just-food's outlook for 2013: the international retail scene
By Michelle Russell | 31 January 2013
Pressure mounting on international retailers
2012 was undoubtedly a year of economic pressure for grocery retailers, as consumer spending continued to constrict. With little less pressure expected in 2013, will we see the trend towards internationalisation slow further? Michelle Russell takes a look at some of the key trends that will shape the international retail scene.
The developed world has become characterised by a period of relatively high inflation, low income growth and, in some places, high unemployment. It is therefore unsurprising that retailers with strong value credentials have prospered and are likely to continue to do so.
We have seen considerable growth at single price operators, such as Dollar General in the US and the UK's Poundland, who have emerged as key players in recent years. Shore Capital analyst Clive Black believes "this should be their time" and therefore expects "they will continue to flourish" in 2013.
German discount giants Aldi and Lidl have been equally successful and continue to thrive. For instance, Aldi intends to open another 40 UK stores in 2013, bringing its total in the country to over 500 outlets. Some of these will be smaller high street stores, which will help the retailer to become more competitive in the convenience market.
Daniel Lucht, analyst at Research Farm, believes some of Aldi's success has been down to the group's tie-up with brand manufacturers. For Aldi, this now represents around 10% of its range.
"I think that's a bit of a cut off point. If you let a brand into your store, the brand can gain a lot of control over things. Discounters don't like that, they want to be in control so [Aldi] will be careful with that."
Aldi has also expanded its operations in the US where the no-frills discount retailer has had a presence since 2008.
But where some succeed, others must fail. 2012 turned out to be something of a disappointment for Tesco's Fresh and Easy venture in the States. Indeed, the company has signalled that failure to make the venture profitable will likely result in it exiting the market this year.
Tesco's problems in the US have been compounded by the economic challenges of last year, which forced the group to re-focus on revitalising its UK operations. This target will feature highly on its agenda again this year.
Black believes a new trend of scaling back internationalisation and instead focusing on regionalisation is likely to become key in 2013, particularly for the likes of Tesco.
"You're going to find the major international groups will be dramatically different from where they thought they would be 15 years ago in their geographic focus. For Tesco that means the British Isles, Central Europe and elements of Asia."
For French retail giant Carrefour, Black says France and Western Europe, Brazil and China will feature on its agenda. The group has also been busy reviewing its international operations as it looks to focus attention on fewer markets and on revitalising its domestic business. It has already sold businesses in Indonesia, Malaysia, Colombia and Greece, so more could well be on the block this year.
Lucht says the key to success for Tesco and Carrefour in 2013 will be down to leadership and their ability to innovate.
"With Tesco, they're doing a lot of things right, they're innovating on a lot of fronts and trying a lot of things out, there are so many different initiatives, including online. They've been strong to get people to come on Facebook, to buy because of recommendation. They're trying all these things out from their mobile strategy and this is exactly what they need to be doing to fresh their operations. All of them together with hopefully produce the required results.
"For Carrefour ... they've had a lot of management changes in recent years, they have to find ... [success] will be down to the key professionals and once they're [settled] things will get better."
For US giant Wal-mart, Black believes the Americas plus China, Japan, South Africa and Asia will be key focus markets.
India could also feature on the radar of most major international retailer in 2013. Until now, multinational retailers have only been able to invest in cash-and-carry or wholesale ventures with local players, a route the likes of Wal-Mart, Tesco and Carrefour have taken. But with the Indian government last year introducing rules that will allow international retailers to own 51% of multi-brand outlets, are we likely to see the floodgates for investment in this key emerging market flung open?
Black isn't so sure. "India may have relaxed its rules but the devil is in the detail," he tells just-food. "India is a highly complex country, regionally and nationally. It has complex political structures, it's got complex ethnic cultural norms, it's got a very bureaucratic, administrative system to put it politely and it has quite a challenging snakes and ladders planning regime to get through."
Black says that despite suggestions India is a country with a middle class larger than western Europe, the combined store count of ventures part-owned by Wal-Mart, Carrefour and Tesco is no more than 25 stores.
"It's tiny, and as much as we hold Charles Wilson [Booker CEO] in a very high esteem, they have had to be very patient in developing their wholesale activities in India and they don't have more than ten stores there yet. There'll be a lot more talking than doing in India."
In particular, the speculation that Tesco, which operates cash-and-carry outlets with Tata Group in India, may be looking to go it alone in the country, may lead to nothing, Black suggests.
"Tesco is entering a new phase in it's development focused on sweating it's existing assets, building its online capabilities and trying to generate as much free cash flow as it possibility can. I'd be very surprised if Tesco announced it was opening standalone stores in India."
Tesco's focus, as suggested, may be on its domestic and online operations. Likewise, Wal-Mart has said it will invest "more heavily" in e-commerce. Markets on the radar this year are likely to be the UK, US, Brazil and China. These, the retailer says, have the "greatest growth potential" for e-commerce sales.
Dutch retailer Ahold bought online retailer bol.com with a view to building its online capabilities. And the group has already this year announced a doubling in the size of the product range available through its Albert Heijn online store.
"If you look at the European market more than the UK, [growth] going to be around the whole pick-up story," Lucht says. "Chilled boxes and boxing solutions. I think the big issue next year is the move to more and quicker delivery times. Also, pick up solutions. Whether its in-store or something else, that's going to become more important next year."
Over the next 12 months we are also likely to see a growth of digital couponing. This could take on a whole new dimension in 2013 with the launch of a technology that analyses transaction data held by banks.
The system has proved extremely successful in the US already and US firm Cardlytics is set to launch this in the UK this year. It enables retailers, through a third-party company, to analyse shopper habits through their bank statements and insert relevant adverts into these, which are redeemed instantly to the shopper's bank account through just a click on the ad.
As for M&A, both Black and Lucht see activity remaining subdued in 2013.
"You will find pockets of activity in 2013," Black says. "For Carrefour, there are still one or two markets it might want to exist, particularly Poland and Turkey. I think Tesco is done on M&A for a while and I don't think they're looking to get out of any more markets."
Of the US players, he added: "I don't particularly see any more of the US businesses looking to internationalise beyond the Americas ... American retailers don't tend to travel well. There will be lots of speculation about the smaller players like 99p Stores and Poundworld. They'll be talked about in terms of potential activity, but it will probably be more chatter than activity."
Lucht suggests the financial crisis may deter retailers from making that investment. "The banks aren't as healthy as they have been. There has been money around but it's been harder to get hold of."
With consumer incomes under no less pressure heading into 2013, retailers may be bracing themselves for a bumpy year ahead.
Where will be key markets for your business? Do you hope to grow your presence in emerging markets or will your focus be on delivering results at home? Share your outlook for 2013 by completing the just-food Confidence Survey for your chance to win a free subscription to the site. Click here for the survey.
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