Russia, E Europe head list of retail growth markets

The strengthening of economies in eastern Europe, and the much publicised troubles in many Latin American countries, mean that retailers looking to expand their business are likely to look further east this year, according to the latest annual ranking by consultancy firm AT Kearney.

The 2003 Global Retail Development Index (GRDI​) shows that Russia and other eastern European countries provide the best opportunities for food retailers, heading the list of 30 emerging markets. In contrast, former favourites Brazil, Argentina and Peru have all dropped out of the top 30 list this year.

The GRDI ranks emerging countries based on an analysis of economic and political risk, retail saturation level and the difference between gross domestic product growth and retail growth. The 30 countries are divided into three tiers based on their scores: countries retailers should enter immediately, countries to consider entering and countries to avoid entering at this time.

Russia rose from the fourth position in the 2002 index to the top spot this year due to a combination of a strengthening economy, reduced inflation rate, limited number of modern retail store concepts, small quantity of international retailers and booming retail sector.

Joining Russia on the list of countries food retailers should enter immediately, according to the GRDI, were the Slovak Republic, China, Hungary, India, Turkey, Morocco, Egypt, Vietnam and Tunisia.

"Eastern European nations make up three of the top four slots on this year's index,"​ said Jean Piquet, co-leader of the study. "The region's output is growing faster than the global average, most countries are expected to join the European Union before the end of the decade and the modern retail market is not saturated. This is the year to target expansion in these markets."​

Russia represents a particularly attractive investment opportunity, according to Piquet. Forecasted inflation has dropped to 16 per cent from 84 per cent five years ago, gross domestic product is growing between 4 and 5 per cent annually and the country has the largest food market in Europe, with many Russians spending as much as 80 per cent of their income on food.

In addition, the number of modern retail concepts and international competitors is extremely low for a country having 13 cities with more than 1 million inhabitants. Very few of the major European retailers have a presence there, with only the German players such as Metro having shown much of an interest up till now.

Eastern European countries also heavily populate the middle third of this year's index, the countries retailers should be considering entering according to AT Kearney. While many major retailers are already present in more developed markets such as the Czech Republic and Poland, the GRDI suggests that there are now significant opportunities for growth in Bulgaria, Slovenia, Romania, Latvia and Ukraine as well, with both Slovenia and Latvia new to this year's index.

In fact, the GRDI recommended that retailers avoid Poland and the Czech Republic this year due to economic and political challenges as well as rapid concentration in the retail sector in each country.

Local players mount a challenge​

But if there are many opportunities for growth for international retailers, they are becoming increasingly difficult to take, according to the report, with international players entering 12 new markets in 2003, a sharp decline from the 19 entered in 2002. Local retailers in many countries are working to slow expansion by modernising operations, identifying small chain acquisitions and expanding into new regions of their countries.

For example, China, which topped last year's index, dropped to third this year as eight global retailers entered the country and increased saturation. Also playing a role in the decline were efforts by local incumbents to solidify their positions through consolidation and alliances. Three Shanghai-based retailers combined operations into a joint holding company, Bailian, with $8.4 billion in revenue and 4,000 stores across China.

Similar consolidation and co-operation efforts in other countries are leading international retailers to step back and focus on reinforcing their existing bases. But although local retailers generally enjoy higher margins, delaying the international expansion of global retailers will not be sustainable in the long run, claims AT Kearney. International retailers have the experience, buying scale, systems and cash flow to withstand the low levels of profitability that sometimes follow market entry.

Countries experiencing significant drops on this year's index include Taiwan and Mexico, which both fell into the bottom third of the index and are considered as countries to avoid. Taiwan dropped from 11th in 2002 to 24th this year because of rapid growth of modern retail concepts in the country and heavy competition between already established foreign retailers. Mexico fell from 13th last year to 23rd because the strong presence of international retailers presents limited growth opportunities for new market entrants.

US groups forced to expand?​

The study also commented on the likely expansion of US retailers, who, with the notable exception of Wal-Mart, have been relatively parochial in their growth plans over the years. Faced with slower growth at home, US retailers are now looking to international expansion, AT Kearney said, and this could shake up a market dominated thus far by the likes of Carrefour and Tesco.

But with many developed markets in Europe and Asia already well saturated with international retailers from within these regions, US retailers will have to look to emerging markets as their future expansion targets, the study claims.

No US retailers rank among the top 15 in terms of sales outside their home markets and the two most global US players, Wal-Mart and Costco, both have just 16-18 per cent of their sales from international operations (compared with Dutch group Ahold, a company with 85 per cent of its sales coming from operations in 26 foreign markets). Most other US retailers' international operations have been limited to neighbouring Canada and Mexico. US retailers have no presence in eastern Europe or the Mediterranean belt.

But Wal-Mart, which has western European operations in Germany and the UK, has committed to increasing its international sales to 33 per cent of revenue in the next few years and Costco is looking to further expansion in Asia. Wal-Mart is particularly well positioned for international success due to its diversity of store formats, including supercentres, warehouse clubs and experimentation with small neighbourhood grocery stores, effective use of technology and established processes for buying from local suppliers. In Mexico, for example, 90 per cent of Wal-Mart's inventory is bought locally.

AT Kearney's analysis indicates that in addition to managing the timing of market entry, flexibility of store formats also is essential to global expansion success. Retailers should enter new markets with two types of store formats (hypermarket, supermarket, convenience, etc.) and be prepared to adjust emphasis if one format proves more successful, the consultancy claims.

While hypermarkets are now the most popular format used by international retailers to enter new markets, the research shows no correlation between any type of format and international success.