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As we studied the 2005 Retail Asia-Pacific Top 500 list of retailers by format type, we were
reassured by the findings. Of the top 20 retailers by format type, it was not unexpected to see Japanese retailers dominate, except for a couple of exceptions from Australia and South Korea. Chen Tianqi, research analyst, and Andrew Ong, news analyst, Euromonitor International, put the region’s retail market into perspective.

In the 2004’s ranking, developed nations (Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea and Taiwan) accounted for 87% of the top 500 total retail sales (US$395.5 billion). For some developed nations, a saturated market means that there is only so much share that retailers can squeeze from one another. Seen from this perspective, the region’s emerging nations (China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam) offer an alluring business opportunity for global, regional and local retailers.

The ultimate goal of global (or local) retailers, irrespective of what corner of the region they operate from, is to establish a more or less captive market in as many countries (or cities) as possible while benefiting from the huge economies of scale that flow from having an improved bargaining power vis-à-vis their suppliers. This is the game rule of the retail trade.

For the second time, we measure the growth of the leading retailing groups, in terms of retail turnover. And to provide a better understanding of the region’s players, we have introduced two new performance indicators: retailing area and sales per sq m.

And the results make for a most riveting read.



Japan – a giant in ‘growth recession’

Continuous deflation and economic growth have managed to coexist in Japan. The nation is experiencing a ‘growth recession’. Such a phenomenon is rather rare, because both booms and slumps tend to gather momentum, producing either rapid growth or clear-cut decline.

Japan, however, has experienced a seven-year growth recession: Japan’s economic engine gradually lost power rather than coming to an immediate halt. Despite the lacklustre economic outlook, Japanese retailers formed 55% of the top 500 retail sales, or US$250.8 billion in dollar terms.

Boasting one of Asia’s largest markets, its consumers are also the region’s richest in terms of GDP per capita.

Among all 14 nations, Japan was at the bottom of the list in terms of total outlets and sales growth. The years of consumer price deflation have led to retail polarisation in Japan. This trend is likely to continue as long as deflation remains a fact of Japan’s economic life.

Consumers are more price-conscious about staples and more discerning about the items they choose at the higher end. Many of the shoppers who frequent the discount stores are also driving the current boom at the top-end retail market.

Aeon’s recent switch to direct distribution to service the four Japanese brewers in the Tokyo metropolitan area could signal the start of a new era.

Japan’s retail system typically has long distribution chains with many small firms and many wholesalers that amount to high product prices; due to every intermediary adding some mark-up in order to make a profit. Aeon’s latest move could accelerate the reorganisation process within the wholesale industry of some 1,000 small and mid-sized wholesalers, which are likely to face consolidation.

Australia – the ‘trans-Tasman’ grand plan

In the second place, Australian retailers composed of 15% of the top 500 retail sales or US$67 billion.

Coles Myer dominated the retail scene last year in retail sales; however, Woolworths exhibited the fastest sales growth among the nation’s top 10 list and also had one of the highest retail sales per sqm growth. Woolworths’ recent US$2.6 billion carve-up of Foodland Associated with Metcash Trading has put a distance between itself and Coles Myer. The acquisition has also set the stage for the replication of Woolworths’ Australian retail model into New Zealand.

New Zealand’s retail sector provides both risks and opportunities to new market entrants. The New Zealand market has suffered limited growth over the past five years due to its classic duopoly market structure; there are more supermarkets per head than Australia and a very efficient Foodstuffs that has been investing in modern systems.

If Woolworths could extract the growth and returns from New Zealand, it will establish an unassailable lead in scale and diversification in the ‘trans- Tasman’ supermarket sector.



The Philippines – industry’s high barrier of entry

The Philippines had the fastest outlets growth rate among all 14 nations; it surged by almost 46% over the previous year. When foreign retailers assessed its local market prospects right after the Retail Trade Liberalisation Act was passed in March 2000, most came away in amazement on how local retailers cope with such low margins.

While the Philippines boasts of a population of 82 million as its potential market, its per capita income of US$1,045 in 2004 fails to inspire much confidence. Comparatively, Japan’s per capita income stands at US$36,529. Even neighbouring Thailand’s per capita income of US$2,669 more than double that of the Philippines.

Perhaps, that is why navigating the minefield of Filipino retailing is best left to the experienced local players like the SM Group. From the foreign players’ perspective, the loosening of legislative rule is offset by the industry’s high barrier of entry. Local players’ commitment to rapid expansion has occupied most of the prime retail locations.

To tap into the nation’s burgeoning middle-class, foreign players have only two entry options: either a joint venture (AS Watson and SM Group) or through the acquisition route.

China – local giants dominate, but can it last?

China came in second in terms of outlets growth. A quick glance at the nation’s top 10 retailers list shows that local players retained their hold of the market in 2004. Carrefour, the French retailer, was the only foreign player to break the local stranglehold; but with great effort and investment.

Carrefour’s outlets and sales grew by 138% and 39% respectively; however, retail sales per sqm fell by almost 10%. China’s retail behemoth, Brilliance Group, exhibited a similar set of growth rate pattern: rapid outlets expansion of about 24%, but a negative retail sales per sqm growth of 6%.

The message is clear. The lifting of restrictions last December on foreign investment has made individual expansion a realistic goal and ever more enticing for well-entrenched foreign retailers. To prevent market share erosion, local players such as Brilliance Group have chosen the merger route to strengthen their foothold.

China’s accession to the World Trade Organisation (WTO) obligates the nation to open the retail market to outsiders without restriction to partnerships, location or capital inputs. The recent decisions of Ito-Yokado and Metro to increase stake in their respective Chinese joint ventures could signal a new trend in China.

Foreign retailers, who have accumulated sufficient local knowledge and established business contacts, will gradually buy out their local partners. These foreign players have viewed prudent business relationships as a critical factor for long-term growth in China.

Despite the previous necessity and all the advantages of roping in a local partner, now that a clear understanding of the local markets have been established, different cultures and management styles between partners will become detrimental to the business ventures.

To date, China’s retail storm is moving swiftly westward with foreign retailers pledging to establish more stores in the second-tier cities.

India – the last frontier of retailing

In terms of economic opportunity, India is the new China. The economy grew 8% last year and consumer spending has been increasing by 11% over the past decade. The combined effect was a 29% surge in retail sales growth for the Indian retailers in the top 500 list.

A proposal by the Indian government to open up the retail sector to foreign investors has heartened global players. Nevertheless, resistance from the leftist parties and domestic retailers could still create problems.

Indian retailers view the advent of foreign rivals with some trepidation. They fear being wiped out, if they are small, or seeing their market share eroded, if they are large. Retail behemoths have asked the government to give them a few more years to grow and to demonstrate that, given this leeway, they can compete with foreign retailers.

Undoubtedly, a huge market exists for both local and global retailers. This can be tapped by opening up the sector to foreign direct investment (FDI). At the crux of the debate is whether the coalition government has the political courage to withstand the opposition pressure from domestic retailers and the left front. India must clear all political hurdles in order to realise the sector’s full potential.

On a micro level, RPG’s recent split with Dairy Farm International (DFI) will reshuffle next year’s retail ranking. DFI’s future success in India boils down to whom it chooses as its new partner. If DFI picks an experienced retailer, it once again risks playing a second fiddle in the joint venture. If it picks a financial investor, it runs the risk of losing out on local market know-how; supply chains and regulatory issues are the major concerns in India. DFI’s best hope is lobbying the government to allow FDI in retail, although this will probably take too long.

From now on, RPG will have to contend with DFI in Bangalore and Hyderabad. However, RPG is expected to stage a comeback with rapid expansion.



Vietnam – the last Asian tiger

With a young population and increasing incomes, foreign retail groups have viewed Vietnam as the last Asian tiger economy. With Thailand’s and Malaysia’s increasingly restrictive zoning regulations, Ho Chi Minh City’s new purchasing power and a virgin market for chain expansion, is attractive to many foreign retailers.

If the city continues to grow at its current rate of around 10% a year, average incomes will reach US$4,400 a year by 2020 from a base of US$720 in 2001. Assuming the city’s population continues to grow at the current rate of 2.3% a year, the city would be home to 8.1 million people, which is equal to onethird of Malaysia’s current population.

Following in the footsteps of major European retailers and Parkson Malaysia, DFI from Hong Kong, and South Asia Investments from Singapore are also eagerly anticipating the Vietnamese authorities’ green light to enter the market.

Vietnam has recently vowed to join the WTO this year. If successful, the number and entry of foreign retailers will rise dramatically in line with Vietnam’s growing openness. Vietnam’s top player, state-owned enterprise Saigon Co-op, is currently busy consolidating its market position — which is a mirror image of China’s recent retail experiences.

Retail sales per sqm – a measure of efficiency

The 2004’s top 500 ranking shows a wide spectrum of retail sales per sqm — ranging from US$208-$130,167 per sqm. In Singapore, Cortina Holdings (fascia: Cortina Watch) topped the chart at US$130,167 per sqm, thanks to its upper-end market positioning, higher margins and smaller retail space.

Department store tends to have lower sales per sqm, due to the need for a larger retail space.

Among the supermarket fascia, Sheng Siong Supermarket came in first with US$11,757 per sqm; market leader DFI clocked in US$8,141 per sqm. Sheng Siong targets the price sensitive segment of the consumer market that are attracted by its low price platform, while DFI offers a more spacious retail environment.

For the more developed nations, retailers have to react to the most discerning consumers ever, who base their choice of where to buy on a combination of factors such as price, product availability, location and image.

Retail chain expansion and revenue will start to slow down as the market becomes saturated. There is just limited space left for further expansion, so retailers will have to concentrate on increasing sales per sqm, not on opening new stores. To increase revenues in this way is more difficult as retailers will have to improve services and the quality of products, and continue to offer low prices.

Epilogue

Judging from this year’s ranking, retailers from this region are firm believers of the scale hypothesis: The bigger the retailer’s share of the distribution market, the larger the procurement volume, which means the more favourable as a rule are the buying conditions which the retailer obtains from its suppliers.

Favourable buying conditions, in turn, can be used in various ways to improve the position of a firm in the distribution market. The improved position is itself reflected in a further improvement in buying conditions and so on.

Retailers are busying chasing this spiral effect that will eventually lead them to ever-higher concentration in both distribution and procurement markets. As far as retail behemoths are concerned, such effects are just the natural law of the retail jungle.

Our team looks forward to next year’s top 500 ranking.

Notes:
This market study, what was originally known as the RetailTrade System, is now part of Euromonitor’s awardwinning Integrated Market Information System (IMIS). The latest addition to Euromonitor’s IMIS database is today recognised as Retailing IMIS 2005.
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