Opportunities and Challenges in the Retail Sector in Emerging Economies
Posted in Operations & IT Articles, Total Reads: 2907
, Published on 10 December 2013
The concept of retailing involves the sale of goods or merchandise to consumers. The retail industry is a wide-ranging sector with businesses of many different types involved. In many countries, what was once perceived to be an industry comprised mainly of small shops and stores, the sector now largely consists of multinational conglomerates which own huge megastores competing for the global market. Competition and technological changes have changed job descriptions, the hazards associated with those jobs and the nature of the workforce itself.
Developing markets hold significant potential for retail growth. Initially, many global retailers focused their expansion aspirations on China, which gained acceptance from the World Trade Organization (WTO) in 2001. In the last decade, the retail sector experienced a massive surge in seeking a high-growth source of revenue coupled with low-cost sources of goods in order to maximise profits. This was more prominently seen among the nations with fast growing economies like Brazil, China and India. Rising disposable incomes and rapid urbanization among the 30-odd emerging markets have directed the attention of global retailers to expand into these markets. Also, the world’s largest retailers noticed a decline in sales among the developed economies as a result of the global economic downturn which led to more cautious spending and a shortage of credit. US-based Wal-Mart, France-based Carrefour, UK-based Tesco and Germany-based Metro Group saw revenues in developing countries grow 2.5 times faster than revenues in their home markets according to a report issued by the US-based global management consulting firm A T Kearney. The economy of the BRIC and a few other developing countries expanded despite a slowdown faced in economy and coupled with an emerging middle class, will provide ample opportunities for domestic and international entrants to capitalize on its newly created wealth. This article would lay its focus mainly on the economies of the BRIC nations in order to understand the opportunities and challenges faced by large retailers while they invest in these growing markets.
Retailing in emergent economies:
Emerging markets contribute to about one-third of the world’s population which amounts to 2.6 billion people. It is estimated that by 2030, the number of emerging markets are said to increase by another 1.3 billion as per The Boston Consulting Group. In contrast, cities in developed markets will add only 100 million new residents in the next 20 years. The figure below describes the rise in emerging markets with a decline in rural areas as we go ahead in the future.
Also, it is seen that the cities in developed markets will add only 100 million new residents in the next 20 years. As the middle class in the emerging markets expand, the power to spend would also go up which would result in the need for new infrastructure to come up. It would bring large retailers to position themselves to capture the opportunity and will allow them to tap into larger profit pools, grow faster, and use emerging-market cities as a catalyst for innovation.
Source: Winning in emerging market cities, BCG
As per 2012 statistics, emerging-markets drive more than 60 percent of world GDP growth and were estimated to account for 67 percent of world GDP growth by 2015. With an increase in the number of middle class households coupled with a rise in their income levels, retailers are constantly looking to expand its business and improve their ability to win in these range of urban market segments.
Source: Winning in emerging market cities, BCG
However, most developing countries were recently hit by the economic downturn arising in the latter half of 2013 which in turn affected their GDP, income levels of the middle class and hindered the decision and growth prospects of large retailers related to investment to some extent. The BRIC countries hit the wall as they come to terms with a potentially inflation oriented environment, ironically an outcome many developed economies feared not so long ago. India is currently focusing on stabilising their currency which had been plummeting of late but brought to control recently. Also, global retail giants Wal-Mart has been reluctant to start operations in India even when the decision to allow 51% FDI in multi-brand retail was imposed a year back due to too many regulations imposed by the government. Whereas China’s deceleration has stalled their growth in the commodity driven economies of Brazil and Russia. Nevertheless, there still remains the long term growth story and the current economic downturn can be considered to be short term in nature. I believe that even in such volatile environment, development of these markets is not going to stop. The middle classes will continue to grow and with it their spending power, businesses will become more efficient and more productive and gradually economies will change from being primary based to secondary and further. And this is where many investment opportunities will lie in the future, but it might be a long term game.
The economic situation for retailers in developing countries:
The scenario for retailers look positive in the developing countries even after the recent economic slowdown experienced across many countries.
Source: Winning in emerging market cities, BCG
During the slowdown, consumers have been reacting to the effects of the global recession and resorting to their discretionary spending much to the disadvantage of the retail markets. Presently, with the growth in per capita income in the developing countries, customer’s attitude will be more towards spending as the economic environment looks to settle down at least in the near future. However, the challenges that lie amidst this huge opportunity is that pursuing growth in emerging markets will never be easy as many more retailers are now ready to take the plunge. A lack of company ESG disclosures, strict government regulations along with understanding the corporate culture poses a challenge for firms for expanding into the markets. There would also be competition among the retailers to cut costs and adjust their inventory to avoid supply chain disruptions.
With the surge in investments, the percentage of unorganized retail will be on a decline against an increase in the organized retail segment which refers to trading activities undertaken by licensed retailers registered under various tax rules. This would mean more focus on the investment plan and policies of the nation that would need to be followed by the retailers. It would include demand-supply factors, regulatory and legal policies and other local policies of the nation. It would also mean adjusting to the changes brought about in the investment policies which would profoundly alter the structure and operation of retail property markets. There is a fear of unfair competition and the retailer giants constraining to monopolistic power resulting in large-scale exit of domestic small and medium enterprises. This would lead to a large scale displacement of persons employed in the retail sector hence, cutting millions of jobs. However, joint ventures and other means could speed up the process of transforming the retail trade of developing nations by creating a balance between SME’s and retail giants.
Thus, growing investments in retail has:
• Boosted the overall growth of the industry and improved the retail capability building while protecting the interests of local retailers. China for instance, has succeeded in giving local retailers protection, while at the same time, learning from the more efficient business models of foreign companies.
• Improved the management of supply chain in the form of a sophisticated front end that international players are likely to bring. It has brought down wastage, increased efficiency and reduced the overall cost to the consumer. The agricultural and mineral extraction investment in Brazil has gone up from $1.5 billion in 2006 to $10.3 billion in 2011. The industrial sector has seen an even bigger jump in investments for the same period.
• Exploited the usage of forced labour and child labour and which can be seen as one of the major disadvantages in India and other developing markets. Such cases have been noticed in China.
From the above article, it can be concluded that in the environment of intense competition, governments of different countries had helped small as well as big domestic retail chains through formulating appropriate policies over time. The governments had helped domestic retail chains by providing capital support and/or formulating strict regulations to restrict entry of foreign retailing giants in their respective countries. This has led to less inflow of foreign investments. Thus, lowering of government regulations at the time of economic crisis might lead to inflow of funds which can be seen as a positive factor for countries grappling with high CAD and inflation and slowdown in GDP annual growth rate. We have also seen that there is a huge potential for the global retailers to expand in the emerging markets as the latter gives huge potential for them to set out their quest which is supported by the increase in income levels and spending power of consumers.
A balanced set of rules and regulations along with a positive economic outlook seen in the near future can boost the retail sector of the countries to a large extent and would also provide with great opportunities for the retailers to expand their horizons to the developing markets where growth tend to be on the higher side.