Business in Emerging Markets

Dr. Ira Kalish's speech on how global assets are changing and our analysis

We have reported an article from the website ArabianBusiness.com for we believe it can provide the reader with foundamental information about global economy and, particularly, about emerging markets.Dr. Ira Kalish explains how global assets are changing, and how western companies can both reduce the risks and enhance the opportunities that the change entails.Throughout his lecture he often refers to giant retailers such as Wal-Mart, Ikea, Tesco and B&Q: he just does that in order to point out the key factors any company has to remember when planning of penetrating emerging markets.China, India, and Russia, seems to say Dr. Ira Kalish in his speech, certainly represent vast emerging markets; however, he also speaks of other significant markets that are acquiring more and more importance: Argentina and Brazil, but also – and to some it may look as a surprise – Vietnam, and North Africa.At some point the article also reports what was said by Sunil Nayak, chief operations officer - international division – of the Landmark Group, a retailer strongly anchored to India, China and other emerging markets. The Article. “Most of the largest retailers in the world are based in Western Europe and the US and now we're going to see more world-class retailing emanating from emerging markets," predicts Dr Ira Kalish, director of global economics & consumer, Deloitte Research, USA.

The obstacles of doing business in the Middle East, from high operating costs and foreign competition to land shortages and ownerships stand in the way of retailers are forcing increasing numbers of companies to steer their growth strategies towards emerging markets.China's economy is growing rapidly despite the economic slowdown in richer markets, and the country has recently appeared as of one the most attractive emerging markets for foreign investment.

"Most of the big emerging markets have high foreign currency reserves, and today they often have undervalued currencies to make exports competitive. In the past, many of these countries had corrupt and non-transparent banking systems, whereas the financial systems are now much more transparent," says Kalish.

China has led the way in terms of retail modernisation and until recently it was mostly on the part of big European, small to medium-sized food retailers, yet "interior, secondary cities are now growing rapidly from a much lower base".

Chengdu in the Szechuan Province is much poorer than the bigger coastal cities but has very limited modern retail, and currently represents low hanging fruit for retailers seeking to invest in China. 

Foreign investment has previously focused on mass merchandise retailing, however the privatisation of housing stock in China has stimulated interested from home-related and furnishing retailers including B&Q and IKEA.

Although its per capita GDP remains low given China's large population, consumer spending has more than doubled from the mid-1990s and continues to grow rapidly in the large southern and eastern cities.

"The Government has privatised state-owned enterprises, including department stores, which have become much more efficient in private hands, in some cases these are being acquired or franchised by foreigners," Kalish comments.

The development of more entrepreneurial retailers such as Gome Electronics and the presence of improved quality retailing have been influenced largely by that privatisation.

The greatest misconception in the relatively poor country is that discounting is the most important format for retailers, he says. 

"Wal-Mart in China's main competition is not the other retailers, but the street market. They cannot match those prices, as the markets have virtually no overheads.

For a company like Wal-Mart to succeed, they have to offer something else: the convenience of one-stop shopping, better merchandising when it comes to food, better hygiene, air conditioning, and fresher foods," he explains.

The attributes of a street market, in the sense of the theatre of retailing and its compelling nature stand in stark comparison to the efficient supply chain, in-stock position and reliability of merchandise of modern retailing.

"Price is not the issue in many of the poorer countries when it comes to the success of modern retailing," he says.
India offers opportunities through the backdoor, and Wal-Mart's joint venture with India's Bharti Enterprises to open up to 15 wholesale outlets by 2015 employing about 5,000 people selling groceries, consumer goods, fruits and vegetables, has demonstrated ways in for large overseas companies.

The first Bharti Wal-Mart Private Limited store is set to open by the end of this year.

"Wal-Mart operates the supply chain for Bharti. From Wal-Mart's perspective, they are involved because they are gambling that some point in the future the government will change the regulatory environment. Other major global retailers are looking at similar joint venture operations," Kalish says.According to speculation, Tesco is still looking for a partner in India, he mentions, adding that modern retailing be reach up to 20% of sales in the country, if there was not a government backlash and protests in response to new competition.

Franchising could be the solution for global companies in India, he says, and "rather than have modern retailers compete, it is possible that big retailers could franchise the independent retailers and give them a strong brand name and high supply chain standards”.

"There are political constraints affecting efficient behaviour, regulations affecting the labour market, farming, transportation, and even tariffs on transportation of goods between states. There isn't even free trade within the country," he blasts.

"The Government in India is very committed to reforms, but it is in a coalition with parties which are against these reforms are they are in the interest of the small shopkeepers, who are afraid of competition from big retailers."

Russia's economy is growing rapidly, however the retail industry is risky because of the dependence of economic growth on the price of oil. There are relatively few formal limits on foreign and domestic investment, and companies such as IKEA have been profitable.

Currency volatility creates a degree of uncertainty that may constrain foreign investment in emerging market and another challenge is backlashes against foreign and formal retailing in countries including Poland, Argentina and Brazil.

"We are likely to see rising values of currencies impact the purchasing power of customers, the rapid rise of the middle class trigger shifts in lifestyle formats and the rise of modern retailing formats and a significant rise in sovereign wealth funds in emerging markets in the next few years."

Away from the demographics, the key considerations are an understanding of the current retail environment in the emerging market in question, the availability of an open and transparent legal environment and a developed banking system.

"Compare rental costs, consider whether manpower is available and how strong the patent laws are that would protect your brands," says Sunil Nayak, chief operations officer - international division, Landmark Group. 

The group opened its first store in Bahrain in 1978, and it now occupies a total retail area of 10 million ft² in 11 countries, across 800 stores with the help of 20,000 employees, after successfully transporting its concepts into international markets.

"Our future plan is to be in the top three retailers in the Middle East & North Africa, India and China."

"Compare rental costs, consider the attitude of the local banks towards foreign loans, look at direct and indirect taxes, and restrictions on expatriate labour that could hinder your business," he warns.

Vietnam ended India's three-year reign as the most attractive emerging market destination for retail investment according to the seventh annual Global Retail Development Index (GRDI), a study of retail investment attractiveness among 30 emerging markets conducted by management consulting firm A.T. Kearney.

Vietnam's leap from fourth in the 2007 GRDI to first place in 2008 was driven by strong GDP growth, changes to the country's regulatory structure favoring foreign investors, and increasing consumer demand for modern retail concepts. India, Russia and China, the top three countries in last year's GRDI, fell to second, third and fourth, respectively, in the 2008 GRDI.While these countries remain important retail investment destinations, high real estate costs in large cities and growing competition have decreased their attractiveness relative to prior years and forced retailers to look for opportunities in tier II and III cities.

The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country. 

"Despite slowing economies in developed countries, the retail opportunity in emerging economies is more compelling than ever as less than 10 percent of the retail market in these countries is organized," says Hana Ben-Shabat, a partner with A.T. Kearney and co-leader of the study."These markets will provide the engines for continued growth and profits for global retailers as sales in their home countries turn sluggish."

While Vietnam's US $20 billion retail market pales in comparison to India or China, the absence of competition and 8% GDP growth make it an attractive expansion opportunity for global retailers.

Vietnamese consumers are among the youngest in Asia, with 79 million below the age of 65, and increased their consumer spending by more than 75% between 2000 and 2007.

The country is growing increasingly urbanized and concentrated with more than one million people a year migrating into the two large cities of Ho Chi Minh and Ha Noi. 

The Vietnamese government is expected to remove controls on 100% foreign ownership of retailers in the country and has established a new program to develop wholesale and retail real estate by 2010. The region has already seen the recent emergence of modern retail in neighboring countries such as Thailand, Philippines and Malaysia.

"The Vietnamese consumer is seeing rapidly growing per capita income and regulations are drastically opening up the market for new entry," says Mike Moriarty, a partner with A.T. Kearney.

"Now is the perfect time to get involved. It won't be easy and you'll be a pioneer. But now is the moment. Currently the top five organized retailers in the country, including Saigon Co-op, G7 and Casino, have less than 3% of the market."

Germany's Metro AG, French supermarket group Casino and Chinese department store operator Parkson Retail Group Ltd have already unveiled stores in Vietnam, while Canada's Alimentation Couche-Tard Inc announced a deal in May to open Circle K convenience stores in the country.

The company has signed a master franchise and license agreement with GR Vietnam International Limited for the exclusive development of the Circle K Brand in Vietnam.

"GR Vietnam has chosen Circle K for its sophisticated system for the establishment and operation of convenience stores, which include management information systems, system communications and distinctive exterior and interior design," commented Rick Hamlin, senior director, Circle K Franchise, after the announcement.

Couche-Tard currently operates a network of 5690 convenience stores and employs 45,000 people.

"Although of limited impact on the company's profitability, this agreement will strengthen Circle K's brand value outside North America," he added.

With seven countries among the top 20 in the 2008 GRDI, the Middle East and North Africa region emerged as the world's hottest region for retail expansion. Boasting a robust 9% growth rate and low retail consolidation with less than 7% of the market held by the top five retail players, Saudi Arabia is among the most attractive global retail destinations.

North Africa has three countries in the top 15 rankings this year: Morocco, Algeria and Tunisia. These countries are, on average, projected to grow by more than 6% in 2008 and are benefiting from tourism, trade with Europe and periods of political and economic stability.

Text from ArabianBusiness.com, July 8th 2008.

Comments by Studio Legale Carattini, Parma, Italy

Avvocati dal 1955