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Home > Sector Profiles > Retail

Sector Profiles

Retail Industry


Major Industry Trends

Retailing involves the sale of commodities to the public. Outlets can vary from family-run stores to global behemoths such as Wal-Mart, the world’s largest retailer, with 2 million employees (or “associates,” as Wal-Mart prefers to call them) and sales of US$476.3 billion during the fiscal year ending January 31, 2014. The industry also covers a wide range of sectors, from general products, such as food and clothing, to specialist goods, such as sports equipment and automobile accessories. Despite the diverse nature of the industry, a number of common trends can be identified.

Industry Concentration

Around the world, small independent outlets, known as “mom and pop” stores in the United States, are coming under pressure from national and, increasingly, global giants, such as Wal-Mart and Tesco, which can exploit their vast buying power to extract the best possible price from suppliers. It is often impossible for the independents, or even relatively large retail chains, to compete on price with the largest retailers.

Whereas once a consumer might have visited the butcher, the baker, and the candlestick-maker on Main Street, he or she is now most likely to drive to an out-of-town retailer such as Wal-Mart in the United States, Tesco in the United Kingdom, or Carrefour in France, and buy meat and bread, towels, duvets, and TVs all under one roof—a phenomenon known as one-stop shopping.

While the power of the giant retailers is already entrenched in advanced economies—in the United Kingdom the biggest four retailers account for 75% of grocery sales—these retailers are also making rapid inroads into emerging economies. This is largely because their domestic markets are close to saturation point, and because the biggest retailers account for such a large share of their own market that taking over a domestic rival could trigger opposition from the relevant competition authorities.

The pattern seen in the grocery market is being repeated in other retailing sectors, such as clothing and electronics, with sales increasingly concentrated in the hands of a relatively small number of retailers. Many of these companies are also expanding internationally. For example, the Spanish clothing retailer Inditex, which opened its first store in 1975, had 6,300 stores in 87 countries around the world by the end of 2013, giving it an international presence that stretches from the Americas to Asia. Sales reached €16.72 billion during the year ending in the fiscal year 2013. Inditex is able to keep costs low and remain close to changing consumer tastes through an organizational structure that encompasses all stages of the fashion value chain (design, manufacturing, distribution, and sale in proprietary stores).

Inditex highlights the ability of certain retailers to exploit trends and develop a retail empire from scratch. Founded in 1963 by Amancio Ortega Gaona, Inditex has become one of the world’s fastest-expanding makers of affordable fashion clothing. Inditex’s success has been built on the vertical integration of design, just-in-time production, delivery, and sales.

Production is deliberately carried out in small batches to avoid oversupply, and designs are replaced quickly to ensure both a scarcity value and a constant turnover that keeps stress stores fresh. Products are manufactured in the company’s own factories, enabling Inditex to respond quickly to changing tastes, a concept that it pioneered and which has become known as “fast fashion.” By keeping costs low, the company has also managed to survive the downturn in Europe relatively well.

Brands Under Pressure

The growth of the giant retailers means that they can now dictate terms to suppliers of even iconic brands. Whereas once suppliers sold their goods through a wide range of small shops, and could tell these retailers how much to charge for their goods and where they should be positioned in the store, the balance of power is now firmly in the hands of the retailer. Companies such as Tesco, which commands nearly one-third of the UK grocery market, can have an enormous impact on a brand simply by refusing to stock it.

The growing popularity of own brands, also known as own labels or private labels, has given even more power to the giant retailers. Own-label goods are products sold under the retailer’s brand. Some companies focus solely on supplying own-brand goods. Dailycer, which supplies own-brand breakfast cereals to European retailers, is one example. However, own brands are also supplied by companies that produce branded goods. Indeed, the own brand may be identical to its branded counterpart.

In the 1960s and 1970s, retailer own brands were focused on the “value” end of the market. In other words, retailers focused on supplying goods that offered a cheap alternative to brands but did not try to compete on quality. That changed in the 1980s and 1990s as retailers increased the range of own brands that they offered. During that period, many supermarkets offered goods in the value, standard, and premium segments of the market. In the late 1990s and in the current decade, supermarket own brands have become increasingly sophisticated. Now, supermarkets target consumers by lifestyle, as well as by income. Thus, in the food sector, retailers now offer “healthy” own brands, which are low in fat or sugar, as well as ethical “fair trade” products, and brands that appeal to a particular sector, such as organic foods. All this activity has inevitably strengthened the share that own brands take in the average supermarket. In the United Kingdom, which is generally thought to have the most sophisticated own-brand market, they account for around 42% of all sales, according to the market research publisher Key Note.

The global economic downturn appears to have given retailers even greater power over suppliers. Hard-pressed consumers are increasingly turning to own-brand value goods to stretch their spending power. In the United Kingdom, The Guardian newspaper reported in February 2013 that nearly a quarter (22%) of shoppers planned to buy more own-brand food and drink in 2013. The newspaper added that more own-label products were launched in 2011 than branded equivalents, and that own label has moved from the margins to become the rising star of the supermarket shelves. “Once aimed at those on a low income, the levelling effect of a grim economy means [that] today own-brand is popular with everyone—so much so that upmarket grocer Waitrose got in on the act, launching its ‘essential’ range as a response to the recession,” the newspaper reported.

The Guardian quoted retail analysts Datamonitor as saying: “The cost of ingredients is going up for food brands while there’s been a decline in spend from the consumers. Something’s got to give—and so more consumers are buying own-label.” Own label’s rise has been nothing short of spectacular, according to the newspaper, which quoted Datamonitor as saying that in most of the food and drink categories it analyzes, own labels outperform well-known household brands.

The onward march of own brands continued in 2013 despite signs of economic recovery in the United States, the United Kingdom, and Europe. In the United Kingdom, for example, Sainsbury’s reported in November 2013 that its own-brand goods are growing at more than twice the rate of branded goods. It said that the relaunched “by Sainsbury’s” and “Taste the Difference” ranges are showing double-digit growth. Sainsbury’s value line, “Basics,” suffered a marginal sales decline, and it is in the process of relaunching the range. A factory opened in September 2013, dedicated to production for Sainsbury’s, to produce bespoke premium chilled desserts using only British ingredients. General merchandise and clothing continue to grow at around twice the rate of food sales. Also in 2013 it relaunched the “Tu” clothing brand and extended the “by Sainsbury’s” line into general merchandise.

It is a similar story in Europe. In March 2014 DutchNews.nl reported that sales of the 100 biggest brands in Dutch supermarkets rose only 0.3% in 2013—the worst result since 1998. The top 100 branded products accounted for sales of €7.8 billion in 2013, or almost 25% of total turnover. In the UK, the established retailers such as Tesco have been coming under increasing pressure from discounters such as LIDL and Aldi. Thus the BBC reported in April 2014 that Tesco reported a 6% fall in group trading annual profit to £3.3bn “as it continues to lose market share to discount rivals.” The BBC quoted Philip Clarke, the chief executive, as saying that that it was "impossible" to win against stores likes Lidl and Aldi. He was quoted as saying that: "discounters will never allow you to be cheaper than them. But you can get closer to them."

Emerging Markets Will Drive Growth

According to a report from Interbrand published in early 2014, the development of the emerging markets will be the key driver for retailing in the coming decades. The consultancy predicts that in little more than a decade over half the world’s population will have joined the consuming classes and that emerging markets will account for nearly 50% of the world’s total consumption, up from 32% today. China and India will account for two-thirds of the expansion, according to Interbrand.

It adds that over the previous five years, the world’s leading retail brands—including Wal-Mart and Carrefour—grew their revenues 2.5 times faster in developing countries than in their home markets. These companies are naturally attracted to fast-growing markets, but sluggish growth in domestic markets is also encouraging them to look abroad. Many are looking to develop an e-commerce and mobile commerce presence as well as to invest in physical stores.

Interbrand’s report says that Brazil, with its economic growth, high consumption rates, large urban population, and dynamic retail landscape, is the most attractive market in Latin America and “is the place to be for many of the world’s most valuable retailers. However, the country is not without obstacles to foreign investment, such as high taxes, duties and challenging logistics.”

India is another market that is luring foreign retailers, despite restrictions on foreign direct investment and a challengingly diverse mix of cultures. With a population of 1.2 billion and a large and growing middle class, the appeal is obvious. The report cites forecasts for retail growth of “15 to 20 percent over the next five years, based on strong macroeconomic conditions, rising disposable incomes and rapid urbanization.” It adds that more than half the country’s population is under the age of 25, representing a huge potential market for Internet retailers. As many as 121 million Indians have Internet access, and more than half of them access the web via their mobile phones. Foreign retailers already in the market include Carrefour, Germany’s Metro Group, and Wal-Mart.

Meanwhile, China is clearly a huge potential market that has already attracted massive foreign investment. Interbrand cites forecasts of a double-digit rise in annual sales and “plenty of growth opportunities in second- and third-tier cities.” It adds that China’s own brands are thriving, increasing in brand value this year. Belle, the top retail brand for women’s sportswear, for example, operates nearly 12,000 retail outlets on the mainland, with nearly 200 in Hong Kong and Macau.

The Chinese form the world’s largest luxury goods market, with US$12 billion a year in sales and growing, according to Interbrand. Its report states that “young and affluent Chinese are boosting growth in consumer electronics and luxury goods, as well as the automotive, real estate, banking, and service sectors,” adding that “the sale of luxury goods is expected to outpace the growth of any other category in China.”

Technological Advances and E-Commerce

The giant retailers have been quick to exploit the benefits of advances in IT, as well as the growth of the Internet. The latter medium has created new retailing giants such as Amazon, but it has largely been exploited by established retailers, which view it as simply another distribution channel and a means to drive sales. Sales via the Internet are certainly growing rapidly. In March 2014, a report by the Centre for Retail Research projected that online sales will grow by 16% in the United Kingdom, with the average shopper expected to spend more than £1,000 online for the first time in 2014. The study forecast that UK retailers would register online sales of £45 billion in 2014. Meanwhile, the report forecast, online sales in the United States will grow by 15% in 2014 to US$306 billion, while in Europe sales are expected to rise by 18% to £131.2 billion (€160 billion/US$220 billion).

The report predicts that the United Kingdom, France, and Germany will account for the bulk of the growth in Europe, accounting for 81% of the online sales that are expected in the eight European markets covered by the report in 2014. The United Kingdom is the largest of these, with sales of £38.8 billion in 2013, and in 2014 is expected to account for more than a third (34%) of all online retail sales in the eight European markets surveyed.

In early 2014, research firm Forrester said that e-commerce generated US$231 billion in sales for US retailers in 2013, and this is expected to increase by 13% to US$262 billion in 2014. The growth of e-commerce, which already accounts for about 8% of total retail sales in the United States, is expected to outpace sales growth at bricks-and-mortar stores over the next five years, reaching US$370 billion in sales by 2017, according to Forrester. By 2017, e-commerce is expected to account for around 10% of all retail sales in the United States.

Forrester says that the proliferation of smartphones and tablets is driving growth by boosting the amount of time consumers spend online. More than half of online consumers in the United States now have smartphones, which they use to research purchases, find stores, and seek out the best prices available. Another factor boosting online shopping is the increased investment by the traditional retailers in their online outlets.

Global Sourcing

The major retailers are increasingly sourcing goods from around the world rather than just in their own domestic markets. This not only allows retailers to find the cheapest suppliers in the world, but it also has other advantages. Grocery retailers, for example, can now supply what were once seasonal foods all year round. In the middle of winter, a shopper in London can buy strawberries flown in from Chile.

Tesco has a global sourcing office in Hong Kong, which supplies more than 60% of all clothing and 40% of other nonfood products sold in Tesco’s UK stores, as well as most of the nonfood items sold in the 12 other countries in which Tesco operates. The Hong Kong office is responsible for design, sourcing, overseeing production, quality control, and arranging the customs documentation for approximately 50,000 Tesco product lines. Many of the goods are sourced from mainland China.

Recently, however, a stumbling block to the continued expansion of global sourcing has emerged in the shape of concerns over its contribution to global warming. The concept of “food miles”—the distance food has to travel to arrive on supermarket shelves—has started to gain ground as environmental groups focus on the carbon footprint associated with supermarket sourcing habits. This issue still has some way to play out in the next few years, but already many supermarkets are emphasizing a “buy local, shop local” dimension to their activities as they attempt to “green up.”

Supermarkets Expand Out Of Food

The major supermarket operators around the world have expanded into a whole range of areas beyond their traditional role as suppliers of food and household goods. They now sell clothing, household equipment, music, electronics, health and beauty products, and pharmaceutical goods, as well as financial services, and even cars. This trend is being driven by various factors. For example, in many countries, there are now so many supermarkets that the market has reached saturation point. In addition, items such as electronics offer higher margins than traditional groceries.

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Market Analysis

The five largest retailers in the world are Wal-Mart (United States), Carrefour (France), Tesco (United Kingdom), Ahold (the Netherlands), and Delhaize (Belgium). All have long since expanded outside their domestic markets and now operate on a global basis.

Wal-Mart Stores (the name of the company; Walmart is the brand) operates more than 11,000 retail units in 27 countries around the world as of 2014. Its 2.2 million employees serve more than 245 million customers every week.

Carrefour SA is Europe’s biggest supermarket operator and is the second-biggest retailer in the world, beaten only by Wal-Mart. The group now operates in three major markets: Europe, Latin America, and Asia. With a presence in more than 30 countries, it generates more than 55% of its sales outside France. The Carrefour Group currently has more than 9,900 company-owned and franchise stores. Carrefour’s operating profit grew to €2.24 billion in 2013, according to results released in March 2014, as sales excluding tax slipped 1% to €74.9 billion. Net profit in 2013 was more than six times higher than in 2012, at €949 million. “Carrefour recorded strong growth in a difficult environment,” chief financial officer Pierre-Jean Sivignon was quoted as saying. The French supercenter operator, which jockeys with Tesco for the title of the world’s second-largest retailer behind Wal-Mart Stores, reported its strongest growth in France and Spain in several years.

Tesco operates just over 6,000 stores around the world in 2014, of which 2,979 are in the United Kingdom, and it employs almost 530,000 people in 12 countries, including China, India, Malaysia, Thailand, the Czech Republic, Hungary, the Republic of Ireland, Poland, Slovakia, and Turkey. Tesco says that it “wants to be the most highly valued business by: the customers we serve, the communities in which we operate, our loyal and committed colleagues and of course, our shareholders.” It also says that over the past two years it has removed a number of significant barriers to progress and to underpinning a more disciplined approach to capital allocation.

Ahold, based in Amsterdam, operates grocery stores in the United States, the Netherlands, the Czech Republic, Slovakia, Sweden, Norway, and the Baltic states. In the United States, Ahold owns the Stop & Shop and Giant-Landover supermarkets, and in the Netherlands it owns the Albert Heijn grocery network. At the end of 2013 it had 3,131 stores, 220,000 employees, and total sales of €32.6 billion.

Delhaize Group is a Belgian international food retailer with activities in six countries on three continents. At the end of 2013, Delhaize’s sales network consisted of 3,534 stores. In 2012, the Group posted €22.7 billion in revenues and an operating profit of €812 million. Delhaize has approximately 157,910 employees.

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Further reading on the Retail industry

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