Retail sales grow despite recession

First in, first out: that’s the general rule regarding retail and recessions. But with the upturn still predicted to be some way off, are there signs that things might be picking up at last? A report released earlier this year by Deloitte entitled 2010 Global Powers of Retailing suggests retail sales have not been as badly hit by the recession as many at first feared. In fact, despite one of the sharpest economic contractions in decades, the world’s largest retailers were able to increase sales by 5.5 percent in fiscal year 2008 (encompassing fiscal years ended through June 2009, the most recent-available data), with total retail sales equalling around $3.8 trillion. However, it wasn’t all plain sailing, with the report showing that the global recession did affect retailers’ bottom line. Profitability at the largest 250 retailers in the world fell from 3.7 percent in fiscal 2007 to 2.4 percent in 2008.

According to the study, two-thirds of the 184 retailers that disclosed their bottom-line results saw their net profit margin decline in 2008, with 30 retailers operating at a loss. This trend affected almost every geography and category.  Retailers in Europe saw their profitability fall from 4.1 percent in 2007 to 2.7 percent in 2008, while those in North America fell from 3.6 percent to 2.4 percent. Only those in Africa and the Middle East saw increased profitability.

Leisure goods retailers saw their profit margin fall by more than half to 3.1 percent from 6.8 percent. Sales growth for fashion retailers fell into negative territory and profits were cut in half to 4.1 percent. Even food retailers saw profits fall from three percent to 2.2 percent, despite seeing higher sales growth than the other groups at 8.6 percent. Meanwhile, the US-headquartered Wal-Mart Stores, Inc. remained the world's largest retailer, ahead of France's Carrefour Group and Germany's Metro.

"2008 has been a tumultuous year for the global retail industry," says Koen De Staercke, Deloitte's Consumer Business Industry leader in Belgium. "Sales growth slowed and profitability fell, sharply for some. Many retailers 'bought' sales with heavy promotions that hit the bottom line hard.  However, we are already seeing evidence that as economic recovery takes hold around the world retailers should be able to return to a path of improving profitability."

The report unveiled a number of significant findings. Multichannel retailing continues to grow as more companies develop an e-commerce capability; however, online still accounts for only a small percentage of sales. On average, online sales account for 6.6 percent of total sales for the top 100 retailers in the world. Food retailers have yet to embrace e-commerce, with online sales accounting for only 0.9 percent.

"The internet is going to pose an ever-greater challenge for retail in the next decade," says De Staercke. "Retailers need to ensure their multichannel strategy is in place to capitalise on web-savvy shoppers migrating to the net. Secondly, we are starting to see retailers launch targeted marketing campaigns online by offering special deals or discounts through their website or social networking sites. In any case, both national and international retailers still have to define a strategy on how to deal with social media such as Facebook, Netlog, Twitter, etc." De Staercke believes social networking will increase transparency in the retail industry, giving consumers greater access to information about retailers, their products and pricing. "This has the potential to undermine margins by lowering prices to the level of the most desperate seller," he says. "There are great opportunities too, as new touch points open up for retailers to communicate with their customers."

Another key trend to come out of the findings is that emerging market retailers are increasingly set to take on established players - sometimes in their own backyards - with many rapidly becoming world-class players in their own right. "Not only are they well-equipped to compete with the global giants in their home markets, some are becoming competitive in other markets too," says De Staercke. "The next step will be investments into developed markets and some of this is starting to take place. These are typically specialty players rather than food or mass merchandise retailers. The global playing field of retailing is becoming more level."

Finally, while it is clear that global growth will bounce back eventually, it is also apparent that a degree of economic rebalancing is taking place within the sector. "Countries that borrowed heavily to finance excessive consumer spending may experience slower consumer spending growth as households struggle to de-leverage, repair tattered balance sheets and accumulate wealth," says De Staercke. "More of the economic growth of these countries will be driven by exports, business investment and government spending." He expects retail spending growth in markets such as the US and UK to be slower over the next decade, while a larger share of the growth will take place in countries with large surpluses, especially the big emerging markets.

As such, global expansion will be critical for many retailers. Slow growth, heavy discounting and more fickle shoppers in recession-weary developed markets mean retailers should be increasingly focused on international markets, agrees Hana Ben-Shabat, AT Kearney partner and co-leader of the firm's annual Global Retail Development Index Study.

"Retail executives have learned again that core markets like the United States and Europe are not the powerful engines of growth they would like," he says. "Reliance on developing countries for future growth is no longer a 'nice-to-have,' but a necessity. Establishing operations in a portfolio of countries both small and large offers the best path to global success for retailers."

And while many retailers are focused on expansion to larger emerging markets such as Brazil, India and China, the study found many smaller countries - including Kuwait, Uruguay, Albania and Macedonia - represent increasingly attractive opportunities for international expansion. Some of these countries represent good opportunities for retailers to establish regional beachheads (Macedonia, Guatemala), some serve as test markets because of their similarities to other countries in the region (Uruguay), while others benefit from heavily urbanised and wealthy populations (Kuwait). Indeed, the top 10 development opportunities in this year's report are the most diverse mix of large and small markets in its nine-year history: China, Kuwait, India, Saudi Arabia, Brazil, Chile, United Arab Emirates, Uruguay, Peru and Russia.

And it's not just one-way traffic, either. Expansion is also on the agenda for many emerging market retailers, with 92 percent of respondents from emerging markets looking to expand beyond their home market, and close to 30 percent of those saying a developed country is among their top three expansion targets.

"Expansion is no longer about retailers from developed markets moving into developing markets," says Ben-Shabat. "Now retailers from developing markets are using their unique insights into local business and culture to expand regionally in a trend that will shift the global retail competitive landscape." In addition, retailers are looking for fast success from their expansion efforts, with most saying they expect expansion to be profitable within three years of new-market entry. In a similar survey in 2005, retailers were looking for a profit between five and seven years of market entry.

RETAIL EXPANSION

China, India, Brazil and Russia remain the highest priority markets for retail expansion according to executives, with nearly 80 percent citing one of these markets as part of their firms' plans for short-term international growth. Kuwait, Saudi Arabia, Chile, UAE, Peru and Uruguay are also ripe for further development, according to research firm AT Kearney.