Glimmers Amid the Gloom Final

8/3/2019 Glimmers Amid the Gloom Final

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Retail & Consumer

Glimmers amid the gloom

The outlook or the retail and consumer productssector in emerging markets


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Glimmers amid the gloomPricewaterhouseCoopers 1

Foreword

Well beore the current global economic malaise, multinationals have beenshiting strategy to concentrate on emerging markets: they know thats wherethe growth is going to be. Now, as the developed world economies ace manychallenges, emerging world economies look like they will be relatively better oin the next ew years with emerging Asia appearing to be the star perormer.

Some sub-sectors within retail and consumer products are actually perormingquite well even now. Which are those sectors and why are they out-perorming? Which sectors are being especially hard hit? How are companies

in these sectors responding, and what does the mid-term outlook hold?

This report, produced in co-operation with the Economist Intelligence Unit,ocuses on six segments: ood and general retail, ashion and apparel, astood restaurants, ast moving consumer goods, luxury goods and consumerdurables and electronics and on emerging markets in Asia, Latin America andCentral and Eastern Europe.

The good news rom the report is that the industry as a whole appears to bemore resilient than many others even though some short-term pain is certainlyexpected. We may see that the ortunes o certain sub-sectors are even more

divergent post-recession.

Thank you to our colleagues and the Economist Intelligence Unit. The insightsin the report provide much ood or thought or addressing the challenges andopportunities that lie ahead.

Sincerely,

Carrie YuGlobal Retail and Consumer LeaderPricewaterhouseCoopers


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Glimmers amid the gloomPricewaterhouseCoopers2

Table o contents

Executive summary 3

Introduction 6

Section 1: Retail

Food and general retail 12

Fashion and apparel 20

Fast-ood restaurants 24

Section 2: Consumer products

Fast moving consumer goods 28

Luxury goods 33

Consumer durables and electronics 36

Conclusion 40

Page

This report was written in co-operation with the Economist

Intelligence Unit's industry and management research division.The economic and industry orecasts included are those o theEconomist Intelligence Unit.


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Executive summary


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Executive summary

Multinational retail and consumer-products rms that have increasingly lookedto emerging markets in Asia, Central and Eastern Europe (CEE) and LatinAmerica to drive the next wave o growth will be concerned by their recenteconomic perormance. Consumer sentiment has been bueted on all sidesby a steady stream o negative developments: crashing real estate markets,plummeting international trade, actory closures, unemployment and allingremittance fows. The latest bad news, particularly or Central America, is the

outbreak o H1N1 fu (swine fu).

Yet not all is gloomy. There are some sub-sectors within retail and consumerproducts that are perorming very well despite market conditions. For example,ast-ood restaurants are experiencing almost universal growth in emergingmarkets. This report, written in co-operation with the Economist IntelligenceUnit, discusses the outlook or six retail and consumer-products sub-sectorsin emerging markets: ood and general retail, ashion and apparel, ast-oodrestaurants, ast moving consumer goods (FMCG), luxury goods and consumerdurables and electronics. It ocuses on how companies in these sectors areresponding to the nancial crisis and what the short- to medium-term holds orthese rms.

The main ndings o the report are as ollows:

There is little evidence that the expansion plans o multinational supermarketchains will alter. Multinational retailers such as Wal-Mart, Carreour, Tescoand Metro will continue to expand their operations in emerging markets. Asiaremains particularly buoyant despite the global economic downturn. CEEand Latin America are tougher trading environments. In the latter, retailers areconcentrating on Brazil as their investment market and scaling back their plansin other countries. Worldwide, discount and private-label goods are perormingwell and retailers are expecting a larger share o revenue to come rom private-

label goods.

For apparel retailers, Asia is the most exciting growth region. China and Indiaare both expecting double-digit growth in sales. European retailers have madesignicant strides into CEE and Russia, spurred on by the regions low costbase or manuacturing. However, consumer spending on apparel has shrunksignicantly, with the exception o a buoyant discount sector. Latin Americaalso oers little growth in 2009.


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Executive summary

Fast ood is proving to be recession-proo in emerging markets. In Asia, afuentconsumers are trading down rom ne-dining options, but they and lower-income consumers continue to be able to aord to eat out. Restaurant chainsare rapidly increasing their outlets and are keeping costs down to und thisexpansion. Russia and Turkey are the ocus or international restaurant chainsin CEE. Brazil is a battleground or ast ood in Latin America, and McDonaldsis in the lead.

The FMCG sector aces competitive threats rom retailers private-labelgoods. FMCG companies ace an increasingly competitive environment,as consumers ocus more on cost and less on brand name. Additionally,the FMCG environment remains immature and ragmented in some areas,particularly CEE and Latin America. The exceptions are some o the chocolateand conectionary brands. The trend across Asia and Latin America is or rmsto penetrate markets more deeply and reach lower-income consumers. At thesame time, they are concentrating on reducing their supply chain costs andinvesting in marketing.

Sales o luxury brands are tumbling in CEE and Russia. Depressed oil pricesand the real estate slump have slashed the number o Moscow billionairesby 60%. This has had a serious impact on the sales o luxury goods. In CEEand Turkey, brand awareness in the luxury sector does not necessarily equateto sales. Sales are slowing in Latin America, but luxury rms will continueto expand cautiously and ocus on long-term brand building. Asia has thebrightest outlook by comparison. Despite the nancial crisis, rich Chineseconsumers are developing a voracious appetite or luxury goods. India also hashuge potential, but regulation prevents rapid expansion.

Sales o household audio-visual equipment are suering in the downturn; PCsand TVs continue to sell. These are turbulent times or consumer electronicscompanies, as their goods are expensive one-o purchases that consumerscan delay or orego. O the three regions examined in this report, the pictureis most rosy in Asia. Asian consumers are likely to continue spending onelectronics, particularly on TVs and computers. CEE, Russia and to someextent Turkey will see household electronics and audio-visual equipment sellingin lower volumes in 2009 than in 2008, although there is still growth in sales oPCs and TVs. The same trend is true in Latin America. Household audio-visualequipment is set to see a double-digit decline in Brazil across 2009. Computersales will hold their ground.


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Introduction

Introduction


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Introduction

The global economy remains in a volatile state. Though there are someglimmers o hope, mostly in the orm o slowing rates o decline in somekey indicators such as unemployment, a genuine and sustained economicrecovery remains a longer-term prospect. The global economy will contractby 2.6% in 2009 and return to marginally positive growth o 1.8% in 2010,with a real recovery setting in ater 2013. Even then, the hangover rom the

nancial crisisthe loss o jobs, the bankruptcies o many businesses and thedestruction o wealthcould prevent global economic growth rom returning tothe speed witnessed in 2004-2007 or some years to come.

While the outlook or the developed world over the next two years is notoptimisticthe US, the Euro zone, the UK and Japan will see economiccontractions o between 2% and 7% and only sluggish recovery in 2010theemerging world economies look relatively better o. Overall, emerging Asiawill be the astest-growing region in 2010-2013, although this rosy outlookrelies heavily on relatively robust growth in China and India. Parts o CEE willbe severely hit, with the recession compounding already serious economicproblems such as largeand potentially unserviceableexternal nancingrequirements. Prospects in Latin America do not look much brighter.

Given the deeper impact o the economic downturn on developed economies,many multinationals (outside the nancial services sector) are expected toput renewed emphasis on emerging markets as an engine o uture growth.Retailers and consumer-products makers are no exception. But how areindustry-changing trends being elt elsewhere in the world aecting thesemarkets? The aim o this report is to provide an overview o how the economicdownturn has aected the retail and consumer-products industries in emergingmarkets thus ar and the outlook or the medium term.

For now, consumer condence, with a ew exceptions, remains low. Credit istight in developed markets despite government stimulus packages, and there isuncertainty in emerging markets as well. Globally, retail sales are down. But notall regions are suering equally.


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Introduction

Growth in retail sales by volume, global (% pa)

Growth in retail sales by volume, Asia (% pa)

2006 2007 2008 2009 2010 2011

North America 2.0 0.6 -4.1 -4.7 0.0 0.8

Western Europe 1.0 0.9 -1.9 -4.0 -0.9 1.1

Economies inTransition* 9.5 10.7 9.6 -3.6 2.2 4.6

Asia andAustralasia

4.6 5.0 6.4 0.4 4.2 4.3

Latin America 4.5 5.9 6.5 -5.3 0.4 3.0

Middle East andAfrica

4.8 5.0 2.3 -1.1 5.4 5.7

World 3.1 2.8 1.0 -2.9 1.4 2.5

Source: Economist Intelligence Unit

*Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine

Estimates

Forecasts

Estimates

Forecasts

Asia. Asian retail sales will be less badly aected by the global crisis thanthose elsewhere. Where growth in worldwide sales slowed to an estimated1.0% in 2008, rom 2.8% the year beore, Asia and Australasia witnessedgrowth o 6.4%, up rom 5.0% in 2007. There will be marginal growth o 0.4%in real terms during 2009, with growth dragged down by the slump in Japan,while North American sales are predicted to all by 4.7% and those in WesternEurope by 4.0%.

2006 2007 2008 2009 2010 2011

China 11.8 11.4 17.2 7.6 9.0 8.3

Hong Kong 4.5 8.4 7.0 -5.8 0.8 1.1

India 5.0 4.3 4.3 7.5 6.0 6.5

Indonesia 2.0 11.3 5.5 1.0 3.3 3.2

Japan 0.6 -0.2 1.4 -7.8 0.2 -0.3

Malaysia 4.9 10.1 3.5 1.1 2.9 1.7

Philippines 4.3 5.3 7.6 -13.8 3.5 4.6

Singapore 4.6 7.2 -2.2 -8.8 2.7 2.7

South Korea 2.4 4.8 -1.8 -5.4 3.0 3.4

Taiwan 3.8 4.4 0.4 -0.6 1.2 2.4

Thailand 2.7 1.5 5.1 -3.9 1.6 6.3

Vietnam 4.1 9.3 3.2 9.1 5.2 2.1



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Introduction

This is not to say that the global recession is not aecting Asia. Both matureand developing markets in the region will contract during 2009, led by thePhilippines, Singapore and Japan. China, the regions biggest retail market, willsee growth slow to 7.6% in 2009, down rom 17.2% in 2008 and will recovermomentum only slowly thereater. In India, Asias third largest retail market aterChina and Japan, the volume o retail sales is orecast to rise by 7.5% in 2009,

up rom 4.3% in 2008. Vietnam will be the star perormer, with growth o 9.1%in 2009, though this is orecast to slow in 2010.

Economies in transition. Compared to Asia, the situation is moreserious in central, eastern and southern Europe, where a decade o retail andbrand growth has come to a shuddering halt. Transition economies have gonerom a 9.6% annual growth rate in 2008 to a projected contraction o 3.6% in2009. The widely held view that the regions economic engines were strongenough to maintain growth levels in spite o the declining economies o theWest has shown itsel to be spectacularly o the mark. Unlike in WesternEurope, where retail markets are more mature, multinationals operating inemerging Europe have ound their ortunes intrinsically entwined with the healtho real estate markets.

Growth in retail sales by volume, CEE (% pa)

Many countries in CEE had ambitiousplans or shopping centre constructionbut have seen their unding dry up.This trend is particularly evident inRussia, Ukraine, Bulgaria and Romania.By regional standards Poland and theCzech Republic are more mature andeconomically transparent, cushioningthe impact o the downturn on theirretail sectors.

2006 2007 2008 2009 2010 2011

Bulgaria 6.1 2.8 0.1 -7.3 -0.5 2.4

Czech Republic 3.8 5.4 1.5 -7.7 1.1 3.6

Hungary 2.5 -4.3 -4.6 -6.1 -1.3 2.9

Poland 7.2 8.0 10.3 -2.9 1.5 4.3

Romania 24.0 17.8 14.2 3.0 4.3 6.9

Russia 14.1 16.1 13.5 -3.0 2.5 4.3

Slovakia 5.9 4.7 20.7 -3.8 1.6 4.7

Turkey 3.0 3.4 -1.2 -5.0 -0.2 2.4

Ukraine 10.0 15.3 2.0 -12.1 -2.3 2.3


Estimates

Forecasts


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Introduction

Growth in retail sales by volume, Central andSouth America (% pa)

2006 2007 2008 2009 2010 2011

Argentina 4.8 11.4 16.6 1.0 0.1 4.1

Brazil 3.4 5.7 9.0 0.1 0.5 2.0

Chile 3.8 6.3 6.4 -3.0 5.1 5.5Colombia 4.9 4.4 0.6 -2.3 2.7 4.0

Ecuador 5.1 1.8 2.7 -7.8 -2.7 -0.1

Mexico 4.4 4.0 3.1 -14.1 0.3 2.7

Peru 3.1 8.3 8.3 5.9 6.0 4.7

Venezuela 15.4 13.9 4.9 -4.7 -6.3 0.5


Turkey is still well regarded as a long-term prospect because o its youthulpopulation and its geographical position as a bridgehead between the MiddleEast and Europe, but it will suer a slump in the short term.

Central and South America. Data show that countries in CentralAmerica, particularly Mexico, have been hit hard as the economic woes in theUS damage exports as well as remittance fows rom oreign workers. Morerecently, the swine fu drama has acted as an additional drag on consumercondence in the northern part o this region.

Further south, notably in Venezuelaand Argentina, other problems such asinfation are aecting purchasing power

and the retail sector. Brazil and Chilestand out as markets where retailershave condence in the latent potential,regardless o the current economiccircumstances.

Estimates

Forecasts


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Section 1: RetailWestern-style retail outlets have beenspringing up across emerging marketsor the past 15 years. These includesupermarket and hypermarket chainsthat sell branded consumer products aswell as the retailers private-label goods,ootwear and clothing stores and ast-oodrestaurants and coee chains.

This section discusses how these industrieshave been aring in the nancial crisis.

Have they been able to build brand loyaltydespite their relatively short history, orwill consumers return to their previousconsumption habits? Will a Big Mac seemlike a luxury item when times are hard? Andhow will retailers manoeuvre to maintainand even gain market share?


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Section 1: Retail

Although sales o ood and other essentials are less aected by economicrecession, this is true largely in volume terms. Consumers can cut back onexpensive ood items such as meat, switch to lower-priced brands or buy inbulk to benet rom economies o scale. They can choose to shop at discountstores or even revert to the inormal sector. All o these require a responserom retailers, who may also be grappling with constraints in regulations or real

estate markets.

Rising ood and grocery sales in Asia

The outlook or general retail in Asia is relatively buoyant despite the recessionand still refects broader trends. Asians, many o whom used to buy oodat wet markets, are increasingly purchasing meat, ruit, milk and coee atsupermarkets. Diets are becoming richer. In 2008 meat consumption in Chinareached 67.6 kg per person, up 15.3% rom 2004. In India milk consumptionwas 75.6 litres per person in 2008, an increase o 9.4% rom our yearsago. Food retail sales in Indonesia and Vietnam were up 63.2% and 58.4%

respectively in the same period. Although growth in spending on ood isexpected to slow in 2009, it will then rebound sharply.

Key ndings:

Asias ood retail environmentremains buoyant despite theglobal economic downturn.

There is no evidence thatthe expansion plans omultinational retailers in Asiawill alter.

Private-label goods areperorming well worldwide.

CEE is a ercely competitiveregion or the retail sector, andEuropean multinationals areghting or dominance.

Discount retail is perormingwell in the CEE region.

Consumer condence is at aparticular low in Mexico, due tothe nancial crisis.

Multinational retailers arecontinuing to invest in Brazil,while reining in spendingelsewhere in Central and SouthAmerica.

Food and general retail

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

2006 2007 2008 2009 2010 2011

Food sales in Asia (US$m)

1,600,000



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Section 1: Retail

Growth in the ood, beverage and tobacco sector will be sluggish in mosto Asia until 2010. China is one o the only markets that is expected to seepositive growth in 2009, with sales rising by 7% rom 2008 levels. Elsewhere inAsia the picture is less rosy. Indonesia, Malaysia and Thailand are just some othe countries that will witness a contraction in their ood, beverage and tobaccosectors in 2009. However, data show that, in most cases, gures will bounce

back to 2008 levels or higher by 2010.

Consumer expenditure in Asia: food, beverages andtobacco (US$m)

2006 2007 2008 2009 2010 2011

China 338,235 405,352 504,617 540,588 597,066 662,743

Hong Kong 15,323 16,917 17,756 17,228 17,924 18,614

India 207,079 244,094 265,334 266,961 293,564 322,128

Indonesia 121,113 142,085 161,556 150,245 164,939 170,425

Japan 435,114 426,684 494,054 520,487 524,962 531,090

Malaysia 16,733 19,815 22,952 21,319 22,197 22,789

Philippines 41,236 49,998 59,407 59,907 63,399 70,688

Singapore 5,596 6,301 7,157 6,405 6,640 7,011

South Korea 89,713 96,899 84,777 76,188 81,844 87,041

Taiwan 51,874 54,847 58,826 47,828 49,611 53,241

Thailand 34,054 38,841 43,993 40,859 42,510 44,446

Vietnam 18,310 21,878 27,914 28,032 29,726 32,644


The trend towards richer diets has not been lost on ood and general retailcompanies. Enterprises such as meat processor Yurun Food in China, RelianceRetail in India and Hero Supermarket in Indonesia have been expanding at arapid pace, though some are now being orced to rein back growth and opt orrationalisation as their nances come under strain. Multinational supermarketchains like Tesco, Wal-Mart and Carreour are also making great strides nowthat they are allowed to invest in the region.

Estimates

Forecasts


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Section 1: Retail

The global recession is not expected to slow the expansion o oreign retailers,but it may have a negative impact on local companies, particularly small-scaleor single-store retailers that do not enjoy the economies o scale and deeppockets o their larger rivals. Larger chains are in a better position to adddiscount lines to their oerings, including private-label goods, and also havethe buying power to negotiate cheaper supplier prices. The situation is not

entirely stable or the largest retailers, however, which run the risk that hard-pressed Asian consumers may return to purchasing at inormal outlets such aswet markets where prices are cheaper but selection, quality and amenities arelimited. The success o out-o-town hypermarket developments will be linked tothe volume o auto sales in the region since without cars consumers are morelikely to continue shopping in town centres.

For now, ood and retail companies in Asia appear to be operating on theassumption that economic recovery will start in 2010 and gain strength in2011, in part because o hety government scal stimulus spending. TheChinese government has allocated the equivalent o nearly 13% o GDP oninrastructure and incentives or the purchase o retail goods, which is proppingup the sector.1 Sales o cars, urniture and household appliances in particularhave been boosted by subsidies and sharp increases in lending, pushing Juneand July retail growth back up towards 2008 levels. Household income has alsobeen sustained by a all in infation, as a slump in exports increased the supplyo goods on the local market.

Despite this, local companies are working to contain costs, even i it meanscutting back on their ambitious expansion plans. Yurun Food in Chinacontinues to expand and upgrade its production and distribution networks butis also ocusing on eciency and productivity.2 Reliance Retail in India recentlyannounced that it will rationalise its 4.2m square eet o retail space, which

could result in the closure or relocation o some 40 outlets.3

Reliance is alsorenegotiating rents on many o its properties and has also scaled back newstore openings. Like its local rivals, the Future Group, Videocon and Indiabulls,it is switching its ocus away rom the cash-and-carry sector towards smallerstores.


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Section 1: Retail

One reason or setting up smaller stores is that the payback period is shorter;the other is the increasing competition in the cash-and-carry sector asinternational retailers move in. In India, oreign companies cannot invest inmulti-brand retail businesses, but they can own up to 51% o consumer-targeted retail chains in partnership with local companies and 100% o cash-and-carry wholesale ventures. Metro o Germany already has ve cash-and-

carry stores in large Indian cities, while Wal-Mart o the US recently opened itsrst store under its deal with Indias Bharti Enterprises. Tesco o the UK plans asimilar venture with local Tata Group and Reliance itsel is in talks with Frenchretail giant Carreour, which hopes to open its rst store at the end o 2009.

Carreour and Wal-Mart have also made signicant inroads into China, wherethey own 1374 and 1465 stores respectively and plan to open another 12-20each per year over the next ew years. Their presence has helped to reshapethe retail market in the larger cities, but the our biggest retailers (which alsoinclude local groups Lianhua and China Resources Enterprise) still controljust 3.2% o total retail sales, suggesting plenty o room or development.The government is actively trying to encourage consolidation among smallerretailers to increase their competitiveness.


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Section 1: Retail

Consumers turn to private label

The downturn has put the spotlight on one trend in particular: private label or private-label retailing, in whichsupermarket chains sell goods under their own name. These goods appeal to consumers because they are cheaperand to retailers because they oer higher margins. Private label has grown strongly in the US and Europe, but untilnow the trend has been slow to catch on in Asia.

Retailers across the regionand particularly in Indiareport a strong increase in the sales o private-label goods.

For example, Vishal MegaMart, a major Indian retailer, reports that in recent months the sale o private-label productshas risen rom 5-6% o revenue to 17-18%. The company expects private label to account or 50% o revenues by2011.6

India may be Asias most receptive market or private-label goods. Today, private-label goods account or 10-12%o the retail market there, and leading brands are ar less dominant than in other countries. In the apparel sector, orexample, the top seven brands account or less than 10% o total clothing sales. Indeed, Indian customers are otenmore loyal to retailers than to the branded products that they stock.

The biggest local players in the Indian private-label market are Trent (nearly 90% o the products it sells are privatelabel), Reliance Retail, Pantaloon, Nilgiris, Indiabulls/Piramyd and Foodworld. The main oreign retailers ocusing on

private label are Wal-Mart and Tesco. While the strongest sectors or private label are apparel, consumer durables,home care and ood, there is activity in other areas such as electronics. Inniti Retail recently announced plans to sellits own brand o computer laptops.

China has historically been a more dicult market or private label. Research by the Boston Consulting Group oundthat Chinese consumers are more brand conscious than Americans or Europeans. Nevertheless, acceptance isgrowing as Western retailers push private label.7 UK retailer Tesco plans to introduce 400 o its own brands into itsHymall Stores in China. In electronics retail, Best Buy recently added private-label LCD TVs to its existing line-up oprivate-label items.

In Vietnam, the economic slowdown has similarly pushed domestic and multinational retailers to ocus on private

label. Metro Cash & Carry o Germany recently introduced private labels or ood in its Vietnam stores. FrancesCasino Group intends to introduce its own brands or 80 items. Local retailers have been active, too. The Citimartchain o stores plans to introduce its own brands. Likewise, Saigon Corp, the countrys leading retailer, has launcheda Co-op Mart brand or rozen and dried oods and a separate brand or apparel.8

In Indonesia, several retailers, including Hero Supermarket and Ramayana Lestari Sentosa, promoted private-labelbrands in the early 1990s as a way o regaining protability. Today, many o the hypermarkets in the country continueto do so, including French retailer Carreour. The most common products or private labels are basic householdgoods: tissue paper, cleaning products and cooking oil, among others. Some hypermarkets also sell private-labelelectronic appliances and apparel.9


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Section 1: Retail

Fiercely competitive retail environment in CEE and Turkey

The global nancial crisis has hit the CEE region hard and the operatingenvironment or retailers is made even tougher by the number o multinationalspresent. Tesco (UK), Ahold (Netherlands), Auchan (France), Carreour (France),Metro (Germany), and discounters Lidl (Germany) and Aldi (Germany) are allwell established regionally as ood anchors in malls or as hubs o smallercentres.

Tesco has a powerul regional presence and recently opened its rstdepartment store, My Liberec, in the Czech Republic. It is also market leader inHungary as o 2008, according to Nielsen, a market-research company. Ahold,which was brought to its knees by over-expansion several years ago, retainsthe CEE region and the Baltics as power bases. Metro and Carreour completethe quartet o European retailers with strong presences here. Yet there is urtherroom to expand. According to Gk Polonia, a market research rm, only 60% othe Polish population does their shopping in modern retail outlets.

There are strong prospects or discounters to outperorm the market,particularly in the Czech Republic, Poland and Slovakia, where they alreadyaccount or 20% o sales. Aside rom Lidl and Aldi, there are strong localdiscount operators such as Biedronka in Poland (owned by Portuguese retailerJeronimo Martins), which owns 60% o all the discount stores in the country.10Double-digit discounter growth is also expected in Romania and Bulgaria, albeitrom a low base.

Europes biggest potential prize, Russias grocery market is dominated byhome-grown retailers that have expanded rapidly while many internationalchains procrastinated. X5 Retail Group operates a mix o hypermarkets,supermarkets and hard discount stores and is the market leader. Independentretailers are struggling, and a national network o 50,000 consumer co-operatives known as TsentroSoyuz could unite under a single banner. Frenchgroup Auchan and Germanys Metro Group are the biggest o the internationalchains. Germanys REWE is expanding, while both Carreour and Wal-Mart arein acquisition talks.


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Section 1: Retail

Despite Russia still oering huge market opportunity (the top ve grocers havea combined share o around 9.5% o Russia's modern grocery distribution,according to Planet Retail, a research company), the market is proving to bechallenging or even the most established operator. X5 Retail Group posteda loss or the rst quarter o 2009, blaming oreign exchange actors hikingthe value o the rms US$1.1bn syndicated loan. The company is now

ocusing more sharply on costs and oering an increased range o private-label products. Oleg Vysotsky, managing director o X5s supermarket chainPyaterochka, says that private-label products will account or 50% o sales by2014. That is an acceleration o an existing strategy last year, the companysaid it would increase private-label sales to 40% o the total by 2012.11

In Turkey, the retail sector remains highly ragmented. Traditional retailers stillaccounted or about 60% o the retail market, compared with about 40% ororganised retailers at the end o 2006.12 More recent data estimates the top-ve players have a market share o just under 20%, according to Planet Retail.Among them are three major oreign retailers: Carreour, Metro and Tesco.Domestic discount chain BIM operates 1,000 stores in Turkey while the largerMigros-Trk is on a growth drive o eight store openings a week since its 2008acquisition by private equity house BC Partners. Further investment is likely tobe curtailed by weak consumer condence throughout 2009, due to soaringunemployment, a sharp all in the value o the Turkish lira and domestic creditconstraints. As the retail environment starts to improve into 2010, however,consolidation should gather pace, with discounters leading the trend.

Consumer condence down in Latin America, yet Brazil holdspromise

Ater a ve-year period o sustained growth, retail sales in Latin America nearedUS$1trn in 2008. Nevertheless, companies operating in the region now ace amuch tougher environment, as income per capita is expected to shrink in mostcountries. Mexico and Central America, which have been hit the hardest by thenancial crisis, look more vulnerable, as do Argentina and Venezuela, whereinfation is high (though Argentinas ocial rate is much lower than Venezuelasand alling). As a result, retail sales in the region are not expected to come backto their pre-crisis level beore 2011 at best.


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Section 1: Retail

As the economic environment has tightened, Latin American shoppers haveresponded by trading down market and looking or bargains. Retailers haveocused on oering low-price and discounted products. Large retailers havealso expanded their portolios o private-label products. In Brazil, private-labelproducts accounted or 7% o total sales in 2008 and are expected to increaseto 9% in 2009, according to the Associao Brasileira de Marcas Prprias,

Abmapro.

Foreign multinationals such as Wal-Mart and Carreour have increasedtheir presence in the past 15 years and will take advantage o opportunitiespresented by the crisis, although small retailers and the inormal sector stilltypically account or more than hal o the market. In October 2008, Mexicosthen third largest retailer, Controladora Comercial Mexicana, led or bankruptcyater suering huge losses in exchange rate derivatives contracts. The demiseo this domestic retail giant has strengthened Wal-Marts dominant position,and its local unit Wal-Mex vows to expand through aggressive investmentsin 2009 and price cuts, which may result in narrower margins. Its main

competitor is Soriana, which is ocusing on improving its services and oeringcheaper goods, although it looks more vulnerable than well-capitalised oreigncompetitors.13

Wal-Mart has also taken a leading position in Chile, ater buying 73% olocal supermarket chain D&S in spring 2009 or US$3.1bn14. The market is acompetitive one and is expected to contract in 2009, but retail sales shouldreturn to growth o over 5% a year by 2010. Wal-Mart, Carreour, and Casino-owned Po de Acar have also unveiled ambitious investment plans in Brazilor 2009indeed, Po de Acar has already announced that it has acquiredPonto Frio, the second largest appliances and electronics retailer in thecountry15. The purchase will make Po de Acar the largest retailer in Brazil.

Despite the economic conditions, they still believe that the market has hugelong-term potential. The retailers are less optimistic about other markets in theregion. For example, Carreour, Wal-Mart and Cencosud have already decidedto scale back investment in Argentina. Carreour has also cut its spending plansin Colombia.


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Section 1: Retail

Large, youthul populations, high interest in ashion and increasing levels odisposable income in emerging markets have attracted numerous multinationalapparel chains. As they struggle in Western markets, apparel retailers will becareully assessing opportunities to enter new countries and capture marketshare where they already have a presence.

Asia oers exciting growth or ashion

China is the biggest apparel and ashion market in Asia, with domestic clothingsales worth US$33.1bn in 2008. The high-end apparel market is dominatedby international brands rom France, Germany, Italy, Japan, US, UK and SouthKorea. The lower end o the countrys apparel market, which targets youngpeople and students, is dominated by local Chinese brands. The overall marketis orecast to grow to US$37.1bn in 2009 and US$42.9bn in 2010.

India is the regions third largest apparel market ater China and Japan, but it

is expected to grow at a aster rate than either over the next two years. Thecountrys US$5.8bn clothing market is predicted to rise by 6.3% in 2009 and4.8% in 2010 in real terms. The key drivers are rapidly-growing disposableincome, more shopping malls ocused on apparel and increased use o creditcards. There are constraints, however: poor inrastructure and infexible labourlaws prevent even aster growth. Nevertheless, India is attracting oreigninvestment. The country is a ocus or Inditex, the Spanish clothing retailer,which plans to open 25 Zara shops by 2010 in partnership with the TataGroup.16

In Vietnam, the deregulation o the countrys retail market this year is sparkingthe interest o oreign brands. The economic crisis has reduced local incomes,

but there remains strong demand or apparel rom the countrys youngpopulation: retail sales o clothing are orecast to grow at nearly 15% year-on-year, according to research rm RNCOS. Top-end brands including Dolce &Gabbana, Gucci and Valentino have made inroads among the countrys elite,but lower-priced labels such as Giordano, Bossini and Mango enjoy wideracceptance. Japanese retailer Wacoal, which manuactures its clothes inVietnam, is now also planning to open a store in Ho Chi Minh City in 2009.17

Key ndings:

Asia is the most excitinggrowth region or apparelretailers, with China and India

both expecting double-digitgrowth in sales.

The Vietnamese market haspotential or apparel, andretailers are taking cautioussteps.

Indonesia holds little promiseor apparel in 2009 or 2010.

The low cost base o the CEEregion and Russia is attractive

or multinational retailers, yetconsumer spending on apparelhas shrunk signicantly.

European retailers are makingstrides in Latin America, eventhough there is little growth. USplayers are more cautious.

Fashion and apparel


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Section 1: Retail

With its large, young and increasingly brand-conscious population, Indonesia isan attractive long-term market, although exchange rate actors will come intoplay over the short term as the rupiah is expected to depreciate against theUS dollar. Indonesias clothing market will barely grow in nominal terms during2010.

Given their size, China and India will be a particular ocus or both oreign anddomestic apparel makers. VF Corp and Levi Strauss, or example, enduredlarge shortalls elsewhere in 2008, but posted signicant gains in these twocountries. In China, many apparel retailers are pressing ahead with expansionplans: Swedish retailer H&M intends to open ve stores, and Gucci plans anew store in Shenzhen.18 Sports apparel retailer Adidas projects that China willbecome its second-largest market this year ater the US.19

Local Chinese companies are also attempting to gain market share, in partto compensate or a sharp drop in exports. With the encouragement o localgovernments in China, many apparel producers are shiting rom a make to

a create model, whereby they own their own brands. One that has achievedsome success is Aimer, Chinas largest high-end lingerie maker.

Depressed sales outlook in CEE

CEE will be a mixed bag or apparel retailers in 2009 and 2010. Many Europeanapparel retailers are active there, such as Spanish operator Inditex (which ownshigh-street chain Zara), British chain Topshop, Mango, H&M and Benetton. Theorecasts or clothing and ootwear spending in CEE, Russia and Turkey projectnegative or fat growth in many markets in 2009 beore a modest rebound in2010.

Retailers remain largely upbeat. We are looking to expand rom 1,250 to 3,000stores worldwide, and we view the low cost base o CEE, Russia and Turkeyas very attractive or our growth, says Aniko Kostyal, expansion director orMango. Discount retailers such as UK chains New Look, Primark and Peacocksare also eyeing opportunities. The latter already owns stores in Romania andUkraine.20


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Section 1: Retail

Russia is still seen as a particularly attractive market or European retailers and,despite the economic slump, real market growth will hover between 4.3% and6.6% over the next ve years. Anecdotal reports rom several ashion retailersin the mid and value markets suggest sales per store in Russia are amongtheir best in Europe. UK retailer Marks & Spencer has 17 stores in Russia21,and department store Debenhams is in ranchise talks. Value retailers suchas Peacocks are perorming increasingly well, with their model considered tobe particularly suitable or lower-income consumers outside Moscow and StPetersburg.

Turkey has a fourishing textiles and clothing retail market as it has a strong

domestic industry and has also attracted substantial oreign investment,notably rom Italian chain Benetton. Rapid mall expansion in cities outsideIstanbul had been boosting the sector, although many o these plans are nowon hold. The opening o landmark mall Kanyon in Istanbul enabled HarveyNichols, a high-end UK department store chain, to enter as an anchor store.22The market is notable or the number o brands present and also or its tieswith the Middle East. Kuwaiti ranchise giant Alshaya operates more than tenEuropean and North American retail brands there, including Miss Selridge,Dorothy Perkins, Next and Topshop.23 Despite the good demographic proleand appetite or ashion in Turkey, it is not plain sailing or retailers the marketactually shrank in real terms in 2008 and is expected to do so again in 2009beore recovering slowly.

0

2,000

4,000

6,000

8,000

10,000

Bulgaria Czech

Republic

Hunga ry Poland Rom ania Russia Turke y Ukra ine

Consumer spending on clothing and footwear (US$m)

2008

20092010



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Section 1: Retail

Market ragmentation in Latin America

In Latin America, Argentina and Chile have the most buoyant outlook or theapparel sector, as clothing demand is set to rise by 7% and 13.5% in 2009respectively in real terms. Growth in Brazil is predicted at 4.6% but is on aslowing trend. Unsurprisingly, Mexico is estimated to have the worst-sueringapparel sector, with clothing demand declining by 3.4% in 2009. This trend ismirrored or ootwear demand.

Apparel and ashion retailers operate in a very ragmented market in LatinAmerica, which is mostly dominated by local and traditional brands. A eworeign retailers have made an impact in key markets, such as Brazil andMexico, and are beneting rom the increasing number o US-style shoppingmalls in Latin American cities. That said, the disposable income o LatinAmerican consumers will remain squeezed or some time. Pressures to cutcosts, so that companies can preserve margins and nance any expansionplans, will intensiy.

Foreign brands are hugely popular in Latin America, but they are sold in multi-branded stores rather than proprietary retail chains. Spanish-owned retail chainInditex is the main exception; it operates 48 Zara stores in Mexico and hasmore than hal this number in Brazil as well as stores in several other countriesin the region.

In Brazil, C&A, a Dutch retailer, has emerged as the largest apparel retailingchain, ollowing an aggressive celebrity marketing policy eaturing a topBrazilian model. The company has taken the lead over domestic rivals Renner,Riachuelo and Marisa. Nevertheless, its consumer credit arm, Banco ibi, hasrecently reported an increase in payment arrears, which has prompted a reviewo its expansion plans. Within the past three years, C&A launched 55 stores inBrazil.24 In June this year, however, it decided to close its 20 stores in Argentinadue to adverse business conditions.25

Where European apparel retailers are moderately active in Latin America, USrms such as Gap and Levi Strauss have little direct exposure to the marketoutside Mexico. JCPenney, a US department store chain, pulled out o Brazil in2005, ater withdrawing rom Mexico and Chile.


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Section 1: Retail

The ast-ood sector tends to work rom a ranchise model and, consequently,expansion into emerging markets has been rapid and comparatively low riskin nancial terms. Across the board, ast ood is perorming well despite theglobal economic downturn as afuent consumers trade down and low incomeconsumers continue to nd value. Globally, the BRIC countries, with their largepopulations, are o particular ocus or expansion.

Fast ood seems recession-proo in Asia

Developing Asia is home to a youthul population. While the median agein Japan is 44.2 years, in China it is ten years younger at 34.1 years. Thedemographics skew even younger in India, where the median age is 25.3years, in Indonesia 27.6 years and in Vietnam 27.4 years. The Asian culture olow-cost street-ood, combined with the rise o two-income households andan increasingly renzied pace o work and school lie, provides ertile groundor Western-style ast-ood chains. Dominating the market are McDonalds,Kentucky Fried Chicken (KFC), Subway and Starbucks, as well as local brands

such as Mongolian hot-pot specialist Little Sheep (a stake in which wasrecently acquired by Yum! Brands o the US), Yonghe King noodles in Chinaand Jumbo King in India.

The conventional wisdom about ast ood is that it is among the last items thatget hit in a recession as well-to-do consumers trade down rom ne-diningrestaurants and middle and lower-income consumers continue to nd value inits pricing and convenience. Indeed, McDonalds reported a 4.8% increase inglobal sales or the second quarter o 2009, with its US revenues up 3.5% andthose in Asia, Middle East and Arica rising 4.4%. Earnings per share came toUS$0.98.26 In the same period, Yum! Brands, which operates KFC, Pizza Hutand Taco Bell ast-ood restaurants, saw worldwide system sales growth o 3%,including 8% growth in China, prior to oreign currency translation.27

Vikram Bakshi, managing director o McDonalds India (North and East Region),told TheEconomic Times in April 2009 that sales in January this year rose animpressive 20% year-on-year. We are seeing an increase o 14-18% ootallsacross our stores system-wide and are hopeul o achieving record-breakinggures this scal [year], the newspaper quoted him as saying. Unnat Varma,marketing director o KFC India, told the daily that the ried-chicken companyexpects 75% growth in system sales this scal year. I eel that people aremore accepting o the middle-price category than ne-dining options, heexplained.28

Fast-ood restaurants

Key ndings:

The ast-ood sector is provingto be recession-proo in Asiaas consumers trade down rom

ne-dining options, and lower-income consumers continue tobe able to aord to eat out.

There is pressure on ast-oodchains to keep costs down andree up unds or opening newstores.

Russia and Turkey arethe ocus or internationalrestaurant chains in the CEEregion.

Brazil is a battleground or astood in Latin America, andMcDonalds is in the lead.


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Section 1: Retail

The strategies o ast-ood companies in Asia remain the same as they havealways been: aordable prices, standardised portions and quality, ast andconvenient service, ocus on hygiene and good locations. They tailor theirproducts to local tastes (such as the deep-ried twisted dough sticks in KFCstores in China, the McAloo tikki burger and Paneer wrap in India), set upcentralised commissaries and optimise the supply chain and other processes.

Serving sizes look the same as beore the recession, but other cost-cuttingmeasures are being put in place. Starbucks, or example, which has nearly 500stores in China, Hong Kong, Taiwan and Macau, now uses coee beans romYunnan province. The local brew is 30-50% cheaper to produce than beansrom Latin America and Arica, cutting the companys transportation costs andincreasing savings on import taris.29

Strong growth or restaurants and coee chains in CEE

Fast-ood retailers have penetrated every market in CEE. US giant McDonaldshas led the way; Burger King, Pizza Hut and KFC are all well established;

and Subways mushrooming number o stores is refected across the region.Coee chains, led by Starbucks, have also achieved notable growth. New storeopportunities include high streets and ood courts in new malls.

Newly acquired consumer habits seem permanent enough to assume thatast ood establishments are well-placed as a cheap oer. McDonalds hasearmarked over US$1bn or investment in its European operations this year,with CEE being its primary ocus. The company expects to increase its 214restaurants by 50% in Poland over the next three to ve years.30 New CEEentries include burger chains Carls Jr and Hardees, both owned by US-headquartered CKE Restaurants; Burger King has just opened in the CzechRepublic; Starbucks in Poland and Costa Coee are also growing rapidly. In thecoee shop sector, ten chains opened across CEE in 2007.

The 1990 arrival o McDonalds in Russia was symbolic o the decline oSoviet communism. In less than two decades, Russia has become one o thestrongest European markets or the ast-ood retailer. There are conrmedplans or continued expansion. KFC has partnered with local operator Rostik,which has rebranded all its outlets Rostik-KFC. Other local operators includeRusskoye Bistro, Kroshka-Kartoshka and Teremok.


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Section 1: Retail

Regionally the strongest domestic ood market, Turkey has nonethelessbecome a major target or ast-ood ranchise operations. Turkey also has theworlds highest per capita bread consumption at 146kg per annum. InevitablyMcDonalds was rst to arrive, setting up shop in 1985. Expansion o thegeneral retail oer and in particular ood courts at new malls around the countryhave allowed the major brands to establish themselves. Trends associated with

mature markets such as health ood and organic produce are yet to make asignicant impact.

McDonalds reigns in Latin America

Latin American consumers love ast ood, and the region is oten eaturedamong the astest-growing markets or multinational chains, such asMcDonalds and Burger King. Foreign brands are popular although localcompetition is gaining strength, especially in large countries such as Brazil.The prolieration o shopping centres during the extended consumer boomhas allowed or the rapid expansion o ast-ood chains. In times o economic

crises, consumers still go to the malls but tend to spend less on ood, hencethe appeal o cheaper ast-ood restaurants in shopping centres so-called oodplazas.

In Brazil, the dynamic growth o the ood-service sector has been attractinginternational brands or decades. McDonalds is the largest chain nationwide,and Brazil represents the companys eighth-strongest market. Burger King hasbeen active in Latin America since the 1960s, although it has aced dicultiesoperating in Brazil. Ater a ailed attempt in 2000, it only launched its rstrestaurant there in 2004. Across the region, McDonalds has the upper handover Burger King, its main rival, except or in Mexico and some other parts oCentral America.

In Brazil McDonalds has launched a Latin alternative to its world amous BigMac sandwich, with one rather than two bread layers, and no pickles (theconventional Big Mac is still on the menu, however). This alternative is dueto be extended to the rest o the region. The healthy meals trend has caughton in Latin America, and the restaurants oerings refect this shit. There is adiversied menu that oers chicken meals and wraps, ice creams and coees.This was also a way to respond to resh competition rom Subway, another USchain that resumed its Brazilian operations in 2003.


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Section 2:Consumer products

Consumer-products companies have alonger history in emerging markets thanretail companies. Yet the ates o these twosectors are now largely intertwined. The riseo retailers private-label brands and theirability to discount will undermine consumer-products rms in markets where brandloyalty is weak.

As is to be expected, the FMCG sector isproving to be more resilient to the nancialcrisis than luxury brands and consumerdurables such as cameras and televisions.


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The rise o retail presents opportunities and threats, particularly to FMCGcompanies. Increased retail space presents greater sales opportunities, yetthe rise o retailers private-label brands presents a threat. FMCG companiesin emerging markets have avoided a catastrophic decline, particularly at thecheaper endsuch as packaged oods, personal care items, beveragesand tobaccobut there is real pressure on costs. Their strategy is to move

ever deeper into emerging markets to penetrate more rural and low-incomepopulations. They are keeping products cheap and costs down, while investingin marketing and distribution.

FMCG rms spend on marketing in Asia

As their earning power rises, consumers tend to ocus more on physicalappearance and hygiene, including the cleanliness o their homes. Thecorrelation is seen clearly in Asia, where spending on household goods,cosmetics and toiletries has been on the rise along with the expansion in theranks o the middle class. In China, the number o households earning the

equivalent o US$10,000 a year has soared rom 4.4m in 2004 to 20.1m, up357%. Over the same period, spending on soaps and cleaners more thandoubled, rom US$8.9m to US$20.9m.31

Despite the global recession, the steady expansion o the middle classconsumer in China and India is set to continue. Thus, spending on soapsand cleaners in these two large markets will continue to rise, growing 15.1%and 17.1% in 2009, respectively. On the other hand, the ranks o Indonesianhouseholds earning US$10,000 a year is expected to shrink rom 1.6m in 2008to 603,000 in 2009, but this is due to the depreciation o the rupiah againstthe US dollar in 2009. Spending in US dollar terms on soaps and cleaners inIndonesia is expected to stay the same in 2009, indicating an actual increase insales volume. No comparable household income data is available in Vietnam,but spending on the same FMCG items there is predicted to rise 7.5% this yearand another 10.6% in 2010.

Key ndings:

FMCG brands are gainingstrength in Asia, andmultinationals are spending to

capture market share.

However, the demand or lowerpriced goods, and retailersaggressive push towardsprivate-label products, areconsiderable threats to FMCGcompanies.

The trend across Asia andLatin America is to penetratedeeper and reach lowerincome consumers.

Local products originallymade or the export marketare increasingly beingsold at home in emergingmarkets, providing additionalcompetition or multinationalFMCG rms.

In CEE and Latin America, thepackaged ood sectorexceptchocolate and conectionary

remains immature andragmented.

Fast moving consumer goods


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This is comorting news or the regions makers o toiletry items and householdcleaners, particularly or multinationals such as Unilever, Procter & Gamble,Colgate-Palmolive and LOreal, which together dominate Asias ragmentedFMCG markets. It is also good or home-grown companies such as ITC in India,a conglomerate with a signicant personal-care portolio. In the quarter Januaryto March 2009, Procter & Gamble saw organic sales (which exclude the impact

o acquisitions, divestitures and oreign exchange) rise 1% on the back ocontinued strength in Asia, which partially oset middling to weak results in therest o the world.

The key strategy o FMCG companies in Asia in recent years has been toexpand beyond the cities to the countryside, where incomes have also beenrising albeit at a slower pace than in the urban areas. Six years ago, UnileverIndonesia agreed to supply its products to 12,000 wholesalers or distributionto 800,000 traditional vendors in the archipelagos villages. It also spent heavilyon advertising. In one memorable advertisement, Unilever urged Indonesiansto brush with Pepsodent, its toothpaste brand, two times a day, instead o justonce as was the practice at the time.

The current crisis is not likely to change this thrust. Indeed, the rural areasmay prove a more resilient market or FMCG products, given that the majorjob losses tend to occur in towns and cities where services and manuacturingindustries congregate. Products can be packaged in smaller bottle sizes andsachets to make them more aordable to rural populations, and companiesmay make wider use o motorcycles as supply vehicles to negotiate rural roadsthat are too narrow or trucks.

Additionally, domestic FMCG exporters in emerging markets may be temptedto start selling at home as demand slows in the West. Until recently, ChinasLandy International sold all its crystal soaps, herbal essences, lotions and otherbath items to Wal-Mart and other oreign customers. It is now building its ownstores in Shanghai and Hangzhou and hopes to sell hal o its production inChina and the other hal abroad.


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FMCG under price pressure in CEE

In the same way that changing liestyles have boosted the soap and cleaningproducts sector in Asia, CEE is also a ast-growth region or sales o thesegoods. Polands cosmetics and drugstore products market, or example, grewby 13% in 2008, according to PMR, a research company. Interestingly, wheresales o most products are supposed to rebound sharply in emerging marketsin 2010, the slump in sales or soaps and cleaning products will not really hitCEE until 2010.

Sales of soaps and household cleaning products,CEE (%change pa)

2008 2009 2010 2011

Bulgaria 3.0 5.8 -0.3 -0.4

Czech Republic 6.9 10.3 0.2 -0.3

Hungary 3.5 0.9 2.0 2.9

Poland 5.0 8.1 0.0 3.0

Romania 17.2 9.0 3.3 3.7

Russia 12.8 7.5 4.5 6.6

Turkey 1.4 -2.9 7.9 3.9

Ukraine 68.7 -12.2 -5.2 -2.5


In Bulgaria, the Czech Republic and Poland, there is still healthy sales growthin 2009. However, these markets will see an abrupt slowdown in sales in 2010and, in the ormer two markets, sales will sink even urther into 2011. Ukrainestands out as a market where sales o soaps and cleaning products will cometo a screeching halt in 2009. Where there had been 68.7% growth in 2008, themarket or these products will shrink by 12.2% this year. Despite the recession,Russia maintains positive growth in these categories.

For ood and beverage, brand awareness or the main FMCG labels is strongin CEE. Companies such as Danone (France), Unilever (Anglo-Dutch), Cadbury(UK), Coca-Cola (US) and PepsiCo (US) are well established and have beenmaking many acquisitions to secure market share. The beverage sector hasalso been booming in CEE. Consumers are increasingly purchasing bottledwater, carbonated drinks and juices. The alcoholic beverage industry has alsobeen growing and imported brands dominate the spirits sector in most markets.

Estimates

Forecasts


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In Russia, the packaged ood market remains immature and ragmented; thereis an emphasis on basic ood products. There is, however, a high demand ordairy products, chocolate and conectionary. The Russian conectionary marketis the ourth largest globally, although domestic production dominates 90%o the market. The multinationals operating in Russia include Cadbury and USgiants Krat Foods and Mars. Due to the decline o the Russian economy and

pressure on local incomes, the short-term trend is towards low-cost packagedgoods. According to Romir, a research agency, in January 2009 purchaseso groceries and staple goods accounted or 76% o real disposable incomein Russia, a similar proportion to that recorded in 1998-1999 and higher thanin Thailand, India or Ukraine. Compare that with January 2008 when Russianconsumers were spending only 61% o their income on ood. Private labels anddiscounters will almost certainly benet.

Turkeys packaged ood industry is highly ragmented. The top our companies,domestic rm Ulker, Unilever, Nestl and Eti Gidaalso a domestic rmholdjust 16% o the market. Given the large Muslim population, sot drinks are morepopular than alcohol. Coca-Cola dominates the market with PepsiCo in secondplace. Tea drinks are also highly popular. Although alcohol is widely available,consumption is 15% lower than the average or the Organisation or EconomicCo-operation and Development, which groups together 30 o the worldsrichest countries. Tourism may create opportunities or the alcoholic beveragesector to expand. The number o tourists visiting Turkey (in spite o the nancialcrisis) is set to grow by 30m by 2013.

CEE, Russia and Turkey present large markets or the tobacco industry,although sales are alling in some countries as public health measures takeeect. In Poland, sales ell by 3.5% in 2007 and, while they will continue toall, premium brands will gain market share as the rising numbers o emale

smokers preer slim or light cigarettes. Sales are also starting to drop in Turkey,ollowing rising taxation. More than 50% o Turkish men are smokers. Themarket or tobacco has doubled in Russia over the past decade, and this is oneo the largest volume markets or cigarettes in the world along with the US andChina.


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Lowering prices in Latin America

Latin America has vast potential or FMCG brands, and multinationals havebeen operating in many o these markets or several decades. Though productsin the FMCG sector are less sensitive to the downturn than more expensivedurable goods, such as cars or computers, there are signs o slowingexpansion. Currency depreciation in several countries has also had a directimpact on balance sheets in dollar terms.

The Brazilian subsidiary o US-headquartered Kimberly-Clark, or instance,depends on imported products to manuacture nappies and other personalhygiene products, and currency depreciation has thereore caused upwardpressure on prices, highlighting the need to reduce costs. The Braziliansubsidiary says it already has achieved a 5% cost reduction and managed toavoid price increases while maintaining growth targets32.

The most severe challenges come rom changing patterns in consumer

behaviour in times o crisis. Brand loyalty declines, as consumers are attractedby cheaper products, edging out some leading brands. To counter this trend,Danone, a French dairy products company, boosted its marketing budget by50% in 2009 to support sales o its premium Activia yoghurt33.

Adapting the sizes o products and bottles is one strategy that companiesare pursuing to retain customers. Some manuacturers, such as US personalcare rm Johnson & Johnson, are selling larger bottle sizes. Their shampoo orchildren is now being sold in 400ml or 750 ml bottles instead o the usual, andproportionately more expensive, 200ml. Nestl has also launched new productswith cheaper and more basic packaging in Brazil, which has enabled lowerpricing. Kimberly-Clark has also launched cheaper alternatives to its populardeodorants. It has managed to boost sales o that category o products by10% in Brazil last year.

In vast countries such as Mexico and Brazil, ecient logistics and reliabledistribution channels are also a key dierentiator. Procter & Gamble nowintends to regionalise its output in Brazil in order to reduce reight costs34.Meanwhile, decient distribution recently led General Mills to close its singleplant in Brazil in April 2009, which may lead to the extinction o two o itspopular brands, Forno de Minas (cheese bread) and Frescarini (pasta).


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In the past decade, the luxury sector has been a stand-out global success. Thestrategy o investing heavily in marketing and diversiying product oerings toinclude small items and accessories has opened exclusive brands up to thenewly rich in emerging markets. This has especially been an Asian phenomenonbut has also infuenced some o the emerging European markets.

Luxury dees nancial crisis in Asia

Global sales o luxury goods are predicted to all 10-15% in 2009 as consumerstighten their belts and the still-rich rerain rom fashy displays o wealth. Butthis is not the case in many places across Asia. With 15,300 householdsestimated to have net wealth o over US$1m in 2008, China is a particulartarget. The ranks o dollar millionaires there are expected to increase to 18,500households in 2010 and to 24,000 in 2011. By 2015, China is orecast tobecome the worlds top buyer o luxury goods.

For now, Japan, South Korea, Singapore, Hong Kong, Taiwan and the richereconomies o Asia account or the bulk o luxury buying in the region. Japanalone accounts or 30% o the world market. South Korea saw a 47.7%increase in the sales o luxury goods between March 2008 and March 2009, butthis was because o the steep all in the value o the won against the dollar andthe yen, which attracted bargain hunters rom Japan and other neighbouringcountries.

Longer term, the growth is clearly in China and, urther down the road, India.Coach, the US leather goods manuacturer, recently reported that sales inChina rose 30% in the last quarter o 2008, and estimates that by 2010 Chinawill represent 10% o the worlds US$25bn luxury handbag and accessories

market. Not surprisingly, the company has decided to scale back plans to opennew stores in North America, rom 40 to 20, and CEO Lew Frankort announcedplans to accelerate growth in China, where the company already has 17 shops,in addition to its eight stores in Hong Kong and two in Macau.

India is attracting new investment too, though it is seen as a longer-term bet. InMarch, local company DLF Brands announced plans to bring 12-15 top brands,including Donna Karan and Giorgio Armani, to India via 500 stores over thenext ve years. Because o the nancial crisis, DLF will be starting cautiously,building only 40 to 45 stores by 2010, down 25% rom the original target,according to TheTimes of India. Foreign luxury retailers are also interestedin India but are deterred by duties o up to 60% on luxury imports and highcapital requirements required by the government. India is seen as ten to 20years behind China as a luxury market, with Indonesia and Vietnam even artherbehind, although aspirational buying is already evident.

Key ndings

Despite the nancial crisis,rich Chinese consumersare developing a voracious

appetite or luxury goods.

A depreciating won hasbolstered the luxury sector inSouth Korea as the Japanesefock over to snap up bargains.

India has huge potential, butregulation prevents rapidexpansion.

CEE and Turkey are immaturemarkets or the luxury sector,

and brand awareness does notnecessarily equate to sales.

Luxury brands are badlyaected in Russia wheretumbling oil prices and the realestate slump have slashed thenumber o Moscow billionairesby 60%.

Sales are slowing in LatinAmerica, but luxury rmscontinue to expand cautiouslyand ocus on long-term brandbuilding.

Luxury goods


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Running or cover in Russia

In CEE, brand awareness or luxury goods has not always translated into salesgures. Europes central and eastern states, with their burgeoning middleclasses, have not embraced luxury retail with the same vigour as ultra-wealthyMuscovites. As a result the major global brands have ocused instead onRussia, China, Japan and Asia. Recent news that luxury Polish clothing andcosmetics chain Galeria Centrum has led or bankruptcy, with sales down20%, suggest that was wise. The one exception is robust perormance romthe actory outlet sector. In CEE these o-price retail parks are a relatively newconcept, in which mid- to top-tier designer brands sell end-o-season lines.

In emerging Europe, the jewel or luxury brands was Russia and Moscow inparticular (80% o Russias luxury market by sales), yet news that Swedishlow-cost ashion retailer H&M is eyeing the very store closed by design doyenAlexander McQueen neatly epitomises luxurys perilous state. With the numbero billionaires down rom 74 to 27 in a year, a host o designer stores have

closed in Moscow and prospects look gloomy until oil prices recover. Similarly,Russias largest luxury retail group and owner o emporium TSUM has admittedit expects fat sales in 2009. However, some o the biggest global namescontinue to expand. CHANEL and Louis Vuitton both plan additional openingsin Millionniki cities (Russias regional cities with populations o one million ormore), and Harvey Nichols is scouting or a store site in Moscow as real estateprices plummet.

The arrival o Harvey Nichols as an anchor to Istanbuls most prestigiousshopping centre, Kanyon, suggests that Turkey is embracing the luxury sector,but in reality its consumer base is similar to that in CEE. High brand awarenessdoes not necessarily equate to sales gures. However some specialists, such

as Swiss watchmaker Rotap, have backed the markets potential. More broadly,investment has been overshadowed by the signicant opportunities in theneighbouring Gul countries.

A slowdown, but no crash in Latin America

The Latin American market or luxury goods expanded in 2008 and will continueto do so in 2009, albeit at a slower pace. Last year, sales were estimated tohave reached US$25bn, a 10% increase over the previous year, according toMCF Consulting, a So Paulo-based luxury brand consultancy. Latin Americahas never been a priority or luxury brands in global terms. But paradoxically,


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the current crisis and the ragility o the international market may open a newavenue o opportunities in Latin America, says Carlos Ferreirinha, presidento MCF, suggesting that Latin America may emerge as an alternative to thetraditional ocus markets o Japan and Russia or luxury brands.

Historically, Buenos Aires was the regional centre or the luxury industry. Butthis changed during the 1990s, even beore Argentinas devastating economiccrisis. More recently, Mexico and Brazil account or some 60% o the regionalmarket, but long-term prospects or Brazil are brighter, says Davide Marcovitch,president o Mot Hennessy (part o the LVMH group) or Latin America,Canada, the Middle East and Arica. The Mexican luxury resort industry, whichdepends on oreign tourists, was expected to be hard-hit even beore therecent swine fu outbreak.

Sales o luxury products in Brazil expanded by 12.5% in 2008, to US$6bn,according to MCF, but the slowdown will bring more moderate growth o 8%in 2009 (less than hal the 17% experienced in 2007). Ater Brazil, Mexico

and Argentina (where there have recently been new launches and openings),Colombia and Venezuela are the ocus o luxury brand companies, as well asPanama, which has registered strong growth in response to its riendly importregulations. Best-selling articles across the region are ashion and leathergoods, accessories, perumes and, especially in Chile, cars, according to MCF.

Nevertheless, Mr Marcovitch says that brand building and prestige may bemore important than actual sales in Latin American territory. Wealthy SouthAmericans would rather shop in Avenue Montaigne [in Paris] than in RuaHaddock Lobo [in So Paulo]. It is not only a matter o money. Hence, LVMHwhich is opening its sixth store in Brazil this yearhas ocused its marketingstrategy on the quality o its products rather than liestyle values. Mr Marcovitchalso emphasises the importance o personal relations in Latin America, wellbeyond mere public relations.

LVMH has been operating in Latin America or over 30 years with its winesand spirits and over 20 years with leather and other goods. The company alsoowns all o its outlets. Luxury retailers would rather have direct operations,but operating costs are higher in Latin America than in other parts o theworld, says Mr Ferreirinha, president o MCF. Retail space in Brazil is twice asexpensive as the rest o Latin America. Some partnerships with local operatorshave ailed in Brazil, such as Burberry, Kenzo and Ralph Lauren, while PPR(France) took our years to launch its Gucci store in So Paulo in late 2008.


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As expensive one-o purchases, sales o white goods, audio-visual equipment,televisions, cameras, personal computers and mobile phones are more likelyto suer as a result o the economic downturn. There are ew plans or urtherinternational expansion within the sectors, although Asia is the one bright spotwhere sales are holding up.

Asia dees trend

Already the worlds largest manuacturer o consumer electronics, Asia is alsoemerging as one o the biggest buyers o computers, colour TVs, DVD playersand mobile phones. Spending on household audio and video equipment inChina reached US$1.9bn in 2003. In 2008, the gure topped US$7.9bn, up316%. From US$809m ve years ago, Indian purchases jumped 123% toUS$1.8bn in 2008. In the same period, demand in Vietnam climbed 144% toUS$127m.

Despite the nancial crisis, steady growth in demand is orecast in 2009 and2010. Between mobile phones, computers and other entertainment devices,consumer electronics are a high priority or most Asians. Government supportor the Internet and the growth in phone and computer applications are helpingdrive demand. The end o analogue broadcasting, scheduled in many countriesin 2011, is also expected to boost buying o high-denition TVs and new-generation video players and recorders.

Indonesia is one o the ew Asian countries in which a decline in someelectronics sales is expected in 2009. Some 5m TV sets were sold in 2008,driven in part by an exemption rom the luxury sales tax or electronics goodsvalued at around US$100. Only 3.9m units are expected to be sold this year.

But sales o DVD players and personal computers are expected to rise. PCownership in Indonesia is still low, with just 3.6 computers per 100 people in2008, compared with 13.9 in Thailand, or example.

Consumer electronics makers and retailers in the region are cautiouslyoptimistic. The higher end o the market is dominated by Japanese and Koreanplayers such as Sony and Samsung, but local companies like BPL in Indiaare also thriving. Still, strong demand at home hasnt been enough to keepsome Chinese companies rom having diculties. Following a February 2009announcement o a US$95m loss in the ourth quarter o 2008, PC makerLenovo is reocusing on the home market.

Key ndings:

Consumers in Asia continueto spend on electronics,particularly on TVs and

computers.

Though some companies areoundering, most are cautiouslyoptimistic about Asiasprospects.

Online retail is still very muchin its inancy but has mostpotential in China.

The market or consumerelectronics is depressed in

CEE, Russia and, to someextent, Turkey. Householdelectronics and audio-visualequipment are selling in lowervolumes in 2009 than in 2008,although there is still growth inPCs and TVs.

The same trend is true in LatinAmerica. Household audio-visual equipment is set to seea double-digit decline in Brazil

across 2009. Computer saleswill hold their ground.

Consumer durables and electronics


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Online retail in Asia

The prospects or online sales o consumer electronics in developing Asiamay be brightest in China, where nearly 300m people used the Internetlast year. About our out o ten shopped. China boasts 108 PCs per 1,000

people, much higher than the 28.8 machines per 1000 in India, whereduties and taxes on imported PC parts can equal 40% o the price o thecomponent.

However, even in China, the Internet is a long way rom becoming asignicant sales channel or consumer electronics. In a February 2009research report, iResearch Consulting Group noted that online paymentsgrew 181% last year to RMB274.3bn (US$40bn), but online shoppingaccounted or only 38% o that number. Consumer electronics are just 16%o all items purchased online in China in value terms, according to AnalysysInternational, another consultancy.

Channel confict may be an obstacle. For example, Chinese PC makerLenovo has opened an online store on taobao.com. But in February 2009the company indicated that it would combine direct sales with its existingdistribution network in China. Some analysts had wondered whether theonline portal would cannibalise sales rom Lenovos current distributors.A shortage o local retailing websites, low levels o credit-card use,security concerns and inadequate inrastructure also hamper e-commercedevelopment.

The biggest challenge may be simply getting more people online. However,Asian subscribership may grow aster than some analysts orecast i the

promise o WiMAX (wide-area Internet service) pans out. In India, TataCommunications is in the midst o rolling out a 140-city WiMAX network.Strategy Analytics, a US market research rm, predicts the number oAsian WiMAX subscribers will exceed 27m by 2014, including 14m in thesubcontinent.

Korea Telecom has already installed a WiMAX network across South Koreaslargest cities, helping the countrys Internet penetration top 76%, whichis higher than Japans 73.8%, according to the website data aggregatorInternet World Stats. At the other end o the spectrum, Internet penetrationis only 7.1% in India, a reminder that there is a long way to go beoreonline shopping becomes a mainstream sales channel in some o the majormarkets.


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Tough-going or electronics retailers in CEE

Demand or electric appliances, household audio and video is generallydepressed across CEE, Russia and Turkey. Broadly speaking, the TV andPC markets remain healthier than audio-visual and household electricals.Sales o these items are in line with the general economic environment andthereore most depressed in markets such as Ukraine. Even where sales remainsolid, companies operating in this sector will have a challenging time as costpressures and competition intensies.

Europes biggest home electrical and electronics retailers have been quickto expand in the region, with UK-headquartered computer retailer DSGInternational (DSGi), French electronics rm Kesa and Metros Media Marktleading the way. DSGi also bought pan-European Internet-only retailerPixmania, which sells into the region through its country-specic sites.However, the big retailers have had sharply dierent experiences in thesemarkets.

Until recently a powerhouse in the region, UK-based giant DSGi has admittedto very weak perormance in CEE. It announced that the Hungarian operation,Electro World Hungary, has been sold to EW Electro Retail Ltd or a token

consideration o one Euro. Operations in the Czech Republic and Slovakiacontinue to perorm well in their markets, and will remain part o the Group. Thebusiness in Poland remains under review.

By contrast, perormance at Metro Groups Media Markt and Saturn ascias hasbeen supported by strong growth across CEE. Europes other big electricalsretailer, Kesa, continues slow but steady growth with Datart in the CzechRepublic and Slovakia where it owns 32 stores. Russian chain, Eldorado,remains the biggest player in CEE.

In Turkey, the sale o PCs and TVs will continue to grow in 2009, but household

electricals and audio-visual equipment sectors will both shrink to pre-2006levels. However, these sectors are both expected to bounce back in 2010.The downturn is likely to particularly aect local players, as they are alreadysqueezed by the infux o international stores. The market is led by GermanysMedia Markt and Saturn. Darty (part o Kesa Turkey) recently opened its rststores outside Istanbul at Izmir and Izmit, bringing its total to nine stores.Another our will open within 2009.

Audio-visual suers in Latin America

In Latin America, sales o consumer-products electronics, which largelydepend on credit, have been especially hard hit by the nancial crisis ater veconsecutive years o strong growth. The boom had witnessed record PC salesin several countries, including Brazil. In 2008, more computers were sold inBrazil than TV sets.


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Demand or household audio and video equipment is now expected to remainfat in Brazil during 2009 at US$2.5bn and to dip slightly in 2010 beorerecovering. The number o computers is also expected to continue to grow,although at a more modest pace.

Mexico and other Central American countries that are dependent onremittances rom migrant workers in the US and Spain have suered evenmore. In Mexico, this is expected to contribute to a contraction o 8.4% inprivate consumption in 2009. Electronic goods manuacturers have had to dealwith growing security concerns in the border area with the US, especially in thetowns o Ciudad Juarez and Tijuana, which host important assembling zones.Sales o household audio and video equipment actually started to all in 2008in Mexico and may not return to their 2007 peak o US$3.5bn or several years.Nevertheless, the number o computers should increase over the period, albeitmore slowly than in the past.

Samsung is among those that have to cut output due to alling demand.Meanwhile, Japanese-headquartered Panasonic, which has boosted its localoutput to export through the region, stands out as an exception. In Brazil, theleading home improvement and electronics goods retailer, Casas Bahia, whichthrived when there was abundant credit in the market, has since slowed down

its expansion. One o its local competitors, Ponto Frio, is to be bought by Pode Acar (pending anti-trust clearance), which will now become Brazils largestretailer.

Nevertheless, the large computer manuacturers that have invested in LatinAmerica in recent years are there or the long haul. Hewlett Packard, aUS computer rm, has strong positions across the region. It has signed apartnership in Brazil with Foxconn to assemble computers in a joint plant.Meanwhile, Japanese giant Sony has started to assemble its fagship Vaiolaptop range locally. And Dell, which has had a base in southern Brazil ornearly ten years, has invested US$130m in another plant in the state o SoPaulo. It has also abandoned its traditional ocus on the corporate market in

order to compete in the retail market rom the end o 2007.

Kodak (US), Sony and Olympus (Japan) dominate the ast-growing Brazilianmarket or digital cameras. Apples ipods and iphones are increasingly popular,although they are still accessible to a minority o consumers across the region.

Sales o mobile phones have soared in Latin America in recent years.Penetration rates are expected to reach 100 mobile subscriptions per 100inhabitants or the rst time in Brazil in 2011. This shows a rapidly increasingpenetration rate rom 36.4 per 100 inhabitants in 2004. Meanwhile, in Mexico,mobile penetration has risen rom 29 per 100 population in 2003 to 68 per 100

in 2008, and the number o mobile-phone subscribers is expected to rise to90m in 2013 rom an estimated 75m in 2008.


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Conclusion


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Conclusion

Consumer-products and retail companies in emergingmarkets have drawn lessons rom Asias 1997 nancialcrisis, not least the importance o a robust balance sheetdevoid o oreign-currency debt and a strong cash fow,in order to survive weak consumer demand and thedisappearance o credit and to provide the repower to

acquire distressed assets and companies. They have alsogone through the trauma o restructuring, mass ring andcost-cutting. In surviving the Asian crisis, many enterpriseswere arguably better armed going into the global creditcrunch that has now mutated into a global recession.

But this current crisis is dierent and more virulent. The1997 turmoil was largely conned to the region, with somemarkets like China and Australia relatively unscathed.Eventually companies were able to export their wayback to protability and source loans and investmentrom outside the region. This time around, virtually everyeconomy is getting hurt, including the major consumermarkets o North America and Europe, as well as mostemerging markets. And with the global nancial systemunder stress rom the backwash o toxic assets in the US,it has become more dicult or most companies to borrowrom banks and raise unds in the capital markets, at homeand overseas.

Fortunately or Asias consumer-products and retailcompanies, they are in an industry that appears to bemore resilient than most, as the Economist Intelligence

Unit orecasts indicate. Unlike the 1997 crisis, their saviourthis time is not the export markets but the local customer,particularly in China, India, Indonesia and Vietnam, asgovernments embark on stimulus programmes aimedat boosting domestic consumption. Companies shouldthereore retool their products to appeal to local tastes.Indeed, in vast countries like China and India, they mayneed to tailor their wares more nely on a sub-regionalbasis.

While most o emerging Asia will continue to oer growth,albeit slower growth in the short term, several economiesin transition and markets in Latin America will suer sharpcontractions. Russia, always a volatile market, will onceagain require investors with the dedication and localcontacts to ride through this period. In Mexico, companies

will have to be prepared to wait or a recovery not only inlocal markets but also in the vital US market. Strategieswill have to remain fexible to cope with this.

In one respect, this recession is the same as all othersbeore it: consumers are uncertain about their economicprospects, so they are gravitating towards discounteditems. The company that can bring down prices withoutsacricing quality can thus enlarge market share andemerge with brighter prospects when the good timesreturn. Even the afuent are attracted to bargains, asshown by the recent oreign rush or luxury goods inKorea, which were priced in the weak won. The question ishow to discount without sacricing the companys abilityto continue operating as a going concern.

The answer is the same as in other economic crises:become leaner and meaner, cut back-oce and non-essential costs, squeeze concessions rom suppliers,align stang and compensation to levels appropriatein a recessionary environment, close or relocateunderperorming outlets, postpone big-ticket investments.One typical response has gained prominence in this

particular crisis, and that is the optimisation o nancialprocesses. Given the diculty o borrowing and capital-raising, conserving and maximising cash should be acrucial objective. This requires an intensied ocus on cashand treasury managem

Glimmers Amid the Gloom Final

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