c m y k - PricewaterhouseCoopers · PDF filechallenging regional assignment, which has...

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c m y k

c m y k

4 2004/2005 Global Retail & Consumer Study from Beijing to Budapest PricewaterhouseCoopers

52004/2005 Global Retail & Consumer Study from Beijing to BudapestPricewaterhouseCoopers

The following PricewaterhouseCoopers thoughtleadership study is the 3rd edition of an importantregional research project started in 2002. It is also achallenging regional assignment, which has flourishedwithin the framework of “Brand Growth”, one ofPricewaterhouseCoopers’ three main Retail & Consumerindustry priorities.

ObjectivesObjectivesObjectivesObjectivesObjectives

The study seeks to provide a broad picture of theeconomic, social and cultural background to fourteendifferent countries from the Asia and Central & EasternEuropean regions, as well as highlighting the challengesand opportunities for retail and consumer goodscompanies wishing to - or already investing there.

ScopeScopeScopeScopeScope

The study covers a market of nearly half of the world’spopulation, living in the economies with the highestgrowth potential, from Beijing to Budapest:

In Asia:China, India, Indonesia, Korea (South), Malaysia,Singapore and Thailand

In Central & Eastern Europe:Czech Republic, Hungary, Poland, Romania, Russia,Slovenia and Turkey

Take awaysTake awaysTake awaysTake awaysTake aways

The expected take aways of the study are to:• provide a multi-cultural approach, outlining the

specificities of each country in both regions;• provide information and insights on the

demographic, economic and industry trends in eachcountry;

• identify investment opportunities, as well as keyconsumer targets and winning retail formats in bothregions;

• share prospective insights on the retail & consumersector evolution in both regions.

MethodologyMethodologyMethodologyMethodologyMethodology

The retail & consumer sector as analysed in the studycomprises the following information:• distribution activities (wholesalers, distributors,

retailers);• suppliers of consumer packaged goods (CPG);• multinational, regional and local players from both

activities;• food and non-food, ie:

- for retailers: convenience stores, departmentstores, supermarkets, hypermarkets,

supercentres, specialty retailers (apparel, Do ItYourself, drugs, electricals, homegoods, etc),and on-line retailers;

- for CPG companies: food, beverage, tobacco,consumer products, household and personalproducts and luxury goods.

Several abbreviations have been used throughout thereport, which are listed in the appendices (page 191191191191191).

The survey was conducted in the fourteen selectedcountries between April and July 2004, using a generictemplate. The template was structured around threemain investigation topics:1. Economic overview and regulatory environment;2. Demographics and consumer behavior;3. Retail & consumer goods sector: performance,

challenges, opportunities and emerging trends

The output consists of a series of country reports / casestudies which make up a great part of the study. Thesereports are structured according to the original template.They aim at providing a relatively objective picture ofthe retail & consumer structure and market potential ineach country, from a local perspective, while ensuringconsistency of information from one country to another.

SourcesSourcesSourcesSourcesSources

The survey was completed by PricewaterhouseCooperslocal offices in each of the fourteen countries.Complementary research was made using internationalfinancial or economic institutions (World Bank, OECD,IMF), national statistical offices as well as economic andindustry intelligence services (Economist IntelligenceUnit, the World Bank Group). Note that slightdiscordance in figures may be observed sometimesbetween the country reports and the executivesummary. This is due to the use of different sources. Anexhaustive list of all sources used is available in theappendices (page 192-194192-194192-194192-194192-194).

CurrenciesCurrenciesCurrenciesCurrenciesCurrencies

Within the country reports, key figures and salesturnover have been provided in local currencies,together with an indicative conversion rate in USD andEuro as at June 30, 2004. A conversion table for allfourteen countries is available in the appendices(page 192192192192192).

The executive summary and the updated 14 countryreports are available on the PricewaterhouseCoopersGlobal Retail & Consumer website: www.pwc.com/growth.

Foreword

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Executive Summary


INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

Transitional economies across the globe show varying degrees of challenge and opportunity for the retail andconsumer investor. The perspectives in these highly differentiated markets swing from saturation in somemarkets, to high growth potential or niche opportunities in others, or to caution elsewhere.

In light of an increasingly interdependent world economy, however, the advantages of developing a policy forglobal spread in the retail and consumer sector, far outweigh the disadvantages in the long term.

The growth opportunities in Asia, Central and Eastern Europe (CEE) and Russia have been merged into onestudy because a modern retail and consumer sector is a “given” in all three regions, whatever the differingstages of development in individual countries. Although the modernization of the retail and consumer sector inthe countries covered by the report is for the most part driven by multinationals, all areas are seeing theemergence of regional players. As the retail and consumer offerings in the major cities becomes saturated,these companies can seize the opportunities offered in smaller urban centers.

An essential ingredient of a modern retail and consumer sector is the efficiency of its supply chain, and allthree regions covered by the study are deploying considerable efforts to build a modern infrastructure toimprove the logistics process and match the rapid development of larger stores.

All the big multinational players are present in either Asia, CEE or Russia, or in all three as is the case of Metro.Carrefour is the only retailer which has the widest spread, present in ten of the fourteen countries covered bythe study, followed by Tesco and Metro which each have operations in eight of the fourteen. In all, twenty-seven retailers have operations in the fourteen countries covered by the report.

A mix of factors has to be taken into account by the potential investor: the general political, economic andsocial environment in the targeted country on the one hand; the retail and consumer scene, competition, thedegree of foreign penetration and the development stage of local companies on the other.

All these countries have to contend with the impact of ageing populations on their economies.

In general, consumption patterns are changing rapidly in all the transitional economies, which are on differentrungs of the ladder of economic development and social progress. What is certain, is that the retail andconsumer companies present are contributing to build a new middle class which is the linchpin of futureeconomic success and social progress in these regions.

This year’s study has pinpointed six countries with a “GO” recommendation as far as investment is concerned.

Executive Summary

FROM BEIJING TO BUDAPEST:NEW RETAIL AND CONSUMER GROWTH PATTERNS IN

TRANSITIONAL ECONOMIES

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Executive Summary

1.1.1.1.1. What’s new in 2004/2005 for Retail &What’s new in 2004/2005 for Retail &What’s new in 2004/2005 for Retail &What’s new in 2004/2005 for Retail &What’s new in 2004/2005 for Retail &Consumer companies in Asia, CEE andConsumer companies in Asia, CEE andConsumer companies in Asia, CEE andConsumer companies in Asia, CEE andConsumer companies in Asia, CEE andRussiaRussiaRussiaRussiaRussia?????

■ EU EnlargementEU EnlargementEU EnlargementEU EnlargementEU Enlargement

European Union (EU) entry for the Czech Republic,Hungary, Poland and Slovenia will have a mixed impacton their economies. Compliance with EU legislation insuch areas as labor, transport, hygiene, food safety andopening hours will push up costs. But entry will alsorequire higher product quality standards which shouldcontribute to an improved export drive and compensatefor the higher costs incurred elsewhere. At the sametime, entry should generate a more level playing field

AreaAreaAreaAreaArea

Ranking by countryRanking by countryRanking by countryRanking by countryRanking by country Area (‘000 sq km)Area (‘000 sq km)Area (‘000 sq km)Area (‘000 sq km)Area (‘000 sq km)

1 Russia 17,075

2 China 9,597

3 India 3,287

4 Indonesia 1,919

5 Turkey 775

6 Thailand 513

7 Malaysia 330

8 Poland 313

9 Romania 238

10 South Korea 99

11 Hungary 93

12 Czech Republic 79

13 Slovenia 20

14 Singapore 0.6

Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries) 34,338.634,338.634,338.634,338.634,338.6

US 9,600

EU (25 countries) 3,930

World 133,700

Source: World Development Indicator Database, April 2004,

http://www.worldbank.org/data

PopulationPopulationPopulationPopulationPopulation

Ranking by countryRanking by countryRanking by countryRanking by countryRanking by country Population (million)Population (million)Population (million)Population (million)Population (million)

1 China 1,299

2 India 1,065

3 Indonesia 212

4 Russia 144

5 Turkey 70

6 Thailand 62

7 South Korea 48

8 Poland 39

9 Malaysia 24

10 Romania 22

11 Czech Republic 10

12 Hungary 10

13 Singapore 4

14 Slovenia 2

Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries)Sub-total (14 countries) 3,0103,0103,0103,0103,010

US 288

EU (25 countries) 456.4*

World 6,200

Source: The Worldbank Group 2004,

http://www.worldbank.org/data, *Eurostat

and encourage the development of local small andmedium-sized entrepreneurial companies – essentialingredients for social progress and stability. It will be along, but fruitful journey.

An open regulatory environment has encouraged foreigndirect investment in these countries, with the exceptionof Romania (which is now a candidate member) whereforeigners are prohibited from owning land. All thecountries covered by the study are continuedinvestment targets for foreign companies in the retailand consumer sector, with the Czech Republic, Hungaryand Romania attracting particularly high interest in theconsumer electronics sector. Store trading hours are ingeneral extremely liberal throughout the region.

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Certain countries, such as the Czech Republic, Polandand Slovenia, which are strategically placed sharingborders with several countries - and Romania becauseof its low labour costs - can play a pivotal role aslogistic hubs and a vastly improved east-west supplychain.

The food sector in general should benefit new entrantssuch as Poland and Romania with increased revenuesdue to convergence with the Common Agricultural Policy(CAP) and the elimination of previous trade barriers.Food exports meeting the required EU quality criteriashould explode. Having seen the highly positive impactthat Spain has derived from its membership of the EU,these transitional economies have everything to gain ifthey play the game according to the rules. It is ahistorical opportunity.

■ Strength and adaptability of Asian economiesStrength and adaptability of Asian economiesStrength and adaptability of Asian economiesStrength and adaptability of Asian economiesStrength and adaptability of Asian economies

The Asian economies are still enjoying strong GDP andsector growth in spite of the negative impact of SARS(Severe Acute Respiratory Syndrome), the Avianinfluenza and the global economic downturn. Theregion’s capacity to recover quickly from a recessionhas already been demonstrated in 1998 during the AsianFinancial Crisis.

The reports on India and Thailand mention the impact ofoil prices on their economies. The Thai economy hasalso been adversely affected by Avian influenza. India’seconomy is benefiting from its highly successful ITservice sector, as a primary location for outsourcingfrom western companies seeking to reduce costs.

In Thailand, land ownership is restricted and zoninglaws make the development of hypermarkets difficult,but in spite of this, retail expansion is dominated byforeign companies. Indonesia and Malaysia are twoother countries in which foreign retailers are makingincreasingly strong inroads. For example out of the topsix retailers in Malaysia are foreign: three North Asian(AEON / Jaya Jusco, Dairy Farm / Giant andSeven-Eleven) and three European (Carrefour, Makroand Tesco).

Local retailers are extremely dynamic in South Koreaand Singapore, creating tough competition in thesecountries for foreign operations.As far as hypermarkets are concerned, this format hasbeen especially successful in Indonesia (Alfa RetailIndo, Carrefour, Makro) and Malaysia (Carrefour, DairyFarm, Makro and Tesco). At the same time, thetraditionally successful Asian department store isreinventing itself in order to compete with new largesurface stores such as the hypermarket, for example inSingapore and South Korea where the department storesare ranked in the top 10 retailers.

China continues to enjoy an extremely robust GDPgrowth rate (+9.1%1 in 2003) in spite of the SARSoutbreak. The government intends to create 9 millionnew jobs to lower unemployment rates and focus onstimulating domestic consumption to drive sustainablegrowth.

Foreign groups are using the acquisition or partnershippath for entry into China, such as Tesco with the TingHsin International Group or Anheuser Busch with theHarbin Brewery. Speciality stores, devoted to productcategories such as DIY, household appliances,telephony or cosmetics are seen as being importantpoles for future retail development in China.

There are huge income, lifestyle and consumptiondisparities between urban and rural populations inThailand, India and China. The latter two are still verymuch rural economies with a majority of people stillliving in the country. Unemployment and poverty are keychallenges.

1 National Bureau of Statistics of China

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Executive Summary


The presence of multinational food retailers in transitional economiesThe presence of multinational food retailers in transitional economiesThe presence of multinational food retailers in transitional economiesThe presence of multinational food retailers in transitional economiesThe presence of multinational food retailers in transitional economies

ChinaChinaChinaChinaChina CzechCzechCzechCzechCzech HungaryHungaryHungaryHungaryHungary IndiaIndiaIndiaIndiaIndia IndonesiaIndonesiaIndonesiaIndonesiaIndonesia(Mainland)(Mainland)(Mainland)(Mainland)(Mainland) RepublicRepublicRepublicRepublicRepublic

AEON (Japan)AEON (Japan)AEON (Japan)AEON (Japan)AEON (Japan) XXXXX

AHOLD (The Netherlands)AHOLD (The Netherlands)AHOLD (The Netherlands)AHOLD (The Netherlands)AHOLD (The Netherlands) XXXXX

AUCHAN (France)AUCHAN (France)AUCHAN (France)AUCHAN (France)AUCHAN (France) XXXXX XXXXX

AVA (Germany)AVA (Germany)AVA (Germany)AVA (Germany)AVA (Germany)

CARREFOUR (France)CARREFOUR (France)CARREFOUR (France)CARREFOUR (France)CARREFOUR (France) XXXXX XXXXX XXXXX

CASINO (France)CASINO (France)CASINO (France)CASINO (France)CASINO (France)

Dairy Farm International (Hong Kong)Dairy Farm International (Hong Kong)Dairy Farm International (Hong Kong)Dairy Farm International (Hong Kong)Dairy Farm International (Hong Kong) XXXXX XXXXX XXXXX

DELHAIZE Group (Belgium)DELHAIZE Group (Belgium)DELHAIZE Group (Belgium)DELHAIZE Group (Belgium)DELHAIZE Group (Belgium) XXXXX XXXXX

FAMILY MART (Japan)FAMILY MART (Japan)FAMILY MART (Japan)FAMILY MART (Japan)FAMILY MART (Japan)

FIBA (Turkey)FIBA (Turkey)FIBA (Turkey)FIBA (Turkey)FIBA (Turkey)

GLOBUS (Germany)GLOBUS (Germany)GLOBUS (Germany)GLOBUS (Germany)GLOBUS (Germany) XXXXX

INTERMARCHE (France)INTERMARCHE (France)INTERMARCHE (France)INTERMARCHE (France)INTERMARCHE (France)

ITO YOKADO (Japan)ITO YOKADO (Japan)ITO YOKADO (Japan)ITO YOKADO (Japan)ITO YOKADO (Japan) XXXXX

JERONIMO MARTINS (Portugal)JERONIMO MARTINS (Portugal)JERONIMO MARTINS (Portugal)JERONIMO MARTINS (Portugal)JERONIMO MARTINS (Portugal)

KOC GROUP (Turkey)KOC GROUP (Turkey)KOC GROUP (Turkey)KOC GROUP (Turkey)KOC GROUP (Turkey)

LECLERC (France)LECLERC (France)LECLERC (France)LECLERC (France)LECLERC (France)

LIDL & SCHWARZ (Germany)LIDL & SCHWARZ (Germany)LIDL & SCHWARZ (Germany)LIDL & SCHWARZ (Germany)LIDL & SCHWARZ (Germany) XXXXX XXXXX

LOUIS DELHAIZE (France)LOUIS DELHAIZE (France)LOUIS DELHAIZE (France)LOUIS DELHAIZE (France)LOUIS DELHAIZE (France) XXXXX

MAKRO (The Netherlands)MAKRO (The Netherlands)MAKRO (The Netherlands)MAKRO (The Netherlands)MAKRO (The Netherlands) XXXXX XXXXX

METRO (Germany)METRO (Germany)METRO (Germany)METRO (Germany)METRO (Germany) XXXXX XXXXX XXXXX XXXXX

REWE (Germany)REWE (Germany)REWE (Germany)REWE (Germany)REWE (Germany) XXXXX XXXXX

SEVEN - ELEVEN (Japan)SEVEN - ELEVEN (Japan)SEVEN - ELEVEN (Japan)SEVEN - ELEVEN (Japan)SEVEN - ELEVEN (Japan) XXXXX

SHINSEGAE (South Korea)SHINSEGAE (South Korea)SHINSEGAE (South Korea)SHINSEGAE (South Korea)SHINSEGAE (South Korea) XXXXX

SPAR (The Netherlands)SPAR (The Netherlands)SPAR (The Netherlands)SPAR (The Netherlands)SPAR (The Netherlands) XXXXX XXXXX

TENGELMANN (Germany)TENGELMANN (Germany)TENGELMANN (Germany)TENGELMANN (Germany)TENGELMANN (Germany) XXXXX XXXXX XXXXX

TESCO (UK)TESCO (UK)TESCO (UK)TESCO (UK)TESCO (UK) XXXXX XXXXX XXXXX

WAL-MART (USA)WAL-MART (USA)WAL-MART (USA)WAL-MART (USA)WAL-MART (USA) XXXXX

Source: PwC Country reports, Observatoire Vigie

Executive Summary

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52004/2005 Global Retail & Consumer Study from Beijing to BudapestPricewaterhouseCoopers 9

KoreaKoreaKoreaKoreaKorea MalaysiaMalaysiaMalaysiaMalaysiaMalaysia PolandPolandPolandPolandPoland RomaniaRomaniaRomaniaRomaniaRomania RussiaRussiaRussiaRussiaRussia SingaporeSingaporeSingaporeSingaporeSingapore SloveniaSloveniaSloveniaSloveniaSlovenia ThailandThailandThailandThailandThailand TurkeyTurkeyTurkeyTurkeyTurkey(South)(South)(South)(South)(South)

XXXXX XXXXX

XXXXX

XXXXX XXXXX

XXXXX

XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX

XXXXX

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX XXXXX

XXXXX

XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX XXXXX

XXXXX

Executive Summary


■ Increased competition and cIncreased competition and cIncreased competition and cIncreased competition and cIncreased competition and consolidationonsolidationonsolidationonsolidationonsolidation

• Emergence of regional players• Towards a more efficient supply chain

In CEE countries, consolidation in the retail andconsumer sector is, in general, on the increase, therebycreating regional players who are able to generate thenecessary economies of scale to succeed in what is anincreasingly competitive market.

The same trend is apparent in China, where the retailand consumer goods market is developing at anextremely fast pace – and is also highly competitive.Local champions such as Haier, Konka and Galanz inhome appliances, and Shanghai Bailian Group inretailing, are trying to stave off competition from foreigncompetitors through consolidation.

In all the Asian countries covered by the report (with theexception of Singapore – already a sophisticatedeconomy), efforts are being made to improve the highlyinadequate infrastructure and to organise professionalsupply and logistic chains which are essential to a morewidespread development of modern business.

Retail and consumer companies are investing heavily intheir supply chains and Carrefour and Wal-Mart are alsousing China as a major sourcing hub for both their localand global markets.

Cost control and investment in logistics and a moreefficient supply chain are also high on the retail andconsumer sector’s agenda in CEE and Russia.

Executive Summary

2.2.2.2.2. Priority investments for retail andPriority investments for retail andPriority investments for retail andPriority investments for retail andPriority investments for retail andconsumer multinationalsconsumer multinationalsconsumer multinationalsconsumer multinationalsconsumer multinationals

Global retail & consumer barometerGlobal retail & consumer barometerGlobal retail & consumer barometerGlobal retail & consumer barometerGlobal retail & consumer barometer

TerritoryTerritoryTerritoryTerritoryTerritory Organized retailOrganized retailOrganized retailOrganized retailOrganized retail RegulatoryRegulatoryRegulatoryRegulatoryRegulatory RiskRiskRiskRiskRisksector situationsector situationsector situationsector situationsector situation constraintsconstraintsconstraintsconstraintsconstraints

CHINACHINACHINACHINACHINA(MAINLAND)(MAINLAND)(MAINLAND)(MAINLAND)(MAINLAND)

CZECHCZECHCZECHCZECHCZECHREPUBLICREPUBLICREPUBLICREPUBLICREPUBLIC

HUNGARYHUNGARYHUNGARYHUNGARYHUNGARY

INDIAINDIAINDIAINDIAINDIA

INDONESIAINDONESIAINDONESIAINDONESIAINDONESIA

KOREAKOREAKOREAKOREAKOREA(SOUTH)(SOUTH)(SOUTH)(SOUTH)(SOUTH)

MALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIA

POLANDPOLANDPOLANDPOLANDPOLAND

ROMANIAROMANIAROMANIAROMANIAROMANIA

RUSSIARUSSIARUSSIARUSSIARUSSIA

SINGAPORESINGAPORESINGAPORESINGAPORESINGAPORE

SLOVENIASLOVENIASLOVENIASLOVENIASLOVENIA

THAILANDTHAILANDTHAILANDTHAILANDTHAILAND

TURKEYTURKEYTURKEYTURKEYTURKEY

Growing

Saturated

Maturing

Emerging

Growing

Maturing

Growing

Saturated

Growing

Growing

Saturated

Growing

Growing

Growing

Changing

Non- significant

Non- significant

Still strong

Some

Non- significant

Some

Some

Some

Changing

Non- significant

Some

Still strong

Changing

Some

None

None

Some

Some

None

Low

None

None

Some

None

None

None

Low

Source: PwC Country reports, Observatoire Vigie

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52004/2005 Global Retail & Consumer Study from Beijing to BudapestPricewaterhouseCoopers 11

Executive Summary

Retail & ConsumerRetail & ConsumerRetail & ConsumerRetail & ConsumerRetail & Consumer Winning formatsWinning formatsWinning formatsWinning formatsWinning formats Retail & ConsumerRetail & ConsumerRetail & ConsumerRetail & ConsumerRetail & Consumer OverallOverallOverallOverallOverallchallenges / opportunitieschallenges / opportunitieschallenges / opportunitieschallenges / opportunitieschallenges / opportunities emerging trendsemerging trendsemerging trendsemerging trendsemerging trends recommendationrecommendationrecommendationrecommendationrecommendation

Increased competition, supply chaineffectiveness / liberalization, diversity of themarket, staff and management training

Price pressure, trade unions / branddifferentiation, regionalisation

Continuing concentration / increasedpurchasing power, logistical hub

Fragmented market, channel conflicts dueto disintermediation, limits to property rights/ opportunities in mergers and acquisitions,investment in the Agri-food business, thirdparty manufacturing

Changing political and regulatoryenvironment / growing middle class

Intense competition / supply chain andcategory management improvement

Price competition / increasing consumerdemand (domestic and tourism)

Low working costs, large and diversifiedmarket, logistical hub, low price and privatelabels

Staff and management training, pricecompetition, mergers and acquisitions,some limits to property rights

Struggle for space in Moscow, pricesensitivity, supply chain effectiveness /staff and management training, expansionin regional cities

Intense competition, service quality,demanding consumer / brand marketing

Regional headquarters, high managerialand technical skills, logistic hub

Intense competition, regulatory constraints

Operational effectiveness, increase inconsumer spending, modernization ofretailing

Specialty stores, supermarkets/hypermarkets and conveniencestores

Supermarkets, discount storesand specialty stores

Hypermarkets, conveniencestores and specialty stores

Discount formats, cash & carryand specialty stores

Hypermarkets, supermarketsand department stores

Discount stores, departmentstores and e-commerce

Hypermarkets and specialtystores

Discount stores, conveniencestores, home improvementretailers and shopping malls

Supermarkets, discount storesand shopping/recreationalcenters

Discount stores, specialtystores and hypermarkets

Department stores, supermarketsand specialty stores

Shopping malls andsupermarkets

Hypermarkets and conveniencestores

Discount stores andsupermarkets

Increase in consumer spending,market consolidation, modernization &diversification of retailing

Non-food retailing, e-commerce, pricesensitivity, potential for private labels

EU compliance, investment in middle-size companies, changing supplier-retailer relationship

Huge opportunities for FMCGcompanies, caution for foreign retailinvestment, growth of organizedretailing, global sourcing, channelintegration

Domestic retailers repositioning,increasing market share for foreignretailers

Rising consumer power, enhancedbrand value, e-business ande-commerce, shopping malls

Consolidation, development ofshopping malls

Consolidation, increasing purchasingpower, development of e-commerce

Foreign retailing development,expansion in regional cities

Private labels, development ofshopping malls, customer loyaltyprograms

Changing geographical shoppingpatterns, service excellence

Privatization, increasing income level,development of larger retail formats

Development of department stores,health concerns, customer relationshipmanagement

Private labels, development of foreignfood retailing

GO

Niche opportunities

GO

GO

Caution

Niche opportunities

GO

Niche opportunities

Niche opportunities

Caution

Niche opportunities

Niche opportunities

GO

GO


Executive Summary

■ High risk versus high rewarHigh risk versus high rewarHigh risk versus high rewarHigh risk versus high rewarHigh risk versus high reward: China and Indiad: China and Indiad: China and Indiad: China and Indiad: China and India

HIGH RISKSHIGH RISKSHIGH RISKSHIGH RISKSHIGH RISKS

CHINACHINACHINACHINACHINA INDIAINDIAINDIAINDIAINDIA

Geographical 23 provinces 28 statescharacteristics 5 autonomous provinces 7 union territories

4 municipalities

Economic disparity Huge disparity between coastal cities Also huge disparity in Indiaand countryside == More than 50%50%50%50%50% of Indian households liveGDP per capita varies between with less than USD82 per month (or USD7Rmb8,075 (USD977) in Chongqing and per day) and 30%30%30%30%30% of Indian householdsRmb46,718 (USD5,651) in Shanghai live with USD1 and less per day

Investment limits Not significant Limits to foreign investment

Financial risks Risk of economic overheating Not significant

Political instability Administrative problems between No single party has majority seats in thethe Government & the provinces Parliament to form government. With aUnpredictable policy coalition government, regional parties

exercise influence on policies which at timestend to meet regional rather than nationalpriorities.

HIGH REWARDHIGH REWARDHIGH REWARDHIGH REWARDHIGH REWARD

CHINACHINACHINACHINACHINA INDIAINDIAINDIAINDIAINDIA

Demographic Huge and diversified consumer market Increasing population= =The world’s largest population with Population of over 1 billion which will1.3 billion inhabitants exceed China population in the coming

decades

Economic WTO accession High growth potential in long termStill high growth potential

Resources/skills Learn fast / Technical and Availability of skilled managerial /managerial training technical manpower at reasonable cost.

Large pool of English speaking people.

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Immediate opportunities in China: GOGOGOGOGO

China is the biggest consumer market in the world andmembership of the WTO (World Trade Organisation) willimprove business conditions for companies investingthere. National and regional brands are still extremelystrong, and multinationals have to be aware of theextent to which they need to adapt their products andmarketing to the Chinese consumer. One avenue that isbeing adopted is that of the setting up of alliances withlocal companies in order to assimilate their marketknow-how.

The Chinese government’s efforts to curb economicoverheating, review the banking sector and redistributethe country’s new riches by investing in health,education and infrastructure will be essentialcomponents of long-term and sound economicdevelopment.

India as an emerging economy with opportunities for thelonger-term: GOGOGOGOGO

The Indian sub-continent, the other potential massmarket of the world, has yet to resolve its infrastructureand business regulations in order to fire off a true waveof general economic development – other than itsalready highly successful IT services sector.

This being said, consumer goods companies havealready established themselves with success in India;and there is obviously a huge potential for futuredevelopment as the country modernizes.

For the time being, foreign retail and wholesaleinvestment is restricted to cash & carry outlets and, to alesser extent, e-commerce. It still remains to be seen ifthe new government will be promoting moderncommerce through a more liberal approach to foreigninvestment from companies in the retail and consumersector - and also to changing the current limits onproperty rights.

But when modern retailing does take off – and it will –the country’s outstanding capabilities in IT will ensurean extremely rapid and dynamic development with, forexample, an immediate assimilation of suchtechnological applications as RFID (Radio FrequencyIdentification).

On the macro economic front, the new governmentappears to be adopting the same goals for economic

and fiscal reform pursued by its predecessors and atthe same time it is designing policies to help 300 millionof its people, which are among the poorest on theplanet. These are encouraging signals for futureeconomic growth and wider prosperity. Partnershipsbetween foreign retail and consumer goods companieswith local firms will undoubtedly contribute to theimprovement of lifestyles and higher levels ofemployment and consumption, when this becomespossible in the future.

■ InvestmentInvestmentInvestmentInvestmentInvestment havens: havens: havens: havens: havens:

Turkey, Thailand, Malaysia, Hungary2: GOGOGOGOGO

The study pinpoints Turkey, Thailand, Malaysia andHungary as being safe investment destinations whichrepresent general opportunities for development in theshort or longer term.

Turkey, with its young and growing population, is anobvious target for companies in the retail and consumersector. A huge effort is being made to modernize theTurkish economy and accession to the EU would make asignificant impact on the country’s economicdevelopment. Retail and consumer companies can findlocal partners with whom they can launch theirinvestment programmes for the long-term. Butinvestors should be aware of the current regulatoryconstraints in the retail sector and bear in mind theunstable political climate in the region.

Although regulatory restraints are still an impediment inThailand, there is plenty of potential for development inthis country, which has a population equivalent to thatof France.

Increasing consumer demand and the existence of aburgeoning middle-class make Malaysia an extremelyinteresting destination for investment. In addition, ayoung population, low unemployment and a growingmodern retail sector all contribute to this country’sextremely attractive investment climate.

Hungary is in the first group of countries to haveacceded to the EU and Budapest, its capital, has atradition of being a financial and managerial hub in theregion. Although it has a fast maturing retail andconsumer market, there are still opportunities left forinvestment there for hypermarkets, convenience storesand specialised outlets especially outside the capital.2 We enumerate the countries by size of population (from bigger to smaller)

13

Executive Summary


South Korea, Poland, Romania, Czech Republic,Singapore and Slovenia: Niche opportunitiesNiche opportunitiesNiche opportunitiesNiche opportunitiesNiche opportunities

South Korea, Poland, Romania, Czech Republic,Singapore and Slovenia are already saturated as far asthe size of the market is concerned. Although a certainnumber of general retail development opportunities inthese countries still exist, retail and consumercompanies would be better advised to focus on nicheinvestments. Singapore and Slovenia’s prosperouspopulations make them targets for niche opportunities.Romania, with its current limitations on property andland acquisitions and the limited availability of skilledstaff and management, also make it a better destinationfor smaller, targeted retail opportunities.

■ Opportunities for the lonOpportunities for the lonOpportunities for the lonOpportunities for the lonOpportunities for the long termg termg termg termg term

Indonesia, Russia: CautionCautionCautionCautionCaution

Investment in Indonesia should be subject to caution.Although the retail sector is gradually being liberalized,the changing political and regulatory environment is animpediment to efficient and rapid development forforeign companies.

Retail and consumer expansion into Russia should alsobe viewed with caution and seen as a long-terminvestment. Russia is a potentially huge massconsumer markets for the investor and boasts one of thehighest current world growth rates. At the same time thecountry is set for the future within what is essentially anextremely fragile economic, political and socialframework.

The decisions made by its government in a number ofareas will have a profound influence on the country’sdevelopment in the long term.

Executive Summary

3.3.3.3.3. Key consumption patterns in transitionalKey consumption patterns in transitionalKey consumption patterns in transitionalKey consumption patterns in transitionalKey consumption patterns in transitionaleconomieseconomieseconomieseconomieseconomies

GNI per capita (USD)GNI per capita (USD)GNI per capita (USD)GNI per capita (USD)GNI per capita (USD)

1. Singapore 20,6902. Slovenia 10,3703. South Korea 9,9304. Czech Republic 5,4805. Hungary 5,2906. Poland 4,5707. Malaysia 3,5408. Turkey 2,4909. Russia 2,13010. Thailand 2,00011. Romania 1,87012. China 96013. Indonesia 71014. India 470

USUSUSUSUS 35,40035,40035,40035,40035,400EU (25 countries)EU (25 countries)EU (25 countries)EU (25 countries)EU (25 countries) 22,08822,08822,08822,08822,088WorldWorldWorldWorldWorld 5,1205,1205,1205,1205,120

Source: World Development Indicator Database, April 2004,

http://www.worldbank.org/data

Ranking by countryRanking by countryRanking by countryRanking by countryRanking by country Real GDP growthReal GDP growthReal GDP growthReal GDP growthReal GDP growthforecast 2004 (%)forecast 2004 (%)forecast 2004 (%)forecast 2004 (%)forecast 2004 (%)

China 8.9Singapore 8.4Russia 7.0India 6.5Malaysia 6.5South Korea 6.4Thailand 6.4Turkey 5.9Poland 5.5Romania 5.0Indonesia 4.7Hungary 3.6Czech Republic 3.5Slovenia 3.3USUSUSUSUS 4.24.24.24.24.2EU (25 countries)EU (25 countries)EU (25 countries)EU (25 countries)EU (25 countries) 1.01.01.01.01.0WorldWorldWorldWorldWorld 4.94.94.94.94.9

Source: EIU (Economist Intelligent Unit)

14


■ Price versus brandPrice versus brandPrice versus brandPrice versus brandPrice versus brand sensitivity sensitivity sensitivity sensitivity sensitivity

Foreign companies dominate the retail and consumersector in most CEE countries and all reports mention thepressure that retailers are putting on their suppliers inorder to reduce prices for extremely price sensitiveconsumers – particularly in Slovenia and Turkey.

At the same time price sensitivity is contributing to agrowing appreciation of brands and private label.Although penetration is as yet low, for example 2% inPoland and 4% in the Czech Republic – compared withan average of 22% in western Europe - the market shareof private label is increasing very fast and should catchup with Western European levels in the near future.

Asian consumers are still extremely sensitive to localbrands, although private label is starting to emerge inboth India and Thailand. In India, consumers are stillvery much attached to their own food culture andmultinationals are having to adapt their productssignificantly to match local tastes.

■ Entertainment retailingEntertainment retailingEntertainment retailingEntertainment retailingEntertainment retailing

In both Asia and CEE, the potential of shopping centersor malls, combining shopping with leisure activities andentertainment, is emerging as an important feature ofnew retailing patterns.

The mega-malls in Malaysia and the entertainmentshopping malls of South Korea, for example, will act aspoles for retail development in the future.

In CEE countries and Russia, the future importance ofshopping centers is highlighted in the reports from theCzech Republic, Romania and Russia.

■ The discountersThe discountersThe discountersThe discountersThe discounters

Hard and soft discount chains are also expected to playa significant role in the future retail landscape. Theseformats are already making their presence felt inHungary, Poland, Romania and Turkey. At the same timeCarrefour is expanding its Dia discount format in China.

15

Executive Summary

■ The move into secondary citiesThe move into secondary citiesThe move into secondary citiesThe move into secondary citiesThe move into secondary cities

As the number of modern retail outlets in the biggertowns saturate, there are significant growthopportunities to be seized in the provinces and smallercities – some of which are already being taken up bylocal retailers. This growth can involve very differingretail formats, depending on the specific retail patternsof the country in question.

For example in Poland, as big cities become saturatedwith the hypermarket, supermarkets are being targetedfor the smaller urban centers, whereas in Romania thehypermarket appears to be the favored format forregional cities.

In China, foreign retailers such as Wal-Mart andCarrefour are starting to move out of the prosperoussouth-eastern coastal areas, which are reachingsaturation, into other regions.


Executive Summary

16

CitiesCitiesCitiesCitiesCities(1)(1)(1)(1)(1) Number ofNumber ofNumber ofNumber ofNumber of CountryCountryCountryCountryCountryinhabitants (million)inhabitants (million)inhabitants (million)inhabitants (million)inhabitants (million)

Zhengzhou 2.4 CHINABudapest 2.4 HUNGARYChangchun 2.4 CHINAWarsaw 2.4 POLANDJinan 2.4 CHINAShijiazhuang 2.3 CHINAMedan 2.2 INDONESIAKonya 2.2 TURKEYTaiyuan 2.2 CHINABursa 2.1 TURKEYKunming 2.1 CHINAChangsha 2.1 CHINA

Sources: Th. Brinkhoff : The Principal Agglomerations of the World,2004, (http://www.citypopulation.de, 2004-08-17); excepted forTurkish cities: State Institute of Statistics.

(1) Important note: according to the above mentioned source,population figures relate to “core cities”. In particular for Chinesecities, these figures may contradict with information from othersources, which may take into account “greater city” populations(eg. “Greater Beijing” amounts 14.6 inhabitants, and Shanghai17.1, according to the China Statistical Abstract – also refer tosources used in the China country report).

■ Brand reputation and corporate responsibilityBrand reputation and corporate responsibilityBrand reputation and corporate responsibilityBrand reputation and corporate responsibilityBrand reputation and corporate responsibility

The transitional economies in CEE are set forunprecedented growth over the next years. But they willhave to learn to comply with stringent EU health,transport and safety regulations in order to succeed. Inthe first instance, this will add to their cost structures,but compliance will ensure long-term viability andsuccess.

In Asia, compliance with acceptable health and safetynorms, as well as decent working conditions foremployees, is extremely difficult to monitor. Themultinationals operating in these countries, which arevery much under the global consumer’s eye, need to beentirely transparent as far as corporate responsibility isconcerned in order to protect their international brandreputation.

But it will be some time yet before the intricate web ofcompanies that constitute the Asian economy draw upPan-Asian norms for corporate responsibility as a whole.

Major cities above 2 million inhabitantsMajor cities above 2 million inhabitantsMajor cities above 2 million inhabitantsMajor cities above 2 million inhabitantsMajor cities above 2 million inhabitants

CitiesCitiesCitiesCitiesCities(1)(1)(1)(1)(1) Number ofNumber ofNumber ofNumber ofNumber of CountryCountryCountryCountryCountryinhabitants (million)inhabitants (million)inhabitants (million)inhabitants (million)inhabitants (million)

Seoul 21.9 SOUTH KOREAMumbai (Bombay) 19.2 INDIADelhi 18.7 INDIAJakarta 16.6 INDONESIAKolkatta (Calcutta) 4.6 INDIAMoscow 13.5 RUSSIAShanghai 13.2 CHINABeijing 10.6 CHINAIstanbul 10.0 TURKEYBangkok 7.7 THAILANDChongqing 7.7 CHINAChennai (Madras) 7.4 INDIAHong Kong 7.2 CHINABangalore 6.8 INDIAHyderabad 6.5 INDIATianjin 5.9 CHINAAhmedabad 5.4 INDIASaint Petersburg 5.2 RUSSIAWuhan 4.9 CHINAGuangzhou 4.9 CHINAHarbin 4.5 CHINAShenyang 4.5 CHINAPune 4.3 INDIAKuala Lumpur 4.1 MALAYSIAAnkara 4.0 TURKEYChengdu 3.8 CHINABusan 3.7 SOUTH KOREASurat 3.5 INDIAIzmir 3.4 TURKEYBandung 3.2 INDONESIANanjing 3.2 CHINAKanpur 3.1 INDIASurabaya 3.1 INDONESIAXian 3.0 CHINADalian 3.0 CHINAKatowice 2.8 POLANDQingdao 2.8 CHINADaegu 2.8 SOUTH KOREAJaipur 2.8 INDIALucknow 2.6 INDIAHangzhou 2.5 CHINANagpur 2.4 INDIA


CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

To conclude, three major and common trends emerge from the majority of economies covered by the report - inboth Asia and CEE.

• Price sensitivity is having a big impact on brand management and the development of private label.Adapting products and marketing to local cultures is an essential ingredient of future success forforeign retail and consumer companies. Price sensitivity will also be contributing to the successfuldevelopment of hard and soft discount stores.

• As the transitional economies develop, the lives of their populations will open up to discover a wholenew range of consumer goods. Shopping centers with their malls, and the creation of adjacent leisureactivities will become one of the important poles of future consumption patterns.

• Emerging regional players, as well as the multinationals already present in these countries, will be seizingthe significant potential for expansion from the increasingly saturated major cities into smaller, regionalurban centers.

As certain retail and consumer investors take their breath after a first phase of investment in these economies –particularly in light of the recent world economic downturn – local players will be capitalizing on their increasingknowledge of modern retailing and their intimate understanding of local cultures to make their presence feltmore forcefully. This, together with the consolidation of local and foreign retailers’ investments, will toughen thecompetitive environment considerably in the future.

17

Jacques-Etienne de T’SerclaesJacques-Etienne de T’SerclaesJacques-Etienne de T’SerclaesJacques-Etienne de T’SerclaesJacques-Etienne de T’SerclaesPricewaterhouseCoopers Global Retail & Consumer Leader

Email: [email protected]

Executive Summary


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