Emerging markets offer massive development potential for international retailers but recently published research from Deloitte Touche Tohmatsu underlines that major local operators are also well placed to capitalise. And, Ben Cooper writes, being local carries some significant advantages.

In the almost frenzied atmosphere that surrounds emerging markets, attention tends to focus on inward investment and the opportunities high-growth developing countries offer international conglomerates. Food retailing is no exception and the excitement generated by the rapidly developing supermarket sectors in Russia and China are without doubt a case to point.

But a recently published report by Deloitte Touche Tohmatsu serves as a reminder that the development of these markets is not all about how the likes of Wal-Mart, Tesco and Carrefour can capitalise. These countries have their own aspiring retail players, some already giants in their own right, and those growth opportunities identified by international players are also on offer to ambitious local operators.

According to Deloitte’s 2008 Global Powers of Retail report, companies from China and Russia have entered the list of the world’s 250 largest retailers for the first time. Six retailers from the two countries are in the top 250, including the Chinese company, Bailian Group, at 101, and the Russian X5 Retail Group at number 191.

Moreover, given the regulatory restrictions on foreign ownership in countries such as China and India, local companies have some important advantages over their international counterparts. The implication is that if local companies can modernise swiftly and embrace the best practice evolved by international retailers over generations, they can exploit those advantages – along with their local knowledge – all the more.

X5’s announcement last month that it planned to target expansion in the hypermarket sector underlines the point. The retailer, formed in 2006 by the merger of the leading Pyaterochka and Perekrestok retail chains, also reported a 20% rise in like-for-like sales for 2007. Including new openings, the 868-store group saw sales rise by 53% to US$5.3bn. X5 forecasts like-for-like sales growth of 10% and net sales growth of 36% to 38% for the current year, and plans to open six compact and two large-sized hypermarkets during the year.

The Deloitte rankings may show that in global terms, Wal-Mart, Tesco and the other giants are pulling away from the crowd, but in emerging markets – the countries offering so much growth potential for the medium and long term – they cannot assume they will have all things all their own way. Well capitalised, locally-based groups like X5, which is listed on the London Stock Exchange, represent formidable competition.

“We are beginning to see evidence of consolidation and modernisation in emerging markets that we expect to continue in the coming years,” says Dr Ira Kalish of Deloitte Research. “Traditionally, foreign retailers have dominated in markets such as Russia and China, but the strategies behind the emergence of these new stores reflect a growing maturity among emerging market businesses.”

A strong and well-funded local company can also compete with international players in their bids to acquire other local companies, where regulations permit. For example, only last month X5 announced that it was considering acquiring hypermarket chain Karusel which is owned by Netherlands-based Formata Holding. In December, X5 sealed the acquisition of Moscow-based discount chain Strana Gerkulesia, which followed the company’s $115m purchase of regional chain Korzinka in October.

China also boasts a strong local retail group formed by the merger of a number of smaller operators. Indeed, the Bailian Group was created in 2003 by the Shanghai municipal government partly in an effort to compete more effectively against foreign companies.

Carrefour and Wal-Mart are both eyeing substantial expansion in China but, as Fiona Miller, senior international business analyst at IGD, points out, they both remain dwarfed by large local competitors. “There are undoubtedly significant opportunities for international retailers in the Chinese market. However, it is important to appreciate that domestic retailers have by far the greatest scale in the market and Chinese retailers such as Shanghai Brilliance and Nong Gong Shang have large multi-format portfolios which dwarf that of Carrefour and Wal-Mart,” Miller tells just-food. “Shanghai Brilliance, the number one operator in the market, operates a multi-format portfolio of over 6,000 stores located in prime sites, whilst Wal-Mart has approximately 100 Supercenters.”

Miller adds: “The domestic retailers not only have significant scale, excellent store locations and strong business relationships, but they are very eager to learn, and whilst international players certainly have strength in retailing skills and back-office operations, IGD believes that the scale of the domestic players will continue to dominate China’s domestic market in the short term.”

What is clear, however, is that notwithstanding the strength of local players, international retailers, particularly from Europe, have a lot staked on expansion into key emerging markets. The Deloitte report states: “Facing saturated and intensely competitive markets at home, European retailers are most likely to expand their operations abroad. With the geographic mix of consumer spending shifting away from the US towards Asia, we expect retailers from the US and Europe to seek opportunities abroad to take advantage of increases in consumer spending in emerging markets, and maintain the growth of their businesses.”

In common with other analysts, Deloitte points to India as “the next battleground” for the major retailers. However, given that India’s foreign investment regulations are some of the strictest among emerging markets, here too strong and ambitious local players have an important edge.

As the recently published just-food report, Branded foods in India – Forecasts to 2015, pointed out, some powerful local groups, notably Reliance Industries, India’s largest private company with annual revenues of US$28bn, are making a significant contribution to the development of the Indian retail sector.

Deloitte confirms this in its report, stating that “the leaders of India’s huge business conglomerates appear to have turned their attention to retailing.  Companies in such disparate realms as energy, telecommunications and manufacturing are recycling their excess cash into creating a modern retailing infrastructure.”

Retail development in India is often viewed with suspicion and hostility by smaller traders, and if a major local chain such as Spencer’s can be the subject of angry protests when it opens new stores, as seen in December in Khozikode, companies from overseas can expect even greater hostility.

However, given the rewards on offer in India, international retailers are unlikely to be deterred, Kalish believes. “Some companies are likely to decide that India is a gamble worth taking,” he says. “It is a country which is moving towards a true market economy and has already experienced rapid growth in consumer spending.”

Moreover, there have recently been strong hints that India could relax its rules on foreign investment in its fast-growing retail sector. The Indian government currently bars overseas retailers from investing directly in retail businesses but a number of multinational groups, including Wal-Mart, have set up local joint ventures.

The country’s Department of Industrial Policy and Promotion (DIPP) has appointed an independent agency to study the impact of overseas investment. The agency is set to publish its findings in March. Subodh Kant Sahai, Government Minister for the food industry, said last month: “India may open up its $330bn retail market if the Government is convinced that kirana stores [small, “mom-and-pop” outlets] would not be affected by big retailers.”

In the meantime, Kalish expects to see more global retailers and Indian conglomerates seeking out one another for joint ventures over the coming months and years.