Contest to fulfil consumers’ aspirations

Financial Times
December 18, 2011
Andrea Felsted

The consumer is proving an elusive prey for retailers hunting for sales. Across the world, store groups are grappling with diverse consumer behaviours, the internet and business planning dominated by the eurozone crisis and the prospect of a slide back into recession.

Consequently, retailers approach the crucial holiday spending season, which can account for a significant proportion of their profits, with trepidation.

According to Richard Hyman, strategic retail adviser to Deloitte, the consultants, times are more challenging than in 2008, at the height of the financial crisis.

“In 2008, it was about sentiment. It was an emotional reaction by consumers to [the collapse of] Lehman Brothers,” he says. “We didn’t go into a consumer recession. We are going into it now.”

Metro, the world’s fourth-biggest supermarket and electricals chain by sales, warned on profits this month, after a weak start to the critical pre-Christmas shopping period across debt-ridden Europe.

Carrefour, the world’s second-biggest supermarket chain by sales after the US’s Walmart, has seen similar trends, amid volatile trading conditions in southern Europe and consumers cutting back on discretionary non-food items.

In the UK, consumers are cutting back on spending, as middle to lower income shoppers are squeezed by rising fuel and food prices and government austerity measures.

By contrast, the US consumer has held up “surprisingly” well, says Ira Kalish, director of global economics at Deloitte.

“There is widespread expectation that this will continue, at last through the holiday season,” says Mr Kalish. “Whether it will continue beyond that is hard to know, because consumers have been spending faster than [their] income, so their savings rate has gone down. There is only so far that can go, unless there is an improvement in consumer incomes in 2012. It could be that consumer spending will then slow down.”

Asian consumers have also continued to spend, with shoppers particularly drawn to luxury brands.

But it is not just in shopping in physical stores that Asia offers potential. According to the Boston Consulting Group (BSG), Chinese consumers could become powerful online purchasers.

It says that China, which already has the largest internet population in the world, also has the second-largest population of online shoppers – 145m people. This compares with 170m in the US, and is more than double the number in Japan and five times that of the UK.

BSG predicts exponential growth in online shopping in China through to 2015, with spending that could make China’s ecommerce market worth more than RMB2,000bn, possibly surpassing the size of the US market.

But despite China’s potential, headwinds are gathering.

Mr Kalish says that retailers have been boosted by rising Chinese incomes. However, the country’s economy is slowing down.

Meanwhile, Walmart, the market leader, has suffered a series of high-profile problems in China, falling foul of authorities over the mislabelling of ordinary pork as organic.

“It is still a good growth market. [But] for global retailers looking for growth opportunities, China is not what it used to be. They are starting to look elsewhere,” says Mr Kalish.

One market in the spotlight is India, although some global retailers expressed frustration at its decision to abandon plans to throw open its $450bn retail sector to foreign supermarkets, with Tesco branding it a “missed opportunity”.

Mr Kalish says some countries of south-east Asia, such as Indonesia and Vietnam, are attracting retailers’ attention – as is Turkey. There is also interest in Latin American countries such as Colombia and Peru, and some of the countries in Central America, such as Costa Rica. There is also growing interest in Africa, following Walmart’s acquisition of a majority stake in Massmart, the South Africa-based group, which has a presence in a dozen sub-Saharan countries.

Indeed, African retail markets feature heavily in Deloitte’s and Planet Retail’s second “Hidden Heroes” report, which identifies the next generation of retail markets.

They draw attention to Algeria, Kazakhstan, Kenya, Morocco, Nigeria, Pakistan, Peru and Serbia, and two that featured in the first report: South Africa and Vietnam. “All these markets are, or will soon be, on the radar of the world’s leading retailers,” Deloitte and Planet Retail, the consultants, say.

For global retailers, navigating existing and new markets will be crucial for their success.

Christine Cross, chief retail and consumer adviser to PwC, the consultants, says companies expanding abroad need to have clear aspirations about which countries and markets to target, what return on capital they desire, where they see themselves in terms of market share and their risk appetites.

Store groups can choose to grow organically, by opening one store – or several – to test a market, or by acquisition. They can own corporate stores, or enter into franchise arrangements. The latter is less risky but is often less profitable. Groups can even take a concession in an existing store, which is lower risk still, but also lower profit with less control of the brand.

“So often people just want to plant a flag, without having a clear view of what a successful operation in an overseas market would look like, and what the investment will return,” Ms Cross says. One important element is to obtain a rapid insight into that market. “You need to acquire local knowledge quickly,” she says.

One way to do this is to team up with a local partner. This can give access to stores, or smooth the way to obtaining planning permission for new outlets. A partner’s reputation could also be a useful asset.

“It may be that, reputationally, you want to work with a known brand, particularly in Asia, rather than going in as a foreign interloper,” she says.

But she warns: “If you do decide to have a partner, you need to choose them carefully.”

Kim Winser, the former senior Marks and Spencer executive who has led and supported a number of British companies in their international expansion, including M&S, Pringle, Aquascutum, Agent Provocateur and French Sole, says it is easier to take a strong brand into overseas markets.

Retailers without a strong identity will be up against local competitors who are experts on their customers and their behaviour.

“As a retailer going abroad, it is quite a tough call,” she says. “Taking brands abroad is different. In that scenario you are playing on the DNA and personality of the brand. If customers relate to that, then you have got serious potential. Over the next decade or so, I believe the most exciting international developments will be with brands.”

But companies should not veer from their brand identity to appeal to new markets.

“The most important thing is to remain true to your DNA. If you are a heritage brand, then you have to respect that heritage, but hopefully give it a really exciting contemporary feel,” she says.

When it comes to more established markets, having the right online strategy is crucial.

Michael Jary, a partner at OC&C Strategy Consultants, estimates that in advanced economies, about 10 per cent of sales are made online.

Traditional bricks-and-mortar retailers have already moved online, but some purely online retailers are now planning to add physical infrastructure. “The interesting battle in online is between the pure plays and the multi-channel retailers, with both stores and an online presence,” says Mr Jary.

Keeping a tight rein on finances is essential for retailers but investing, even in difficult times, is also important to lay the foundations for success.

Retailers say that despite pressures, consumers are still prepared to spend when they see a product that they want. This is underlined by the success of Apple’s iPad in a sluggish consumer-electronics market.

According to Richard Brasher, chief executive of Tesco’s UK business: “It is not that [consumers] have a complete aversion to spending money, but you better be right. I would say that you have to be great to look good. In the past, you only had to be good to look great.”