real estate will add 10 shopping malls to thecurrent 15 by 2011 and up to a total of 100by 2015. Interbank acquired real estate rmMilleniawhich owns four main locations ofits direct competitor Metrofrom Cencosud.

Interbank also plans to complement its super-market operations by integrating the recentlyacquired InkaFarma pharmacy chain. Foreign retailers are investing heavily in Peru.Cencosud, which runs Perus Wong chain, hasreceived approval to create Banco Cencosud andalso plans to create private label brands. It will alsointroduce its Paris brand in 2012 to compete withChilean retailers Falabella and Ripley. Ripley isnot standing still, though, as it plans to nearlydouble its store count by 2013. Subway, present inPeru during the 1990s, is planning to return with10 stores in 2011. As marketplace competitiongrows, rst movers may have the most successin Peru as they acquire the best locations in thehighest-prole cities and offer complementaryservices, such as credit. Mexico: Back on track. Mexicos economyrecovered in 2009, highlighted by a GDP growth

Chile is considered one of Latin

Americas most competitive and

promising retail markets, with a

retail sector projected to grow

10 percent in 2011.


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others that are already present (such as Nautica)are expanding and opening new stores.

Dominican Republic: Slow rise continues. At 28th position, the Dominican Republic contin-ues to see retail development. The country of 9.9million has experienced signicant expansion inshopping space with three large malls currentlyunder construction. Luxury (Louis Vuitton andCartier) and mid-level (Nike, Desigual and Timber-land) retailers are entering as Santo Domingobecomes the Caribbeans shopping capital.

AsiaIndia and China have occupied the GRDIs topthree places for several years, yet both fell this year, which may come as a surprise to our readers. While these countries are large and growing, ona relative basis, several Latin American marketsoutshine both India and China. And as retailerscontinue to enter India and Chinaparticularlyin tier 2, 3 and 4 cities where consumers areincreasingly accepting global brands, have risingdisposable incomes and are becoming more dis-cerning in their tastesin several instances, trafcto stores has yet to meet expectations. The outlook for Southeast Asia remainsbright, with increased domestic demand andexports, stabilizing retail sales and improving con-sumer condence. Grocery remains the regionsmost important sector, accounting for almosttwo-thirds of total organized retail sales. India: The time to enter is now. Indias stronggrowth fundamentals9 percent real GDPgrowth in 2010; forecasted yearly growth of8.7 percent through 2016; high saving and invest-ment rates; fast labor force growth; and increasedconsumer spendingmake for a very favorableretail environment and the 4th spot in the GRDI. As has been the case for several years, Indian con-sumers continue to urbanize, have more money to

spend on non-food purchases, and have moreexposure to brands. The result is a powerful, morediscerning consumer class. Indias population ofnearly 1.2 billionforecast eventually to over-take Chinasalso is an attractive target.

Organized retail accounts for 7 percent ofIndias roughly $435 billion retail market and isexpected to reach 20 percent by 2020. Big-boxretail, in the form of hypermarkets, has gainedprominencea refocus from the burgeoningsupermarkets and small formats of several yearsago. Food accounts for 70 percent of Indian retail,but it remains under-penetrated by organizedretail. Organized retail has a 31 percent share inclothing and apparel and continues to see growthin this sector. The home segment shows promise,growing 20 to 30 percent per year. Indias moreurban consumer mindset means this sector ispoised for growth. The recession proved an opportunity fordomestic and foreign retailers to optimize theirstore portfolios and drive more protable growthin India. They are now in much better and smarterpositions to take advantage of Indias retail possi-bilities. Domestic players are selectively growingin Indiapostponing aggressive expansion plans,adding stores judiciously and shifting gears to tier2 and 3 cities. Aditya Birla Group plans to openabout 100 supermarkets and 10 hypermarkets bymid-2011. Spencers is expected to add up to25 hypermarkets through 2012. Reliance Retail,Indias organized retail leader, plans to open 150Reliance Trends apparel and accessories stores inthe next year. Foreign players are also addingstoresthe United Kingdoms Marks & Spenceris planning 50 retail outlets in the next ve years. Wal-Mart is planning up to 12 outlets in its wholesale format by the end of 2011, and MetroGroup plans 50 wholesale stores in the next veyears. International food retailer Spar plans to


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open another 24 hypermarkets in the next twoyears. Zara opened in Delhi and Mumbai lastyear, has already added a third store in Delhi and,after early success, plans to expand across India.Carrefour entered India in December 2010 withits rst wholesale cash-and-carry store and hasplans to open more stores by end of 2011.

Though the biggest cities will remain retailcenters in coming years, retailers have startedfocusing on tier 2 cities to gain the early-mover

advantage and to get in while the real estate is stillavailable. The increased salaries and growing aspi-ration levels of tier 2 consumers is allowing theneighborhood store, the large-format retail storeand the foreign investor-funded retail store to co-exist. Retailers with plans to enter tier 2 citiesinclude Spencers, Spar, Reliance Retail, PantaloonRetail, Shoppers Stop and Trents Westside. While India remains a hot market for retail-ers, it has its difculties. Foreign direct investment(FDI) regulations continue to require single-brand retailers to enter the market throughan Indian partner or joint ventures. Governmentpolicy-change discussions have intensied recently,but whether or not there will be new rules remainsuncertain. The regulatory challenges mean that

selecting the right partner is crucial for success.Beyond having access to the right real estate, theskills to customize assortments to local tastes andnancial stability, there also needs to be intangiblechemistry between top management at both com-panies. While India is a difcult market to enter,the potential payoff is huge. Private equity rmshave taken note and retail investment has quintu-pled in the past year to more than $370 million.Examples include a $200 million investment

in Caf Coffee Day by KKR,an $86 million investment inLilliput Kidswear by Bain Capitaland TPG and several invest-ments in fast-food restaurants. China: A hot economy. China places 6th on the 2011Index. Chinas economy con-tinues to boomthe countryof more than 1.3 billion hadGDP growth of 10.3 percent in2010 and is expected to growbetween 9 and 10 percent in2011. Chinas retail market size

is $2.1 trillion, or roughly 50 percent of the U.S.retail market, and retail growth remains strong at15 percent between 2009 and 2010. However, abooming market does not come without its draw-backs. Increased ination worries weakened con-sumer condence last year, and the benchmarkdeposit and lending rate was raised four timesduring 2010. Nevertheless, Chinese consumersremain positive about personal income levels andemployment prospects for the future. This wasreinforced by the countrys latest ve-year plan, which calls for a major shift of resources towarddomestic consumption. This is expected to increaseconsumer spending by $100 billion per year.

Rapid organic growth of local and foreignretailers continues, with their main targets today

Indians continue to urbanize

and have more money to spend

on non-food purchases. The

result is a powerful, more dis-

cerning consumer class.


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in the suburban areas of tier 1 cities, tier 2, 3 and4 cities, and even rural areasthe result of highsaturation and competition levels in tier 1 cities.For example, in 2010, Wal-Mart, Carrefour andRT-Mart opened 13, 18 and 17 stores respectively,mostly in tier 2, 3 or 4 cities. Retail industry con-solidation continues, with the market share of thetop 20 retailers increasing from 8.4 percent to 8.9percent from 2009 to 2010. Carrefour acquiredseven supermarket stores from Baolongcang, aregional player in Hebei. Wumart, a leading localplayer, purchased four Lotus stores in Tianjin tostrengthen its presence there. Another top localretailer, Vanguard, purchased roughly 2,000 storesfrom regional players between 2004 and 2010. Retail formats are diversifying, with specialtystores growing most rapidly. For example, cosmet-ics used to be sold through department stores, butnow they can be accessed in personal care storessuch as Sephora. Wine specialty stores opening ineastern and southern China allow customers tobuy mainly imported wine with a broader priceand product selection. Online shopping is increas-ing dramatically, at a CAGR of 105 percent from2004 to 2010 (including business-to-consumerand consumer-to-consumer), and is driven primar-ily by young consumers in more developed regions,increased Internet access and improved door-to-door fulllment support.5 Chinas major onlineshopping sites are 360Buy, Taobao, Amazon.cn(formerly Joyo), Dangdang and Newegg, whichaccounted for 80 percent of the total market in2010. Leading traditional retailers are also movingonline, including department stores Blemall,Dashang and Tianhong, and appliance retailerGome, which acquired online rival Coo8. Chinese consumers in both urban and ruralareas are maturing and trading up for more expen-sive, higher-quality products. They are also chal-

lenging well-known brands that dont providegood quality and service; some retailers haveexited China due to poor reception. Mattel closedits agship Barbie store in Shanghai after twoyears because of poor performancethe Barbiedoll failed to reect unique local tastes and prices were high; the $30 (200 RMB) average price of aBarbie was more than triple most local brands.Best Buy closed stores under its own banner anddecided to focus instead on its local brand, FiveStar. Five Star has an operating model similar tolocal players and reects the way consumers areused to shopping for electronics in China. While the Chinese retail market will holdsubstantial promise for years to come, achievingprotability in the market is not easy. Success willnot happen overnight, or without putting theright mechanisms in place to ensure consumeracceptance. Outside of major cities, retailers areoften ahead of the consumer, and store trafchas not yet materialized. Also, success in Chinameans doing business the Chinese waysimplycutting and pasting your existing operating model wont y.

Indonesia: Strong underlying growth.Indonesias retail sales are expected to grow from$134 billion in 2011 to $223 billion by 2015,thanks to strong underlying economic growth andthe worlds fourth largest population (235.5 mil-lion); the country ranks 16th this year. Increasedper capita incomes and continued development inthe organized retail infrastructure are boostingfood retail sales. Other retail sectors are also poisedfor growthconsumer electronics sales, led bycomputers, are predicted to rise 13 percent year-over-year for the next ve years.

Domestic player PT Matahari Putra Prima hasheld discussions with potential buyers regardinga 20 to 30 percent stake in its hypermarkets and

5 For more information, see Chinas E-Commerce Market: The Logistics Challenge at www.atkearney.com.


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supermarkets, worth up to $1 billion. No deal hasbeen announced yet, but several global retailersand private equity funds have reportedly enteredinto bidding.

Philippines: Urban areas fueling growth. The Philippines, 24th this year, is expected to seeretail sales grow from $39 billion in 2011 to $42billion by 2015, thanks to an expanding urbanpopulation and rising consumer spending that isfueling growth in organized retail. GDP is alsoexpected to increase at a CAGR of 5.3 percentover the next ve years, with per capita GDP pre-dicted to increase by more than 25 percent in thesame time frame. Today, half of the Philippinestotal retail sales are concentrated in the Manilametropolitan area. In urban areas, a growingnumber of dual-income, middle-class familiesand young professionals are driving retail sales.The countrys young population40 percent ofthe Philippines 94 million people are betweenthe age of 15 and 39represents a key elementof future retail spending.

Malaysia: Concerns down the road. Malaysiaseconomy is expected to expand by 6.2 percent thisyear, and retail sales have grown steadily over thepast two years, but there are concerns beyond2011 for this country of 28.9 million, ranked 21stthis year, because of a potential property bubbleand high household debt levels.

The government stepped into the retail arenato support big-box boulevards (BBB)con-centrated centers of shopping outlets in city out-skirts. Retailers are offered cheaper rental rates,savings that in turn can be passed on to consumers.The goal is to group six to 10 different retailersfor example, clothing, auto, home furnishings,sports and furniturealong a single boulevard, with the Malaysian government helping to iden-tify suitable locations and working with promot-ers to bring multiple retailers together. Australias

Harvey Norman is one foreign retailer takingadvantage of the BBBs.

Vietnam: Traditional retail still dominates. Vietnam is in 23rd place, and is still attractive, with an expected market size of $113 billion by2012 and a growing population of 88.9 million.Vietnam ofcially opened its retail market tointernational entrants with 100 percent foreigncapital in early 2009, at the height of the globaleconomic crisis, when many multinational com-panies were taking a more conservative approachto expansion. While consumer condence is high, poor dis-tribution infrastructure and expensive retail spaceremain barriers to entry by foreign retailers.Traditional retail channels still dominate themarket, but modern retail formats are growingmore prominent. Consolidation is expected amongforeign retailers trying to deepen their marketpenetration. U.K.-based Tesco and Singapore-based FairPrice plan to enter the market in 2011.

Middle East and North AfricaMiddle East and North Africa (MENA) includeseight of the top 20 countries in the GRDI and,despite the regions political turmoil that hasgripped the world since December 2010, includ-ing government overthrows in Tunisia and Egypt,civil war in Libya and protests in numerous othercountries, it remains a promising retail growthopportunity.

The GRDI measures long-term potential, andthrough that lens there are many indicators thatthe region will bear watching for years to come.It recovered quickly from the recession, consumercondence is growing, most countries are expect-ing 3 to 5 percent GDP growth over the next year,disposable incomes are high, its population isyoung and middle class is growing, and the con-sumer base is increasingly connected and engaged.


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Many hurdles existed before this winters rev-olutions, including foreign ownership regulationsthat differ from country to country, the high shareof family-owned businesses, the relatively frag-mented retail landscape, and limited foreign own-ership outside free zones in most countries. Theseissues and continued political instability requireclose consideration by any retailers consideringexpansion. But in the long run, we believe theoutlook is positive.

Kuwait: Small but highly attractive. Kuwait,5th in the GRDI, remains MENAs highest-ranked country. While it has only 3.1 millioninhabitants, 96 percent live in cities and 65 per-cent are between the ages of 15 and 39. Thesedemographic trends have led to retail sectorgrowth of 8 percent annually over the past veyears. Overall, retail sales are expected to growfrom $8.41 billion in 2011 to $11.92 billionin 2015. Disposable income will remain exceptionallyhigh, driven by low utility costs, extensive welfareprovisions and high salaries for government jobs.Kuwait has one of the highest retail sales percapita of any country in the Index ($4,300), andstrong government support for improving citi-zens welfare should boost consumer condenceand spending. In January 2011, to help citizensimprove living conditions and to celebrate the50th anniversary of independence, Kuwaits gov-ernment presented its citizens with $3,500 andfree food staples for 13 months. While Kuwait offers an exciting destinationto international retailers, given its small popula-tion, entry will most likely make sense as part ofa regional approach.

Saudi Arabia: A young and engaged population. Saudi Arabia dropped three places to 7thposition in the GRDI this year, but that reectsthe relative performance of higher-ranked nations

more than Saudi Arabias underlying fundamen-tals. Saudi Arabia, with 29.2 million citizens, isclearly a retail hot spot worth watching. Consumer condence in Saudi Arabia is high;bullish sentiments mean greater spending and lesssaving. Consumer spending is increasing rapidly, with most disposable income spent on food,apparel, health and beauty. Non-food categoriesgrew 8 percent and food categories 4 percent in2010. Given its young population (two-thirdsunder the age of 29) and high discretionaryincome, Saudi Arabian consumers are consideredby many retail experts as early adopters.

New brands and international players arrivedin 2010, and current operations expanded in mostretail sectors, including fashion, electronics, digi-tal products, furniture, home products, automo-tive, health and beauty products. On the foodscene, local players dominate, with Panda andBinDawood as the leading hypermarkets, whileCarrefour brings international know-how andexpertise to help drive the sectors development.Saudi rm Savola Group plans to increase thenumber of Panda stores to 120 supermarkets and40 hypermarkets in 2012 and has acquired severalcompetitor assets, including 11 Gant stores fromthe Fawaz Alhokair Group.

Several international retailers entered themarket in the past year. Boots, the U.K. healthand beauty retailer already present in the UAE,Kuwait, Bahrain and Qatar, opened its rst Saudistore in Jeddah in 2010. Indian mobile handsetmaker Micromax plans to enter Saudi Arabia in2011 through several partners. When considering Saudi Arabia, retailershave to bear in mind the constraints of govern-ment regulations. Retailers must hire Saudiemployees, particularly for operational positionssuch as checkout, and they often need to comply with the religious laws (such as Halal principles


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for food preparation). Despite these challenges,Saudi Arabia should not be ignored. UAE: Becoming saturated. The UAE (popu-lation 5.4 million) is recovering quickly from theeconomic downturn, reected by the second-highest ranking in market attractiveness of allcountries in the GRDI. Tourism, sizable house-hold consumption and ample retail space isboosting the retail sector. Still, the UAE droppedfrom 7th to 9th place this year.One cause is an increasingly sat-urated market as many foreignentrants have set up operationsin the country. Consumer spending grew ahealthy 9 percent last year, a goodindicator of consumers stabiliz-ing condence. Overall, however,consumers remain cautious withdiscretionary spending and, com-pared to pre-crisis years, havea greater propensity to save. Prices are rising fasterthan wages, and many consumers are feeling theirpurchasing power declining. In response, the gov-ernment temporarily lowered prices at hypermar-kets for 260 basic commodities in March 2011and began supervising pricing tactics by retailers. For many retailers, the UAE remains the pre-ferred entry point into MENA for new productsand brands. In 2010, Bloomingdales opened itsrst store outside the United States in Dubai, andVictorias Secret opened its rst store in the regionthrough a partnership with M.H. Alshaya. The economic downturn gave UAE retailerspause for thought. Until recently, many of themestablished outlets in whatever mall space wasavailable, failed to consider the market position,adjacent facilities or store location within themall, and as a consequence paid the price:Unfavorable location and a poor economic cli-

mate forced Frances Auchan to close its DubaiDragonMart hypermarket in January 2011; andmajor luxury fashion and accessories playerBinHendi Enterprises closed its 26-store wing inDeira City Centre after its customers, no longersuited to its high-end products, started going tonewer malls. Now, retailers are paying more atten-tion to consumer prole and location and theselection they offer in each location.

Turkey: Leapfrogging into the top 10. Turkey jumped eight spots to take 10th place in theIndex. The economy has recovered from theglobal recession, with GDP growing by 8.9 per-cent in 2010. Turkeys population of 73.6 millionis mostly urban, and more women have enteredthe workforce. The demand for convenienceshopping is increasing, and the number of shop-ping malls is surging, especially in Istanbul andother large cities. Retailers are also investingin medium-sized cities by introducing smallerformats to improve market access. The Turkishmarket has potential, but the domestic and inter-national competition is intense. Growth along with consolidation will be the key highlights ofthe market in the coming years. Domestic discounter BIM is the marketleader by revenues, followed by Migros Trk(owned by private equity) and Carrefour (in a

Consumer spending in the UAE

grew a healthy 9 percent last

year, a good indicator of stabi-

lizing condence.


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partnership with local conglomerate SabanciHolding). The other main players are MetroGroup (Real Hypermarkets), domestic playerBizim Toptan, Tesco Kipa, Kiler (which had a2011 initial public offering), Makromarket anddiscounter A101. Regional and local retailersexpanded by 50 percent in the past two years, andthe market is consolidating. There is still room forconsolidation as the top four players make uponly 14 percent of the industry. Private labels are just 8 percent of sales, below European levels, butthat is expected to increase in the next few years. No major grocers entered in 2010. In theelectronics sector, Best Buy exited Turkey in 2011after a two-year trial run with two stores. Apparelretailer H&M entered in late 2010, while C&Aramped up its commitment to Turkey with plansfor 10 new stores on top of its existing base of 24stores, focused predominantly on the Anatoliaregion. Another retailer betting on Turkey isGerman shoe retailer Deichmann, which opened44 stores in 2010 and has committed $8.5 millionto opening a further 20 stores. It is seeking to have200 Turkish stores in 10 years.

Lebanon: A solid debut. Lebanon, with its 4.3million inhabitants, is new to the GRDI, taking11th place. It is an attractive market for manyretailers, thanks to the liberal mindset of its con-sumers and recent investment in new malls. WhileGDP grew at a 7 percent CAGR for the past veyears, there are several challenges. Additional infra-structure investment is needed to repair insuf-cient road networks and communications linesoutside of Beirut, and disposable income remainsfairly low. Further, Lebanons stability, measuredby the country risk score, is lower than most of itsneighbors on the GRDIa factor to gauge whenevaluating the market for entry.

Lebanese consumers are among the most lib-eral in the Middle East. The alcohol industry is

fairly strong, which distinguishes it from mostMENA markets. The electronics and home appli-ances sector has also grown rapidly over the pastve years, with Khoury Home leading the pack.It pioneered the concept of a one-stop-shop forhome appliances and is undergoing a large-scaleexpansion, with ve major outlets planned. Azadea Groups Le Mall concept was launchedin 2009 by the local Azadea Group, which alsoholds franchise rights for retailers such as ZARAand Mango and has placed all of its banners inLe Mall, resulting in signicant cost savings. A second Le Mall was introduced in 2010 in Saidain the south, the citys rst high-end mall. A thirdLe Mall is under construction in a northernsuburb of Beirut, providing additional opportuni-ties for retailers to enter or expand in Lebanon. Egypt: Growth despite turmoil. The dust isstill settling from the demonstrations that led tothe ousting of President Hosni Mubarak, but when all is said and done, the movement couldlay the groundwork for a promising mid- to long-term retail opportunity. Egypt moved up one spotthis year, to 12th place. Egypts retail market is expected to grow10 percent over the next ve years, driven bya large, active and growing population of morethan 80.4 million that is gaining purchasingpower. Still, Egypt has a low share of modernretailing compared to other North African coun-tries such as Morocco and Tunisia. This, coupled with low levels of market consolidation and grow-ing consumer demand, continues to make Egyptattractive for large global retailers. Within grocery, international retailers havea strong foothold in the hypermarket sector, wherethe focus is on the middle-income population andthe sale of local products. Competition in thisspace is increasing with the arrival of new inter-national grocery retailers and the expansion of


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existing international retailers. The modern gro-cery retail area is expected to grow by 23 percentannually over the next few years. Lulu Hyper-market, from Abu Dhabi-based EMKE, enteredin 2010, with plans to expand in coming years.Carrefour has doubled its sales area in Cairo and Alexandria over the past ve years, with plans for15 more stores in Egypt. Metro Group entered in2010 under its Makro Cash & Carry banner andplans to open 20 outlets in the long-term. Metrosources 90 percent of its products locally. Dubai-based Spinneys also plans to expand its presencein coming years. Growth in grocery, and particu-larly hypermarkets, is partly driven by an increasein women in the workforce who are looking formore convenient food preparation.

Policy reforms in Egypt, such as tariff and taxreductions, helped pave the way for entry by for-eign non-grocery retailers. In 2010, Marks &Spencer opened its rst Egyptian store in conjunction with UAE-based franchise partner Al-Futtaim Group, while Debenhams expandedinto Africa with its rst store in the AlexandriaCity Centre mall. Al-Futtaim has stated thatfuture plans to expand the IKEA brand into Cairodepend on regional stabilityboth internationalretailers were forced to shut down temporarily inCairo and Alexandria due to the violent protestsearly in 2011.

Morocco: Retail sales bolstered. Moroccodrops from 15th to 17th place this year. The retailsector represents 13 percent of the countrys GDPand is expected to grow 5 percent annually incoming years. A strong performing tourism sectorand a shift toward more modern retail channelshas bolstered retail sales. Key drawbacks inMorocco (population 31.9 million) include lowconsumer spending per capita compared toTunisia, complexities in the distribution modelsand the need for local knowledge.

In 2010, the grocery sector saw signicantconsolidation and growth. Metro Group, whichentered in 1998, agreed to sell its eight Moroccanstores to local chain LabelVie, the rst time Metroexited a country. It cited limited growth andexpansion potential for its self-service wholesalebusiness in Morocco. LabelVie also partnered with Carrefour to open Moroccos rst Carrefourhypermarket last year. In addition, Turkish super-market retailer BIM announced plans to openapproximately 40 new stores, increasing itsMoroccan footprint to 85. Elsewhere in retail,luxury players are drawn to Moroccos expandingand progressive middle class. Dior opened a storein Marrakesh and has plans to open a second inCasablanca. The suburbs of both of these citiespresent new and interesting retail opportunities. Tunisia: Slowing consumer spending. Aftera year of political turmoil and a drop in consumerspending growth to 1 percent per year, Tunisia,a nation of 10.5 million inhabitants, drops eightspots to 19th. By regional standards, Tunisia hasa more advanced and diversied economy, and thegovernment has gradually loosened its control ofthe market in favor of greater privatization.However, retail space development continues tolag behind its neighbors. While Tunisia remainson the radar as a good opportunity, we envisiona two- to three-year slowdown in store openingsand development due to the political uncertainty.

Eastern Europe and RussiaEastern Europe is a diverse region, with severalmarkets dropping off the Index because of slowretail and GDP growth rates relative to Latin America, the Middle East and Asia. Russia alsocontinued its decline in the GRDI and is nowoutside the top 10. Russia: Hurdles are surmountable. TheRussian economy recovered from the downturn,


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with the retail market returning to pre-crisis levelsand expected to grow at a CAGR of 10 percentover the next ve years. Food retail is at pre-crisislevels, while non-food retail is expected to growfaster. Nevertheless, Russia fell four spots in theGRDI this year to 14th place. While some under-lying metrics have grown strongerretail salesper capita has increased to about $3,700 in

2010Russia is hampered by its relative politicalinstability and a drop in newly created retail salesarea. Still, the fact that Russia (population 141.9million) is expected to become Europes largestconsumer market with rising disposable incomesand an expanding middle class makes it a priorityfor many retailers seeking long-term options.6

Russias retail market continues to consolidatethrough mergers and acquisitions (M&As), par-ticularly among local companies. We expect thistrend to continue, with the largest domestic chainsacquiring both national and medium-sized regionalplayers. For foreign companies, entry via M&Ahas proven difcult as local companies have stronglobbying advantages. Entering Russia requires

understanding and adapting to local operatingconditions, including logistical challenges. Linesat borders and ports, poor service quality, infra-structure issues and long distances between largecities cause delays and make the supply chaina strategically crucial function. Additionally, therecan be long lead times and a steep learning curveto build and open stores in Russia. IKEA, for

example, spent years overcomingbureaucratic hurdles before openingstores in Russia. Nevertheless, it ispossible to overcome these hurdlesand be successful in the market.Multinationals such as Metro Groupand Auchan have operated in Russiafor years, understanding the rules ofthe game and continuing to growthrough expansion. Companies enter-ing Russia should also pay closeattention to risk-mitigation strategies,including establishing governmentrelations.

Albania. Albania slides one spotto 13th position this year. Albania is

relatively tiny (population 3.2 million), but itshigh ranking is driven by a lack of market satura-tion. It is a good country to have on the radarin the medium term, but it may not be themost pressing country to enter today. Carrefoursplans to enter Southeastern Europe in partnership with Greeces Marinopoulos will include storesin Albania.

The Retail Apparel IndexIn 2008 and 2009, A.T. Kearney published theRetail Apparel Index, and this year it returns withan improved methodology that highlights thesubset of GRDI markets most attractive from anapparel perspective. We have evaluated more than

Russia, expected to become

Europes largest consumer

market with rising disposable

incomes and an expanding

middle class, is a priority for

many retailers.

6 See Riding Russias Consumer Boom inExecutive Agenda at www.atkearney.com.


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30 apparel markets to identify the top 10 coun-tries in terms of clothing market attractiveness,levels of retail development and country risk(seesidebar: About the Retail Apparel Index).

In the past two years, a few trends shaped theglobal apparel market. After a downturn in 2009,the market is recovering and forecast to accelerate,thanks to more apparel consumption, increaseddisposable income, low interest rates and improv-ing consumer sentiment. E-commerce is alsohelping, as clothing retailers use it to test amarket without signicant capital expenditures. A few retailers use this tactic, including J. Crew,Gap, Inc. and Victorias Secret.

Lets look at the Apparel Indexs top threecountries (see gure 4): China. Chinas top ranking is driven by itslarge population and the growing disposableincome of its middle class. Apparel retail in Chinahas grown at a CAGR of 20 percent for the pastfew years, a trend expected to continue for thenext ve years. Retail formats are diversifying inChinabeyond traditional department stores,specialty stores, outlets, discount stores and onlinesales are growing. Foreign companies, including luxury brands,have aggressively entered the market. American

clothing retailer Gap, Inc. opened stores in Beijingand Shanghai in late 2010 and may tap the onlinemarket with the simultaneous launch of Gap.cn.PVH Apparel Group entered China with its Izodbrand and plans to open 3,000 stores in the nextve years. Italian retailer RDM announced aninvestment of $910 million to set up ve Italian-style luxury outlet centers in China under the

ScoreCountry

risk

Retaildevelop-

ment

Marketattrac-

tivenessCountry

Source: A.T. Kearney Note: Scores are rounded.

2011rank

China

UAE

Kuwait

Russia

Saudi Arabia

India

Brazil

Turkey

Vietnam

Chile

1

2

3

4

5

6

7

8

9

10

37.0

38.8

31.4

30.4

25.6

25.8

23.6

21.3

23.3

16.4

14.3

8.2

7.2

8.1

7.4

8.0

7.5

7.3

6.9

8.3

10.1

11.9

9.9

7.8

10.9

8.2

9.0

8.8

7.1

12.2

61.4

58.9

48.6

46.4

43.9

42.0

40.1

37.4

37.3

36.9

Figure 4The 2011 Retail Apparel Index

About the Retail Apparel Index

The Retail Apparel Index is calcu-lated by analyzing three metrics: Clothing market attractiveness(60 percent). This includes clothingsales, clothing sales growth, youthand urban populations, and level ofinternational presence. Retail development (20 percent).The retail development indicator

includes share of modern retailingand sales area growth. Country risk (20 percent) .Country risk indicators includepolitical and nancial risk, businessreadiness and the business cost ofcrime, terrorism and corruption. Within each metric, a countrysvalue is indexed from 0 to 100 to

allow for relative comparison to bemade across metrics. For example,UAE had the highest clothing salesper capita at $785, giving it a scoreof 100 points for that metric.


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Authors

Hana Ben-Shabat is a partner in the rms consumer products and retail practice. Based in the New York ofce,she can be reached at [email protected].

Mike Moriarty is a partner in the rms consumer products and retail practice. Based in the Chicago ofce, he canbe reached at [email protected].

Deepa Neary is a consultant in the rms consumer products and retail practice. Based in the New York ofce,she can be reached at [email protected].

The authors wish to acknowledge the contributions and insights of their A.T. Kearney colleagues around the world whohelped write this paper, especially Guilherme Barreto, Sonali Chaudhuri, Katie Finnegan, Thierry Le Compte, Marcelo

Marques, Nithya Rajagopalan, Helen Rhim, Fabiola Salman, Can Savasan, Smriti Tankha and Sheryl Yang.

This material was prepared in conjunction with the

A.T. KEARNEY GLOBAL CONSUMER INSTITUTE,

a worldwide network of professionals and executives

that combines proprietary and public data resources

with local knowledge to deliver strategic and operational

insights to executives in consumer-facing industries

seeking long-term growth and competitive advantage.

For more information, please contact [email protected].


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Retail Global Expansion-GRDI 2011 (1)

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