Management of timing and flexibility key to successful expansion

Russia and Eastern European countries provide the best opportunities for food and general merchandise retailers with international expansion plans, according to management consulting firm AT Kearney`s 2003 Global Retail Development Index (GRDI), an annual ranking of retail investment attractiveness among 30 emerging markets.

The GRDI helps retailers address the timing of international expansion by ranking 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 were the Slovak Republic, China, Hungary, India, Turkey, Morocco, Egypt, Vietnam and Tunisia (see full ranking attached below).

"Eastern European nations make up three of the top four slots on this year`s index," said Jean Piquet, AT Kearney vice-president and co-leader of the annual 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 AT Kearney. Forecasted inflation has dropped to 16% from 84% five years ago. Gross domestic product is growing between 4% and 5% annually. The country has the largest food market in Europe with many Russians spending as much as 80% 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 one million inhabitants.

Eastern European countries also heavily populate the middle third of this year`s index, the countries retailers should be considering entering. Bulgaria, Slovenia, Romania, Latvia and Ukraine represent five of the 10 "countries to consider" category. Both Slovenia and Latvia are new to this year`s index. Only two Eastern European countries - Poland and the Czech Republic - were classified as "to be avoided" in 2003 by the study. This is due to economic and political challenges as well as rapid concentration in the retail sector in each country.

International retailers are in the process of entering 12 new markets in 2003, a sharp decline from the 19 entered in 2002, according to the study. 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.

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 US$8.4 billion in revenue and 4 000 stores across China. Similar consolidation and cooperation efforts in other countries are leading international retailers to step back and focus on reinforcing their existing bases.

Although local retailers generally enjoy higher margins, delaying the international expansion of global retailers will not be sustainable in the long run. International retailers have the experience, buying scale, systems and cash flow to withstand the low levels of profitability that sometimes follow market entry, AT Kearney says.

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 "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.

As they face slower growth at home, US retailers are looking to international expansion and that is likely to shake up the international retail scene in the next year, AT Kearney predicts.

"Increased competition and limited expansion opportunities domestically are forcing US retailers to seek growth abroad," said Josh Chernoff, AT Kearney vice-president and leader of its global Consumer Industries and Retail Practice. "With many developed markets in Europe and Asia already well saturated with international retailers from within these regions, US retailers instead must look to emerging markets as their future expansion targets."

US retailers are greatly under represented on the international stage. 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% to 18% of their sales from international operations (compared with Ahold, a company with 85% 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 has committed to increasing its international sales to 33% 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 groceries, effective use of technology and established processes for buying from local suppliers. In Mexico, for example, 90% 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 is also essential to global expansion success. AT Kearney recommends retailers 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. 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.

"Today the top 30 food retailers in the world are in 85 different countries, compared with just 15 countries 10 years ago," said Fadi Farra, AT Kearney manager and co-leader of the study. "Yet two out of three retailers don`t meet their initial financial targets when entering developing countries. Flexibility and timing need to be higher on the agenda of global retailers as most don`t consider these factors crucial for success."

A copy of the GRDI report is available at http://www.atkearney.com/main.taf?p=5,3,1,61.