Ready or not

BY INVITATION

Successful retail expansion has a lot to do with being at the right place at the right time.

Global retail is experiencing an explosive modernisation as investment rushes into developing markets.

From small proprietors with a mainly local focus, retail's ambitions now stretch worldwide, embracing the latest trends in marketing, distribution and supply. Modern retail grew 25-30 per cent in India and 13 per cent in both China and Russia.

As the wealthiest markets mature, more retailers are pursuing new growth opportunities. They are eyeing countries new to modern retailing, smaller cities, and customer segments hungry for specialty products.

Retailers that can identify the most promising markets will become fierce global competitors "" able to saturate the obvious markets and gain first-mover advantage in new ones.

Retailers understand these new realities. Modern retail has been expanding to new markets for a few years now. The trouble is, it is difficult to determine which new market is the most promising one. As one market becomes saturated, is it enough simply to follow the crowd into the next one?

For the past six years, A T Kearney's Global Retail Development Index (GRDI) has been identifying windows of opportunity to help retailers make strategic investments in exciting new markets. 
 

GLOBAL RETAIL DEVELOPMENT INDEX 2007: TOP 10
Rank	Country	Country risk   (0= high risk;  100 =  low risk)	Market  attractiveness  (0= low  attractiveness;  100= high attractiveness)	Market saturation  (0= saturated;  100 = not saturated)	Time pressure  (0= no time pressure; 100= urgency  to enter)	GRDI score
1	India	67	42	80	74	92
2	Russia	62	52	53	90	89
3	China	75	46	46	84	86
4	Vietnam	57	34	76	59	74
5	Ukraine	41	43	44	88	69
6	Chile	80	51	42	43	69
7	Latvia	77	32	21	86	68
8	Malaysia	70	44	46	54	68
9	Mexico	83	58	33	33	64
10	Saudi Arabia	65	40	35	35	64

It ranks emerging countries based on a set of 25 variables, including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth. The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country.

India and Russia continue to occupy the top two spots of the GRDI in 2007, as they have for the last three years. China vaulted past Vietnam and Ukraine to place third in this year's index, largely on the strength of continued growth in consumer spending and retailers moving into smaller markets. Retailers moved from talking about expansion plans to acting on them in top cities.

Woolworth's, Wal-Mart, Supervalu and Euroset all have plans for entering India, joining a handful of single-brand retailers that are already there, including Lacoste, Chanel, Swatch and Omega. In China, the action spreads from tier-one to tier-two cities, where a proliferation of modern retail has begun.

Of course, there is more to entering a new market than knowing which cities are hot and which ones are not. There are three factors that, taken together, can mean the difference between success and failure in a new market.

They are: gauging the window of opportunity for entering key cities, understanding consumer readiness, and knowing when and how to move into second- and third-tier cities.

Windows to the world
Countries typically progress through four stages "" opening, peaking, declining and closing "" as they evolve from emerging to mature markets, usually over the course of five to 10 years.

Generally, companies can use the window of opportunity as a time frame to plan their market entry strategies. India's window of opportunity continues to be wide for retail investment and development, evident in the spate of alliances and market entry announcements from local conglomerates. Once India's window closes for grocery retailers, there will be little opportunity for market domination in the main cities.

Market saturation in China's and Russia's tier-one cities over the past few years means the window of opportunity is closing, while Vietnam and UAE still offer a few more years of opportunity in the main cities. Latvia remains a solid contender and will probably stay that way for another year or two, as will Saudi Arabia.

Ready or not
While the window of opportunity concept is relevant as an overall guide, there are instances when consumers are ready to adopt modern retail independently of a market's current state.

This is particularly true where there is a very high GDP capita (Dubai) and in countries with a large population of upper-income earners (India and China).

For instance, a segment of consumers in India eagerly shop at luxury retailers, as they have been exposed to these goods and have the wherewithal to make purchases.

Luxury retailers have entered the country thanks to recently relaxed government regulations. Most observers believe that the government will continue to relax Foreign Direct Investment (FDI) rules in retail beyond single-brand retailers. Smart discounters and warehouse clubs are already planning their entry strategies.

Retailers depend on consumers' willingness to accept modern retail formats and products "" if not immediately, at least eventually. How does one determine if customers are ready for modern retail? Look out for these groups:

Young, working population with money: Modern retail is most welcome in markets with a large population of young, employed workers with disposable income, a propensity to spend, and a willingness to embrace new formats. These young professionals are "time poor" so will happily pay for speed, choice and convenience.

Older population ready to try something new: As younger consumers become acclimated to modern retail, their families are exposed to it and before long people of all ages begin to embrace its benefits.

This is one reason why Russia's modern retail food sector is expected to grow from a 31 per cent share of the overall Russian grocery market in 2006 to a 48 per cent share by 2011. In contrast, the market share of traditional "Soviet- style" stores is expected to decrease from 21 to 11 per cent during the same period.

Influence of Western cultures: In India, modern retail is just 2 to 3 per cent of overall retail, but is growing at a remarkable 25 per cent per year. The catalyst for this growth, or at least one catalyst, is the westernisation of the culture.

Modern retail is taking off in large cities primarily because television shows, movies and Internet sites help shape daily life and offer a glimpse into modern retail's enticements "" a vast selection of products (not available at mom-and-pop shops) and the ability to shop in air-conditioned comfort.

Expanding horizons
Retailers that have exhausted growth options in retail-saturated tier-one cities often find new opportunities in tier-two and -three cities. But a retailer should not go into a second-tier city armed with a first-tier city strategy.

Consumers in smaller cities have different needs and requirements. They earn less and so are not willing to pay as much for products and services. The overall strategy should be to customise products and services for these new markets.

For instance, when Hindustan Unilever moved beyond Mumbai, it offered the same products but in smaller sizes and at a fraction of the cost.

Is there an advantage to establishing a presence in a major city first before moving into a second-tier city? The answer depends on the market and the format. There are definite demographic, economic and social factors that make a tier-one city a safer bet, especially in developing countries.

But if the city is already saturated with format competitors (hypermarkets, for instance), it may not make sense to move in and risk failure. Still, most grocery retailers prefer to build a strong brand in tier-one cities first because it makes it far easier to expand once established this more hospitable terrain.

Then again, the benefits of entering a second-tier city should outweigh the risks. Inadequate infrastructure and lack of exposure to modern retailing may hinder success in tier-two cities.

When the infrastructure develops, these smaller cities become attractive targets both for retailers that missed the window of opportunity in major cities and for established retailers looking for growth.

Another drawback to tier-two cities is talent. It is difficult enough to find talented, qualified people in the major cities, so imagine how hard it is to find good people in the smaller cities. Retailers have to be prepared to win the war for talent by tailoring their HR policies to local realities.

Shopping for retail opportunities
Retailers hope that consumers around the world will accept new ways of shopping when their stores open for the first time.

Similarly, retailers must adopt a new way of shopping for global locations if they hope to find receptive markets. Key to that success is targeting each country's window of opportunity, but understanding how consumer readiness loosens wallets is just as important.

Finally, as retailers shift from the largest cities to secondary and tertiary locales, an awareness of these new markets' unique opportunities can mean the difference between a short-lived global expansion plan and healthy retail growth now and long into the future.

Vivek R Gupta is Managing Director, AT Kearney India