RetailSectorReport_Nov10

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RETAIL MARKETREPORTAUTUMN 2010



CONTENTSFOrEwOrd

1.0 EXECUTIVE SUMMArY

2.0 UK rETAIL MArKET 2.1 Economy an etail t en s

o Economic trends and retail driverso Outlook and riskso Retailer trading conditions

2.2 retail evelo mento Recent retail development trendso Retail construction outlook:

The next phase in retail growth 2.3 retaile evie

3.0 GLOBAL rETAIL MArKET 3.1 Global economic back o

3.2 Key Ma ket o o tunities

3.3 Eu o e

3.4 Mi le East3.5 BrIC

3.6 Beyon t e BrICs – t e C am ions i Economies

4.0 rETAIL TrENdS 4.1 Consume abits

4.2 retail catego ies

4.3 Su ly-c ain ynamics

4.4 Sto e location, layout/ esign

4.5 retail globalisation

4.6 retaile s’ st ategies fo success

4.7 Ot e issues



1.0 EXECUTIVESUMMArY Retail plays a major role invirtually all economies the worldover, and the health of the sectoris an important bellwether forthe performance of the widereconomy. This report examinesthe outlook for the UK retailsector, implications for the retailproperty and construction market,key global retail opportunities andsigni cant trends that are shapingand changing the retail market.

UK economy andretail trendsThe dust from a turbulent two yearsfor the UK economy has settled in2010, but it now faces the challengeof reconciling the twin goals of deficitreduction and sustained economicrecovery.

The outlook for the UK economy hascertainly improved compared to thelast two years, but remains vulnerableas government support is being

withdrawn. UK growth has beensurprisingly strong this year, raisinghopes that the economy is in bettershape than thought. Nevertheless, therisks to growth remain mainly on thedownside and stem from uncertaintiesabout how the UK economy willadjust to a smaller public sector.The business sector will be key tothe recovery, and if a stronger thancurrently expected rebound can beachieved, UK growth in the yearsahead could prove faster and better

balanced than in recent years.Retail was one of the worst hit sectorsduring the 2008/09 recession. Boththe retail investment and occupiermarket witnessed a sharp downturn,and the flow of retail constructiondwindled. The sector was hit bythe credit crisis, scarcity of finance,investor risk aversion, as well as weakconsumers spending. However, whileconsumer spending slowed, retail salesremained surprisingly strong, drivenin parts by demand for necessities.

The resilience of the sector looksset to be seriously tested in the yearahead. Consumer spending is likely toremain relatively subdued reflecting

expectations that low earnings growthand high legacy debt levels will limitspending power. In addition, thegovernment’s fiscal squeeze will seehigher taxes and public sector jobcuts, which will impact on consumerspending.

Retailer review andretail developmentRetailers in the UK are facing up toa changed playing field; one that ischaracterised by thrifty consumers,heavier price competition and lessnew store space. Over the last twoyears, many retailers have had tocut prices, scale back, adapt oreven abandon expansion plans.However, others have seen business

more resilient, with some pursuingaggressive expansion plans.

The retail property market has hadanother difficult year in 2010, butlooks in better shape than might havebeen anticipated a year ago. Retailoccupier demand has shown signsof improvement, though sentimentremains mixed within the sector andlocation. The balance of negotiatingpower sits firmly with tenants, butlandlords in buoyant places such asLondon have “hardened” their stanceover the course of this year.

The retail construction pipeline hasshrunk significantly over the past twoyears, as many developers put a stopon planned schemes. Developmentactivity remains weak, with theexception of the grocery sector.The volume of retail constructiondeclined by 22% between 2007 and2009, and a further 10% decline ispencilled in for 2010. Retail demandis expected to slowly increase in 2011,

which should herald a restart of manyof the currently stalled projects. Thefirst wave of major retail developmentis expected to commence on site in2011/2012, but a more substantialincrease in retail construction is notexpected before 2013.

Global retail outlookAfter decades of uninterrupted globalgrowth, the world economy shrankin 2009. Most industrialised and

some emerging markets saw deeprecessions, while growth slowed inmany other emerging markets. Globalgrowth recovered over the course of 2010. However, there are significant

differences in the pace and natureof the rebound. Recovery in mostadvanced economies remains sluggish,due to weak consumer demand.In contrast, many emergingeconomies are seeing strong growth,mainly because they did notexperience major financial excessesprior to the recession.

Retail demand, bar some exceptions,proved more resilient than expectedduring the economic downturn of 2008/09. In 2010, many markets sawsome retail growth and emergingmarkets even saw strong growth.Most of the big global (food)retailers continued to post relativelystrong sales throughout the crisis.More stable market conditionsare encouraging strong retailers

to continue with their expansionplans – albeit more slowly and lessaggressively than in the earlier partof the decade.

The shift in the distribution of globaloutput and wealth continuous. Infact, the much stronger performanceof key emerging economies throughthe crisis and stronger growthprospects are likely to accelerate theshift in global economic dynamics.This has major consequences forglobal retailers.

Key marketopportunitiesThe recovery in retail developmentin Western Europe and the USis likely to remain cautious, withowners looking at refurbishmentsand extensions. In these matureretail markets, the emphasis isshifting towards more proactive assetmanagement initiatives.

The European retail market is verydiverse and despite a general slowrecovery, retailers will still spotopportunities in better performingregions. In particular, there areexpansion opportunities for retailersin less mature Central and EasternEuropean markets. Some markets,which have already over the pastdecade seen a sharp increase innew retailers, i.e. Poland, the CzechRepublic and Slovakia will continue toremain attractive, due to their marketsize and growth potential. Others willbecome increasingly attractive as theyare still relatively underdeveloped.Both Russia and Ukraine arepotentially huge retail markets.



A number of smaller countries arealso attractive for retailers, includingBulgaria, Serbia, Croatia, and Albania.

Leading retailers are increasinglyfocused on emerging markets to drivegrowth. Asia looks to have the bestgrowth prospects, with both China

and India continuing to expand firmly.Brazil is also doing well. A firm growthoutlook in these economies, togetherwith large populations, rising incomesand domestic demand, and increasingurbanisation bodes well for retaildevelopment in the years ahead.

The Middle East is one of the world’sfastest growing retail environments. Ithas witnessed a rapid transformationon the back of changing socio-economic factors, infrastructureinvestment, rising purchasing power,large oil-wealth, and growing tourism.The Middle East is a key market forglobal retailers.

The term “BRIC” has entered theaverage consumer’s lexicon over thepast two decades, but there is a groupof sometimes overlooked emergingmarkets, with huge retail growthpotential - the 10 Championshipeconomies. These are middle-income emerging countries withlarge and growing populations, rapidurbanisation, industrialisation andchanging lifestyles, all of which isattracting retailer interest.

Retailer trendsConsumer trends evolve at a rapidpace – in particular taking into accountthe global context. Retailers constantlyadapt and innovate to maintain theircompetitiveness, which makes the

retail sector a dynamic market space. We examine key issues with regards toconsumer habits, sustainability, retailcategories, supply-chain dynamics,globalisation, store location, layout anddesign, and portfolio optimisation.



2.0 UK rETAILMArKET 2.1 Economy andretail trendsThe dust from a turbulent two yearssettled in 2010, but the UK economynow faces the enormous challenge of reconciling the twin goals of deficitreduction and sustained economicrecovery. At the same time, retailersin the UK are facing up to a changedplaying field; one that is characterisedby thrifty consumers, heavier pricecompetition and less new store space.

Economic trends andretail driversThe UK economy has moved out of recession since the final quarter of 2009 and appears to be on the pathto gradual recovery. However, it willtake some time before the 6% declinein output during the recession will bemade up and GDP returns to pre-crisis levels.

The economy grew by an annualised1% during the first half of 2010,

led by a rebound in the productionand construction industries, whileconsumer spending growth remainedsubdued. The question is whetherthis upturn can be sustained, andmost forecasters expect much slowergrowth in the year ahead. Theheadwinds facing the UK economyare numerous and relate mainlyto the debt accumulated by bothgovernment and households.

Over the past two years, governmentsaround the world have implemented

fiscal stimulus packages to supporttheir economies through the recession;but this has pushed budget deficitsto worryingly high levels. Facedwith sovereign debt issues, manygovernments are now embarking onmajor fiscal tightening.

In the UK, the June 2010 budget setan ambitious target: the eliminationof the structural current deficit overthe next five years. The plan impliesreductions of 25% and more in mostdepartmental budgets. The scaleand scope of the public sector cutsis likely to impact on the patternof UK growth in the years ahead.In particular, it hopes to achieve arebalancing of the economy away

from household and governmentspending, towards production andexports.

With the UK growth outlookuncertain, businesses remain cautiousabout their investment plans. Whilefirms across many industries have

reduced their headcount in thepast two years, the feared massunemployment has not happened – but workforce flexibility has hit realwages hard. Last year the effect wasdisguised by lower inflation and thefall in mortgage payments, and realdisposable incomes actually increasedby 1%. However the boost fromfalling inflation and interest rates hasworn off this year and real incomesfell 0.5%.

Consumer spending slowed sharplylast year, but retail sales remainedsurprisingly strong. In parts, the retailsector was supported by a revival inthe housing market last year. Housingmarket activity has been a source of rising household wealth over muchof the past decade and house pricegrowth is an important driver of consumer expenditure. After fallingby more than a fifth between end2007 and early 2009, house pricerose by 15% in the 16 months to June2010. However, the support from thehousing market has started to fadesince summer 2010. Housing marketactivity has started to slow again, asmortgage financing remains tight andbuyer confidence weakens.

According to the Bank of England,household debt now stands at 150%of disposable income. Whilst the

June budget was relatively businessfriendly, it placed a higher burden

on consumers. Households will paymore tax, i.e. VAT is hiked to 20%in January 2011, and householdincomes will be hit by a cumulative£26.3bn cut in welfare spending,which includes a switch to CPIindexing of benefits (instead of RPI),changes to the tax credit system andhousing benefit reforms. Against thisbackground household - perceivedand real - wealth will remain underpressure, which no doubt will impacton consumer spending.

Outlook and risksThe UK economy is expected toremain weak near term, but the paceof growth is anticipated to pick upgradually in 2011 and stronger in the

subsequent years, as the economyadjusts to a smaller public sector.

Consumer spending is likely to remainrelatively subdued in the year ahead,reflecting expectations that low earningsgrowth and high legacy debt levels willlimit spending power. The fiscal squeezewill impact on public sector jobs, withthe ITEM club estimating that 150,000jobs could be lost over the next fiveyears. Nevertheless, a strengtheningin the growth outlook should increaseconfidence in the labour market and

unemployment is expected to fall backgradually over the years to 2014.

Retail sales will also be hit by VATrising from 17.5% to 20% in January2011. This should bring forward somespending to the final weeks of this year,as consumers look to make big-ticketpurchases ahead of the increase, whichshould boost retailers’ Christmas 2010results.

UK GDP

80

85

90

95

100

105

2 0 0 7 Q 1

Q 2

Q 3

Q 4

2 0 0 8 Q 1

Q 2

Q 3

Q 4

2 0 0 9 Q 1

Q 2

Q 3

Q 4

2 0 1 0 Q 1

Q 2

Source: ONS

G D P :

I n d e x

2 0 0 6 =

1 0 0

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q u a r t e r - o n - q u a r t e r

GDP ManufacturingGovernment spending Construct ion

Consumer spending



Consumer price inflation is likely toremain above target over the nexteighteen months, but is likely to fallsignificantly below 2% subsequently,as the impact of higher energy pricesand taxes wears off and spare capacitybears down on pr icing power.

Against this background, consumers,key drivers of UK growth in therecent past, are unlikely to drive aneconomic recovery. The UK economywill be reliant on the businesssector to drive growth and there aresome positive signs of a rebalancedeconomy emerging. Businessinvestment and exports are improvingafter the sharp falls seen in the firsthalf of 2009. Business investmentwas surprisingly firm in the first half of this year and is likely to pick up

further as world output strengthens.Large corporations are generally ina healthy financial position and theyhold the keys to this recovery. Thepound remains much weaker thanin recent years, which should helpexporters in the longer term.

The UK economic outlook hascertainly improved compared to thelast two years, but remains vulnerableas government support is withdrawn.The risks remain on the downside andstem mainly from uncertainties overpublic finances. It is too early to assesswhether the coalition governmentwill be able to achieve all of the taxincreases and spending cuts, and theimpact these measures will have onthe economy.

In addition, a large part of the forecastgrowth relies on a strengthening of the export sector. Sovereign debtproblems and fiscal austerity in theEurozone – the UK’s largest tradingpartner - could drag down growth in

the region, weakening demand for UK exports. Unresolved sovereign debtissues in the Eurozone’s peripherycould result in heavy losses forthe banking sector, so that creditconditions could remain tight on thecontinent and in the UK. With theexternal demand outlook uncertain,businesses will be reluctant to committo investments, which could removeanother growth driver from the UK economy.

More positively, should demandprospects improve; investment growthcould be stronger than currentlyanticipated. The UK government willbe hoping that the business sectorwill be the key to UK recovery, as

otherwise it will find it very hard topull of the trick of fiscal retrenchmentand economic growth. If this can beachieved, UK growth in the yearsahead could prove faster and betterbalanced than in recent years.

Retailer tradingconditionsRetail was one of the worst hit sectorsduring the recession. Both the retail

investment and occupier marketwitnessed a sharp downturn, and theflow of retail construction dwindled.The sector was hit by the creditcrisis, scarcity of finance and investorrisk aversion, as well as depressedconsumers spending.

However, whilst consumer spendingslowed sharply, retail sales held upremarkably well. Both the officialstatistics and figures from the BritishRetail Consortium (BRC) show thatretail sales did not slow by as much ashad been feared last year.

The resilience of retail spending inthe recession of 2008/09 is in contrastto the experience in the early 1990sdownturn, when retail sales fell fortwo consecutive years.

A number of factors could explainthis, including a relatively containedrise in unemployment, low mortgageinterest rates, and a VAT cut in2009. Retail volumes have also beensupported by sales of necessities suchas food. Spending on leisure andbig-ticket items, including those thatrely on credit, was generally muchweaker, highlighting the reluctanceof consumers to commit to largepurchases while uncertainty over thefuture persists. The growth in onlinesales has also slowed sharply, fromdouble-digit growth in recent years,to more modest single digit figures,though growth of online retailers isstill by far outpacing the bricks-and-mortar peers.

Over the course of 2010, there hasbeen a reduction in companies goinginto administration. Despite someretailers voicing concern abouttrading performance going forward, anumber of recent trading results have

helped sentiment and highlight theresilience of the retail sector to date.

Food retailers’ sales remain relativelyfirm, as the bulk of the products arenon-discretionary for the majority of consumers. However, performancewithin the sector is mixed.

2008 2009 2010f 2011f 2012f 2013f 2014f GDP (%) -0.1 -4.9 1 1.9 2.8 2.9 2.9Consumer spending (%) 0.4 -3.3 0.5 0.5 2.2 2.7 2.3Retail sales (£, bn) 280.9 285.8 291.3 293.4 297.8 304.5 311.3Retail sales / capita (GBP) 4,580 4,620 4,680 4,680 4,720 4,800 4,870Consumer price inflation (%) 3.6 2.2 3 2.8 1.2 1.5 1.6

Source: Item Club, ONS, IMF, Davis Langdon

Key Economic and Retail Indicators

Retail sales

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0 Y T

D

Source: IMF

A n n u a

l c

h a n g e

i n r e

t a i l s a

l e s v o

l u m e s



Sainsbury’s reported that total salesrose 5.2% during the second quarterended 2 October. Like-for-like saleswere up 2.9%. Tesco’s UK sales rose5.9% to reach £21.9 billion in the firsthalf year ended 28 August 2010. Incontrast, Morrrisons’ sales growth wasmuch weaker, with like-for-like sales(excluding VAT and fuel) in the half year to end August 2010 up 0.9%,compared to 7.8% growth in the sameperiod last year. For the 26 weeksto 3 July 2010, the Co–operativeincreased sales by 11.5% to £3.9bn.However, like-for-like sales were down1%. The performance of departmentand variety stores was also mixed,but generally positive. John Lewis forexample has consistently achieveddouble digit weekly sales growth in2010 and posted strong half yearfigures.

Whilst retailers have been able toreturn positive results so far this

year, times for the industry remainchallenging, not least because thegovernment’s fiscal squeeze will seehigher taxes and public sector jobcuts. The resilience of the sector,which continued to show positiveyear-on-year growth over the courseof 2010 but looked vulnerable inmore recent months, looks set to beseriously tested in the year ahead.

Retail sales may get a boost aheadof the VAT rise next January asconsumers bring forward purchases.According to Verdict Consultancy,Christmas 2010 is expected to bethe best Christmas for retailers since2007. Sales are forecast to increase1.9% to £85.2 billion, as consumers

will spend an extra £1.6 billion thisyear. After that, retailers will behighly exposed to consumers facedwith relative job insecurity, subduedearnings growth, tax rises, tightcredit conditions and concerns overpensions.

The pressure will be on retailers tocontinue to price competitively, whichwill impact on profit margins. At thesame time, retailers are faced with

rising input costs. For example, fabricand the associated costs accountfor around 65% of product price instores such as Next and Primark, sothe impact of this year’s poor cottoncrops, which pushed prices to 15-yearhighs, on retailers’ margins seemsstraightforward to predict.

Verdict expects retail growth of 1.5%in 2010 (excluding the impact of inflation), with the subsequent paceof growth increasing steadily to 3.1%by 2014. However, growth is likely to

vary wildly within the sector. Between2010 and 2014, cumulative retailgrowth is forecast to be 59% at thepremium end of the market, 29% atthe value end, but falling 7% for midmarket retailers.

Coming out of this recession, retailersare faced with a changed competitivelandscape, one that is characterisedby thrifty consumers, heavier pricecompetition, and less new store space.Retailers have responded differently,from scaling back expansionplans, rationalising store space, toconcentrating on cost containment.Others however, maintain aggressiveexpansion plans to seek advantageover weaker rivals.

Retail Market Size

100

120

140

160

180

200

220

240

260

280

300

320

2005 2006 2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Source: ONS, PlanetRetail, Davis Langdon

£ b

i l l i o n

Food sales Non-food sales Non-store sales



2.2 RetaildevelopmentThe retail property market has hadanother difficult year in 2010. Rentscontinue to fall in markets outsideLondon, while capital value growth

has tapered off in recent months.Development activity remainssluggish at best – with the exceptionof the grocery sector – and the totalamount of retail floor space underconstruction is now at less than50% of 2007 levels. With manyschemes put on hold for the timebeing, a significant upturn in retailconstruction seems unlikely until2011/2012 at the earliest.

Recent retaildevelopment trendsOn the back of uncertainty overthe economic outlook, the past yearsaw exceptional volatility in bothoccupational and investment retailmarkets. Nevertheless the retailproperty market in 2010 looks inbetter shape than might have beenanticipated a year ago.

Sentiment in the retail investmentmarket improved in the second half

of last year, although transactionvolumes remain below pre-crisislevels. As with the wider commercialproperty market, the retail sector sawa substantial re-pricing of assets frommid 2009 after two years of fallingvalues. Peak to trough, all retail capitalvalues fell by 45% (CBRE MonthlyIndex) during the recession. Withinthis, shopping centres and retailwarehouses fell by 49% and 47%respectively. Retail capital growthyear-to-date in September stood at

7.5% or 20% compared to a year ago.However, capital growth has slowedin recent months and property yieldsnow look to be stabilising after theearlier compression.

Retail rents continued to fall overthe course of 2010, but the pace of decline has moderated. There aresignificant variations between assetsand locations. Central London storescontinued to see rising rents on theback of strong retailer demand, whileoutside of London rents are stillfalling. The CBRE expects averagerental values to edge back into positiveterritory in 2011 across all three mainretail property asset classes, with aslight pick up in growth expected in

2012. Occupational demand pressureswill continue to vary, which implies adifferential rental growth.

On the occupier side, despite someprominent administrations, thenumber of retailer failures slowedsharply this year. Retailer demandhas shown signs of improvement, butsentiment is very mixed dependingon sector and location. Value retailersand supermarkets have generally

capitalised on opportunities in therecession. In contrast, changingconsumer spending patterns havecaused many other retailers to rethinktheir store networks and scale backexpansion plans.

Generally, the Central London marketis firm, but outside of London the UK retail scene is much tougher. Vacancyrates remain high in many secondaryand tertiary locations, but there aresome shortages visible for primespace. With the retail constructionpipeline severely cut, the expansionplans of many retailers now focuson new formats and out-of-townlocations.

The balance of negotiating powersits firmly with tenants, althoughlandlords in buoyant places such asLondon have “hardened” their stancein recent months. Retailers continueto negotiate hard in search of the mostfavourable terms when acquiring newunits. Leasing incentives including

longer rent free periods, turnover rentand fit-out contributions are beingrequested.

The UK is the largest and mostsophisticated retail market in Europe.

Between 2002 and 2007, retailconstruction output rose by 14%.However, 2007 was the peak of thecurrent development cycle. The retailconstruction pipeline has been cutback significantly and constructionactivity dropped sharply, as manydevelopers put a stop on plannedschemes. Speculative developmenthas slumped since the onset of thecredit crisis. Overall retail related newbuilds declined by 22% between 2007and 2009, and a further 10% declineis pencilled in for 2010. Retail outputat current prices totalled £5.45bn in2009.

Retail space under construction inthe first half of 2010 was some 60%lower compared to its recent peak in2007. This sharp decline highlightsthe speed at which developers turnedoff the pipeline following the onset of recession. The decline in developmenthas been sharpest for retail parks with

space under construction currentlyrunning at only 0.5m sq ft, downby almost 80% on the 2007 level.The shopping centre pipeline fell bymore than 65% over the same period.In 2010 to date, a few schemeshave opened: St Catherine’s Walk;Carmarthen: Eldon Square extension,Newcastle; and phases 2 and 3 of Southgate, Bath and the Rock, Bury.The only major schemes currentlyunder construction and due to openin 2011 are Westfield Stratford,

Newbury Parkway and Trinity Walk, Wakefield.

Retail construction

0

1000

2000

3000

4000

5000

6000

7000

8000

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

12-month moving averages Source: ONS

£ m

i l l i o n ,

c u r r e n

t p r i c e s

New orders

Output



In contrast, the supermarket pipelinehas risen, with the total pipeline now30% up on 2007 levels. Some of the big food retailers continue withexpansion plans, albeit not at quitethe same level as in previous years.Tesco has earmarked £1.6bn for newstores over the next few years, whileSainsbury’s announced last year itsintention to raise £445m for newstores and extensions to existing ones.

Wm Morrison has indicated that itintends to add a further 140,000m 2 of space over the next three years, largelythrough expansion of stores.

The limited amount of new spacecoming on-line will impact on theretail market in a number of ways.A demand/ supply mismatch couldemerge, with larger units in prime

location in short supply. According tosome industry surveys, anchor traders,such as John Lewis, Debenhams orHouse of Fraser are finding it difficultto meet expansion targets, as there arefew new developments.

The next phase inretail growthThe total retail pipeline for the nextfour years currently stands at 6.2msq ft, which is 85% less than wasprojected two years ago (Experian,EGI). Delivery of some projectsput on hold will have to wait until asustained recovery in the retail sector.There are a few exceptions, such asLand Securities’ Leeds shoppingcentre, which is expected to be giventhe green light.

Retail demand is expected to slowlyincrease in 2011, and a return of confidence should herald a restart of many of the currently stalled projects.

However, whilst retailers can quicklyresurrect expansion plans oncedemand conditions are met, the retaildevelopment pipeline will not be ableto react as quickly. The first wave of major shopping centre developmentis expected to commence on site in2011/2012, but a more substantialincrease in retail construction isnot expected before 2013. This is,however, very much dependant on anumber of factors, such as the speedof the recovery, retailer demand,

developer confidence and, ultimately,funding.

Retail space under construction

0

2

4

6

8

10

12

14

16

18

20

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

Source: CBRE

m i l l i o n s q

f t

Shopping centresRetail parks

Supermarkets

Retail construction forecast

-22%

-18%

-14%

-10%

-6%

-2%

2%

6%

10%

14%

2005 2006 2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Source: ONS, CPA

A n n u a

l c

h a n g e

( c o n s

t a n

t p r i c e s

)

Retail construction output

Total construction output

Evolution of retail structureChannel size by sale

0102030405060708090

100110120130

Hypermarkets &Superstores

Supermarkets &Neighbourhood

stores

Conveniencestores

Discount stores Cash & Carry

Source: PlanetRetail

S a

l e s

( £ ,

b n

)

20092014 forecast



2.3 Retailer reviewEven after three challengingyears, retailer trading conditionsare set to remain tough in 2011.Consumers are being faced withmajor fiscal tightening, sustained highunemployment, low earnings growth,and heightened legacy debt levels. Allthis is weighing on spending powerand the willingness to spend. Morepositively, retail sales proved relativelyresilient so far, which has givenretailers confidence going forward,with some pursuing aggressiveexpansion plans.

Future prospects are brighter. TheUK will remain a high-income marketwith a sophisticated retail sectorand will provide attractive growth

opportunities. As a mature market,the structure of the UK retail sector isnot expected to change dramatically,but there are still a number of developments expected, including:

o Supermarket development hascontinued strongly through therecession; and this trend is expectedto continue. The strong growthof supermarkets’ non-food offerwill further divert footfall fromtraditional high street locations.

o The evolution of supermarketsas anchor tenants looks set togrow. For example, Silverburn inGlasgow is jointly anchored byTesco, Debenhams and M&S. Tescois also represented in St Stephen’s(Hull) and Ellesmere (Walkden,Manchester) shopping centres.Other supermarkets includingSainsbury’s, which will be co-anchoring Trinity Walk in Wakefield,have sought to expand through thisformat.

o Discount retailers continue to gainimportance, with a number of these having bold expansion plans.Discounters still hold a relativelysmall share of the UK market(around 2.5%), but this is set to risemarkedly.

o Due to a limited amount of newshopping centre space available,retailers are developing moreflexible trading formats. Forexample, there is increased demandfor quality out-of-town space

from the supermarket and fashionsectors, with names such as Next,River Island, Peacocks and JohnLewis foraying into the retail parkmarket.

Results and trading statements fromUK retailers provide evidence aboutthe state of high street spending.

Tesco – investing tosecure market positionTesco reported robust trading resultsfor the six months ending 28 August2010. Sales including VAT of £32.9bnwere up 8.3% against the same periodlast year. Growth mainly comes frominternational markets, while the UK isthe slowest growing region, with totalsales, including VAT, excluding petrol,up 4.4%. Tesco plans to embark on amajor UK store opening programmein the second half of its financialyear, as it looks to secure its marketlead. It plans to open 1.7m sq ft of new space, equivalent to around 16%of rival Wm Morrison’s entire store

base. In the first half of this year,Tesco opened just 0.4m sq ft. Tescoalso continues to expand globally. Forexample, it plans to develop moreretail and leisure space in China overthe coming five years than it operatesin the UK, with the aim of opening 80shopping centres in China by 2016,amounting to 40m sq ft and £2bn of expenditure in the five year period.

Sainsbury’s –

accelerating growthplanSainsbury’s reported that total salesin the 16 weeks to 2 October 2010were up 6.6% (5.2% excluding fuel).

Like-for-like sales rose 4.3% (2.9%excluding fuel). Sainsbury’s openedseven supermarkets, 12 conveniencestores and completing sevenextensions – in total adding 460,000sq ft of new space to its estate. Itopened its largest stores in England inQ2 2010 at Crayford, Kent (100,000sq ft), in Scotland at Darnley andin Wales at Newport. Sainsbury’s is

set to accelerate space growth, withplans calling for 15-20 extensions peryear, 15-20 new supermarkets p.a.,75-100 convenience stores in 2010/11and 100 plus thereafter. Sainsbury’sis looking at targeting China’sgrowing middle class for a possibleexpansion into the country, thoughit will be a latecomer to the marketcompared with western retailerssuch as Walmart, Carrefour, Auchan,Tesco and South Korea’s Lotte. Italso hinted that it considered other

international markets in addition toChina.

Marks and Spencer – prioritising propertystrategyM&S’s group sales rose 6.5% in thesecond quarter ended 2 October2010. Whilst this is a positiveperformance it is up against weakcomparatives a year ago. M&S has

conducted a review of its business,putting together a strategy to get itthrough the downturn. Objectivesinclude: to accelerate multi-channeldevelopment, drive developments

Supermarkets floorspace by region (%)

0

10

20

30

40

50

60

70

80

90

100

E a s t M

i d l a n d s

E a s t

G r e a t e r

L o n d o n

N o r t h

E a s t

N o r t h

W e s t

S c o t l a n d

S o u t h

E a s t

S o u t h

W e s t

W a l e s

W e s t M

i d l a n d s

Y o r k s

& H u m

b e r

Source: CBRE

i n p e r c e n t

Morrisons

Sainsbury

AsdaTesco

Others



in international markets, and tore-focus brand communication. Itsproperty strategy remains largelyunchanged and priorities are: toenhance major city centre stores,increase out-of-town stores of around10,000 sq m and expand its space;open more stores of between 4,000-6,000 sq m on retail parks; examineits portfolio of high street stores. Inaddition to new space growth, M&S isprogressing through a modernisationprogramme. Once it has completedits refurbishment programme it isworking on a new store blueprintin collaboration with design agencyFitch. Global expansion remains a keyarea for M&S, with plans to increasingthe international business to 15%-20% of group revenues by 2012.Notable expansion is set to take placein India with 10 to 15 stores set toopen over the next two years.

Asda – expanding thediscount offer

Walmart’s UK arm Asda saw revenuesrise by 6.8% to £19.83bn for the yearended 31 December 2009, but salesgrowth slowed sharply in 2010. In

terms of new format openings, Asda isranked behind Tesco and Sainsbury’s,who in recent years, have bothlaunched many small and conveniencestores in urban and highly-populatedresi¬dential districts. Asda is nowworking on a five year strategy tosecure its position as the number twoin food and leader in non-food sales.The main focus will be the opening of smaller supermarkets of around 1,580sq m, increasing the number of suchstores from the 24 in 2009 to 100within five years, and the opening of around 125 new Asda Living generalmerchandise stores to bring a total of 150 within five years. Earlier this year,the group announced its intention tobuy the UK arm of Danish discountretailer Netto. Morrison and Tescoare among the parties interested inbidding for the 47 Netto conveniencestores that Asda has to dispose of following its acquisition of the chain.Once Asda sells off the 47 storesrequired by the Office of Fair Trading,it will be left with 147 former Nettoshops. It will name them ‘AsdaSupermarket’ and add its existing 26smaller stores to the portfolio. Asdawill open its first pilot conversions inthe first quarter of 2011.

Morrisons – from“national tonationwide”Morrisons reported like-for-likesales (ex VAT and fuel) up 0.9%during the six months to July,

compared to 7.8% growth during thepreceding year. In 2009/10 the Groupopened 43 new stores, including34 acquired from the Co-operativeGroup and converted to Morrisonsafter complete refurbishment. Itsstores programme will see 15 storesopen in the second half of 2010,adding a further 0.4m sq ft to theestate. Morrisons aims to go from a“national to a nationwide” havingidentified 8.4 million householdsthat are more than a 15 minute drive

from one of their stores. In order toachieve this and to take advantageof the growing availability of retailproperty, Morrisons is to embarkupon a small format store expansionprogramme. This will see the retailerbreaking with its traditional operatingmodel (hypermarkets/superstores)and opening smaller stores. The newstores of around 1,000 to 1,800 sqm will carry the grocer’s full ‘Market



Street’ range. As a result, by 2010/11Morrisons will have added anadditional 92,000 sq m of new space,on top of the 92,000 sq m set out inthe optimisation plan.

Co-operative – investing in storerefurbishmentsThe Co-operative Group reportedsupermarket sales up 11.5% to£3.9bn in the 26 weeks to 3 July2010. However, like-for-like sales weredown 1% following the disruptionto trading from the continuedintegration of Somerfield. Co-op saysit is on course to integrate Somerfieldwithin the next year, and Britannia,the building society it merged within 2009, within another two years.

Whilst driving operational efficienciesand cost control throughout thebusiness remain a priority, there isalso significant investment in storerefurbishment and re-branding.Currently 2,500 food stores havebeen converted, including half of theSomerfield portfolio.

Aldi – expansionslows amid fiercecompetitionAldi, symbol for the shift to value inthe recession, has suffered a reversalof fortune last year, turning a £93mpre-tax profit in the UK and Irelandinto a £54m loss. This reflectsa difficult year for the discountretailer and reveals struggles of howcontinental discounters have foundit difficult to compete against strongUK supermarkets. While they haveprospered in mainland Europe, thesophisticated value offers and betterstore environments of Tesco and Asdahave made it harder to make progress.Still, Aldi is planning to increase itsUK store base by 50 per year, withthe expansion strategy also involvingrefurbishments of existing outlets andstore re-locations.

Lidl – emergingstronger from

the crisisIn contrast to Aldi, Schwarz Group’sLidl has continued to perform wellthis year. Investments made inthe business, with broader ranges

including brands, more Britishproducts, more shelves instead of pure pallet presentation and moreappealing stores appear to have paidoff. Lidl is stepping up expansion inthe UK, seeing potential for 1,400Lidl stores. Long term plans see itexpanding at a rate of 8%-12% ayear for up to 15 years. This equatesto more than 50 stores a year. Todeliver these requirements, Lidl willlook to develop stores on sites ownedby residential developers that haveshelved construction because of thehousing downturn. Part of expansionis also expected to come throughopportunistic buys from weakercompetitors.

Debenhams – expansion sought ininternational marketsDebenhams announced that itexpected headline profit before taxand exceptional items to hit £150min the year to August 28, a resultthat would be ahead of marketexpectations. Sales in 2010 havebeen helped by the addition of moreprofitable lines and a recovery in salesover the summer months. However,overall like-for-like sales in the yearto end August were flat comparedto last year. Debenhams has gainedin market share, assisted by theacquisition of Danish departmentstore chain Magasin du Nord in 2009.During 2010 Debenhams openedsix new stores, of which three newdepartment stores and three newDesire stores. In addition, Debenhamshas undertaken a series of in-storedepartment store refurbishments.Debenhams’ is expected to continueto expand internationally, with thelikely focus being on the emergingNorth African market. New UK store expansion opportunities areexpected to remain scarce given thepause in the UK retail developmentprogramme and the uncertaineconomic outlook.

PrimarkValue retailer Primark reported a6% rise in like-for-like sales for its

2009/10 financial year and forecastsanother year of solid like-for-like salesgrowth. The business opened eightbranches of Primark during the pastsix months to end September alone,

five of them in Spain, bringing thetotal to 204. A second flagship onLondon’s Oxford Street is expectedto open before Christmas 2011 inthe former Virgin store site, as part of the redevelopment of the TottenhamCourt Road end of the street. Thecompany also intends to expandfurther in Spain, Germany, theNetherlands and Portugal.

John Lewis/ WaitroseThe John Lewis Partnership reported a28% rise in pre-tax profits to £110.5min the six months to July 31. Salesrose 12.4%, helped by opening newstores and refurbishment of existingones. Operating profits at the JohnLewis department stores rose 77%

to £35.9m, on sales up 14.5% to£1.4bn. Like-for-like sales rose12.3%. Despite its upper-mid marketpositioning, the department store hasconsistently achieved double digitweekly sales growth in 2010. JohnLewis has announced that it will opentwo new ‘At Home’ stores in Swindonand Tunbridge Wells, taking the totalnumber of stores in the format to four.Operating profits at Waitrose rose 6.2%to £127.8m, on sales up 11.3% to£2.4bn. Waitrose has an ambitious plan

to double sales to £8 billion by 2017.It is planning to expand its chain of 231 supermarkets to 250 by the end of the year, and open 40 new sites a yearuntil 2015. Future store growth willlargely be organic, but will be acrossa range of its sales and formats. Forexample, following the opening of thechain’s first convenience store outlets inMay 2009, Waitrose plans to open upto 300 stores over the next five years,through its partnership with motorwayservices operator Welcome Break.

Other standalone c-store formats arealso in the pipeline. It is also planningto extend and refurbish outlets acrossthe country. The refurbishmentsare part of its Store ImprovementProgramme and range from majorextensions and refurbishments to‘refresh’ programmes. In 2007,

Waitrose expanded internationally withthe signing of its first licensing dealin association with Spinney’s in theUAE for the development of some 20outlets by 2010. It has stated that by

expanding its operations overseas it willbe in a better position to invest in lowerpricing in the UK.



3.0 GLOBALrETAIL MArKET 3.1 Globaleconomic backdropAfter decades of uninterrupted globalgrowth, the world economy shrank in2009. Most industrialised and someemerging markets saw deep recessions,while growth slowed markedly in manyother emerging markets.

Global growth recovered over thecourse of 2010 and is predicted toreach 4.8% this year. However, it hasbecome increasingly clear that thereare significant differences in the paceand nature of the economic recovery.Recovery in most advanced economieshas been slow. Low consumerconfidence and reduced householdincomes are limiting consumptionexpenditure growth. In contrast, manyemerging economies are seeing stronggrowth, mainly because they did notexperience major financial excessesprior to the recession. Householdspending is doing well, as a strongbusiness sector is boosting job creation.

Risks for the global economic outlook

remain. In particular, Eurozonesovereign debt problems have causeda setback in global financial stability,which could impact on growth in theyear ahead.

The US economy is recovering,thanks to a large fiscal stimulus,financial stabilisation measures anda cyclical upswing. But, the recoveryis slow, with much of the weaknessdue to sluggish consumer spending.Consumer demand is weak for severalreasons, including lower householdnet worth due to asset price falls, highunemployment, tight credit conditionsand fading government incentives. Thegovernment will also have to deal withfiscal imbalances and the public sectoris likely to retrench in the near term.The most likely prospect for the US isfor a continued but slow recovery, withgrowth far weaker than in previousupswings.

In Europe, the depth and breath of therecession meant that almost all regional

economies saw a sharp contraction inactivity and job losses in 2009. Therecovery this year has been patchyand there are marked differences inprospects across the region, depending

on the condition of public and privatesector balance sheets and the extent towhich economic policies can supportgrowth. Ongoing concerns over thestate of government finances in somecountries have added to the economicchallenges faced by the region. Indeed,the sovereign debt crisis will have asignificant impact on economic growthfor several years. In emerging Europe,growth in economies that experiencedthe mildest downturns (Poland), isexpected to gain strength. However,those that had seen unsustainabledomestic booms (Bulgaria, Latvia) orhave vulnerable private or public sectorbalance sheets (Hungary, Romania) areexpected to recover more slowly. AcrossEurope, aggressive deficit reductionplans will mean weaker governmentspending and the end to rapid publicsector employment creation, both of which are likely to impact on growth inthe years ahead. More positively, thereare also upside risks. For example, astronger German economy could liftgrowth in Europe more generally, giventhe country’s substantial trade andproduction linkages.

Asia entered the global crisis on astrong footing and is leading the globalrecovery. In most parts of the region,resilience in domestic demand has offset

weaker exports. In particular, China’sstrong growth over the past two yearshas benefited global capital goods andcommodities exporters. Chinese growthis projected to average 10.5% in 2010and 9.6% in 2011, driven by domesticdemand. A slight moderation in recentactivity is expected in the year ahead, inlight of tighter credit growth, measuresto cool off the property market and theplanned unwinding of fiscal stimulus.

The recovery in Russia and LatinAmerica has been supported by Asiancommodity demand, normalising tradeand capital flow and accommodativepolicies. In particular in Brazilthe recovery has been faster thanexpected, due to solid macroeconomicpolicy fundamentals, policy support,favourable external financing conditionsand strong commodity revenues. This inturn has boosted domestic demand.

The Middle East and North Africa isrecovering firmly, largely underpinnedby the rebound in oil prices fromtheir trough in 2009. In addition, asizable and rapid fiscal policy response,especially in oil exporting economies,has played a substantial role insupporting growth. The region stillfaces challenges, as credit growth has

been sluggish in the aftermath of thecrisis due to weak balance sheets bothfor the banking sector and the non-financial corporate sector.

Overall, there is still a high level of uncertainty about the global economicoutlook, in particular in the US andEurope. The global recovery remainsfragile, as policies to foster internalrebalancing of demand from public toprivate sector, and external rebalancingfrom deficit to surplus economies arenot yet in place. In particular, howEurope deals with fiscal problems,how advanced countries proceedwith fiscal consolidation, repair andreform their financial sector, and howemerging market countries rebalancetheir economies by developingdomestic demand will determine thesustainability of world growth in theyear ahead.

Global growth

-5-4-3-2-1

0123456789

1011

2008 2009 2010f 2011f 2012f 2013f 2014f 2015f

Source: IMF

A n n u a

l p e r c e n

t a g e

WorldUSAEuro areaCentral and Eastern Europe

Middle East and North AfricaBrazilChinaIndia



3.2 Key MarketopportunitiesIt has been a challenging two yearsfor global retailers. At the beginningof 2009, consumer demand in manycountries – primarily the Western but

also some of the emerging economiesin Europe – began to fall, resultingin a significant decline in retailspending that many feared wouldprove lasting. However, by the end of 2009, sentiment had improved, andconsumers – bar some exceptions

– proved more resilient than wasexpected. In 2010, many markets sawsome growth and emerging marketseven saw strong growth.

Most of the big global (food)retailers continued to post relativelystrong sales throughout the crisis,although grocery retailers with highproportion of non-food were hitharder. More stable market conditionsare encouraging strong retailersto continue with their expansionplans – albeit more slowly and lessaggressively than in the earlier part of the decade.

The global retail market haschanged over past decades, as theenlargement of the EU, globalisation,

the emergence of China and India aspowerhouses of the world economyand the rise of the Middle East haveall impacted on retailers’ expansionand location decisions. The economiccrisis of 2008/09 is likely to cause afurther shift in the global pattern of consumer spending.

There has been a marked shift in thedistribution of global wealth. Theemerging markets have seen theirshare of global output and wealthrise significantly, driven by risingincomes, higher savings ratios, stronginvestment and export growth. Themuch stronger performance of keyemerging economies through thecrisis and stronger growth prospectsare likely to accelerate the recent shiftin global economic dynamics.

In the Western countries, even wheneconomies start to recover, consumerspending growth will be limited.The destruction of housing wealthover past years and fiscal austerity

will weaken consumer spending andretail sales growth. With consumersfocussing on value/ price, discountstore growth is strengthening inkey markets of Europe and North

America last year. This trend is setto continue, with discount retailersset for the strongest growth in theyears ahead. Hypermarkets will seerelatively low growth due to saturatedmarkets, the high cost of investmentper store and growing pressure onnon-food sales. The recovery in retaildevelopment activity in WesternEurope and the US is very cautious,with owners looking at refurbishmentsand extensions. In these matureshopping centre markets, theemphasis is shifting towards moreproactive asset managementinitiatives.

The shift in global wealth creationhas major consequences for globalretailers. Consequently, leading(grocery) retailers are increasingly

focused on emerging markets to drivegrowth. Asia looks to have the bestgrowth prospects, with both Chinaand India continuing to expandfirmly. Brazil is also doing well, onthe back of significant investment andrising consumer incomes. A numberof countries in the Middle East andNorth Africa are also on the targetlists of international retailers, due toinvestment in infrastructure, growingtourism, an increasing middle classand rising disposable incomes.

A.T. Kearney’s “Global RetailDevelopment Index” ranks countriesaccording to their retail marketattractiveness. A market is attractivefor retailers if it has high retail salesper capita, (urban) population, andbusiness efficiency. Market saturationis reached if there is a high shareof modern retailing, number of international retailers, modern retail

sales area per urban inhabitant, andmarket share of leasing retailers.A “window of opportunity” isidentified when retail expansionis attractive, in particular for firstmovers. According to the research,currently the markets offering the bestopportunities for retailers are in:

o Asia: China, India, Vietnam,Indonesia and Malaysia

o Middle East/ North Africa: Kuwait,Saudi Arabia, the UAE, Tunisia,Egypt, Morocco

o Europe: Russia, Turkey, Albania,Bulgaria, Macedonia

o America: Brazil, Chile, Uruguay,and Peru

2010 Global Retail Development Index – Country attractiveness

Source: A.T. Kearney 2010



3.3 EuropeThe impact of the 2008/09 recessioncontinues to be felt across Europe,with direct implications for retailersand the retail property market. Inthose economies where householdand public purses suffered most in thedownturn (Spain, Hungary, Ireland,UK), fiscal consolidation via both cutsin government spending and highertaxes will have a direct impact ondisposable incomes and consumersmay take time to rebuild theirspending habits. Where economieshave been relatively resilient (Poland,Nordics) retail sales will pick upsooner.

On the occupier side, there has beenan increase in retailer fall-out over

the last two years, which has pushedup vacancy levels in high streets,shopping centres and retail parksacross Europe. However the paceof fall-outs has slowed considerablyover the course of this year. In manymarkets, retailers adapted, scaled backor even abandoned expansion plans,though this has not been universal.Discount retailers in particular havecapitalised on opportunities andpushed on with expansion plans.

On the back of difficult marketconditions, the balance betweenlandlords and retailers shiftedfundamentally. Retailers are cautiousabout expansion and commit to spaceonly on best terms and conditions,in order to reduce their risk to theminimum.

The retail construction pipelinehas shrunk sharply across theregion over the past two years. Thetightening of credit criteria by bankshas considerably raised the cost of

financing investment. This has, over thepast three years, led to the cancellingof many investments, some of whichseemed quite certain before. Accordingto Colliers, the first half of 2010 sawaround 2.1 million sq m of shoppingcentre GLA being added to the market- the slowest first half since 2005. TheCBRE estimates that 2011/12 willsee a decline in new completions of 45-50% compared with the peak of the market in 2008, as many proposedschemes may be delayed for several

years. However, the number of newretail projects may increase in somecountries next year, depending onthe pace of the economic recoveryand retailer demand for new space.

Those retail schemes with a deliverytimeframe in 2012/2013 are in quitea strong position, as they are likely toopen at a time when the market will bestaging a recovery.

The European retail market is nothomogenous and countries are in

very different stages with regards toretail development. Western Europeanmarkets are significantly more maturethan those in Central and EasternEurope (CEE). The “big three”markets - UK, France and Germany

– account for some 56% of all retailsales in Europe. Although spendingpower in central Europe has grownsteadily over the past 15 years, ithas not yet caught up with WesternEuropean levels. There are also markeddifferences within the CEE and

retailers’ expansion opportunities differwidely across the region. In particular,there is a high discrepancy in spendingpower between the capital and theregional cities.

Western Europe Western Europe is one of the mostconcentrated retail markets in theworld and has one of the mostmodern retail landscapes. There area number of very large retail groups.The main players are Carrefour,Metro Group, the Schwarz Group,Tesco, and the Edeka Group.

In Western Europe, fiscalconsolidation and highunemployment is likely to continueto restrain retailers in the year ahead.There are a few notable exceptionswith, for example, retailers expectedto fare fairly well in Germany. Thehypermarket and superstore, as wellas cash & carry format are likely tosee the slowest growth in the future.

Most of the French retailers andmany of Germany’s, Spain’s andItaly’s leading players do not placehypermarkets at the centre of theirgrowth strategies.

Shopping Centre GLA (sq.m) per 1,000 Population

Source: Colliers ‘Shopping Centre Development’ report, September 2010



The focus is increasingly on smallerformat stores which allow retailersto target markets more efficientlyand adapt the store mix according tocustomer demand. Discount storesgrowth is anticipated to outpace otherstore formats, and many retailers haveresponded to the growing popularityof discounters by launching their ownlow-price concepts.

Central andEastern EuropeThere are vast differences betweenCentral and Eastern Europeancountries in terms of retail marketstructure and foreign retailerdominance.

Across the region, the retail markethas diversified over the last 15 years,with countries in different stagesof retail development. Therefore,retailers approach each market on anindividual basis, as one-size-fits-allstrategies are unlikely to be successful.

Retail market consolidation isprevalent in the Czech Republic,Slovakia, Hungary and Slovenia.Smaller markets such as Estonia andLithuania are fairly concentrated, dueto the strong domestic retailers. The

Polish retail market remains relativelyfragmented due to the large numberof medium sized retailers, whileothers further in the East are notconsolidated yet.

Foreign retailers are market leadersin Central Europe, as these moreprosperous countries attracted earlyinvestment in the mid-to-late 1990s.

Romania and Bulgaria have also seenan increase in foreign investment inrecent years. In contrast, the retailmarkets in the Balkan and Balticcountries remain mainly in the handsof local retailers. Further east, themarket is in the hands of domesticretailers, with a few global playerslooking to build their presence.The Metro Group, Schwarz Group,Carrefour, Tesco and X5 are thebiggest retailers in the Central andEastern Europe and further expansionis expected by these retailers. TheSchwarz Group is expected to becomethe leader in Central Europe by 2014,as it pushes ahead with expansionplans.

In central Europe the discountchannel is expected to see the

strongest growth. Hypermarkets andsuperstores are likely to be the secondfastest growing channel. Tesco is theleading hypermarket retailer in theCzech Republic, Slovakia, Hungaryand Poland, but the Schwarz Groupis closing the gap as it rapidly expandsits Kaufland hypermarket concept.

The hypermarket and supermarketchannels are the fastest growingsegments in Eastern Europe, withBuchan the clear leader in Russiaand Ukraine. Cash & carry formats,i.e. Metro and Rewe Group, are alsoimportant. Western-style discountstores are beginning to take off inEastern Europe (Russia and Ukraine).

Russia is the largest retail marketin Central and Eastern Europe,thanks to increasing incomes and thedevelopment of a middle class. Russia

had a bad economic downturn in2009, which improved in 2010 and itslonger-term outlook depends heavilyon the price of commodities, thedegree of confidence in Russia on thepart of foreign investors, investmentin infrastructure and other factors.If Russia’s economy grows consumerspending will expand. X5 Retailand Magnit are the clear leaders inRussia and both are expanding. X5Retail Group is operating a strongmulti-format portfolio of Karuselhypermarkets, Pyaterochka valuesupermarkets and Perekrestoksupermarkets. Magnit is rapidlyexpanding through hypermarkets,supermarkets and neighbourhoodstores in the densely populatedSouth and Central Russia, targetingcities with less than 500,000 people.Foreign retailers have also expandedinto Russia, including Metro Groupand Auchan – both of which arein full expansion mode, as well asGlobus, Rewe Group, RautakirjaGroup, Carrefour and others. Thefinancial crisis has impacted on theretail scene over the last two years.In particular, as credit became moredifficult to obtain and developersstruggled to maintain buildingprogrammes, retailers were forced toadjust their development strategies.

Ukraine is a market with muchpotential, but this is a longer terminvestment for retailers. Ukraine’sretail spending per capita is far lowerthan Russia’s, the retail scene isfragmented and the economic andfinancial crisis has hit retailers whohave slowed expansion plans.

Top 10 Retailers - Western EuropeBanner sales (EUR billion)

0 10 20 30 40 50 60 70 80 90

Sainsbury's

Metro Group

Leclerc

Auchan

Rewe Group

Aldi

Edeka

Schwarz Group

Tesco

Carrefour


20092014f

Top 10 Retailers - Central and Eastern EuropeBanner sales (EUR billion)

0 5 10 15 20 25

Ahold

Jerónimo Martins

Magnit

Rewe

Carrefour

Auchan

X5 Retail Group

Tesco

Schwarz Group

Metro Group


includes Russia and Ukraine, excludes Turkey

2009

2014f



OutlookThe past 18 months have beendifficult for European retail markets.The economic crisis was a consumer-led slowdown, hitting consumerconfidence and spending. AcrossEurope, the retail climate remainschallenging. On the positive side,economies are recovering, consumerconfidence in many markets is slowlyreturning, retailer fall-out is slowingand occupier demand is tentativelyreturning.

On the downside, consumerconfidence remains fragile. Consumerspending could slow again due tohigh unemployment and higherinterest rates. Retailers will remaincautious about their expansion plans.

Many countries in the region havelived beyond their means in recentyears, with household and publicdebt at high levels. Governments arenow forced to implement austeritymeasures to bring their finances backon a sustainable path, implementingpublic spending cuts and freezingpublic sector wages.

The longer term outlook is moreencouraging, with most retail marketsnow stabilising after a severe andpainful correction. The Europeanmarket is very diverse and despitea general slow recovery, retailerswill still spot opportunities inbetter performing regions. Thereare expansion, investment anddevelopment opportunities forretailers in less mature Europeanmarkets, where retail sales growthis from a much lower level than in

Western Europe. The major growthpotential in many CEE countrieswill only be unlocked over a longerperiod of time, as incomes increase.Some markets, which over the pastdecade have seen a sharp increase innew retailers, i.e. Poland, the CzechRepublic and Slovakia will continue toremain attractive, due to their marketsize and growth potential. Others willbecome increasingly attractive as theyare still relatively underdeveloped.Both Russia and Ukraine arepotentially huge retail markets.A number of smaller countries arealso attractive for retailers, includingBulgaria, Serbia, Croatia, and Albania.

Central and Eastern Europe: retail concentration

Market share of Top 5 groceryretailers up to 30%

Market share of Top 5 groceryretailers 30% - 60%

Market share of Top 5 groceryretailers over 60%


Type of Retail2009-2014f

0

2

4

6

8

10

12

14

Western Europe Central Europe Eastern Europe


C A G R g r o w

t h o f

R e v e n u e

( % )

Hypermarkets & SuperstoresSupermarkets & neighbourhood stores

Discount storesCash & Carry

Convenience stores



Western European Retail Market

-50

0

50

100

150

200

250

300

350

400

450

0 2 4 6 8 10 12 14 16 18 20 22Cumulative GDP growth 2010-15

Size of bubble refers to population

Source: National statistics, IMF, Davis Langdon

R e

t a i l s a

l e s ,

E u r o

b n ,

2 0 0 9 e

Netherlands

Norway

Portugal

Denmark

SwedenGreece

UK

Spain

Germany

Switzerland

Austria

Finland

Italy

Ireland

France

Central and Eastern European Retail Market

-50

0

50

100

150

200

250

10 12 14 16 18 20 22 24 26 28

Cumulative GDP growth 2010-15Size of bubble refers to population

Source: National statist ics, IMF, Davis Langdon

R e

t a i l s a

l e s ,

E u r o

b n ,

2 0 0 9 e

Albania

Bos&Herz

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Macedonia

Moldova

Montenegro

Poland

Romania

Serbia

Slovakia

SloveniaUkraine

Russia



3.4 Middle EastShopping is at the very heart of theMiddle Eastern way of life, and thesheer scale and diversity of retaildevelopment particularly in Dubai,attracts people from all over theworld.

The region is one of the world’sfastest growing retail environments.It has witnessed a rapid transformationon the back of changing socio-economic factors, large expatriatepopulation, rising purchasing powerand large petro-wealth.

Retail across the region has evolvedfrom traditional outlets to largeshopping malls, hypermarkets andsupermarkets. These malls, a numberof which ranked among the largest inthe world, have been built as leisuredestinations offering a diverse range of attractions beyond shopping. Againstthis background, the Middle East hasemerged as a key market for globalretailers.

Retail varies from country tocountry, depending on the size of the economy, disposable incomes,expatriate population and economicdevelopment. Without doubt, theglobal economic downturn has hit

retailers and retail developers alike inthe region, with expansion plans beingshelved or put on hold in response tochanged demand conditions.The impact of the downturn varied,as fiscal stimuli offset damage.

Looking ahead, the basic fundamentalsfor future retail development are stillin place. The two most importantones are people and money. Thecombination of a young, growingand more affluent population,together with a significant numberof expatriates and tourists is whatretailers want and they are positioningthemselves to capitalise on it.

Whilst there is certainly retailoversupply in some countries of theregions, i.e. Dubai, others still provideample opportunity. Retail space inthe region is expected to continue toincrease firmly.

Strong retail growth in

the GCCThe UAE has dominated theregional retail market for more than adecade. An affluent population, largeexpatriate community and a relatively

liberal and progressive attitude havespurred retail investment. Retailsales growth slowed in 2009, as thedownturn led to a decline in tourismand decreased demand for luxurygoods. Still, with a mostly urbanpopulation, a high rate of retail salesper capita and high per capita wealth,the UAE remains a growth market forinternational retailers.

Dubai has emerged as the shoppingcapital of the world, or at least the

Middle East. The number of mallsand retail space built over the past fiveyears is astonishing. Dubai Mall, thelargest, has around 1,000 units and400,000 sq m of lettable space. Mirdif

City Centre opened in early 2010.However this is likely to be the last of new mega malls for the time being.

What we are seeing now is a switch toCommunity Malls (30,000 to 50,000sq m) in areas which lack a goodretail offer, but whose catchmentarea means that the business casedoes not support anything larger. Allof the facets of large centres can befound in these smaller developmentsand they often provide a hub forthe local community, who havepreviously relied on a fragmented andsub-standard retail experience. AbuDhabi, which has lagged behind therapid retail development of Dubai,is now seeing a marked change to

GDP growth and incomes

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,00090,000

100,000

110,000

120,000

S y r i a

J o r d a

n E g y p

t

L e b a

n o n

S a u d i

A r a b

i a O m

a n

B a h

r a i n

U A E

K u w a

i t Q a

t a r

Source: IMF

G D P / c a p

i t a i n P P P

0

10

20

30

40

50

60

C u m u

l a t i v e

G D P g r o w

t h 2 0 1 0 - 1

4

GDP/capita 2009

GDP/ capita 2014

GDP growth

Consumer and Retail Spending

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

22000

B a

h r a

i n

E g y p

t

J o r d a n

K u w a

i t

L e

b a n o n

O m a n

Q a

t a r

S a u

d i A r a

b i a

S y r i a

U A E

Source: IMF, PlanetRetail (2008 data)

S a

l e s p e r c a p

i t a ( U S D )

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% o

f G D P -

8 - y e a r

t r e n

d

Retail sales/capitaOther consumer spending/ capitaConsumer spending as % of GDP



its retail landscape with a numberof malls under construction. Theleasable retail area in Abu Dhabi is setto increase from over 398,800 m² atthe beginning of 2010 to 1.4 million

m² by 2012, according to ColliersInternational.

Saudi Arabia is large, populous andrelatively rich fertile ground retaildevelopment. Indeed, Saudi Arabia isseen as one the countries for retailersto be in over the next few years. OnA.T. Kearney’s 2010 Global RetailDevelopment Index (GRDI) it takesthe fourth spot, behind China, Kuwaitand India. The main factors drivingretail development are firm economicfundamentals, rising disposableincomes, increasing acceptanceof modern retailing, a youthfulpopulation, urbanisation, and a largenumber of Muslim tourists visiting

to take part in the hajj and umrahpilgrimages.

The hypermarket and supermarketsectors have changed significantly overthe past few years as foreign playershave entered and local players haveexpanded. French Carrefour andCasino entered it in 2004, EMKE andits Lulu hypermar¬kets in 2009, withmore planning to follow. Domesticcompetition is strong, with Panda themain player.

Mall development is expanding. Asretail is one of the few leisure activitiesin Saudi Arabia where all membersof a family can go, recent projectsare being developed as destination

retail venues. Riyadh’s retail supplyis expected to increase by 19%,reaching over 2.3m sq m of GLA by2013. Jeddah’s malls are the mostdeveloped in the Kingdom in terms

of entertainment activities available,and the city has seen considerableincreases in available retail space inrecent years.

Kuwait takes the second place inA.T. Kearney’s 2010 GRDI. It is asmall, ur¬banised country with a

wealthy population. Some 80% of theKuwaiti population are expatriates,while foreign workers crossing theborder from Iraq also stimulate theretail market. A very high level of urbanisation is also contributing to avibrant retail sector. The retail sectoris still dominated by small food stores,but large retailers have made inroadsaround Kuwait City. Carrefourentered in 2007, Groupe Casinojoined UAE’s Retail Arabia andKuwait’s Tandeem in 2009. Shopping

centre devilment is rising and ColliersInternational predicts Kuwait willsoon have the Gulf’s third largestsupply of retail space.

Bahrain, with its proximity to SaudiArabia, has seen an expansion inretail space, in particular largeshopping malls. New large-scale retaildevelopment is likely to pause overthe next couple of years until newopportunities emerge for developers.

Retail development has increased in

Qatar and shopping malls are centresof social life. There are a numberof large retail schemes currentlyunder construction in Doha, suchas the Barwa Commercial Avenue.According to Colliers, around175,000 sq m GLA is expected tobe delivered in 2010, if scheduledcompletion dates are met - whichrepresents a 39% increase in supply.By 2012 total supply is expected toexceed 826,000 sq m GLA. As newsupply is delivered, market conditions

are likely to become more competitive.

Retail Prospects

2%

4%

6%

8%

10%

12%

14%

16%

0 1000 2000 3000 4000 5000 6000 7000 8000

Retail Sales/ capitaSize indicator = total retail sales 2008 (USD mn)

Source: PlanetRetail, Davis Langdon

F o r e c a s

t A v e .

A n n u a

l R e

t a i l S a

l e s

G r o w

t h

2 0 0 9 - 1

4

Bahrain Egypt Jordan Kuwait Lebanon

Oman Qatar Saudi Arabia Syria UAE

Shopping centrescompleted in 2010

Under development/planning 2010

UAE 4.04 3.04...of which Dubai 2.66 1.43

Abu Dhabi 0.67 1.16Bahrain (Manama) 0.64 0.10Kuwait (Kuwait City) 0.57 0.35KSA 4.23 1.21...of which Riyadh 1.40 0.21

Jeddah 1.91 0.46Oman (Muscat CD) 0.31 0.04Qatar (Doha) 0.52 0.65

Total GCC 10.32 5.38

Lebanon (Beirut) 0.47 0.13Jordan (Amman) 0.25 0.16Syria (Damascus) 0.10 0.45

Source: Retail International 2010

Middle East shopping centre supply

Total Levant 0.82 0.73Egypt (Cairo) 0.62 1.96



Beyond the Gulf Economic growth in Egypt has pickedup speed over the past decade. Inthe three years prior to the globaleconomic crisis, growth averagedroughly 7% per annum, higher thanthe Middle East average and higherthan the global average. This strongperformance was due, in part, toreforms gradually introduced by thegovernment. During the recent globalcrisis, Egypt did surprisingly well andlooking ahead Egypt should be ableto continue its performance, as longas the reform agenda is uninterruptedand relative political stability ismaintained. With 80 million people,Egypt is a big market. Greater Cairohas a population of 15 million andAlexandria has around five million.

Whilst still a relatively poor country,retail sales in Egypt doubled between2004 and 2008, mainly due to a shiftfrom traditional to organised retail.Retail sales are set to continue to risesharply over the next years, drivenby the large and young population,emergence of a more affluent middleclass, increasing urbanisation and avibrant tourism sector.

Until ten years ago, Egypt’s retailindustry was almost completelycomposed of small independentshops and street markets. However,over the past decade, domestic andforeign retailers started to roll outlarge stores, both supermarkets andhypermarkets. Still, the lack of largemodern players means that the topfive grocery retailers hold a combinedmarket share of less than 2%. Moreforeign retailers are expected to enterEgypt, while domestic retailers arealso expected to grow.

The Lebanese retail sector is stillvery traditional. Modern outlets -supermarkets or hypermarkets - aregrowing slowly in numbers, but largescale development is hindered byinadequate infrastructure.

However, there is a definite movetowards modernisation of retailhappening in Lebanon and moreinvestors are expected to wake up tothe potential of the market. Jordan’sretail market is also developing.In 2006, Carrefour entered as thefirst international player, openingin City Mall in Amman. This haspaved the way for other retailers.

Jordan is a small country andcoupled with low household incomes,modern retail development maybe limited. However, changingconsumer attitudes and favourabledemographics should provide anattractive backdrop for retailers’expansion. Jordan is expected to seeincreased investment in modern retailproperty, including shopping mallsand hypermarkets.

Syria is still undeveloped in retailterms compared with leading Gulf States or even Jordan and Lebanon.Retail spend per capita is still verylow, though overall retail sales areexpected to expand markedly over thenext years, driven by rising consumerdemand and increasing touristnumbers. A modern retail offer is

starting to develop, with supermarketsand hypermarkets emerging inDamascus and Aleppo. High-profileGulf investors are backing bigprojects. Damasquino Mall was thefirst hypermarket-anchored mall builtin the country, and more are underconstruction or planned.

Top 15 Retailers Middle East - 2008

0 500 1000 1500 2000 2500 3000

Al Sadhan

GSL

Al Safeer

Tiv Taam

Al Othaim

Consumer Co-op UAE

The Sultan Center

Bin Dawood

Spinneys

Casino

Panda

Emke Group

Carrefour

Blue Square

Shufersal

Source: PlanetRetail (Banner sales, Eur, mn)

Forecast Top 15 Retailers Middle Eeast - 2013

0 500 1000 1500 2000 2500 3000 3500 4000

Al Sadhan

GSL

Al Safeer

Tiv Taam

Al Othaim

Consumer Co-op UAE

The Sultan Center

Bin Dawood

Spinneys

Casino

Panda

Emke Group

Carrefour

Blue Square

Shufersal

Cairo cumulative shopping mail supply

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2009 2010 2011 2012 2013

Source: Colliers International

m ² G L A



3.5 BRICsThe BRICs – Brazil, Russia, Indiaand China - offer major opportunitiesfor retailers. The economic crisis hasimpacted on the BRIC economiesdifferently. Whilst Russia has been hitvery hard, the recession was short-lived in Brazil, while China and Indiacontinued to plough ahead. Growthin these countries is expected tocontinue to outpace the majority of other economies in the world. Thisfirm growth outlook, together withlarge populations, rising incomes anddomestic demand, and increasingurbanisation will bode well for retailmarket development in the yearsahead.

We have covered the Russian retail

market within the European contextand will now briefly look at theChinese, Indian and Brazilian retailsector.

Population

3953.5384336.462

1328.021375.286

1182.06

1299.239189.613

199.492

0

1000

2000

3000

4000

5000

6000

7000

8000

2009 2015f

Source: IMF

i n m

i l l i o n

Brazil

India

China

Rest of World



ChinaAccording to A.T. Kearney’s 2010Global Retail Development Index,China regained the title “land of retailopportunity”. China’s growth storyhas been spectacular. Over the lastthree decades, China, on the backof economic reforms, emerged as aglobal export powerhouse. Purchasingpower has increased dramatically,with GDP per capita rising 29 timesbetween 1980 and 2010. As incomeshave grown, so has the capacity tospend. By 2015, China is expected tobecome the third biggest consumermarket, after the US and Japan,according to the 2009 Annual ChineseConsumer Study by McKinsey.

China performed exceptionally well

during the economic crisis, withgrowth bouncing back quickly onthe back of a US$585bn stimuluspackage. This has helped internaldemand and revitalised the domesticretail market. Retail sales rose 17% in2009 and are expected to rise by morethan 10% this year.

Retailing in China could receive anadditional boost, if the economyadjusts away from export-orientedgrowth towards increased consumerdemand. The government haslaunched measures to boost spending,including liberalising consumerfinances, improving the socialsafety net and allowing currencyappreciation.

Retail sales are primarily urbandriven, with urban centrescontributing to 68% of total retailsales. Between 1980 and today,China’s urban population hasincreased by over 200%. According toa McKinsey research study, by 2025

two thirds of Chinese people will beliving in urban areas. 221 Chinesecities will boast of a population of overone million, with 23 cities registeringover five million. Between 1990-2005two mega-cities with a population of over ten million emerged - Beijing andShanghai. This is set to climb to eightby 2025, adding Tianjin, Shenzhen,

Wuhan, Chongqing, Chengdu andGuangzhou. These mega-cities arethe leading retail hubs in China.Urbanisation has led to a sharp rise

of the Chinese middle class, which isdefined as households with incomesof between US$6000 and US$25,000a year. This group virtually non-existed in 1995, but is expected to

rise to over 340 million people by2016 (Understanding China’s MiddleClass, chinabusinessreview.com, Jan-Feb, 2009). This urban middle-class

will be a force in driving the Chineseretail boom.

The Chinese retail market is highlyfragmented but is consolidating, withthe Top 20 retailers increasing theirshare from 4.9% in 2004 to 8.6% in2009. Retailer demand is robust andglobal retailers have made a beeline tograb a share of the booming market,including Wal-Mart, Carrefour,Auchan, Tesco, South Korea’s Lotteand RT-Mart. Others are looking toenter. For example, J Sainsbury islooking at targeting China’s growingmiddle class for a possible expansioninto the country. Sainsbury’s willhave a long way to go to catch upwith its UK rival Tesco. Tesco already

has plans to develop more retailand leisure space in China over thecoming five years than it operates inthe UK, with the aim of opening 80

shopping centres in China by 2016,amounting to 40m sq ft and £2bn of expenditure in the five year period.

The organised retail makes up abouta quarter of the total retail market forChina. Hypermarkets are becomingincreasingly popular, especiallyin big cities. The developmentof hypermarkets has been led byglobal retailers, including Wal-Mart,Carrefour, Vanguard, Tesco, Metro,RT Mart Shanghai and Trust-Mart.The supermarkets sector is a highlyfragmented market dominated bydomestic players. Conveniencestores are rapidly expanding, but arestill very much in developing stageand dominated by local players.

GDP and Retail sales

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2008 2009e 2010f 2011f 2012f 2013f 2014f

Source: National statistics, Business Monitor, Davis Langdon

i n U S $

, b i l l i o n ,

c u r r e n

t

-2

0

2

4

6

8

10

12

G D P g r o w

t h ,

a n n u

a l

Brazil India ChinaBrazil GDP India GDP China GDP

Retail sales per capita

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009e 2010f 2011f 2012f 2013f 2014f

Source: National statistics, Business Monitor, Davis Langdon

i n U S $

, b i l l i o n ,

c u r r e n

t

ChinaIndiaBrazil



Department stores were popularearlier, but are now facing intensecompetition and are battling to stayahead. Franchising constitutes about3% of China’s total retail market, butappears to have huge potential forfuture growth.

Regional development is verydisparate in China, and retailopportunities vary accordingly. Theretail landscape in the coastal regionshas become increasingly crowdedafter years of rapid developments,particularly in the “mall segment”.Eastern China is the most developedand prosperous region, with anaverage GDP per capita of aboutUS$5,000 and 30% of China’spopulation. Three main economiczones are located in the East: Bohai

Rim, the Yangtze River delta andthe Pearl River Delta. Average GDPper head in Northeast China, thecountry’s heavy industrial heart,is roughly half of that of EasternChina, at around US$2,800. CentralChina has been developing slowerthan other regions, and its GDP perhead is slightly less than US$2,000.

Western China, with 27% of China’spopulation is the least developedregion, with an average GDP percapita of US$1,800. As China

strives to promote balanced regionaldevelopment, inland areas areexpected to continue to show stronggrowth momentum.

Many retailers are still cautious aboutexpanding into the rural regions,due to vast geographical span, lessdeveloped logistics infrastructure, andlower purchasing power. However,urbanisation, rising disposableincomes, fast development of high-speed railway and intercity rail transitnetwork are set to bring huge retailgrowth potential to lower-tier citiesand the rural market. Consequently,many lower-tier cities are now on theradar screen of many retailers.

Total retail sales of consumer goods

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f

Source: National Bureau of Statistics

Retail sales in dollar converted at average annual USD/Yuan exchange rates

U S D , b i l l i o n

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

A n n u a

l % ,

n o m

i n a

l

Retail salesYoY growth (nominal)

Total retail sales($, m)

Number of stores

1 Suning Appliances 17,206 9412 Gome Home Appliances 15,706 1,170

3516993,41nailiaB34 Dashang Group 10,373 1605 CR Vanguard 10,000 29266 RT Mart Shanghai 5,946 1217 Carrefour China 5,382 1568 Anhui Huishang Group 5,056 2,8849 Walmart China 5,000 175

10 Wumart Group 4,809 2,333

Source: Li & Fung Research Centre, June 2010

Top Retailers in China

Retail sales in million yuan converted to USD at average 2009 exchangerate of 1:6.8

China retail potential

Tier 1 - The Big 4 BeijingShanghaiGuangzhouShenzhen

Tier 2 - High flyers Chengdu NanjingChongqing ShenyangFoshan TianjinHangzhou Wuhan

Tier 2 - High flyers Changzhou WenzhouNingbo WuxiDongguan XiamenSuzhou ZhonshanTaizhou

Tier 2 - Modest neighbours Changchun ShantouChangsha ShijiazhuangDalian TangshanHarbin Xi’anJinan ZiboKunming ZhengzhouQingdao Taiyuan

Tier 3 - Developing provincial centres 40 cities

Tier 4 - Poor relatives +600 cities

Retail market, % of total

Regional retail potential

Source: China Cities Statistical Yearbook

9

11

5

7

68



IndiaIndia is ranked third on thisyear’s A.T. Kearney Global RetailDevelopment Index, highlighting thepotential of the Indian retail market.

India has been one of the economic

star performers in recent years. It isoften compared to China, due to thesize of its population, fast growth andforeign investor interest. However,India’s economy, demographics andretail market are very different. Firstly,it is on average much poorer. Amongthe three most dynamic emergingeconomies, India’s consumers havethe lowest purchasing power. GDPper capita is less than half that of China and less than a third that of Brazil. Foreign investment is far

more welcome than in the past, butit remains a protectionist countryand restrictions are high in somesectors, including retail. India isnot a single market, which makestrade more difficult, in particular asthe transport infrastructure is poor.States have different legislation, withsome preventing large scale retaildevelopment.

Despite difficulties, India is anattractive market for retailers. It has alarge, young and growing population.Incomes are rising, with morehouseholds entering the middle class.Less than a third of the populationlive in urban areas, but urbanisation isincreasing and there are several verylarge cities with a large middle class.All of this bodes well for consumerand retail demand in the yearsahead, and should augur well forthe development of a modern retailmarket.

The retail market is worth between

US$375 and US$430bn, accordingto varying sources. However,organised retail accounts for just5% of the market, though this shareis expected to rise in the future, asdomestic retailers expand. Increasingpurchasing power, changing lifestylesand western culture influence are alsokey factors driving India’s organisedretail market. The Indian retail sectoris one of the least concentrated inthe world, with the top five retailersaccounting for just 2% of the market.

There are many obstacles for foreignretailers to enter the market, sothat local players dominate. Withthe market set to grow strongly inthe years ahead, domestic retailers

are looking to expand fast. Initialexpansion plans of major retailersproved too ambitious and regulationprevented them in some cases fromrolling out large-scale developments.Nevertheless, these investmentshave started to change in the retailenvironment. Reliance, Pantaloonand Bharti in particular, who haveemerged as major players in many

market segments, plough on withexpansion plans across a wide rangeof formats. Bharti Retail for example,plans to expand its Easy Day storesacross the country, planning 125 EasyDay supermarkets and 13 Easy DayMarket hypermarkets. Over the nextfive years, Bharti Retail aims to bepresent in each Indian city of morethan one million people, investing upto $2.5bn.

Foreign players continue to monitorthe Indian retail market, with majorglobal food retailers either having apresence or studying market entry.Restrictions on foreign ownershippose the biggest challenge to retailers.Full foreign ownership is only allowedin the single brand format, i.e.vertically integrated specialty apparelretailer, or if retailers were alreadypresent in India pr ior to 1997. Asa consequence, foreign retailers areallowed to invest in wholesaling (cash& carry), but cannot open their ownretail stores. Walmart and Metro haveentered through this route, whileCarrefour and Tesco plan to follow.Many global retailers are waiting

in anticipation for a relaxation of foreign direct investment restrictionsby 2012/13. Retail real estate is alsoa major challenge. The price of landis high and foreigners are prohibited

from land ownership. In addition,whilst there has been considerablemall construction, retailers argue thatthere is still a lack of quality sites inurban locations.

Boosted by growing demand, theIndian retail sector should continueto grow rapidly, with the share of organised retail expected to doublein the four years ahead, as a growingmiddle class demands higher-qualityshopping environment. While politicalobstacles remain, foreign retailers areready to venture into India.

BrazilOn the back of economic reformsand high commodity prices, Brazil’seconomy has performed stronglysince 2004. It has come out of theglobal recession with little damage

and there is a general consensus thatthe outlook is strong.

Brazil has many appealing featuresfor global retailers. It is a largeand growing market with 190million people – many of which areyoung – making it the fifth mostpopulous country in the world.Strong economic growth has boostedaverage incomes, with GDP percapita rising from US$7,203 in2000 to US$11,290 in 2010. Inaddition, social policies of the current

government have led to a fall inincome inequality.

The number of people movingfrom poverty into the middleclass is substantial and increasing.Today roughly half the populationis considered middle class, whichis generating significant growth inconsumer and retail spending, andrepresents a massive opportunity forretailers. The euphor ia surroundingBrazil’s winning bid to host the 2014

World Cup and 2016 Olympics hasled to infrastructure investments,including commercial centres andshopping malls.

2008 2009e 2010f 2011f 2012f 2013f 2014f Population (mn) 1,182 1,199 1,216 1,233 1,249 1,266 1,282GDP (US$, bn, current) 1,260.6 1,236.9 1,430.0 1,598.4 1,762.3 1,955.2 2,174.4GDP growth (%, real) 6.4 5.7 9.7 8.4 8.0 8.2 8.1GDP/ capita (US$, PPP) 2,868 3,015 3,291 3,563 3,847 4,168 4,524Consumer spending (US$, 664.9 679.3 812.7 895.1 986.9 1,094.9 1,217.7Retail sales (US$, bn) 457.6 461.8 545.4 610 670 740 798

Retail sales/ capita (US$) 327 320 368 495 536 585 622Source: IMF, BMI, Davis LangdonConsumer spending and retail sales are estimates only

India - Economic and retail indicators

Key retail players in India

Pantaloon RetailShopper’s StopLifestyleReliance RetailAditya Birla RetailBharti Retail



In addition to sophisticated domesticretailers, Brazil is a major destinationfor foreign retailers. Food retailingis already highly consolidated anddominated by foreigners, includingCarrefour, Casino, and Walmart, whohave all been in the market for manyyears. The large chains are pursuingmulti-format strategies includinghypermarkets, supermarkets, discountstores and convenience stores. Non-food retailing remains fragmented,but foreign retailers such as LeroyMerlin, C&A, Zara and H&M areactive. Overall, the retail industry isrelatively mature and consolidated foran emerging market.

Despite consolidation, Brazil remains

attractive for major retailers, whoare now expanding into second-tiercities in the Northeast and Centre-west regions. Major retailers indicatethat they are planning to invest some$8.5bn over the next three years,including over 2000 new stores in2010 (Source: Deloitte). For example,Carrefour is continuing expansion,with 100 new stores plannedincluding 38 hypermarkets. Walmartis also ramping up expansion,announcing in 2009 that Brazil was

among its top priority markets forfurther investment.

Brazil’s growth outlook is strong andconfidence is high among the globalbusiness community, so that the retailplaying field remains attractive in theyears ahead.

3.6 Beyondthe BRICs the“Championshipeconomies”The term “BRIC” has enteredthe average consumer’s lexiconover the past two decades, butthere is a group of sometimesoverlooked emerging markets,with huge retail growth potential -the 10 Championship economies.

Different authors include differentcountries into this group, but generallythese are middle-income emergingcountries with large populations.Together they account for the world’sfourth largest economic group, afterthe EU, the US, and the BRICs.

These countries are characterisedby a growing population, rapidurbanisation, rising middle class,industrialisation and changinglifestyles, all of which is attractingretailer interest.

2008 2009e 2010f 2011f 2012f 2013f 2014f Population (mn) 189.6 191.5 193.3 194.9 196.5 198.0 199.5GDP (US$, bn, current) 1 ,635.5 1 ,574.0 2 ,023.5 2 ,193.0 2 ,326.8 2 ,471.5 2 ,626.3GDP growth (%, real) 5.1 -0.2 7.5 4.1 4.1 4.1 4.1GDP/ capita (US$, PPP) 10,526 10,499 11,289 11,805 12,355 12,951 13,615Consumer spending (US$, 952.8 909.8 1,114.5 1,206 1,280 1,359 1,444Retail sales (US$, bn) 716.7 702.0 862.3 905 960 1,019 1,083Retail sales/ capita (US$) 3,780 3,666 4,462 4,641 4,884 5,148 5,431

Brazil - Economic and retail indicators

Consumer spending and retail sales are estimates only Source: IMF, BMI, Davis Langdon

2008 No of Stores

Sales Area(sq m, million)

GroceryBanner Sales

($ billion)Market Share

(%)

Carrefour 550 1.34 3.8 6.1Casino 611 1.42 3.6 5.7Wal-Mart 340 1.56 2.1 3.4SHV Makr 65 0.51 1.1 1.8Cencosud 90 0.13 0.4 0.7Other n/a n/a 51.5 82.3

Brazil - Top 5 g rocery retailers


Region Inhabitants,million

São Paulo 11.04Rio de Janeiro 6.19Salvador 3.00Brasília 2.61Fortaleza 2.51Belo Horizonte 2 .45Curitiba 1.85

Manaus 1.74Recife 1.56Belém 1.44Porto Alegre 1.44Guarulhos 1.30Goiânia 1.28Campinas 1.06

Brazil - Largest cities

Source: Wikipedia

GDP, US$,billion

2009 2014f %, 2009-14 f Mexico 874.8 13,609 17,290 27%Korea 832.5 27,938 36,725 31%Turkey 614.5 12,466 15,641 25%Indonesia 539.4 4,151 5,690 37%Poland 430.7 18,050 23,382 30%Saudi Arabia 376.3 23,272 27,503 18%

Argentina 310.1 14,525 18,110 25%South Africa 287.2 10,229 12,410 21%Egypt 188.0 6,114 7,821 28%Vietnam 93.2 2,942 4,155 41%

Source: IMF

The Championship Economies

GDP PPP per capita GDP

Population growth

Indonesia

VietnamTurkey

Poland

Mexico

South Africa

Argentina

Saudi Arabia

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0 40 80 120 160 200 240

Population in million

F o r e c a s

t g r o w

t h 2 0 0 9 - 2

0 1 4

Source: IMF



TurkeyTurkey, at the crossroads betweenEurope, Asia and the Middle East, iscertainly an economic heavyweight.

After a deep recession in 2009,Turkey’s economy has bounced back

this year. Turkey should perform wellin the years ahead, in particular if market-oriented reforms continue.Relatively cheap labour and easyaccess to the European market hasmade it an attractive location forproduction.

Turkey has a fast growing populationof more than 70 million people today,the majority of which are young.

Whilst income distribution is skewed,in particular between the urban andrural areas, it can be considered as

a middle income country. GDP percapita in purchasing power termsis nearly double that of China andahead of Brazil’s. With the economyexpected to expand rapidly in theyears ahead, the number of middleclass households is set to growsignificantly, increasing discretionaryspending power. The majority of spending power is in the Westernregions, in particular Istanbul. Turkeyis also rapidly urbanising, with morethan 12 million people living inIstanbul alone.

Foreign retailer investment in Turkeyhas been significant over the pastdecade and is expected to remainstrong in the years ahead, as retailerscapitalise on a growing economy andrising middle class. In contrast tomany other emerging economies, theregulatory environment is benign,which makes it relatively easy forforeigners to enter. Turkish retailersare also impor tant. Migros Türk,

acquired by a private equity companyin 2008, remains the market leader.Other local retailers are makingsignificant investments abroadthemselves, including in Russia,Central Asia and the Middle East.

The Turkish retail market isfragmented and dominated by smallindependent stores. The top fiveplayers have a combined market shareof less than 20%. However, shoppinghabits of Turkish consumers arechanging, in particular in urban areas,which has already led to a growingnumber of modern (grocery) retailformats. The hypermarket format isdominated by foreign players suchas Metro, Tesco and Carrefour.

The discount segment has grownin popularity in recent years and isexpanding rapidly, due to local andforeign retailer expansion. BIM, forexample now has over 2,600 stores,compared to just 21 at the end of 1995 (Source: Planet Retail). Othersignificant players are Sok (MigrosTicaret), Dia (Carrefour) and A101.

On the back of a fast growingconsumer sector, retail propertydevelopment has been strong inthe years before the economiccrisis, in particular shoppingcentre construction. The recessionhas caused a sharp slowdown inshopping centre projects in 2009,with the increase in GLA slowingfrom 26% in 2008 to 17% (Source:Colliers International). However,

the slowdown has not been universalacross the country, with developmentin Istanbul continuing through thecrisis. Retailers and retail developmentin the recent past concentrated onthe largest cities in the country, i.e.Istanbul, Ankara and Izmir. However,retailers are now increasinglyexpanding into secondary citiesacross Turkey.

As the economy recovers, moreretailers will be attracted to Turkeyand the retail development marketis expected to expand rapidly inthe years ahead. M&S, H&M, Zaraand Mango announced plans toadd further outlets and stores, whileHarvey Nichols, present in Istanbulsince 2006, has this year opened abranch in Ankara.

Turkish chains – both food and non-food – are also expanding, includingthe Boyner Group, which alreadyhas several department stores as mallanchors, with more planned.

2008 2009 2010f 2011f 2012f 2013f 2014f GDP, current (US$, bn) 730.3 614.5 729.1 789.6 845.8 902.9 966.0GDP growth (real, %) 0.7 -4.7 7.8 3.6 3.7 3.8 4.0GDP/ capita (US$, PPP) 13,124 12,466 13,392 13,880 14,402 14,982 15,641Population (million) 69.7 70.5 71.4 72.3 73.2 74.2 75.1Consumer spending (US$, bn) 507 425 483 529 575 623 667Retail sales (US$, bn 248 208 234 259 282 305 327Retail sales/ capita 3,560 3,950 3,280 3,585 3,850 4,120 4,350

Turkey: Economy and Retail Indicators

Source: IMF, Deloitte, Business Monitor, Davis Langdon

GroceryBanner Sales(€ bn)

MarketShare(%)

GroceryBanner Sales(€ bn)

MarketShare(%)

Migros Ticaret 2.5 5.6 BIM 4.7 6.7BIM 2.2 4.8 Migros Ticaret 4.2 6.1Carrefour 1.5 3.2 Carrefour 2.8 4Metro Group 0.9 2.1 A101 2.1 3.1Tesco 0.6 1.4 Tesco 1.3 1.9Other 37.8 82.9 Other 54.0 78.2Total 45.6 100 Total 69.1 100


Turkey

31028002



IndonesiaIndonesia, with more than 230 millionpeople and a fast growing economyis an emerging star with a potentiallybright future. On the back of arelatively stable political environmentover the last decade, the economyhas expanded at a firm pace, exportshave grown rapidly, public financesimproved and foreign investors havereturned.

During the global economic crisis of 2008/09, Indonesia has done well,with growth slowing only slightlyin 2009. This has much to do witheconomic and financial policiesimplemented after the 1998 Asiancrisis, in which Indonesia suffereddearly. Looking ahead, Indonesia’s

economy is expected to continueto perform strongly, with consumerspending increasingly driving growth.

Indonesia’s population of more than230 million people is the fourthlargest in the world, after China,India and the US. Demographics arefavourable, with the majority of thepopulation young and growing fast.Indonesia is still relatively poor, with aper capita GDP roughly a third lowerthan China’s. There is a significantdifference in purchasing powerbetween urban (mainly Jakarta, thecapital) and rural areas. Nevertheless,the number of people in the middleclass is rising, driven by strongeconomic growth. Urbanisation isincreasing quickly, with already morethan two-fifth of the population livingin urban areas. All of this augurs wellfor retail sales growth, retailers andtheir expansion plans.

The Indonesian retail sector is highlyfragmented, with the top five retailersaccounting for a market share of just5%-10%, and small independent

stores dominating. The organised(modern) retail sector remains small,but the number of different channelsis rising, as leading retailers expandmultiple formats. Domestic playersdominate the retail scene, in particularIndomart, Alfa Mart and departmentstore operators such as Matahari andRamayana.

Foreign retailer investment has alsoincreased. However their expansionhas been slow, which may relate toexperience during the 1998 Asiancrisis, when many global retailersexited the country or stopped plansto enter. However global retailersare likely to become increasinglyimportant as expansion plansare resurrected. The regulatoryenvironment is not benign, but has

improved over the last 15 years.Foreigners can directly invest in theretail market, but do face restrictionsregarding location, store size andformat, and types of acquisition.Carrefour is already a significantplayer (the leader in hypermarketsector) and is implementing anaggressive expansion plan. HongKong’s AS Watson, Korea’s Lotte andGermany’s Metro have also recentlyentered. To capture a share of thisrapidly growing consumer market,

many more global retailers are noweither entering the market or areexamining opportunities. Initiallyinvestment will be concentratedaround Jakarta, but in time moreopportunities will open up in theprovinces as well.

by Number of stores StoresIndomaret 3,500

Alfa Mart 3,300Dairy Farm 470Matahari 305Carrefour 90

Top 5 Indonesian Retailers

Source: Planet Retail, at end December 2009

2008 2009 2010f 2011f 2012f 2013f 2014f GDP, current (US$, bn) 511.5 539.4 695.1 777.0 850.1 932.0 1,020.3GDP growth (real, %) 6.0 4.5 6.0 6.2 6.5 6.7 7.0GDP/ capi ta (US$, PPP) 3 ,985.4 4 ,150.8 4 ,380.3 4 ,647.9 4 ,953.5 5 ,296.7 5 ,690.3Population (million) 228.6 231.5 234.6 237.6 240.7 243.8 247.0Consumer spending (US$, bn) 311.8 315.0 417.0 466.2 510.1 559.2 612.2Retail sales (US$, bn 193.1 193.5 232.2 279.7 306.0 335.5 367.3

Indonesia: Economy and Retail Indicators

Source: IMF, PlanetRetail, Davis Langdon

)



VietnamVietnam is considered as one of thefastest growing and most lucrativeretail markets in the world. Vietnamis often compared to China twentyyears ago: a single-party governmentundertaking market-oriented reforms,relatively poor with low wages, apopular production location attractingforeign investors, and a large (andin contrast to China) fast growingpopulation that is increasinglyurbanised. And like China over thepast twenty years, Vietnam has seenvery rapid economic growth over thepast decade.

The global crisis was felt in Vietnambut growth slowed only modestlyfrom 6.3% in 2008 to 5.3% in 2009.

Growth rebounded in 2010 andis expected to average more than7% in the four years ahead. Thisstrong growth should help increasethe purchasing power of Vietnam’spopulation.

Vietnam has one of the largestpopulations in Asia, with 87 millionpeople, which is set to further growrapidly. Only about one quarter of the population lives in urban areasbut this is rapidly changing. Thisis important for the retail sector,as like in many emerging markets,purchasing power varies dramaticallybetween the urban and ruralpopulations. Consumer spendingis still limited and per capita retailsales are the lowest in East Asia,though this is also changing rapidly.Indeed, Vietnam’s retail sector isexpanding fast thanks to its increasingpopulation, increasing incomes andthe rise of organised retailing. Retailsales in Vietnam are expected sharplyin the years ahead.

The Vietnamese retail sector is highlyfragmented and dominated by smallindependent shops. By far the largestlocal player is Saigon Co-op, the

state-owned superstore chain. Otherimportant local players are Fivimart,Citimart, Maximart, Intimex andHapro Mart. Vietnam opened up toforeign retailers only recently, buttoday they can open wholly ownedbusinesses without a local partner.Until recently, the only major foreignretailer was Casino and the MetroGroup. However, recognising themarket’s potential others have enteredrecently or are planning to do sosoon, including Malaysia’s Parksondepartment stores, FamilyMart, DairyFarm, Carrefour, Walmart and Tesco.South Korea’s Lotte plans to spendUS$5bn developing 30 departmentstores and supermarkets over the nextten years in major cities.

In terms of organised retail, Vietnam

remains largely underdeveloped. Onlyin the two main cities, Ho Chi MinhCity and Hanoi, there has been amodest level of retail development.This is expected to change in theyears ahead and the Vietnameseretail market is likely going tobe characterised by increasingmodernisation and growing presenceof large global retailers.

2008 2009 2010f 2011f 2012f 2013f 2014f GDP, current (US$, bn) 90.3 93.2 102.0 113.6 125.4 137.9 151.5GDP growth (real, %) 6.3 5.3 6.5 6.8 7.0 7.2 7.4GDP/ capita (US$, PPP) 2,800.8 2,941.7 3,123.1 3,339.4 3,579.0 3,848.9 4,154.6Population (million) 86.2 87.2 88.3 89.3 90.4 91.5 92.6Consumer spending (US$, bn) 57.7 59.7 66.8 73.9 81.5 89.6 98.5Retail sales (US$, bn 38.7 39.6 43.8 48.7 53.8 59.2 65.0Retail sales/ capita 449 454 496 546 595 647 702)

Vietnam: Economy and Retail Indicators

Source: IMF, Deloitte, PlanetRetail, Davis Langdon



4.0 rETAILErTrENdS 4.1 Consumer habits

Retail in the“age of austerity”The recession has changed consumerbehaviour. Consumers have becomemore value conscious, trading down,less likely to purchase big-ticketitems and more careful about leisurespending. The scale of the downturncould lead to a permanent shift inspending pattern, particularly in thosemarkets where consumer spendingwas excessive and fuelled by debtin previous years, like in the UK.Retailers will have to adapt to newconsumer behaviour, and the valuesand priorities that will dr ive decisionmaking. As more retailers drivethe value proposition, they have toclearly differentiate themselves fromcompetitors, which could includebrand management, investing in thedevelopment of discount concepts,and expanding in newer markets.

Green issues stillon the agendaSustainability and green issues took aback seat during the economic crisisin 2008/09, but are now set to re-emerge as key trends. However, withvalue a top priority for households,retailers will need to work hard toconvince consumers of the benefits,particularly as many now expectretailers to offer sustainable productswithout having to pay a premium.

Increased consumer awarenessof environmental issues, togetherwith government regulations, isputting retailers under pressure toadopt sustainable practices suchas recycling, energy efficiency,reducing packaging, or collaboratingwith suppliers. Whilst adoptingthese practices offers retailers anopportunity to gain customer loyalty,it can also bring tangible financialbenefits. In particular, cutting waste,reducing energy and improving the

performance of the supply chaincan cut costs and lead to enhancedefficiency.

Ethical retailingConsumer spending on ethicalproducts, including fairtrade,organic, free range and dolphinfriendly products, increased almostthreefold in the last decade, from£1.9bn in 1999 to over £6bn in2008. According to IGD, householdshave not dramatically compromisedon their values during the 2008/09recession, but they are certainlyscrutinising products closely toget the best price for their values.Ethical shopping is becoming moremainstream, but barriers to buyingethically remain, including price, lackof availability across more stores,categories and brands, and lack of trust. Looking ahead, while the paceof ethical retail sales growth is likelyto slow, it is now firmly establishedin the UK and consumers do notwant to compromise on their values.Many food and grocery retailersare also making long term ethicalcommitments.

Multi-channelretailingConsumers today prefer to browsethrough multiple retail channels,

rather than relying solely on brick-and-mortar stores, in order to informthemselves about products beforemaking purchases. This has promptedretailers to broaden their multi-channel retail practices (Source:Verdict). The additional channelsthat retailers use include the internet,mobile devices and catalogues.Retailers today aim to utilise the bestattributes of both store-based andonline shopping channels to maintaintheir competitive edge.

Online-retailingInternet retailing will continue toincrease over the coming decade,as more households around theworld will be connected. It is nearlyimpossible to predict what share of retail sales will take place online,but estimates show that online retailsales in Europe are to grow fromUS$83.2bn in 2009 to US$140.2bnin 2014, at a compound annualgrowth rate of 11%. US online retailsales are expected to grow fromUS$155.2bn in 2009 to US$248.7bnin 2014, while Chinese online retailsales are predicted to increase from

$37bn in 2009 to $146.2bn in 2013.This will have a substantial impact onstore retailing, and store retailers willhave to offer more entertaining andinteractive shopping experiences.

Retail marketing through social media

Social media is becoming a majorinfluence on consumers’ buyingdecisions and retailers are increasinglyfocussing their marketing budgets onthis area. As social media is evolving,it is becoming a viable channel viawhich retailers engage customersand build online communities tosupport their brands. In particular,the growing popularity of networkingsites such as Facebook and Twitterhave caused retailers to shift theirfocus from mass marketing toindividual marketing. In addition,retailers are using social media toconvert loyal customers into activesupporters, influencing others’ buyingdecisions. Furthermore, retailersare using social media not only topromote sales, but also to researchconsumer opinion to establish closerrelationships with their customers.

4.2 Retail categories

Discounters tooutperform themarketValue retailers across the globe haveemerged as the winners during the2008/09 recession. While otherretailers’ sales have weakened,discount stores continued to expandswiftly, taking up newly vacant spacein order to capitalise on growingdemand. This trend is set to continue,

as consumers eye their balance sheetsmore carefully.

SupermarketdominanceGrocery retailers, in particulardiscounters continue to expand. Inthe UK, the “big four” grocers aredominant, accounting for over 60%of the total supermarket floor space,pushed up by Asda’s recent purchaseof Netto. However, others are alsoexpanding, with for example Waitroserolling out a new conveniencestore format. Grocery expansion isincreasing demand for suitable space.Indeed, whilst the shopping centre



and retail warehouse constructionpipeline has shrunk markedly over thepast two years, the grocery pipelineis increasing rapidly. A trend thathas emerged recently is the move of grocery retailers from the high streetto out of town locations, where 80%of the total supermarket pipelineis now located (Source: CBRE).This trend looks set to continue.Supermarkets are increasingly actingas anchor tenants. For example,Silverburn (Glasgow) is jointlyanchored by Tesco, Debenhams andM&S. Tesco anchors the St Stephen’s(Hull) and Ellesmere (Walkden,Manchester) shopping centres. Othersupermarkets are also expandingthrough this format, including

Sainsbury’s, who is co-anchoring theTrinity Walk scheme (Wakefield).

4.3 Supply-chaindynamics

Shift of power toretailers remainsin placeOn the back of the deep recession in2008/09, the retail tenant-landlordrelationship is being tested in newways. How both sides respondcould go a long way in determiningthe health of the industry in years

to come. Market conditions haveprompted a substantial shift in thebalance of power from landlordto tenant. The prospect of vacantspace and loss of income streamshas increased retailers’ bargainingpower and was key for the decline inrental values. Retailers have becomemore influential in negotiationswith landlords and are unwilling tocompromise their business needs.They aim to reduce their risk tothe minimum. Today, retailers seekto secure locations in high profilehigh street locations and shoppingcentres at better conditions and arerenegotiating terms and conditions inboth existing and planned spaces.



Retail landlordsadapt to changingrequirementsThe change in consumer spendingpatterns over the past three yearshas caused many retailers to rethinktheir store networks and expansionplans. Shopping centres have beenparticularly vulnerable to the changein strategies. Location, access, conceptdesign, best terms and conditions,as well as proven performance foran existing centre or track record

of the developer for a plannedproject will determine the successof shopping centres going forward.In particular, improving shoppingcentre management, for example withregards to presentation and tenantmix will be critical in today’s retailenvironment.

Evolving retailer-supplier collaborationDue to the economic slowdown,retailers are having to placeincreased emphasis on cuttingcosts and improving supply chainefficiency. Strategies include cost-effective product sourcing and better

inventory management. To achievethis, retailers are now collaboratingmore closely with their suppliers.This includes removing middlemento tighten supply chains, increasingdirect sourcing of products, keepingtrack of supplier service levels, andcollaborating with regards to ethicaland sustainable practices

4.4 Store location,layout/ design

New trading formatsThe retail construction pipeline hasshrunk dramatically over the lastcouple of years, which is increasinglycausing problems for retailers thatare pressing on with expansion plans.In response, retailers are developingmore sophisticated and flexibletrading formats, which enables themto adapt to the market rather thanwait for construction pipeline to

catch up. Moving to out-of-townlocations has been a strategy forsome retailers, with for example JohnLewis developing their “at home”format in out-of-town stores. Multi-

channel offers and shared spaceare other strategies. For example,

Waitrose and Boots tied up, whileHMV and Waterstone’s have createthe “entertainment hub” format.New formats have also been rolledout in the grocery sector by, forexample ASDA, Morrisons and

Waitrose. Grocery anchors arebecoming increasingly popular inshopping centres and retail warehousedevelopments, though the decline inshopping centre and retail warehousedevelopment will slow this trend.

“Back to basics”approach in storelayoutDevelopers building new retailcentres and repositioning old onesin today’s market climate can takecomfort in the fact that they canstill create exciting space withoutspending a lot of money. The trend isgoing back to basics. Customers arenot likely to avoid a shopping centrejust because it doesn’t have featuresthat give it an extra oomph. Whatthey care most about is convenienceand ease of use – and many of thesefeatures, including better access to the



property or more natural light – canbe achieved without costing a fortune.The biggest change is likely to be thetrend toward minimalism, creatingtimeless spaces that showcase theretailer, not over-building.

When it comes to re-developing

existing retail space, the “back-to-basics” approach can also work. Forexample, every shopping centre comeswith a different shopper profile, sodevelopers might want to conductcustomer surveys to figure out exactlywho their customers are and whatdesign features are important to them.Responding to the needs of customersis likely to make the scheme moresuccessful.

The fashion trendof ‘what’s old is nowin’ also applies to retailstoresUS lifestyle retailer Urban Outfittersrestored a 1930’s art deco movie palacein Stockholm and re-opened it. Whenit opened the revamp was spectacular.The trend can also be seen in the UK,where Abercrombie & Fitch set upshop in London in a former branchof the Bank of England. With the

outer skin of a Georgian townhouseon the outside and the ambiance of a nightclub within, shoppers haveflocked to it. It has proved a soundinvestment: the store has the highestsales per square foot compared to anyother Abercrombie & Fitch outlet andis hoping to find similar spaces acrossEurope.

Value end retailers lookfor quality store designThe success of value retailers suchas Lidl, Primark or Uniqlo showsthat consumers value costs and retialexperience. Primark opened on OxfordStreet in 2007 and it plays all the mid-market merchandising tricks. Designedby London-based Dalziel + Pow, it hasdark wood perimeter panels, blue neonstrips above the central escalator andmannequins placed casually aroundthe store. Down the street, Uniqlo’sflagship would not disgrace some

nearby Bond Street operations. Incontrast, Aldi had fallen back last year,as consumers perceived the shoppingexperience in their stores as notdesirable.

4.5 Retailglobalisation

Expansion strategiesRetailers go global for a number

of reasons. Some retailers seek tocapitalise on fast growing consumermarkets, especially when their homemarkets offer limited expansionopportunities, due to marketsaturation, stagnant growth and highcompetition. Less mature marketsoften offer the opportunity of substantial long term growth. Othersexpand to leverage their existingassets, i.e. global supply-chains, aunique format or a well known brand.In some markets, e.g. Europe, retailers

face restrictions on development, asdue to regulations, they cannot easilyopen new stores in their home market.Consequently, they seek growth inother markets.

According to Deloitte’s “GlobalPower of Retail”, on average the top250 global retailers operated in 6.9countries in 2008, up from 5.9 in2005. European retailers are the mostglobal, operating in an average 11.7countries. In recent years, the marketconcentration of the top 10 globalretailers has slipped, due to the risingof emerging market competitors.

In recent years major global retailershave shifted their focus towardsstrengthening their presence inexisting markets ahead of expandinginto new ones, but nevertheless,global retailers are constantly takingup expansion opportunities whenthey arise. Overall, European retailersdominate global retailing, in part dueto the fact that European retailers are

inhibited from domestic expansion,which is stimulating their globalambitions. Walmart, Carrefour, Metroand Tesco rank as the major globalgrocery retailers by turnover.

The world’s centre of gravity forretailers is moving towards theemerging markets, with the BRICmarkets offering the most significantgrowth prospects for retailers andsuppliers. China is expected to becomethe world’s largest grocery retailmarket by 2014, overtaking the US.



There are four main routes tointernational expansion, each of whichare characterised by a different risk-return trade off.

1. Organic expansion: the potentialreturns are probably the highest,but there are significant risks.

Organic expansion can be a slowand cumbersome process, and it cantake a long time for the operationof break-even. There is the riskof failing to understand the localmarket.

2. Acquisition of domestic retailer:this route provides quicker accessto operational scale and localmarket knowledge. The risks aremainly associated with the large upfront investment and the culturaldifferences.

3. Joint venture with domestic retailer:this has been the main option inhistorically closed market, i.e. Indiaor China, where outright acquisitionof a domestic retailer is legally notpossible. The risks are mainly thesame as with acquisition.

4. Franchising: this has been a popularoption, as it is considered the lowestrisk strategy. However, it is alsolikely to provide the lowest potentialprofits for the retailer. In particular,high street retailers rather than foodor retail warehouse operators havetaken this strategy to enter a foreignmarket.

In terms of retail market developmentthere are a number of models, noneof which are universally acceptableor universally applicable. One modeldivides retail market development intoeight phases, some of which can occurat the same time.

World-class emergingmarkets retailersMany global retailers have expandedinto the emerging markets overthe past decade, but at the sametime emerging market retailers arerapidly becoming global players intheir own right, expanding into Asia,Africa, the Middle East and SouthAmerica. This trend is set to continue.Some emerging-market retailers areindicating that they see investmentopportunities in more affluentdeveloped markets. Generally theseare vertically integrated specialityplayers rather than mass merchandiseor grocery retailers. Many of theseretailers have easier access to capitalthan their Western competitors, i.e.

they can obtain capital from privatesavings or sovereign wealth funds.As such, these companies are ableto increasingly compete on a globalscale.

2010 e Country £bn 2014 f Country £bn

1 US 638 1 China 7612 China 529 2 US 7453 Japan 345 3 India 4484 India 279 4 Japan 3605 France 205 5 Russia 3226 Russia 186 6 Brazil 2847 Brazil 185 7 France 2288 UK 170 8 UK 1989 Germany 160 9 Germany 16810 Italy 130 10 Indonesia 167

Source: IGD Research

Top 10 Global Grocery Markets

Retail market development stages

1. Entry of international cash & carry retailers

2. Entry of large international grocery retailers

3. Entry of large international bog box retailers

4. Entry of speci c luxury brands, opening up inprime areas

5. Entry of major international high streetbrands

6. Development of modern shopping centres

in capital7. Entry of additional players, rising shopping

centre stock

8. Development of modern retail facilities inregions



4.6 Retailers’strategies forsuccessAmid continuing tough marketconditions in many countries, retailerswill have to continue to focus onretaining their competitive edge andgain market share. Two attributes aretypically associated with successfulretailers: efficient supply chains ora successfully managed brand. Costconsciousness remains high on theagenda for the majority of retailers,which includes:

o Controlling costs and prices:Consumers remain strongly value-oriented, so the focus remains ondiscount retailers. Those retailers

with a low-price offer (i.e. Aldi,Lidl) and more price-focussedmainstream grocers (i.e. Wal-Mart)are faring well as consumers havetraded down. But some upmarketplayers (i.e. Waitrose) are also doingrelatively well, as they target a niche.The worst position for retailersremains the middle ground. To cutcosts retailers will have to rationalise

supply chains, re-negotiate leases tocut operational costs and strengthentheir position in core marketsegments.

o Re-think supply chains: Retailershave developed highly sophisticatedglobal supply chains over the pasttwo decades. However furthereconomies of scale are likely to bemore limited, given that energy andtransport costs are likely to remainrelatively high in the future. Inaddition, with rising living standardsin many emerging economies,labour costs could also rise, forcingretailers to start shifting supplychains gradually to other low costlocations or closer to home to avoidtransport costs.

o Improve risk management: Post-

recession, retailers will need tocontinue to adjust to a more volatilebusiness environment. Majorchanges in exchange rates, interestrates, capital costs and energy costswill affect operating incomes andcash flow. The economic downturnhas demonstrated that a morecomprehensive understanding of risk is needed, and there is a need

to improve the adaptability of business models. Retailers will haveto develop more sophisticated riskmitigation strategies, which wouldhelp to diversify risk, reducing thebusiness’ vulnerability to a severeshock.

o Customer experience and change inshopping pattern: Retailers have tofind ways to differentiate themselvesfrom their competitors in orderto build brand loyalty, generatebusiness and gain market share.Customer experience can make alarge difference in the performanceof a retailer. Retailers will needthe ability to constantly innovateto maintain differentiation, whichwill help retailers to preserve theirpricing power.

o Portfolio optimisation: the bulk of retail property downsizing occurredin 2008 and 2009. However,retailers have to continue tooptimise their real estate portfoliosin a more competitive retailenvironment, and the demand forprofessional asset managementservices is increasing.



4.7 Other issues

Retail cost inflationRetailers could come under pressureto absorb higher raw material andenergy costs to ensure their productsremain attractive for cost consciousconsumers. A number of factors arecombining to currently create themost inflationary environment in theretail sector since the mid-1980s.This is a marked change from thepast ten years when clothing andfood prices fell markedly, whichwas mainly driven by the growthof value players. A combination of higher supply chain costs, transportcosts, increases in VAT, and rawmaterial price increases have pushedup input costs. For example, cottonprices in China are nearing theirhistorical peak, squeezing garmentmanufacturers, while the drought inRussia this year has pushed up wheatprices. Agricultural prices are likelyto remain significantly above theirlevels in the early years of the decadeand will be much more volatile thanin the past, due to short and longterm supply and demand issues. Inaddition, having already securedmany of the benefits of internationalsourcing, it will become more difficultfor retailers to extract significant extrasavings from moving production toever cheaper locations. Indeed, overthe medium term wage inflation inChina and other emerging marketscould push up clothing productioncosts. Retailers will seek to pass oninput costs increases, so that foodand clothing could become moreexpensive in the years ahead.

Inflation/ deflation in the clothing market

-5

-4

-3

-2

-1

0

1

2

3

4

5

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0 f

2 0 1 1 f

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

Source: Verdict Consultancy

A n n u a

l I n f l a t i o n

/ D e

f l a t i o n , %

Source: Company Annual Reportsand Retail Forward, Inc.

Top 20 Retailers WorldwideEuropean retailers are the most global

High

HighLow

Low

No. of countries

withoperations

No. of operatingformats

Kmart KKR Sears

Ito YakadoDaiei

Wal-Mart

Rewe

Le Clerc

Edeka

TengelmannPromodes

Aldi

Intermarche

Auchan

Tesco

JC Penney

Kroger Dayton Hudson

Country of Origin

Retailer Net sales, 2009/10$ million

1. Wal-Mart US 404,7432. Carrefour France 163,8523. Metro Group Germany 91,412

4. Tesco UK 90,0915. Schwarz Group Germany 77,279

Source: IGD Retail Analysis Datacentre, 2010

Grocery Turnover League 2009/10



CONTACTS

Lionel Dore Head of Retail – Middle [email protected]

Máren Baldauf-Cunnington Economist – [email protected]

Paul Zuccherelli Head of Retail – [email protected]



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