Retailers enter emerging markets through smaller cities

India, Russia and China Top Annual List of Most Attractive Emerging Markets for Retail Investment

(Mumbai) -- As larger cities in India, China and Russia reach retail saturation, some retailers are entering countries through smaller second- and third-tier cities where consumers are ready to embrace Western-style retail concepts and products thanks to the influence of television, movies and the Internet.

This is one of the findings of the sixth annual Global Retail Development Index™ (GRDI), a study of retail investment attractiveness among 30 emerging markets conducted by management consulting firm A.T. Kearney.

Published since 2001, the GRDI helps retailers prioritize their global development strategies by ranking emerging countries based on a set of 25 variables including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth. The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country.

India and Russia continue to occupy the top two spots of the GRDI in 2007, as they have for the last three years. China vaulted past Vietnam and Ukraine to place third in this year's index, largely on the strength of continued growth in consumer spending and retailers moving into smaller markets. Modern retail formats grew between 25 and 30 percent in India and 13 percent in both China and Russia in the last year.

Until recently, such rapid growth was confined to the largest cities in each country. However, increased competition in those cities is quickly forcing domestic and global retailers to expand into smaller second- and third-tier cities to drive growth. In China, foreign retailers such as Wal-Mart and Tesco, and Hong Kong-based retailers are branching into smaller mainland cities, such as Yuxi, Weifan, Nanchang and Wuhu. In Russia, Carrefour recently announced it is entering the country via tier-two cities. And in India, shopping center developer Prozone is focusing development on smaller cities in anticipation of growing demand for modern retailers.

But all cities are not created equal. "India being at the top of the GRDI validates the level of activity and enthusiasm we have seen in the marketplace. We anticipate seeing another year of major investments and new retail concepts changing the rapidly evolving organized retail landscape in India, not just in the metros but also deeper penetration in the Tier 2 and 3 cities". Said Hemant Kalbag, Principal "� Consumer Industries and Retail Practice with A.T. Kearney India. "However, retailers should not go into second and third-tier cities armed with a first-tier strategy. Successfully entering a new country via smaller cities requires careful identification of cities with consumers who are ready to embrace modern retail formats. Incomes are smaller and products need to be customized for different markets. But with the right strategy, smaller cities can be attractive targets for retailers that missed the 'window of opportunity' in major cities and for established retailers looking for growth".

Driven by strong retail expansion, GDP growth and consumers' penchant for a Western lifestyle, the Middle East and North African countries made significant advances in this year's GRDI. Saudi Arabia, Tunisia, Turkey, Egypt, Morocco, and the United Arab Emirates are all among the GRDI's top 20 countries this year, giving the region more counties in the top 20 than either Asia or the Americas.

Central and Eastern Europe also placed six countries among the top 20 -- Russia, Ukraine, Latvia, Bulgaria, Slovenia and Croatia. This region as a whole remains attractive, but A.T. Kearney predicts the window of opportunity for large-scale supermarket and convenience stores will likely close within two years. The opportunity for entry into Eastern Europe for retailers in categories such as do-it-yourself, consumer electronics and apparel retailers is potentially ripe as specific formats targeted at niche segments will be available. Multi-level fashion malls and mixed-use centers, which are cropping up throughout Eastern Europe, are expected to be successful.

Asia's attractiveness for retail expansion is not limited to just India and China. Vietnam, Malaysia and Thailand also were among the top 20 countries in this year's GRDI. Latin American countries continued the rebound noted in the 2006 GRDI, with Mexico jumping 10 spots on this year's Index to place ninth, joining Chile and Brazil in the top 20.

"So much of successful global retail expansion is about timing," said Hana Ben-Shabat, A.T. Kearney partner and co-leader of the study. "Identifying markets on the cusp of embracing modern retail concepts and building a presence in them ahead of the competition remains key."

"But retailers can also learn from the luxury goods sector, which has shown the patience to invest early in markets, well before consumers were ready," Ben-Shabat said. "Now luxury retailers are enjoying tremendous growth in emerging markets. Mass-market retailers can build on this success by creating 'luxury corners' aimed at attracting consumers who are already familiar with the concept of luxury goods. An example might be a high-end gourmet foods section in a hypermarket."

A.T. Kearney also recommends retailers consider the effect of an available and well-educated labor supply in their expansion decisions. This year that analysis points to Malaysia and Chile as alternate expansion choices because of their labor advantages. Both countries received strong marks in the firm's Retail Labor Index, a measurement of the strength and skills of the country's retail workforce in relation to its position on the GRDI.

"Finding a skilled labor force is just as important to global expansion as an underserved market and ready consumers," Moriarty said. "Rapid expansion in markets such as India, China and Russia has created significant risks of wage inflation, attrition and business disruption for retailers."