WORLD RETAILING

FINANCIAL TIMES SPECIAL REPORT | Monday December 19 2011

www.ft.com/retailing2011 | twitter.com/ftreports

A contest to fulfil consumers aspirations

Andrea Felsted reports on how the sector is coping with shrinking economies and the rise of the internet

he 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 (see page 3). In 2008, it was about sentiment. It was an emotional reaction by consumers to [the collapse of] Lehman Brothers, he says. We didnt go into a consumer recession. We are going into it now. Metro, the worlds fourth-biggest supermarket and electricals chain by sales, warned on profits this month, after a weak start to the critical preChristmas shopping period across debt-ridden Europe. Carrefour, the worlds second-biggest supermarket chain by sales after the USs Walmart, has seen similar trends, amid volatile trading conditions in southern Europe and consumers cutting back on discretionary nonfood 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 Chinas ecommerce market worth more than RMB2,000bn, possibly surpassing the size of the US market. But despite Chinas potential, headwinds are gathering. Mr Kalish says that retailers have been boosted by rising Chinese incomes. However, the countrys 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 (see page 4). 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 Walmarts acquisition of a majority stake in Massmart, the South Africabased group, which has a presence in a dozen sub-Saharan countries. Indeed, African retail markets feature heavily in Deloittes and Planet Retails second Hidden Heroes report, which identifies the next generation of retail markets. They draw attention to Algeria,

Black Friday: the US consumer has held up surprisingly well amid global economic turmoil

Getty

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 worlds 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

I would say that you have to be great to look good. In the past, you only had to be good to look great
Richard Brasher, UK chief executive, Tesco
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 partners 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 Apples iPad in a sluggish consumer-electronics market. According to Richard Brasher, chief executive of Tescos 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.

Inside this issue

Leaders must get connected
What makes a good chief executive for the sector? An important part of the job is the ability to close stores in recession Page 2

The US
Too many shops, too few shoppers Page 2

Online business
Why social media can contain a threat if customer complaints are not dealt with correctly Page 3

Software minimises discounts

Companies are improving pointofsale analysis and embracing technology to learn more about what their customers want Page 3

China props up global sales

The willingness of Chinese consumers to buy shirts, bling and everything in between is propping up the worlds retailers Page 4

Emerging markets
Walmarts lessons Page 4

Inf lation encourages trend to nearsource production

Supply chain Manufacturing close to markets can cut transport and energy bills, says Andrea Felsted
For two years, retailers have been grappling with spiralling commodity prices, which they either absorb or pass on to customers an unpopular option when shoppers disposable incomes are being squeezed. This has marked the end of a decade of deflation where consumers enjoyed ever-cheaper clothing as supermarkets offered products made in cheaper locations, such as China. The prices of some commodities are now easing, but there are other pressures in the supply chain. The price of cotton, for example, rose for a year or so and peaked in March before falling sharply. However, European and US retailers manufacturing in China are facing rising wages for local workers. While this is good for domestic consumption and could help retailers selling goods inside the country it is not so welcome for those selling China-made goods in other parts of the world. To ease this pressure, retailers have shifted production many have already moved from factories in Chinas coastal hubs to inland cities, where wages are lower. Others are leaving China altogether, in favour of lower-cost locations such as Vietnam, Bangladesh, Cambodia, Pakistan or Indonesia. We are seeing more of a diversification in the supply chain, says Ira Kalish, director of global economics at Deloitte, the consultancy. A few years ago, you would have said China is the worlds factory. That is not really the case anymore. Some companies are moving production closer to home to mitigate the effect of higher wages in China and the rising cost of oil. For European retailers, this means moving production to central and eastern Europe. Some British retailers are even considering using the UK. Asda, the British arm of Walmart, the worlds biggest supermarket chain by sales, is buying some of its fabric from the UK this year. In the US market, this trend tends to favour Latin America and the Caribbean. Some Chinese companies have even set up factories in Mexico, so they have more access to the US consumer, says Mr Kalish. The decline of China as the worlds factory has been beneficial to Mexico, Central America and the Caribbean, he says. He adds that rising energy costs are an important consideration when it comes to the decision to near source. The old model assumed very cheap energy, and very low transport costs, he says. Now with energy prices much higher, and expected to go higher, companies are thinking more seriously about transport costs. Producing closer to the final market is a greater consideration now.
We see more diversification in the supply chain Ira Kalish

But Christine Cross, chief retail and consumer adviser at PwC, the consultancy, says that as commodity prices soften, there are other factors driving the trend towards sourcing closer to home. The crisis in Europe and efforts to improve its manufacturing

prowess, are also contributing to the trend. You can now get production of denim out of Turkey, true knitwear out of Portugal and ceramics out of Italy cheaper than you could 10 years ago, because they are trying to increase their exports, she says. The countries that have been hit by the economic crisis have got some very cheap production, which is well worth relocating for. But the eurozone crisis is also injecting a fresh element of risk into the supply chain. Tesco, the worlds thirdbiggest supermarket chain by sales, said recently that it would refrain from entering into long-term contracts with European suppliers for the moment. We will not go long on

stock. We will not have instances where we have got long agreements until things settle down more, says Laurie McIlwee, Tescos finance director. Another problem for British retailers is currency. While commodity prices were racing ahead, they were able to offset some of the cost with a more favourable exchange rate. But sterling has been moving nearer the $1.50 mark for some time now. The sterling-dollar exchange rate matters because retailers pay Asian suppliers in dollars, although most hedge their exposure. Nevertheless, there is hope that softer commodity prices will feed though into lower inflation next year. Lord Wolfson, chief exec-

utive of Next, the UK-based fashion chain, has said he hopes inflationary pressures will soon begin to abate. I am expecting inflation to fall dramatically in the second quarter of next year, he said when Next reported its third quarter sales in November This means that prices for consumers should not rise any further, but it does not necessarily mean they will decline. Next said its prices were rising by 8 per cent in the autumn/winter season. However, it is expecting no further price rises in January. But Lord Wolfson cautioned: I would not want to be so brave as to say that prices will come down.

FINANCIAL TIMES MONDAY DECEMBER 19 2011

World Retailing

Leaders must get connected

Talent Chief executives should focus on customers and technology, writes Andrea Felsted

US Too many shops, too few shoppers

Bloated is an apt description of bricksand mortar retail in the US. Or perhaps overstored, over stuffed, as Robin Lewis and Michael Dart put it in their book, The New Rules of Retail. These notions of excess apply to the shops, but not the shoppers and that is why the sector needs to contract and consolidate. In the past three years, two big changes have reduced the number of shoppers in US stores. First, the financial crisis and global downturn ushered in an era of economic hardship and prudence for many, which shows no sign of ending. Second, online shopping has continued to grow, with internetonly retailers and traditional rivals offering an ever wider assortment of goods online. The marketing is sophisticated and policies on deliveries and returns are cheap and easy for customers. So with the exception of luxury retailers store traffic is down. To put the excess in a wider context, Mr Lewis and Mr Dart say the US has more than 22 sq ft of retail space for every person in the country. The second highest figure is Sweden, with 3 sq ft per capita. Something has to give. That will be the story of retail over the next 10 years, says Joel Bines, a retail specialist at AlixPartners, a consultancy. What do we do with all those brick and mortar assets when we dont have the same foot traffic? The process of shedding space began this year at Gap, a chain of clothes shops whose prolonged sales slump came because it opened too many stores at the time it was losing some of its edge in fashion and marketing. In October, after at least five years of trying to reverse the fall, it said it would cut the number of its US stores from 889 to 700 by 2013. A more brutal way space has been reduced is through bankruptcies. In 2009, Circuit City, the electronics retailer, went into liquidation and this year it was the turn of Borders, the book chain. In both cases, the downturn sealed a demise hastened by an inability to adjust to the internet age. Last month, Syms, a discount clothing retailer, and its unit Filenes Basement also joined the bankruptcy heap. The real estate of some bankrupt companies has or will be taken over by other retailers, but the rest will be turned into cafs, cinemas, gyms or simply be left looking sad and vacant. In The New Rules of Retail, the authors say that half the retailers and brands that exist today will be extinguished by natural selection, but they do not give a time frame.
Overstored, overstuffed, as Robin Lewis and Michael Dart put it

rom embracing new technology to knowing your consumer inside out, retail leaders need a abundance of skills to survive in the current climate. With the rise of internet shopping, retail leaders must be able to get to grips with the implications for their business. Michael Jary, a partner at OC&C Strategy Consultants, says chief executives need to be skilled in the use of technology to connect to the customer. Skills related to managing stores will become less relevant as more business moves online, he says. For some chief executives, the march of online shopping coupled with tough conditions on the high street means that part of their job will be to close stores. In these constrained times, the focus is on costcontrol, offering value and, in some cases, downright contraction. This requires a methodical and dispassionate approach with a touch of opportunism. A bull who splashes money around in these conditions is a reckless gambler, says Samuel Johar, chairman of Buchanan Harvey, a headhunter. Sally Elliott, head of retail at Korn/Ferry Whitehead Mann, the recruitment consultant, says leaders also need to be able to respond quickly, given the speed at which digital developments are altering the retail landscape. The main thing everyone is grappling with is what does it mean for stores, and for leaders, if your customers are much more demand-

The combination of difficult economic times and competition from online sales could mean that outlets will have to close

Bloomberg

ing in what they expect from retailers. It means the pace of leadership will change over time, she says. Korn/Ferry Whitehead Mann asked delegates at a Retail Leadership Forum in September dubbed the retail Davos what they thought the retail leader of the future would look like. They said that persons most important attribute would be the ability to respond quickly to change. But she cautions: Retail leaders need to make sure they are ahead of the curve, rather than simply reacting to trends. That is how they will capture market share and grow sales. Moira Benigson, the managing partner of MBS Group, the executive search firm, says: You have to embrace electronic commerce to be a retail leader

in the current climate. Generation X, who are the new retail leaders coming up, will have mastered technology already. Understanding the consumer has also never been more important. Sue Shipley, head of the retail practice at Odgers Berndtson, the executive search firm, says; If you dont understand your consumer, and you are not first of all clear about who it is you are selling to, there is a tendency in difficult times for people to move into territory that they are not familiar with, and their proposition then becomes fuzzy. Retailers need to be crystal clear about who their target customers are, and deliver rigorously to meet their needs. She adds: The balance of power has now shifted to

the consumer. If retailers are not in that day-today dialogue, really understanding what is in the consumers mind what it is that is going to motivate them to buy from you rather than your competitors you are dead in the water.

Somebody who does not live a luxurious life will not be a successful luxury retailer
Mr Johar says retail leaders must have an affinity with their customers. You usually find that somebody who doesnt live a slightly luxurious life, would not be a very successful luxury retailer. Sim-

ilarly, for supermarkets, if you have somebody who essentially lives a jet-set lifestyle, it is quite difficult for them to be a successful supermarket leader, he says. Fran Minogue, managing partner of Clarity, the executive search firm, also stresses that chief executives must keep in close contact with customers and staff in the current climate. Retail leaders must strike the right balance between setting long-term strategy and managing the business on a daily basis, as well as motivating and energising people right down to the tills. This means keeping it simple and focusing on just a few key performance indicators that everyone in the organisation can understand. It is also important to

keep in touch with people on an informal basis, and take the businesss temperature. Today in retail, you need to be out there as much as you can. You need to be on the front line, talking to staff, talking to customers in a lot of cases your staff are your customers and keeping as close as possible to the market, she says. But, according to Ms Benigson, the most important attribute for leaders at the moment is just to keep going and to keep their own and their staffs spirits up amid the turmoil on the high street. You have to be positive. You have got to wake up in the morning on the right side of the bed, and you have to think positively, and think of new ways of doing things. Most of all, you need bottle, she says.

In an interview, Mr Lewis identifies three factors that will work against any speedy reduction in excess retail space. One is that opening a store creates instant revenue, which matters greatly in a business where most executives still define success as sales growth and will pursue it even at the expense of profits. Second, Mr Lewis says that real estate brokers are always pushing retailers into toogoodtomiss deals for new leases. Third, plenty of retailers have brands that are seen as iconic, even if they fall into financial trouble. They tend to be a magnet for private equity groups that would much prefer to salvage a brand than an engineering company that no one has heard of.

Barney Jopson

The most cashstrapped alter their buying behaviour

Consumer Andrea Felsted finds shoppers are becoming more professional about bargain hunting
Across the world, consumers are exhibiting very different characteristics, making life challenging for global retailers. In the UK, consumer spending held up reasonably well in 2009 and 2010, despite the fact that the world was emerging from the financial crisis. Shoppers who owned their homes and were in work saw their incomes swelled by lower mortgage costs. But the impact of this is fading. Meanwhile, many consumers have seen their incomes squeezed by rising fuel and food costs and tax increases. At the same time, government austerity measures are beginning to bite. This led Richard Pennycook, the highly regarded finance director of Wm Morrison, the UK supermarket chain, to declare this year: While the [UK] economy was technically in recession in 2009, disposable incomes actually rose a little bit, because higher tax rates had not kicked in. In 2011, while technically the economy is no longer in recession, consumers are seeing and feeling a sizeable reduction in their disposable incomes, and those who are most cash-strapped are exhibiting very real behaviour changes to cope. Such behaviour changes include consumers taking a more professional approach to shopping, according to Morrison. This includes checking prices, buying cheaper ownlabel goods and swapping money-saving tips on social networking sites. Shoppers are leaving credit cards at home, and instead choosing to pay with cash or debit card. They are eating out less, and cooking more. Some people are even clubbing together to buy jumbo packs of toilet rolls or minced meat, and then splitting them with friends and neighbours. Morrison thinks a third of its 11.5m customers have no money left at the end of the month. Justin King, the chief executive of J Sainsbury, has long talked about the savvy shopper, who may buy top of the range meat, but basic tomatoes. But he has identified another trend for customers to shop more locally and more frequently. Sainsbury estimates that when customers do a big shop, they put one item fewer in their basket. They then buy this later in the week when they do a top-up shop, in order to reduce on food waste and ultimately spending. Asda says those people who still want to do a big shop are doing so less often, but they are putting more in their trolleys each time. In the US, shoppers are also responding to the pressures they are under. They, too, are cutting back on trips to big out-oftown superstores to save on petrol costs, and are a l s o shopping m o r e locally. In the US, analysts talk about the bifurcated consumer. This can apply to the difference between the shopping habits of wealthier customers, whose incomes and asset values are holding up, and those on middle to lower incomes, who are more squeezed. But it can also refer to shoppers who are scrimping on basic items, perhaps shopping in Walmart or socalled dollar stores, in order still to be able splash out on luxuries. Ira Kalish, director of global economics at Deloitte, says: There has been a substantial widening of the gap in income distribution, and so to the extent that there has been an increase in spending, it has been disproportionately at the upper end. Certainly in the past six months, we have seen very strong performances for luxury and other upscale retailers, and weaker performances for the retailers in the middle, and retailers that focus on poorer consumers whose incomes have been stagnant. With pressure on consumers in developed markets, attention has turned to emerging nations, particularly in Asia, and Latin America. But concern is rising that these markets may be losing steam, with Chinese growth slowing and the Brazilian shopper showing signs of faltering. But, for now, Asian consumers continue to spend. An expanding middle class, together with rising wages for workers in exportoriented factories is powering demand. But the Chinese economy is slowing. Mr Kalish says that the labour force, an important purchasing group, is not expanding as fast as it was. Consumer spending has held up pretty well. It may be at a decelerating rate, but it is still growing, says Mr Kalish. There are countervailing influences in China, but for now, the consumer has held up pretty well. Indeed, even with these headwinds, China and other parts of Asia will continue to be significant retail markets. According to McKinsey, luxury goods sales in China are expected to increase from about $10bn in 2009 to $27bn in 2015, at a fixed exchange rate. By then, China will account for more than 20 per cent of global luxury demand, overtaking Japan as the largest luxury market. Kim Winser, the former senior Marks and Spencer executive, who has led the overseas expansion of a number of British companies, including into Asia, says that, even if the Chinese market slows, it will remain crucial for many brands, including the luxury goods groups. Growth is going to come not just from within China, but when the Chinese travel. Even if the market struggles a bit, it will remain seriously important, rather like Japan has been for the luxury sector for the past two decades.

Contributors
Andrea Felsted Senior Retail Correspondent Claer Barratt Retail Correspondent Barney Jopson US Retail Correspondent Louise Lucas Consumer Industries Editor Martin Brice Commissioning Editor Steven Bird Designer Andy Mears Picture Editor For advertising contact: Ian Edwards +44 020 7873 3272 [email protected] or your usual representative

Richard Pennycook: The cash strapped are exhibiting very real behaviour changes to cope

FINANCIAL TIMES MONDAY DECEMBER 19 2011

World Retailing

The danger of ignoring customer complaints

Online Companies need to take social media seriously, says Claer Barrett

Smarter software helps minimise discounting

Technology Companies are improving point ofsale analysis, says Claer Barrett
As retailers grapple with falling consumer spending and rising costs, the smart use of technology is proving a valuable weapon. Creating a point-of-sale linked supply chain is the latest tactic that larger retailers are employing in order to manage inventories and minimise discounting. In difficult times, a lot of the existing retail processes are being questioned and retailers are busy transforming the structure of their business processes, says Razat Gaurav, senior vice-president of JDA, the supply-chain management company. The only way retailers can deal with uncertainty is to get closer to consumers and obtain a deeper understanding of their buying behaviour. Todays consumer is more empowered than ever before, thanks to the rise of online and multichannel shopping and price comparison websites, which have become even more popular against the gloomy economic backdrop. Retailers are also embracing technology to learn more about what their customers want. Retailers are getting a lot more intelligent about predicting buying patterns, and are collecting huge amounts of data via loyalty cards and point-of-sale data, Mr Gaurav says. Encouraging online consumers to register enables websites to be tailored to their needs. For example, as a man of a certain age, I may see a very different assortment of goods on a retailers homepage compared with a different demographic, he says. Retailers can also email me very targeted promotions. What consumers see online has a huge influence on what they buy in store. Deloitte, the professional services firm, predicts that UK shoppers will embrace online shopping this winter, projecting that 9bn of general merchandise retail sales will be internet influenced this Christmas either ordered or reserved online. This is equivalent to 50 per cent of non-food sales. Noting the trend to research online before buying, Colin Jeffrey, the head of multichannel retail, expects shoppers to make purchases earlier in December, and make more use of click and collect facilities. Retailers are ending the practice of dual pricing,
Retailers are transforming the structure of business processes Razat Gaurav

etailers used to worry about their ecommerce strategy, but the rise of the smartphone has introduced additional words to their vocabulary. The term m-commerce is used to describe mobile internet applications, and f-commerce represents the added dimension of social networking sites such as Facebook, which some

If you want us to use social media to talk to you, you had better be ready to talk back
argue is the shop window of the 21st century when it comes to brand awareness. Consumers increasingly research their purchases online to obtain the best deals, so how retailers manage their social networking presence is of prime importance. With the notable exception of Asos, the online clothing retailer, few actually sell products through sites such as Facebook, though increasingly, f-commerce is the preferred channel for customer services.

However, surveys suggest that retailers are unable to manage the volume of communications from customers that come through the social networking medium. Research tracking US consumer expectations of social media carried out by Conversocial, which advises US and UK retailers on social media strategy, found that 51 per cent of respondents were using social media to communicate with corporations, and that 78 per cent believed this would become the dominant way to communicate. Produced in association with New York University, the research revealed that a third of consumers who had attempted to communicate with companies via social networking sites found they were ignored. Furthermore, 88 per cent of respondents said they would be less likely to do business with that retailer if their complaint went unanswered. The message to companies from their customers is clear: if you want us to use social media to talk to you, you had better be ready to talk back, says Josh March, chief executive of Conversocial. He warns that retailers who do not treat social media complaints seriously risk losing not just their current customers, but vast numbers of potential customers, who now have a window to see how you respond to or ignore your customers in full public view.

Groupon is increasingly providing offers with retailers

Alamy

Groupon Another weapon in the battle to shift stock

Groupon, the online deal website, is known in the UK for providing discounts on services such as beauty treatments, restaurant meals or days out, but offers with retailers are increasingly available. In North America, 17 per cent of Groupons deals are from merchants selling products, compared with 15 per cent internationally, measured on sales data for the first nine months of 2011. North Americans have a stronger preference for deals on food and drink, at 24 per cent of sales versus 17 per cent internationally, says Jason Child, chief financial officer of Groupon. Conversely, our global markets prefer health and beauty deals, compared with their North American counterparts, at 31 per cent to their 19 per cent. In the same period in the UK, the most popular Groupon deals were 5 healthy snack boxes from online retailer Graze.com (sold at a 59 per cent discount), followed by an indoor skydiving experience with Airkix, and personalised photo calendars from Printerpix, the online photo store. Mr Child also reports there is high demand for discounted mattresses and mattress toppers from UK consumers. Using special offers to boost sales is hardly a new tactic for UK retailers, most of whom have started discounting earlier and deeper this winter, because of poor sales amid worsening consumer sentiment. When it comes to managing excess stock and maximising cash flow, online promotion could have a growing role. Were increasingly working with retailers, so that they shift stock and drive interest before key buying periods, Mr Child explains.

realising that consumers will not pay more for goods purchased in-store. After it aligned prices, Comet, the UK electrical chain, reported a 12 per cent year-on-year fall in online sales, admitting that many customers had been viewing goods in store, then ordered them over the internet to take advantage of the price difference. The next stage, Mr Gaurav says, is to use point-of-sale data to forecast stock replenishment and set pricing strategies. Analysis of point-of-sale information can shed light on volatile buying patterns. If you can split that data into generational segments, different patterns emerge, and thats what retailers need to understand, he says. One example is how different age groups

approach grocery shopping. My mother typically goes once a month to stock up, I typically go at the weekends, because its when I have time, but younger people will buy on a day-to-day basis, even meal-by-meal, he notes. The opposing problems of excess inventory and stock shortages are a particular concern for clothing retailers, who can have a lead time of up to nine months if they are sourcing products from East Asia. In the UK, where high street clothing retailers suffer from endemic discounting, Aurora Fashions says point-of-sale software is behind a recent boost in sales and an improvement in its gross margin. The group, which operates the Oasis, Coast and Warehouse brands, has invested in software to provide greater visibility of its in-store stock, meaning popular items that have sold out on its websites can be despatched from stores. This technology enables much higher sell-through rates at full price, says Mike Shearwood, the chief executive. Technology can be used to calculate the impact of lost sales when products go out of stock, he says. It can also flag merchandise which is not moving fast enough. Burberry, the British luxury label, has been investing in electronic point-ofsale systems over the past five years, enabling much tighter control of worldwide stock movements. Analysts hope this will prevent a repeat of the gross margin erosion witnessed in the 2008 downturn, the after-effect of clearance of unsold stock. The economic crisis is forcing retailers to question their current practices, concludes Mr Gaurav. Sadly, were going to find many retail players today wont make it.

Scale is no longer the potent force that it once was

Guest Column
RICHARD HYMAN
Given their size in most economies, it is no surprise that retail industries across the globe are being significantly affected by the debt crisis and its implications. The golden days of seemingly relentless growth were no preparation for what we are seeing. The consequences of spending borrowed money we could not afford have pervaded pretty much everything, retailing more than most. Many western retail markets are more about cash than margins, as retailers struggle to reconcile markedly lower revenue lines with costs that are often trending higher than expected. Pressing as these challenges are, I believe there are wider, more structural and cyclical changes taking place, and it would be short-sighted to think that, once the debt crisis is over, things will return to where they were. While the majority of retail markets in the developed world have been more or less saturated for years, economic growth has allowed increasingly wealthy consumers to finance retailers growth. This has come to an end and, even once debts are sorted, the eastward shift of the balance of global economic power has gained a fundamental momentum. Oversupply in developed retail markets will remain an issue for some time to come. Without credit-fuelled growth to propel it forward, a tougher and more demanding competitive retail landscape is in prospect. While the debt crisis has undoubtedly accelerated this trend and magnified its consequences, the writing has been on the wall for some years. For 14 years, Deloitte has been conducting an annual analysis (Global Powers of Retailing) of the 250 largest retailers. This throws up important data, among which are scale and its significance the size of a business and the economic advantages that accrue. Retail is an industry that works off relatively modest net margins and relatively high fixed costs. It is among the most scalesensitive of all businesses. Models able to leverage size through highly competitive prices can gain on the volume swings what they cede on the margin roundabouts. Not surprisingly, some of the worlds very largest businesses are retailers. The 250 largest retailers in the world identified by and she will not buy if she is not offered it. Much of the growth we have seen in global retailing over the past three or four decades has been wants-driven, financed by growing earnings and cheap credit. Needs-driven spend is relatively finite. When disposable income was rising, purchasing through being persuaded to want something you do not need drove growth. Most western households own more televisions than there are people to watch them and wardrobes full of clothes that will be thrown out before they wear out. Todays more economically constrained consumer needs rather more persuading; low prices and tremendous convenience are increasingly not enough. Retailers added value, and therefore their margins, are under pressure. It is not just retail business models that are under threat. Geography and the global economic balance of power are shifting fundamentally. Many of the wests largest retailers have sought to export formats from their increasingly mature home markets to much fastergrowth developing markets. But this has proved extremely difficult. Retail does not cross borders easily and history tells of far more failures than successes. Moreover, many of these markets have not been simply sitting and waiting for the west to come and show them how to do it. They have their own cultures, values and consumption patterns and understanding the nuances of these is no easy task. In the developed-world retail market, retailers have long paid lip service to understanding their customers. Research or customer insight departments are generally positioned low in the hierarchy and, by the time messages filter up to the board, they will often have been diluted and sanitised. Decades of economic growth have produced a sellers market, where demand outstripped supply. Businesses serving this market have tended to be supply led. The market that is emerging is more demand driven. It is a buyers market, characterised by oversupply. Retailers will have to get much closer to customers: they need to become much more relevant. Their customer knowledge must define their decisions about what they sell and that insight needs to be at the heart of everything they do. Many simply do not have customer-centric cultures. International retailing can only get tougher. Faster-growing developing economies are increasingly developing their own sophisticated retail businesses, tailored to local demand. The first-mover advantage enjoyed by leading western retailers has become diluted and last-mover advantage is beginning to become more important. The writer is the strategic adviser to Deloittes consumer business practice

Retail does not cross borders easily and history tells of more failure than success
our Global Powers research shows that while the majority of these big names have been growing in recent years, the past decade or so shows they have not collectively increased their share of global retail spend. I believe this is highly significant and reflects a number of profound shifts in the global retail marketplace. This certainly does not mean retail is no longer hugely volume sensitive. Big is still beautiful, but the analysis shows that scale is not quite the potent force that it once was. While demand exceeded supply, speed to market and scale may not have always been barriers to entry, but they were massively advantageous. Todays global consumer has more choice than ever, and generally less spending power. He, and predominantly she, demands more than just low prices and convenience

Richard Hyman (left)

FINANCIAL TIMES MONDAY DECEMBER 19 2011

World Retailing

The biggest market props up global sales

China Many international groups fail to do proper research, says Louise Lucas

Emerging markets Walmarts lessons

Walmarts US sales may be sluggish, but its international business is powering ahead. Walmart International, on its own, had revenues of $109bn last year, making it the thirdbiggest retailer in the world by sales, trailing only Walmart US ($310bn) and Frances Carrefour ($135bn). So it is an excellent prism through which to view the trials and tribulations that foreign retailers face in emerging markets, particularly the Bric countries of Brazil, Russia, India and China, where so many companies are looking for ways to convert rising consumer wealth into profits. The lessons that can be learnt from Walmarts experience are vital to any retailer grappling with acquisitions the US retailers preferred means of entry regulation, real estate, corruption and personnel. Walmart International has operations in 27 countries, and has reported sales up 16 per cent in the first nine months of this year, yet only has a retail presence in two of the Bric countries: it is not in India or Russia. For about 48 hours this month, the company was celebrating the chance to open its first shops in India, only to have the opportunity taken away. A political storm forced Manmohan Singh, the prime minister, to reverse planned reforms that would have allowed foreign retailers to own majority holdings in local supermarket chains, and to own single brand stores outright, such as Apple or Zara. Indias closed doors have not stopped Walmart from setting up a joint venture with Bharti Enterprises, an Indian conglomerate, to run a small wholesale supply business that would provide the foundation for an expansion into retail. However, this months U turn has sown seeds of doubt that could limit how much foreign retailers are willing to invest. In Russia it is a different story. The door is open to foreign retailers. The question is whether you have the guts to go in. Last December, Walmart closed its Moscow office having been very publicly on the prowl for takeover targets for three years. The decision came a week after X5, Russias largest retailer by sales, announced a $1.7bn deal for Kopeika, a discount store chain that Walmart could have snapped up. Now Walmart could be eyeing X5 itself, after it hired Lev Khasis, the former chief executive of the Russian retailer. Walmarts problem in Russia is to find an acquisition that comes without governance or corruption worries. David Marcotte, of Kantar Retail, a consultancy, points out that unlike many
Walmart hired Lev Khasis, former chief executive of X5

hinas potential as a land of shoppers was spotted long before Chanel, Louis Vuitton and Tiffany began erecting megastores in its biggest cities. An Englishman, writing in 1840, noted: If we could only persuade every person in China to lengthen his shirttail by a foot, we could keep the mills of Lancashire working round the clock. While Lancashires mills may be long gone, the willingness of the Chinese consumer to buy shirts, bling and everything in between is propping up the worlds retailers. For the moment, China is extremely into very highend, pricey goods and the complete opposite, says Claus-Dietrich Lahrs, chief executive and chairman of Hugo Boss, the luxury menswear group. The group, part-owned by Permira, a private equity firm, lifted sales 73 per cent in the first nine months of 2011 in China and claims to be in more or less all the big cities with a population above 5m. The story is repeated at a host of luxury brands: Burberry owes the run-up in its share price (and subsequent fall-off) to China, even though the country

makes up just a 10th of sales. Louis Vuitton, which once had a significant proportion of its sales in Japan, now has its sights trained on the Chinese, both in the domestic market and, as with the Japanese before them, when shopping abroad. Analysts reckon the strong growth rates are resilient. HSBC estimates sales of global luxury brands in China have risen more than 30 per cent a year over the past four years, far outpacing income growth and suggesting it may keep growing in a slowdown. In March, McKinsey, the consultancy, released a report that forecast spending on luxury goods by Chinese consumers would grow 18 per cent a year to about $27bn by 2015, when the market will surpass Japan, currently the biggest. Nor is it just a question of fancy clothes and handbags. Analysts at IGD say the Chinese grocery market will be worth more than 1,000bn in 2015, up from 597bn in 2010, outstripping the USs projected 843bn. Spurred by these dynamics, international supermarkets, led by Walmart of the US and Frances Carrefour, have charged in. Every multinational in the world is rushing into China to try to offset falling sales, but the reality is there are probably more losers than winners, says Shaun Rein, head of China Market Research in Shanghai and author

Building bridges: misunderstanding the Chinese shopper led to B&Q being seen as more expensive than local peers

Getty

of the forthcoming book The End of Cheap China. Walmarts global revenue of $420bn makes its Chinese income of $7.5bn seem small, but the retailer is expanding there at a pace of 17 per cent a year. Moreover, Chinas retail sector is ripe for consolidation and both Walmart and Carrefour stand to benefit when it happens. Tesco, a relative latecomer, has just under 100 hypermarkets and lifestyle malls and has set up a joint venture to develop retail spaces. Yet the going is far from smooth. In the third quarter, Carrefour reported a slight dip in same-store sales in China, while Walmart has fallen foul of authorities in Chongqing over allegations that ordinary pork was mislabelled as organic. The fallout saw 13 Walmart stores in the south-west city closed for a fortnight and two store managers arrested. Walmart subsequently announced that its chief executive for China and its top executive for human resources in the country were resigning for personal reasons. The Chinese market also

remains fragmented. Its top five chains have a combined market share of less than 10 per cent, compared with 76 per cent in neighbouring Hong Kong (where antitrust authorities bellyache over the concentration). But even in southeast Asian nations, the proportions are about a quarter to a third. Foreigners are also tripping up in the way they approach China. Dale Preston, managing director for

People would be embarrassed to be viewed as as middle class

retail in greater China at Nielsen, says there is still a focus on if I open another store tomorrow, I will get fantastic sales rather than thinking about what consumers want. Mr Rein concurs: Companies are not catering to local consumers. He cites a range of misdemeanours, from Marks and Spencer selling large-sized clothes in styles too matronly and

dowdy, to B&Q, the DIY store, gaining a perception of being more expensive than its local peers. These all stem from a misunderstanding of the Chinese shopper, he says. M&S, for example, he sees as targeting older women, when it is younger females who have money to spend. Those, such as Gap, in the middle, between luxury and cheap brands miss out. Everybody is talking about the great middle class growth story, he says. But, here, there is no static middle class. People would be embarrassed to be viewed as middle class. They see themselves more as on the way to riches. Other difficulties include expansion. Having almost saturated top-tier cities such as Shanghai, retailers and manufacturers are launching into lower-tier cities, with big populations but lower wealth levels. Thats where western brands are starting to struggle, because there are not enough customers willing to buy these brands in those cities, says Melvin Glapion, head of business intelligence at Kroll, the risk consultancy.

Another is that for all Chinas buoyant growth, shakiness from lower manufacturing growth to shuttered factories is emerging. Consumers are cutting back and hunting for bargains. Nielsens Mr Preston says high inflation, albeit now easing, has changed the way the Chinese shop. In addition to cutting back on luxury goods, meals out and travel, consumers are increasing the shopping they do at cheap online sites, he says. Nor are the rich averse to a bargain, though their shopping is more likely to be done overseas. Buying designer goods abroad brings cachet, particularly if the item is only available in Paris, New York or Tokyo at a lower price, given high taxes at home. This is one factor behind the metamorphosis of Hong Kong from eclectic shoppers playground to glitzy array of big brand names. But none of these niggles is enough to deter hopeful retailers, particularly as their traditional stamping grounds of Europe slide into a deeper funk and the jury is out on US recovery.

European peers Walmart has to obey the strict mandates of the US SarbanesOxley Act on accounting and corporate governance. It is also bound by the Foreign Corrupt Practices Act, the US antibribery legislation. In the Bric countries where Walmart does have retail stores, the company forecasts its Brazil business will grow at 1.4 times the pace of the rest of its international operations over the next five years and that China will grow at 2.5 times the pace. It turned its first profit in China only in 2008 a dozen years after it entered the market. For a longer version of this story, go to www.ft.com/retailing2011

Barney Jopson and Courtney Weaver