RETAIL MARKET REPORT

AUTUMN 2010

CONTENTS
FOrEwOrd 1.0 EXECUTIVE SUMMArY 2.0 UK rETAIL MArKET
2.1 Economy and retail trends o Economic trends and retail drivers o Outlook and risks o Retailer trading conditions 2.2 retail development o Recent retail development trends o Retail construction outlook: The next phase in retail growth 2.3 retailer review

3.0 GLOBAL rETAIL MArKET

3.1 Global economic backdrop 3.2 Key Market opportunities 3.3 Europe 3.4 Middle East 3.5 BrIC 3.6 Beyond the BrICs the Championship Economies

4.0 rETAIL TrENdS

4.1 Consumer habits 4.2 retail categories 4.3 Supply-chain dynamics 4.4 Store location, layout/ design 4.5 retail globalisation 4.6 retailers strategies for success 4.7 Other issues

FOrEwOrd: A NEw rETAIL pLAYING FIELd SEIzING ThE MOMENT

Welcome to our second Retail Market Review. It is somewhat bulkier than previous reports as we have combined both the Retail Development and Retailer Sectors this time around. To make it easier for you to read, we have inserted bookmarks so that you can readily find the bits that interest you and I hope you find it a stimulating and informative read. As stated above, we have gone for a bumper edition covering the:
o UK Retail Market o Global Retail Market and, o Retail Trends

The recent Spending Review set out by George Osborne, has on the face of it, not ravaged capital spending. Having said that, the devil will be in the detail and will only truly be revealed once the Departmental Reform Business Plans are published over the coming weeks. One point we can pick up on immediately, is the current governments decision to simplify the CRC Energy Efficiency scheme and turn it into, what on face value, is now a tax. This will increase the financial burden on all those who have not started to address carbon legislation. Our commitment to ongoing market research, training and development means that we can respond quickly and effectively to the often complex questions that get posed when working within Retail. Our enhanced, integrated service and knowledge agenda means we can respond to a broader and more encompassing set of queries. We have the necessary specialists to deal with almost any circumstance that may arise. For those looking further a field, some of the BRICs and the 10 Championship economies are likely to provide some interesting opportunities both for Retailers and Retail Developers. Working in these countries comes with added risks, both from a cultural and market position perspective, but their emerging middle classes and growing populations will drive development in these countries In summary, 2011 is likely to be another tough year. Those with the ability to expand and grow are likely to benefit from another year of limited construction inflation and highly competitive tender prices. We trust that you will find this report informative and we look forward to working with you in the future to maximise the opportunities and minimise the risks that 2011 throws up. If you would like to discuss the report or need any clarification, please contact: Paul Zuccherelli Head of Retail Paul.zuccherelli@davislangdon.com

It will come as no surprise that 2009 was a tough year for retail, with 2010 following the same course. Retail development in the UK has fallen by 50% from 2007 levels and it is likely to be 2011/12 before we see any significant movement in this area. Retailers have competed strongly for what little space has been available and food retailers in particular continue to expand, and in many cases, increase their market share. Conditions are expected to remain challenging in 2011, although many are predicting light at the end of the tunnel in the second half of the year. For those of you contemplating development opportunities, timing to market is going to become more important than ever. Although there has been a marked slow down in businesses going into receivership/ administration, we are still forecasting limited growth in inflation and output next year. However, with the weak pound making imports expensive, when the uptick does come, we can expect certain trades to experience a significant spike in pricing MEP, cladding and shopfit spring to mind.

1.0 EXECUTIVE SUMMArY

Retail plays a major role in virtually all economies the world over, and the health of the sector is an important bellwether for the performance of the wider economy. This report examines the outlook for the UK retail sector, implications for the retail property and construction market, key global retail opportunities and significant trends that are shaping and changing the retail market.

expectations that low earnings growth and high legacy debt levels will limit spending power. In addition, the governments fiscal squeeze will see higher taxes and public sector job cuts, which will impact on consumer spending.

Retailer review and retail development

Retailers in the UK are facing up to a changed playing field; one that is characterised by thrifty consumers, heavier price competition and less new store space. Over the last two years, many retailers have had to cut prices, scale back, adapt or even abandon expansion plans. However, others have seen business more resilient, with some pursuing aggressive expansion plans. The retail property market has had another difficult year in 2010, but looks in better shape than might have been anticipated a year ago. Retail occupier demand has shown signs of improvement, though sentiment remains mixed within the sector and location. The balance of negotiating power sits firmly with tenants, but landlords in buoyant places such as London have hardened their stance over the course of this year. The retail construction pipeline has shrunk significantly over the past two years, as many developers put a stop on planned schemes. Development activity remains weak, with the exception of the grocery sector. The volume of retail construction declined by 22% between 2007 and 2009, and a further 10% decline is pencilled in for 2010. Retail demand is expected to slowly increase in 2011, which should herald a restart of many of the currently stalled projects. The first wave of major retail development is expected to commence on site in 2011/2012, but a more substantial increase in retail construction is not expected before 2013.

differences in the pace and nature of the rebound. Recovery in most advanced economies remains sluggish, due to weak consumer demand. In contrast, many emerging economies are seeing strong growth, mainly because they did not experience major financial excesses prior to the recession. Retail demand, bar some exceptions, proved more resilient than expected during the economic downturn of 2008/09. In 2010, many markets saw some retail growth and emerging markets even saw strong growth. Most of the big global (food) retailers continued to post relatively strong sales throughout the crisis. More stable market conditions are encouraging strong retailers to continue with their expansion plans albeit more slowly and less aggressively than in the earlier part of the decade. The shift in the distribution of global output and wealth continuous. In fact, the much stronger performance of key emerging economies through the crisis and stronger growth prospects are likely to accelerate the shift in global economic dynamics. This has major consequences for global retailers.

UK economy and retail trends

The dust from a turbulent two years for the UK economy has settled in 2010, but it now faces the challenge of reconciling the twin goals of deficit reduction and sustained economic recovery. The outlook for the UK economy has certainly improved compared to the last two years, but remains vulnerable as government support is being withdrawn. UK growth has been surprisingly strong this year, raising hopes that the economy is in better shape than thought. Nevertheless, the risks to growth remain mainly on the downside and stem from uncertainties about how the UK economy will adjust to a smaller public sector. The business sector will be key to the recovery, and if a stronger than currently expected rebound can be achieved, UK growth in the years ahead could prove faster and better balanced than in recent years. Retail was one of the worst hit sectors during the 2008/09 recession. Both the retail investment and occupier market witnessed a sharp downturn, and the flow of retail construction dwindled. The sector was hit by the credit crisis, scarcity of finance, investor risk aversion, as well as weak consumers spending. However, while consumer spending slowed, retail sales remained surprisingly strong, driven in parts by demand for necessities. The resilience of the sector looks set to be seriously tested in the year ahead. Consumer spending is likely to remain relatively subdued reflecting

Key market opportunities

The recovery in retail development in Western Europe and the US is likely to remain cautious, with owners looking at refurbishments and extensions. In these mature retail markets, the emphasis is shifting towards more proactive asset management initiatives. The European retail market is very diverse and despite a general slow recovery, retailers will still spot opportunities in better performing regions. In particular, there are expansion opportunities for retailers in less mature Central and Eastern European markets. Some markets, which have already over the past decade seen a sharp increase in new retailers, i.e. Poland, the Czech Republic and Slovakia will continue to remain attractive, due to their market size and growth potential. Others will become increasingly attractive as they are still relatively underdeveloped. Both Russia and Ukraine are potentially huge retail markets.
4

Global retail outlook

After decades of uninterrupted global growth, the world economy shrank in 2009. Most industrialised and some emerging markets saw deep recessions, while growth slowed in many other emerging markets. Global growth recovered over the course of 2010. However, there are significant

A number of smaller countries are also attractive for retailers, including Bulgaria, Serbia, Croatia, and Albania. Leading retailers are increasingly focused on emerging markets to drive growth. Asia looks to have the best growth prospects, with both China and India continuing to expand firmly. Brazil is also doing well. A firm growth outlook in these economies, together with large populations, rising incomes and domestic demand, and increasing urbanisation bodes well for retail development in the years ahead. The Middle East is one of the worlds fastest growing retail environments. It has witnessed a rapid transformation on the back of changing socioeconomic factors, infrastructure investment, rising purchasing power, large oil-wealth, and growing tourism. The Middle East is a key market for global retailers.

The term BRIC has entered the average consumers lexicon over the past two decades, but there is a group of sometimes overlooked emerging markets, with huge retail growth potential - the 10 Championship economies. These are middleincome emerging countries with large and growing populations, rapid urbanisation, industrialisation and changing lifestyles, all of which is attracting retailer interest.

Retailer trends
Consumer trends evolve at a rapid pace in particular taking into account the global context. Retailers constantly adapt and innovate to maintain their competitiveness, which makes the retail sector a dynamic market space. We examine key issues with regards to consumer habits, sustainability, retail categories, supply-chain dynamics, globalisation, store location, layout and design, and portfolio optimisation.

2.0 UK rETAIL MArKET

2.1 Economy and retail trends
The dust from a turbulent two years settled in 2010, but the UK economy now faces the enormous challenge of reconciling the twin goals of deficit reduction and sustained economic recovery. At the same time, retailers in the UK are facing up to a changed playing field; one that is characterised by thrifty consumers, heavier price competition and less new store space.

from household and government spending, towards production and exports. With the UK growth outlook uncertain, businesses remain cautious about their investment plans. While firms across many industries have reduced their headcount in the past two years, the feared mass unemployment has not happened but workforce flexibility has hit real wages hard. Last year the effect was disguised by lower inflation and the fall in mortgage payments, and real disposable incomes actually increased by 1%. However the boost from falling inflation and interest rates has worn off this year and real incomes fell 0.5%. Consumer spending slowed sharply last year, but retail sales remained surprisingly strong. In parts, the retail sector was supported by a revival in the housing market last year. Housing market activity has been a source of rising household wealth over much of the past decade and house price growth is an important driver of consumer expenditure. After falling by more than a fifth between end 2007 and early 2009, house price rose by 15% in the 16 months to June 2010. However, the support from the housing market has started to fade since summer 2010. Housing market activity has started to slow again, as mortgage financing remains tight and buyer confidence weakens. According to the Bank of England, household debt now stands at 150% of disposable income. Whilst the June budget was relatively business friendly, it placed a higher burden
UK GDP

on consumers. Households will pay more tax, i.e. VAT is hiked to 20% in January 2011, and household incomes will be hit by a cumulative 26.3bn cut in welfare spending, which includes a switch to CPI indexing of benefits (instead of RPI), changes to the tax credit system and housing benefit reforms. Against this background household - perceived and real - wealth will remain under pressure, which no doubt will impact on consumer spending.

Outlook and risks

The UK economy is expected to remain weak near term, but the pace of growth is anticipated to pick up gradually in 2011 and stronger in the subsequent years, as the economy adjusts to a smaller public sector. Consumer spending is likely to remain relatively subdued in the year ahead, reflecting expectations that low earnings growth and high legacy debt levels will limit spending power. The fiscal squeeze will impact on public sector jobs, with the ITEM club estimating that 150,000 jobs could be lost over the next five years. Nevertheless, a strengthening in the growth outlook should increase confidence in the labour market and unemployment is expected to fall back gradually over the years to 2014. Retail sales will also be hit by VAT rising from 17.5% to 20% in January 2011. This should bring forward some spending to the final weeks of this year, as consumers look to make big-ticket purchases ahead of the increase, which should boost retailers Christmas 2010 results.

Economic trends and retail drivers

The UK economy has moved out of recession since the final quarter of 2009 and appears to be on the path to gradual recovery. However, it will take some time before the 6% decline in output during the recession will be made up and GDP returns to precrisis levels. The economy grew by an annualised 1% during the first half of 2010, led by a rebound in the production and construction industries, while consumer spending growth remained subdued. The question is whether this upturn can be sustained, and most forecasters expect much slower growth in the year ahead. The headwinds facing the UK economy are numerous and relate mainly to the debt accumulated by both government and households. Over the past two years, governments around the world have implemented fiscal stimulus packages to support their economies through the recession; but this has pushed budget deficits to worryingly high levels. Faced with sovereign debt issues, many governments are now embarking on major fiscal tightening. In the UK, the June 2010 budget set an ambitious target: the elimination of the structural current deficit over the next five years. The plan implies reductions of 25% and more in most departmental budgets. The scale and scope of the public sector cuts is likely to impact on the pattern of UK growth in the years ahead. In particular, it hopes to achieve a rebalancing of the economy away

GDP Government spending Consumer spending

Manufacturing Construction

105 GDP: Index 2006=100 100 95 90 85 80 2007 Q1 2008 Q1 2009 Q1 2010 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2

10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Quarter-on-quarter

Source: ONS

Consumer price inflation is likely to remain above target over the next eighteen months, but is likely to fall significantly below 2% subsequently, as the impact of higher energy prices and taxes wears off and spare capacity bears down on pricing power. Against this background, consumers, key drivers of UK growth in the recent past, are unlikely to drive an economic recovery. The UK economy will be reliant on the business sector to drive growth and there are some positive signs of a rebalanced economy emerging. Business investment and exports are improving after the sharp falls seen in the first half of 2009. Business investment was surprisingly firm in the first half of this year and is likely to pick up further as world output strengthens. Large corporations are generally in a healthy financial position and they hold the keys to this recovery. The pound remains much weaker than in recent years, which should help exporters in the longer term. The UK economic outlook has certainly improved compared to the last two years, but remains vulnerable as government support is withdrawn. The risks remain on the downside and stem mainly from uncertainties over public finances. It is too early to assess whether the coalition government will be able to achieve all of the tax increases and spending cuts, and the impact these measures will have on the economy. In addition, a large part of the forecast growth relies on a strengthening of the export sector. Sovereign debt problems and fiscal austerity in the Eurozone the UKs largest trading partner - could drag down growth in the region, weakening demand for UK exports. Unresolved sovereign debt issues in the Eurozones periphery could result in heavy losses for the banking sector, so that credit conditions could remain tight on the continent and in the UK. With the external demand outlook uncertain, businesses will be reluctant to commit to investments, which could remove another growth driver from the UK economy. More positively, should demand prospects improve; investment growth could be stronger than currently anticipated. The UK government will be hoping that the business sector will be the key to UK recovery, as

Key Economic and Retail Indicators 2008 GDP (%) -0.1 Consumer spending (%) 0.4 Retail sales (, bn) 280.9 Retail sales / capita (GBP) 4,580 Consumer price inflation (%) 3.6

2009 -4.9 -3.3 285.8 4,620 2.2

2010f 1 0.5 291.3 4,680 3

2011f 1.9 0.5 293.4 4,680 2.8

2012f 2.8 2.2 297.8 4,720 1.2

2013f 2.9 2.7 304.5 4,800 1.5

2014f 2.9 2.3 311.3 4,870 1.6

Source: Item Club, ONS, IMF, Davis Langdon

otherwise it will find it very hard to pull of the trick of fiscal retrenchment and economic growth. If this can be achieved, UK growth in the years ahead could prove faster and better balanced than in recent years.

Retailer trading conditions

Retail was one of the worst hit sectors during the recession. Both the retail investment and occupier market witnessed a sharp downturn, and the flow of retail construction dwindled. The sector was hit by the credit crisis, scarcity of finance and investor risk aversion, as well as depressed consumers spending. However, whilst consumer spending slowed sharply, retail sales held up remarkably well. Both the official statistics and figures from the British Retail Consortium (BRC) show that retail sales did not slow by as much as had been feared last year. The resilience of retail spending in the recession of 2008/09 is in contrast to the experience in the early 1990s downturn, when retail sales fell for two consecutive years.

A number of factors could explain this, including a relatively contained rise in unemployment, low mortgage interest rates, and a VAT cut in 2009. Retail volumes have also been supported by sales of necessities such as food. Spending on leisure and big-ticket items, including those that rely on credit, was generally much weaker, highlighting the reluctance of consumers to commit to large purchases while uncertainty over the future persists. The growth in online sales has also slowed sharply, from double-digit growth in recent years, to more modest single digit figures, though growth of online retailers is still by far outpacing the bricks-andmortar peers. Over the course of 2010, there has been a reduction in companies going into administration. Despite some retailers voicing concern about trading performance going forward, a number of recent trading results have helped sentiment and highlight the resilience of the retail sector to date. Food retailers sales remain relatively firm, as the bulk of the products are non-discretionary for the majority of consumers. However, performance within the sector is mixed.

Retail sales 7% Annual change in retail sales volumes 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% 2010 YTD
7

2006

2007

2008

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: IMF

2009

Retail Market Size

320 300 280 260 billion 240 220 200 180 160 140 120 100 2005 2006 2007 2008 2009 2010f 2011f 2012f 2013f 2014f
Source: ONS, PlanetRetail, Davis Langdon Food sales Non-food sales Non-store sales

Sainsburys reported that total sales rose 5.2% during the second quarter ended 2 October. Like-for-like sales were up 2.9%. Tescos UK sales rose 5.9% to reach 21.9 billion in the first half year ended 28 August 2010. In contrast, Morrrisons sales growth was much weaker, with like-for-like sales (excluding VAT and fuel) in the half year to end August 2010 up 0.9%, compared to 7.8% growth in the same period last year. For the 26 weeks to 3 July 2010, the Cooperative increased sales by 11.5% to 3.9bn. However, like-for-like sales were down 1%. The performance of department and variety stores was also mixed, but generally positive. John Lewis for example has consistently achieved double digit weekly sales growth in 2010 and posted strong half year figures. Whilst retailers have been able to return positive results so far this year, times for the industry remain challenging, not least because the governments fiscal squeeze will see higher taxes and public sector job cuts. The resilience of the sector, which continued to show positive year-on-year growth over the course of 2010 but looked vulnerable in more recent months, looks set to be seriously tested in the year ahead. Retail sales may get a boost ahead of the VAT rise next January as consumers bring forward purchases. According to Verdict Consultancy, Christmas 2010 is expected to be the best Christmas for retailers since 2007. Sales are forecast to increase 1.9% to 85.2 billion, as consumers

will spend an extra 1.6 billion this year. After that, retailers will be highly exposed to consumers faced with relative job insecurity, subdued earnings growth, tax rises, tight credit conditions and concerns over pensions. The pressure will be on retailers to continue to price competitively, which will impact on profit margins. At the same time, retailers are faced with rising input costs. For example, fabric and the associated costs account for around 65% of product price in stores such as Next and Primark, so the impact of this years poor cotton crops, which pushed prices to 15-year highs, on retailers margins seems straightforward to predict. Verdict expects retail growth of 1.5% in 2010 (excluding the impact of inflation), with the subsequent pace of growth increasing steadily to 3.1% by 2014. However, growth is likely to vary wildly within the sector. Between 2010 and 2014, cumulative retail growth is forecast to be 59% at the premium end of the market, 29% at the value end, but falling 7% for mid market retailers. Coming out of this recession, retailers are faced with a changed competitive landscape, one that is characterised by thrifty consumers, heavier price competition, and less new store space. Retailers have responded differently, from scaling back expansion plans, rationalising store space, to concentrating on cost containment. Others however, maintain aggressive expansion plans to seek advantage over weaker rivals.
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2.2 Retail development

The retail property market has had another difficult year in 2010. Rents continue to fall in markets outside London, while capital value growth has tapered off in recent months. Development activity remains sluggish at best with the exception of the grocery sector and the total amount of retail floor space under construction is now at less than 50% of 2007 levels. With many schemes put on hold for the time being, a significant upturn in retail construction seems unlikely until 2011/2012 at the earliest.

Retail construction
8000 7000 million, current prices 6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 New orders Output

Recent retail development trends

On the back of uncertainty over the economic outlook, the past year saw exceptional volatility in both occupational and investment retail markets. Nevertheless the retail property market in 2010 looks in better shape than might have been anticipated a year ago. Sentiment in the retail investment market improved in the second half of last year, although transaction volumes remain below pre-crisis levels. As with the wider commercial property market, the retail sector saw a substantial re-pricing of assets from mid 2009 after two years of falling values. Peak to trough, all retail capital values fell by 45% (CBRE Monthly Index) during the recession. Within this, shopping centres and retail warehouses fell by 49% and 47% respectively. Retail capital growth year-to-date in September stood at 7.5% or 20% compared to a year ago. However, capital growth has slowed in recent months and property yields now look to be stabilising after the earlier compression. Retail rents continued to fall over the course of 2010, but the pace of decline has moderated. There are significant variations between assets and locations. Central London stores continued to see rising rents on the back of strong retailer demand, while outside of London rents are still falling. The CBRE expects average rental values to edge back into positive territory in 2011 across all three main retail property asset classes, with a slight pick up in growth expected in

12-month moving averages

Source: ONS

2012. Occupational demand pressures will continue to vary, which implies a differential rental growth. On the occupier side, despite some prominent administrations, the number of retailer failures slowed sharply this year. Retailer demand has shown signs of improvement, but sentiment is very mixed depending on sector and location. Value retailers and supermarkets have generally capitalised on opportunities in the recession. In contrast, changing consumer spending patterns have caused many other retailers to rethink their store networks and scale back expansion plans. Generally, the Central London market is firm, but outside of London the UK retail scene is much tougher. Vacancy rates remain high in many secondary and tertiary locations, but there are some shortages visible for prime space. With the retail construction pipeline severely cut, the expansion plans of many retailers now focus on new formats and out-of-town locations. The balance of negotiating power sits firmly with tenants, although landlords in buoyant places such as London have hardened their stance in recent months. Retailers continue to negotiate hard in search of the most favourable terms when acquiring new units. Leasing incentives including longer rent free periods, turnover rent and fit-out contributions are being requested. The UK is the largest and most sophisticated retail market in Europe.

Between 2002 and 2007, retail construction output rose by 14%. However, 2007 was the peak of the current development cycle. The retail construction pipeline has been cut back significantly and construction activity dropped sharply, as many developers put a stop on planned schemes. Speculative development has slumped since the onset of the credit crisis. Overall retail related new builds declined by 22% between 2007 and 2009, and a further 10% decline is pencilled in for 2010. Retail output at current prices totalled 5.45bn in 2009. Retail space under construction in the first half of 2010 was some 60% lower compared to its recent peak in 2007. This sharp decline highlights the speed at which developers turned off the pipeline following the onset of recession. The decline in development has been sharpest for retail parks with space under construction currently running at only 0.5m sq ft, down by almost 80% on the 2007 level. The shopping centre pipeline fell by more than 65% over the same period. In 2010 to date, a few schemes have opened: St Catherines Walk; Carmarthen: Eldon Square extension, Newcastle; and phases 2 and 3 of Southgate, Bath and the Rock, Bury. The only major schemes currently under construction and due to open in 2011 are Westfield Stratford, Newbury Parkway and Trinity Walk, Wakefield.

In contrast, the supermarket pipeline has risen, with the total pipeline now 30% up on 2007 levels. Some of the big food retailers continue with expansion plans, albeit not at quite the same level as in previous years. Tesco has earmarked 1.6bn for new stores over the next few years, while Sainsburys announced last year its intention to raise 445m for new stores and extensions to existing ones. Wm Morrison has indicated that it intends to add a further 140,000m2 of space over the next three years, largely through expansion of stores. The limited amount of new space coming on-line will impact on the retail market in a number of ways. A demand/ supply mismatch could emerge, with larger units in prime location in short supply. According to some industry surveys, anchor traders, such as John Lewis, Debenhams or House of Fraser are finding it difficult to meet expansion targets, as there are few new developments.

Retail space under construction

20 18 16 14 million sq ft 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2014f Supermarkets Retail parks Shopping centres

Source: CBRE

Retail construction forecast

14% 10% Annual change (constant prices) 6% 2% -2% -6% -10% -14% -18% -22%
Source: ONS, CPA Retail construction output Total construction output

The next phase in retail growth

The total retail pipeline for the next four years currently stands at 6.2m sq ft, which is 85% less than was projected two years ago (Experian, EGI). Delivery of some projects put on hold will have to wait until a sustained recovery in the retail sector. There are a few exceptions, such as Land Securities Leeds shopping centre, which is expected to be given the green light. Retail demand is expected to slowly increase in 2011, and a return of confidence should herald a restart of many of the currently stalled projects. However, whilst retailers can quickly resurrect expansion plans once demand conditions are met, the retail development pipeline will not be able to react as quickly. The first wave of major shopping centre development is expected to commence on site in 2011/2012, but a more substantial increase in retail construction is not expected before 2013. This is, however, very much dependant on a number of factors, such as the speed of the recovery, retailer demand, developer confidence and, ultimately, funding.

2005

2006

2007

2008

2009

2010f

2011f

2012f

2013f

Evolution of retail structure Channel size by sale

130 120 110 100 90 80 70 60 50 40 30 20 10 0 Hypermarkets & Supermarkets & Superstores Neighbourhood stores Convenience stores Discount stores
2009 2014 forecast

Sales (, bn)

Cash & Carry

Source: PlanetRetail

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2.3 Retailer review

Even after three challenging years, retailer trading conditions are set to remain tough in 2011. Consumers are being faced with major fiscal tightening, sustained high unemployment, low earnings growth, and heightened legacy debt levels. All this is weighing on spending power and the willingness to spend. More positively, retail sales proved relatively resilient so far, which has given retailers confidence going forward, with some pursuing aggressive expansion plans. Future prospects are brighter. The UK will remain a high-income market with a sophisticated retail sector and will provide attractive growth opportunities. As a mature market, the structure of the UK retail sector is not expected to change dramatically, but there are still a number of developments expected, including:
o Supermarket development has continued strongly through the recession; and this trend is expected to continue. The strong growth of supermarkets non-food offer will further divert footfall from traditional high street locations. o The evolution of supermarkets as anchor tenants looks set to grow. For example, Silverburn in Glasgow is jointly anchored by Tesco, Debenhams and M&S. Tesco is also represented in St Stephens (Hull) and Ellesmere (Walkden, Manchester) shopping centres. Other supermarkets including Sainsburys, which will be coanchoring Trinity Walk in Wakefield, have sought to expand through this format. o Discount retailers continue to gain importance, with a number of these having bold expansion plans. Discounters still hold a relatively small share of the UK market (around 2.5%), but this is set to rise markedly. o Due to a limited amount of new shopping centre space available, retailers are developing more flexible trading formats. For example, there is increased demand for quality out-of-town space from the supermarket and fashion sectors, with names such as Next, River Island, Peacocks and John Lewis foraying into the retail park market.

Supermarkets floorspace by region (%)

100 90 80 70 in percent 60 50 40 30 20 10 0 Greater London East Midlands South East North East Scotland Yorks & Humber North West West Midlands South West Wales East
Morrisons Sainsbury

Asda
Tesco Others

Source: CBRE

Results and trading statements from UK retailers provide evidence about the state of high street spending.

Tesco investing to secure market position

Tesco reported robust trading results for the six months ending 28 August 2010. Sales including VAT of 32.9bn were up 8.3% against the same period last year. Growth mainly comes from international markets, while the UK is the slowest growing region, with total sales, including VAT, excluding petrol, up 4.4%. Tesco plans to embark on a major UK store opening programme in the second half of its financial year, as it looks to secure its market lead. It plans to open 1.7m sq ft of new space, equivalent to around 16% of rival Wm Morrisons entire store base. In the first half of this year, Tesco opened just 0.4m sq ft. Tesco also continues to expand globally. For example, it plans to develop more retail and leisure space in China over the coming five years than it operates in the UK, with the aim of opening 80 shopping centres in China by 2016, amounting to 40m sq ft and 2bn of expenditure in the five year period.

Like-for-like sales rose 4.3% (2.9% excluding fuel). Sainsburys opened seven supermarkets, 12 convenience stores and completing seven extensions in total adding 460,000 sq ft of new space to its estate. It opened its largest stores in England in Q2 2010 at Crayford, Kent (100,000 sq ft), in Scotland at Darnley and in Wales at Newport. Sainsburys is set to accelerate space growth, with plans calling for 15-20 extensions per year, 15-20 new supermarkets p.a., 75-100 convenience stores in 2010/11 and 100 plus thereafter. Sainsburys is looking at targeting Chinas growing middle class for a possible expansion into the country, though it will be a latecomer to the market compared with western retailers such as Walmart, Carrefour, Auchan, Tesco and South Koreas Lotte. It also hinted that it considered other international markets in addition to China.

Marks and Spencer prioritising property strategy

M&Ss group sales rose 6.5% in the second quarter ended 2 October 2010. Whilst this is a positive performance it is up against weak comparatives a year ago. M&S has conducted a review of its business, putting together a strategy to get it through the downturn. Objectives include: to accelerate multi-channel development, drive developments
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Sainsburys accelerating growth plan

Sainsburys reported that total sales in the 16 weeks to 2 October 2010 were up 6.6% (5.2% excluding fuel).

in international markets, and to re-focus brand communication. Its property strategy remains largely unchanged and priorities are: to enhance major city centre stores, increase out-of-town stores of around 10,000 sq m and expand its space; open more stores of between 4,0006,000 sq m on retail parks; examine its portfolio of high street stores. In addition to new space growth, M&S is progressing through a modernisation programme. Once it has completed its refurbishment programme it is working on a new store blueprint in collaboration with design agency Fitch. Global expansion remains a key area for M&S, with plans to increasing the international business to 15%20% of group revenues by 2012. Notable expansion is set to take place in India with 10 to 15 stores set to open over the next two years.

Asda expanding the discount offer

Walmarts UK arm Asda saw revenues rise by 6.8% to 19.83bn for the year ended 31 December 2009, but sales growth slowed sharply in 2010. In

terms of new format openings, Asda is ranked behind Tesco and Sainsburys, who in recent years, have both launched many small and convenience stores in urban and highly-populated residential districts. Asda is now working on a five year strategy to secure its position as the number two in food and leader in non-food sales. The main focus will be the opening of smaller supermarkets of around 1,580 sq m, increasing the number of such stores from the 24 in 2009 to 100 within five years, and the opening of around 125 new Asda Living general merchandise stores to bring a total of 150 within five years. Earlier this year, the group announced its intention to buy the UK arm of Danish discount retailer Netto. Morrison and Tesco are among the parties interested in bidding for the 47 Netto convenience stores that Asda has to dispose of following its acquisition of the chain. Once Asda sells off the 47 stores required by the Office of Fair Trading, it will be left with 147 former Netto shops. It will name them Asda Supermarket and add its existing 26 smaller stores to the portfolio. Asda will open its first pilot conversions in the first quarter of 2011.

Morrisons from national to nationwide

Morrisons reported like-for-like sales (ex VAT and fuel) up 0.9% during the six months to July, compared to 7.8% growth during the preceding year. In 2009/10 the Group opened 43 new stores, including 34 acquired from the Co-operative Group and converted to Morrisons after complete refurbishment. Its stores programme will see 15 stores open in the second half of 2010, adding a further 0.4m sq ft to the estate. Morrisons aims to go from a national to a nationwide having identified 8.4 million households that are more than a 15 minute drive from one of their stores. In order to achieve this and to take advantage of the growing availability of retail property, Morrisons is to embark upon a small format store expansion programme. This will see the retailer breaking with its traditional operating model (hypermarkets/superstores) and opening smaller stores. The new stores of around 1,000 to 1,800 sq m will carry the grocers full Market

12

Street range. As a result, by 2010/11 Morrisons will have added an additional 92,000 sq m of new space, on top of the 92,000 sq m set out in the optimisation plan.

Co-operative investing in store refurbishments

The Co-operative Group reported supermarket sales up 11.5% to 3.9bn in the 26 weeks to 3 July 2010. However, like-for-like sales were down 1% following the disruption to trading from the continued integration of Somerfield. Co-op says it is on course to integrate Somerfield within the next year, and Britannia, the building society it merged with in 2009, within another two years. Whilst driving operational efficiencies and cost control throughout the business remain a priority, there is also significant investment in store refurbishment and re-branding. Currently 2,500 food stores have been converted, including half of the Somerfield portfolio.

including brands, more British products, more shelves instead of pure pallet presentation and more appealing stores appear to have paid off. Lidl is stepping up expansion in the UK, seeing potential for 1,400 Lidl stores. Long term plans see it expanding at a rate of 8%-12% a year for up to 15 years. This equates to more than 50 stores a year. To deliver these requirements, Lidl will look to develop stores on sites owned by residential developers that have shelved construction because of the housing downturn. Part of expansion is also expected to come through opportunistic buys from weaker competitors.

five of them in Spain, bringing the total to 204. A second flagship on Londons Oxford Street is expected to open before Christmas 2011 in the former Virgin store site, as part of the redevelopment of the Tottenham Court Road end of the street. The company also intends to expand further in Spain, Germany, the Netherlands and Portugal.

John Lewis/ Waitrose

The John Lewis Partnership reported a 28% rise in pre-tax profits to 110.5m in the six months to July 31. Sales rose 12.4%, helped by opening new stores and refurbishment of existing ones. Operating profits at the John Lewis department stores rose 77% to 35.9m, on sales up 14.5% to 1.4bn. Like-for-like sales rose 12.3%. Despite its upper-mid market positioning, the department store has consistently achieved double digit weekly sales growth in 2010. John Lewis has announced that it will open two new At Home stores in Swindon and Tunbridge Wells, taking the total number of stores in the format to four. Operating profits at Waitrose rose 6.2% to 127.8m, on sales up 11.3% to 2.4bn. Waitrose has an ambitious plan to double sales to 8 billion by 2017. It is planning to expand its chain of 231 supermarkets to 250 by the end of the year, and open 40 new sites a year until 2015. Future store growth will largely be organic, but will be across a range of its sales and formats. For example, following the opening of the chains first convenience store outlets in May 2009, Waitrose plans to open up to 300 stores over the next five years, through its partnership with motorway services operator Welcome Break. Other standalone c-store formats are also in the pipeline. It is also planning to extend and refurbish outlets across the country. The refurbishments are part of its Store Improvement Programme and range from major extensions and refurbishments to refresh programmes. In 2007, Waitrose expanded internationally with the signing of its first licensing deal in association with Spinneys in the UAE for the development of some 20 outlets by 2010. It has stated that by expanding its operations overseas it will be in a better position to invest in lower pricing in the UK.

Debenhams expansion sought in international markets

Debenhams announced that it expected headline profit before tax and exceptional items to hit 150m in the year to August 28, a result that would be ahead of market expectations. Sales in 2010 have been helped by the addition of more profitable lines and a recovery in sales over the summer months. However, overall like-for-like sales in the year to end August were flat compared to last year. Debenhams has gained in market share, assisted by the acquisition of Danish department store chain Magasin du Nord in 2009. During 2010 Debenhams opened six new stores, of which three new department stores and three new Desire stores. In addition, Debenhams has undertaken a series of in-store department store refurbishments. Debenhams is expected to continue to expand internationally, with the likely focus being on the emerging North African market. New UK store expansion opportunities are expected to remain scarce given the pause in the UK retail development programme and the uncertain economic outlook.

Aldi expansion slows amid fierce competition

Aldi, symbol for the shift to value in the recession, has suffered a reversal of fortune last year, turning a 93m pre-tax profit in the UK and Ireland into a 54m loss. This reflects a difficult year for the discount retailer and reveals struggles of how continental discounters have found it difficult to compete against strong UK supermarkets. While they have prospered in mainland Europe, the sophisticated value offers and better store environments of Tesco and Asda have made it harder to make progress. Still, Aldi is planning to increase its UK store base by 50 per year, with the expansion strategy also involving refurbishments of existing outlets and store re-locations.

Lidl emerging stronger from the crisis

In contrast to Aldi, Schwarz Groups Lidl has continued to perform well this year. Investments made in the business, with broader ranges

Primark
Value retailer Primark reported a 6% rise in like-for-like sales for its 2009/10 financial year and forecasts another year of solid like-for-like sales growth. The business opened eight branches of Primark during the past six months to end September alone,

13

3.0 GLOBAL rETAIL MArKET

3.1 Global economic backdrop
After decades of uninterrupted global growth, the world economy shrank in 2009. Most industrialised and some emerging markets saw deep recessions, while growth slowed markedly in many other emerging markets. Global growth recovered over the course of 2010 and is predicted to reach 4.8% this year. However, it has become increasingly clear that there are significant differences in the pace and nature of the economic recovery. Recovery in most advanced economies has been slow. Low consumer confidence and reduced household incomes are limiting consumption expenditure growth. In contrast, many emerging economies are seeing strong growth, mainly because they did not experience major financial excesses prior to the recession. Household spending is doing well, as a strong business sector is boosting job creation. Risks for the global economic outlook remain. In particular, Eurozone sovereign debt problems have caused a setback in global financial stability, which could impact on growth in the year ahead. The US economy is recovering, thanks to a large fiscal stimulus, financial stabilisation measures and a cyclical upswing. But, the recovery is slow, with much of the weakness due to sluggish consumer spending. Consumer demand is weak for several reasons, including lower household net worth due to asset price falls, high unemployment, tight credit conditions and fading government incentives. The government will also have to deal with fiscal imbalances and the public sector is likely to retrench in the near term. The most likely prospect for the US is for a continued but slow recovery, with growth far weaker than in previous upswings. In Europe, the depth and breath of the recession meant that almost all regional economies saw a sharp contraction in activity and job losses in 2009. The recovery this year has been patchy and there are marked differences in prospects across the region, depending

on the condition of public and private sector balance sheets and the extent to which economic policies can support growth. Ongoing concerns over the state of government finances in some countries have added to the economic challenges faced by the region. Indeed, the sovereign debt crisis will have a significant impact on economic growth for several years. In emerging Europe, growth in economies that experienced the mildest downturns (Poland), is expected to gain strength. However, those that had seen unsustainable domestic booms (Bulgaria, Latvia) or have vulnerable private or public sector balance sheets (Hungary, Romania) are expected to recover more slowly. Across Europe, aggressive deficit reduction plans will mean weaker government spending and the end to rapid public sector employment creation, both of which are likely to impact on growth in the years ahead. More positively, there are also upside risks. For example, a stronger German economy could lift growth in Europe more generally, given the countrys substantial trade and production linkages. Asia entered the global crisis on a strong footing and is leading the global recovery. In most parts of the region, resilience in domestic demand has offset weaker exports. In particular, Chinas strong growth over the past two years has benefited global capital goods and commodities exporters. Chinese growth is projected to average 10.5% in 2010 and 9.6% in 2011, driven by domestic demand. A slight moderation in recent activity is expected in the year ahead, in light of tighter credit growth, measures to cool off the property market and the planned unwinding of fiscal stimulus.
Global growth
11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5

The recovery in Russia and Latin America has been supported by Asian commodity demand, normalising trade and capital flow and accommodative policies. In particular in Brazil the recovery has been faster than expected, due to solid macroeconomic policy fundamentals, policy support, favourable external financing conditions and strong commodity revenues. This in turn has boosted domestic demand. The Middle East and North Africa is recovering firmly, largely underpinned by the rebound in oil prices from their trough in 2009. In addition, a sizable and rapid fiscal policy response, especially in oil exporting economies, has played a substantial role in supporting growth. The region still faces challenges, as credit growth has been sluggish in the aftermath of the crisis due to weak balance sheets both for the banking sector and the nonfinancial corporate sector. Overall, there is still a high level of uncertainty about the global economic outlook, in particular in the US and Europe. The global recovery remains fragile, as policies to foster internal rebalancing of demand from public to private sector, and external rebalancing from deficit to surplus economies are not yet in place. In particular, how Europe deals with fiscal problems, how advanced countries proceed with fiscal consolidation, repair and reform their financial sector, and how emerging market countries rebalance their economies by developing domestic demand will determine the sustainability of world growth in the year ahead.

Annual percentage

2008

2009

2010f

2011f

2012f

2013f

2014f

2015f

World USA Euro area Central and Eastern Europe

Middle East and North Africa Brazil China India Source: IMF

14

3.2 Key Market opportunities

It has been a challenging two years for global retailers. At the beginning of 2009, consumer demand in many countries primarily the Western but also some of the emerging economies in Europe began to fall, resulting in a significant decline in retail spending that many feared would prove lasting. However, by the end of 2009, sentiment had improved, and consumers bar some exceptions proved more resilient than was expected. In 2010, many markets saw some growth and emerging markets even saw strong growth. Most of the big global (food) retailers continued to post relatively strong sales throughout the crisis, although grocery retailers with high proportion of non-food were hit harder. More stable market conditions are encouraging strong retailers to continue with their expansion plans albeit more slowly and less aggressively than in the earlier part of the decade. The global retail market has changed over past decades, as the enlargement of the EU, globalisation, the emergence of China and India as powerhouses of the world economy and the rise of the Middle East have all impacted on retailers expansion and location decisions. The economic crisis of 2008/09 is likely to cause a further shift in the global pattern of consumer spending. There has been a marked shift in the distribution of global wealth. The emerging markets have seen their share of global output and wealth rise significantly, driven by rising incomes, higher savings ratios, strong investment and export growth. The much stronger performance of key emerging economies through the crisis and stronger growth prospects are likely to accelerate the recent shift in global economic dynamics. In the Western countries, even when economies start to recover, consumer spending growth will be limited. The destruction of housing wealth over past years and fiscal austerity will weaken consumer spending and retail sales growth. With consumers focussing on value/ price, discount store growth is strengthening in key markets of Europe and North

America last year. This trend is set to continue, with discount retailers set for the strongest growth in the years ahead. Hypermarkets will see relatively low growth due to saturated markets, the high cost of investment per store and growing pressure on non-food sales. The recovery in retail development activity in Western Europe and the US is very cautious, with owners looking at refurbishments and extensions. In these mature shopping centre markets, the emphasis is shifting towards more proactive asset management initiatives. The shift in global wealth creation has major consequences for global retailers. Consequently, leading (grocery) retailers are increasingly focused on emerging markets to drive growth. Asia looks to have the best growth prospects, with both China and India continuing to expand firmly. Brazil is also doing well, on the back of significant investment and rising consumer incomes. A number of countries in the Middle East and North Africa are also on the target lists of international retailers, due to investment in infrastructure, growing tourism, an increasing middle class and rising disposable incomes. A.T. Kearneys Global Retail Development Index ranks countries according to their retail market attractiveness. A market is attractive for retailers if it has high retail sales per capita, (urban) population, and business efficiency. Market saturation is reached if there is a high share of modern retailing, number of international retailers, modern retail

sales area per urban inhabitant, and market share of leasing retailers. A window of opportunity is identified when retail expansion is attractive, in particular for first movers. According to the research, currently the markets offering the best opportunities for retailers are in:
o Asia: China, India, Vietnam, Indonesia and Malaysia o Middle East/ North Africa: Kuwait, Saudi Arabia, the UAE, Tunisia, Egypt, Morocco o Europe: Russia, Turkey, Albania, Bulgaria, Macedonia o America: Brazil, Chile, Uruguay, and Peru

2010 Global Retail Development Index Country attractiveness

Source: A.T. Kearney 2010

15

3.3 Europe
The impact of the 2008/09 recession continues to be felt across Europe, with direct implications for retailers and the retail property market. In those economies where household and public purses suffered most in the downturn (Spain, Hungary, Ireland, UK), fiscal consolidation via both cuts in government spending and higher taxes will have a direct impact on disposable incomes and consumers may take time to rebuild their spending habits. Where economies have been relatively resilient (Poland, Nordics) retail sales will pick up sooner. On the occupier side, there has been an increase in retailer fall-out over the last two years, which has pushed up vacancy levels in high streets, shopping centres and retail parks across Europe. However the pace of fall-outs has slowed considerably over the course of this year. In many markets, retailers adapted, scaled back or even abandoned expansion plans, though this has not been universal. Discount retailers in particular have capitalised on opportunities and pushed on with expansion plans. On the back of difficult market conditions, the balance between landlords and retailers shifted fundamentally. Retailers are cautious about expansion and commit to space only on best terms and conditions, in order to reduce their risk to the minimum. The retail construction pipeline has shrunk sharply across the region over the past two years. The tightening of credit criteria by banks has considerably raised the cost of financing investment. This has, over the past three years, led to the cancelling of many investments, some of which seemed quite certain before. According to Colliers, the first half of 2010 saw around 2.1 million sq m of shopping centre GLA being added to the market - the slowest first half since 2005. The CBRE estimates that 2011/12 will see a decline in new completions of 45-50% compared with the peak of the market in 2008, as many proposed schemes may be delayed for several years. However, the number of new retail projects may increase in some countries next year, depending on the pace of the economic recovery and retailer demand for new space.

Those retail schemes with a delivery timeframe in 2012/2013 are in quite a strong position, as they are likely to open at a time when the market will be staging a recovery. The European retail market is not homogenous and countries are in very different stages with regards to retail development. Western European markets are significantly more mature than those in Central and Eastern Europe (CEE). The big three markets - UK, France and Germany account for some 56% of all retail sales in Europe. Although spending power in central Europe has grown steadily over the past 15 years, it has not yet caught up with Western European levels. There are also marked differences within the CEE and retailers expansion opportunities differ widely across the region. In particular, there is a high discrepancy in spending power between the capital and the regional cities.

Western Europe
Western Europe is one of the most concentrated retail markets in the world and has one of the most modern retail landscapes. There are a number of very large retail groups. The main players are Carrefour, Metro Group, the Schwarz Group, Tesco, and the Edeka Group. In Western Europe, fiscal consolidation and high unemployment is likely to continue to restrain retailers in the year ahead. There are a few notable exceptions with, for example, retailers expected to fare fairly well in Germany. The hypermarket and superstore, as well as cash & carry format are likely to see the slowest growth in the future. Most of the French retailers and many of Germanys, Spains and Italys leading players do not place hypermarkets at the centre of their growth strategies.

Shopping Centre GLA (sq.m) per 1,000 Population

Source: Colliers Shopping Centre Development report, September 2010

16

The focus is increasingly on smaller format stores which allow retailers to target markets more efficiently and adapt the store mix according to customer demand. Discount stores growth is anticipated to outpace other store formats, and many retailers have responded to the growing popularity of discounters by launching their own low-price concepts.

Central and Eastern Europe

There are vast differences between Central and Eastern European countries in terms of retail market structure and foreign retailer dominance. Across the region, the retail market has diversified over the last 15 years, with countries in different stages of retail development. Therefore, retailers approach each market on an individual basis, as one-size-fits-all strategies are unlikely to be successful. Retail market consolidation is prevalent in the Czech Republic, Slovakia, Hungary and Slovenia. Smaller markets such as Estonia and Lithuania are fairly concentrated, due to the strong domestic retailers. The Polish retail market remains relatively fragmented due to the large number of medium sized retailers, while others further in the East are not consolidated yet. Foreign retailers are market leaders in Central Europe, as these more prosperous countries attracted early investment in the mid-to-late 1990s.
Top 10 Retailers - Western Europe
Banner sales (EUR billion)

Romania and Bulgaria have also seen an increase in foreign investment in recent years. In contrast, the retail markets in the Balkan and Baltic countries remain mainly in the hands of local retailers. Further east, the market is in the hands of domestic retailers, with a few global players looking to build their presence. The Metro Group, Schwarz Group, Carrefour, Tesco and X5 are the biggest retailers in the Central and Eastern Europe and further expansion is expected by these retailers. The Schwarz Group is expected to become the leader in Central Europe by 2014, as it pushes ahead with expansion plans. In central Europe the discount channel is expected to see the strongest growth. Hypermarkets and superstores are likely to be the second fastest growing channel. Tesco is the leading hypermarket retailer in the Czech Republic, Slovakia, Hungary and Poland, but the Schwarz Group is closing the gap as it rapidly expands its Kaufland hypermarket concept. The hypermarket and supermarket channels are the fastest growing segments in Eastern Europe, with Buchan the clear leader in Russia and Ukraine. Cash & carry formats, i.e. Metro and Rewe Group, are also important. Western-style discount stores are beginning to take off in Eastern Europe (Russia and Ukraine). Russia is the largest retail market in Central and Eastern Europe, thanks to increasing incomes and the development of a middle class. Russia

had a bad economic downturn in 2009, which improved in 2010 and its longer-term outlook depends heavily on the price of commodities, the degree of confidence in Russia on the part of foreign investors, investment in infrastructure and other factors. If Russias economy grows consumer spending will expand. X5 Retail and Magnit are the clear leaders in Russia and both are expanding. X5 Retail Group is operating a strong multi-format portfolio of Karusel hypermarkets, Pyaterochka value supermarkets and Perekrestok supermarkets. Magnit is rapidly expanding through hypermarkets, supermarkets and neighbourhood stores in the densely populated South and Central Russia, targeting cities with less than 500,000 people. Foreign retailers have also expanded into Russia, including Metro Group and Auchan both of which are in full expansion mode, as well as Globus, Rewe Group, Rautakirja Group, Carrefour and others. The financial crisis has impacted on the retail scene over the last two years. In particular, as credit became more difficult to obtain and developers struggled to maintain building programmes, retailers were forced to adjust their development strategies. Ukraine is a market with much potential, but this is a longer term investment for retailers. Ukraines retail spending per capita is far lower than Russias, the retail scene is fragmented and the economic and financial crisis has hit retailers who have slowed expansion plans.

Top 10 Retailers - Central and Eastern Europe

Banner sales (EUR billion) Metro Group Schwarz Group Tesco X5 Retail Group Auchan Carrefour Rewe Magnit

Carrefour Tesco Schwarz Group Edeka Aldi Rewe Group Auchan Leclerc Metro Group Sainsbury's 0 10 20 30 40 50 60 70
2009 2014f

Jernimo Martins Ahold 0 5 10 15 20

2009 2014f 25

80

90

includes Russia and Ukraine, excludes Turkey

Source: PlanetRetail

Source: PlanetRetail

17

Outlook
The past 18 months have been difficult for European retail markets. The economic crisis was a consumerled slowdown, hitting consumer confidence and spending. Across Europe, the retail climate remains challenging. On the positive side, economies are recovering, consumer confidence in many markets is slowly returning, retailer fall-out is slowing and occupier demand is tentatively returning. On the downside, consumer confidence remains fragile. Consumer spending could slow again due to high unemployment and higher interest rates. Retailers will remain cautious about their expansion plans. Many countries in the region have lived beyond their means in recent years, with household and public debt at high levels. Governments are now forced to implement austerity measures to bring their finances back on a sustainable path, implementing public spending cuts and freezing public sector wages. The longer term outlook is more encouraging, with most retail markets now stabilising after a severe and painful correction. The European market is very diverse and despite a general slow recovery, retailers will still spot opportunities in better performing regions. There are expansion, investment and development opportunities for retailers in less mature European markets, where retail sales growth is from a much lower level than in Western Europe. The major growth potential in many CEE countries will only be unlocked over a longer period of time, as incomes increase. Some markets, which over the past decade have seen a sharp increase in new retailers, i.e. Poland, the Czech Republic and Slovakia will continue to remain attractive, due to their market size and growth potential. Others will become increasingly attractive as they are still relatively underdeveloped. Both Russia and Ukraine are potentially huge retail markets. A number of smaller countries are also attractive for retailers, including Bulgaria, Serbia, Croatia, and Albania.

Central and Eastern Europe: retail concentration

Market share of Top 5 grocery retailers up to 30%

Market share of Top 5 grocery retailers 30% - 60%

Market share of Top 5 grocery retailers over 60%

Source: PlanetRetail

Type of Retail 2009-2014f

14 12 CAGR growth of Revenue (%) 10 8 6 4 2 0 Western Europe Central Europe

Hypermarkets & Superstores Supermarkets & neighbourhood stores Discount stores Cash & Carry Convenience stores

Eastern Europe Source: PlanetRetail

18

Western European Retail Market

450 400 350 300 250 200 150 100 50 0 0 -50 2 4 6 8 10 12 14 16 18 20 22 Cumulative GDP growth 2010-15 Size of bubble refers to population Source: National statistics, IMF, Davis Langdon Netherlands Norway Portugal Denmark Sweden Greece UK Spain Germany Switzerland Austria Finland Italy Ireland France

Retail sales, Euro bn, 2009e

Central and Eastern European Retail Market

250

Albania Bos&Herz Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Macedonia

200 Retail sales, Euro bn, 2009e

150

100

Moldova Montenegro Poland

50

Romania Serbia Slovakia Slovenia 10 12 14 16 18 20 22 24 26 28 Ukraine Russia

-50

Cumulative GDP growth 2010-15 Size of bubble refers to population Source: National statistics, IMF, Davis Langdon

19

3.4 Middle East

Shopping is at the very heart of the Middle Eastern way of life, and the sheer scale and diversity of retail development particularly in Dubai, attracts people from all over the world. The region is one of the worlds fastest growing retail environments. It has witnessed a rapid transformation on the back of changing socioeconomic factors, large expatriate population, rising purchasing power and large petro-wealth. Retail across the region has evolved from traditional outlets to large shopping malls, hypermarkets and supermarkets. These malls, a number of which ranked among the largest in the world, have been built as leisure destinations offering a diverse range of attractions beyond shopping. Against this background, the Middle East has emerged as a key market for global retailers. Retail varies from country to country, depending on the size of the economy, disposable incomes, expatriate population and economic development. Without doubt, the global economic downturn has hit retailers and retail developers alike in the region, with expansion plans being shelved or put on hold in response to changed demand conditions. The impact of the downturn varied, as fiscal stimuli offset damage. Looking ahead, the basic fundamentals for future retail development are still in place. The two most important ones are people and money. The combination of a young, growing and more affluent population, together with a significant number of expatriates and tourists is what retailers want and they are positioning themselves to capitalise on it. Whilst there is certainly retail oversupply in some countries of the regions, i.e. Dubai, others still provide ample opportunity. Retail space in the region is expected to continue to increase firmly.
GDP growth and incomes
120,000 110,000 100,000 90,000 GDP/ capita in PPP 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Sy ria Eg yp t bi a Ba hr ai n Ku w ai t n n U AE Jo rd a Ar a O m Q at ar an o an

60 GDP/capita 2009 GDP/ capita 2014 GDP growth Cumulative GDP growth 2010-14
% of GDP - 8-year trend

50

40

30

20

10

Le b

Sa ud i

Source: IMF

Consumer and Retail Spending

22000 20000 18000 Sales per capita (USD) 16000 14000 12000 10000 8000 6000 4000 2000 0 Egypt Kuwait Syria Saudi Arabia Lebanon Bahrain Jordan Oman Qatar UAE Retail sales/capita Other consumer spending/ capita Consumer spending as % of GDP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: IMF, PlanetRetail (2008 data)

liberal and progressive attitude have spurred retail investment. Retail sales growth slowed in 2009, as the downturn led to a decline in tourism and decreased demand for luxury goods. Still, with a mostly urban population, a high rate of retail sales per capita and high per capita wealth, the UAE remains a growth market for international retailers. Dubai has emerged as the shopping capital of the world, or at least the Middle East. The number of malls and retail space built over the past five years is astonishing. Dubai Mall, the largest, has around 1,000 units and 400,000 sq m of lettable space. Mirdif

Strong retail growth in the GCC

The UAE has dominated the regional retail market for more than a decade. An affluent population, large expatriate community and a relatively

City Centre opened in early 2010. However this is likely to be the last of new mega malls for the time being. What we are seeing now is a switch to Community Malls (30,000 to 50,000 sq m) in areas which lack a good retail offer, but whose catchment area means that the business case does not support anything larger. All of the facets of large centres can be found in these smaller developments and they often provide a hub for the local community, who have previously relied on a fragmented and sub-standard retail experience. Abu Dhabi, which has lagged behind the rapid retail development of Dubai, is now seeing a marked change to
20

Retail Prospects

Bahrain 16% Forecast Ave. Annual Retail Sales Growth 2009-14 14% 12% 10% 8% 6% 4% 2% 0 1000 2000 Oman

Egypt Qatar

Jordan Saudi Arabia

Kuwait Syria

Lebanon UAE

of entertainment activities available, and the city has seen considerable increases in available retail space in recent years. Kuwait takes the second place in A.T. Kearneys 2010 GRDI. It is a small, urbanised country with a wealthy population. Some 80% of the Kuwaiti population are expatriates, while foreign workers crossing the border from Iraq also stimulate the retail market. A very high level of urbanisation is also contributing to a vibrant retail sector. The retail sector is still dominated by small food stores, but large retailers have made inroads around Kuwait City. Carrefour entered in 2007, Groupe Casino joined UAEs Retail Arabia and Kuwaits Tandeem in 2009. Shopping centre devilment is rising and Colliers International predicts Kuwait will soon have the Gulfs third largest supply of retail space. Bahrain, with its proximity to Saudi Arabia, has seen an expansion in retail space, in particular large shopping malls. New large-scale retail development is likely to pause over the next couple of years until new opportunities emerge for developers. Retail development has increased in Qatar and shopping malls are centres of social life. There are a number of large retail schemes currently under construction in Doha, such as the Barwa Commercial Avenue. According to Colliers, around 175,000 sq m GLA is expected to be delivered in 2010, if scheduled completion dates are met - which represents a 39% increase in supply. By 2012 total supply is expected to exceed 826,000 sq m GLA. As new supply is delivered, market conditions are likely to become more competitive.

3000

4000

5000

6000

7000

8000

Retail Sales/ capita Size indicator = total retail sales 2008 (USD mn) Source: PlanetRetail, Davis Langdon

Middle East shopping centre supply Shopping centres completed in 2010 UAE ...of which Dubai Abu Dhabi Bahrain (Manama) Kuwait (Kuwait City) KSA ...of which Riyadh Jeddah Oman (Muscat CD) Qatar (Doha) Total GCC Lebanon (Beirut) Jordan (Amman) Syria (Damascus) Total Levant Egypt (Cairo) 4.04 2.66 0.67 0.64 0.57 4.23 1.40 1.91 0.31 0.52 10.32 0.47 0.25 0.10 0.82 0.62 Under development /planning 2010 3.04 1.43 1.16 0.10 0.35 1.21 0.21 0.46 0.04 0.65 5.38 0.13 0.16 0.45 0.73 1.96

Source: Retail International 2010

its retail landscape with a number of malls under construction. The leasable retail area in Abu Dhabi is set to increase from over 398,800 m at the beginning of 2010 to 1.4 million m by 2012, according to Colliers International. Saudi Arabia is large, populous and relatively rich fertile ground retail development. Indeed, Saudi Arabia is seen as one the countries for retailers to be in over the next few years. On A.T. Kearneys 2010 Global Retail Development Index (GRDI) it takes the fourth spot, behind China, Kuwait and India. The main factors driving retail development are firm economic fundamentals, rising disposable incomes, increasing acceptance of modern retailing, a youthful population, urbanisation, and a large number of Muslim tourists visiting

to take part in the hajj and umrah pilgrimages. The hypermarket and supermarket sectors have changed significantly over the past few years as foreign players have entered and local players have expanded. French Carrefour and Casino entered it in 2004, EMKE and its Lulu hypermarkets in 2009, with more planning to follow. Domestic competition is strong, with Panda the main player. Mall development is expanding. As retail is one of the few leisure activities in Saudi Arabia where all members of a family can go, recent projects are being developed as destination retail venues. Riyadhs retail supply is expected to increase by 19%, reaching over 2.3m sq m of GLA by 2013. Jeddahs malls are the most developed in the Kingdom in terms

21

Beyond the Gulf

Economic growth in Egypt has picked up speed over the past decade. In the three years prior to the global economic crisis, growth averaged roughly 7% per annum, higher than the Middle East average and higher than the global average. This strong performance was due, in part, to reforms gradually introduced by the government. During the recent global crisis, Egypt did surprisingly well and looking ahead Egypt should be able to continue its performance, as long as the reform agenda is uninterrupted and relative political stability is maintained. With 80 million people, Egypt is a big market. Greater Cairo has a population of 15 million and Alexandria has around five million. Whilst still a relatively poor country, retail sales in Egypt doubled between 2004 and 2008, mainly due to a shift from traditional to organised retail. Retail sales are set to continue to rise sharply over the next years, driven by the large and young population, emergence of a more affluent middle class, increasing urbanisation and a vibrant tourism sector.

Until ten years ago, Egypts retail industry was almost completely composed of small independent shops and street markets. However, over the past decade, domestic and foreign retailers started to roll out large stores, both supermarkets and hypermarkets. Still, the lack of large modern players means that the top five grocery retailers hold a combined market share of less than 2%. More foreign retailers are expected to enter Egypt, while domestic retailers are also expected to grow. The Lebanese retail sector is still very traditional. Modern outlets supermarkets or hypermarkets - are growing slowly in numbers, but large scale development is hindered by inadequate infrastructure. However, there is a definite move towards modernisation of retail happening in Lebanon and more investors are expected to wake up to the potential of the market. Jordans retail market is also developing. In 2006, Carrefour entered as the first international player, opening in City Mall in Amman. This has paved the way for other retailers.

Jordan is a small country and coupled with low household incomes, modern retail development may be limited. However, changing consumer attitudes and favourable demographics should provide an attractive backdrop for retailers expansion. Jordan is expected to see increased investment in modern retail property, including shopping malls and hypermarkets. Syria is still undeveloped in retail terms compared with leading Gulf States or even Jordan and Lebanon. Retail spend per capita is still very low, though overall retail sales are expected to expand markedly over the next years, driven by rising consumer demand and increasing tourist numbers. A modern retail offer is starting to develop, with supermarkets and hypermarkets emerging in Damascus and Aleppo. High-profile Gulf investors are backing big projects. Damasquino Mall was the first hypermarket-anchored mall built in the country, and more are under construction or planned.

Top 15 Retailers Middle East - 2008

Shufersal Blue Square Carrefour Emke Group Panda Casino Spinneys Bin Dawood The Sultan Center Consumer Co-op UAE Al Othaim Tiv Taam Al Safeer GSL Al Sadhan 0 500 1000 1500 2000 2500

Forecast Top 15 Retailers Middle Eeast - 2013

Shufersal Blue Square Carrefour Emke Group Panda Casino Spinneys Bin Dawood The Sultan Center Consumer Co-op UAE Al Othaim Tiv Taam Al Safeer GSL Al Sadhan

3000

500

1000

1500

2000

2500

3000

3500

4000

Source: PlanetRetail (Banner sales, Eur, mn)

Cairo cumulative shopping mail supply

1,400,000 1,200,000 1,000,000 m GLA 800,000 600,000 400,000 200,000 0 2009 2010 2011 2012 2013
Source: Colliers International

22

3.5 BRICs
The BRICs Brazil, Russia, India and China - offer major opportunities for retailers. The economic crisis has impacted on the BRIC economies differently. Whilst Russia has been hit very hard, the recession was shortlived in Brazil, while China and India continued to plough ahead. Growth in these countries is expected to continue to outpace the majority of other economies in the world. This firm growth outlook, together with large populations, rising incomes and domestic demand, and increasing urbanisation will bode well for retail market development in the years ahead. We have covered the Russian retail market within the European context and will now briefly look at the Chinese, Indian and Brazilian retail sector.
Population
8000 7000 6000 in million 5000 4000 3000 2000 1000 0 3953.538 4336.462 199.492 1299.239 1375.286
Brazil India China Rest of World

189.613 1182.06 1328.02

2009

2015f

Source: IMF

23

China
According to A.T. Kearneys 2010 Global Retail Development Index, China regained the title land of retail opportunity. Chinas growth story has been spectacular. Over the last three decades, China, on the back of economic reforms, emerged as a global export powerhouse. Purchasing power has increased dramatically, with GDP per capita rising 29 times between 1980 and 2010. As incomes have grown, so has the capacity to spend. By 2015, China is expected to become the third biggest consumer market, after the US and Japan, according to the 2009 Annual Chinese Consumer Study by McKinsey. China performed exceptionally well during the economic crisis, with growth bouncing back quickly on the back of a US$585bn stimulus package. This has helped internal demand and revitalised the domestic retail market. Retail sales rose 17% in 2009 and are expected to rise by more than 10% this year. Retailing in China could receive an additional boost, if the economy adjusts away from export-oriented growth towards increased consumer demand. The government has launched measures to boost spending, including liberalising consumer finances, improving the social safety net and allowing currency appreciation. Retail sales are primarily urban driven, with urban centres contributing to 68% of total retail sales. Between 1980 and today, Chinas urban population has increased by over 200%. According to a McKinsey research study, by 2025 two thirds of Chinese people will be living in urban areas. 221 Chinese cities will boast of a population of over one million, with 23 cities registering over five million. Between 1990-2005 two mega-cities with a population of over ten million emerged - Beijing and Shanghai. This is set to climb to eight by 2025, adding Tianjin, Shenzhen, Wuhan, Chongqing, Chengdu and Guangzhou. These mega-cities are the leading retail hubs in China. Urbanisation has led to a sharp rise of the Chinese middle class, which is defined as households with incomes of between US$6000 and US$25,000 a year. This group virtually nonexisted in 1995, but is expected to
GDP and Retail sales
5,000 4,500 in US$, billion, current 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009e 2010f 2011f 2012f 2013f 2014f 4 2 0 -2
Source: National statistics, Business Monitor, Davis Langdon
Brazil Brazil GDP India India GDP China China GDP

12 10 8 6 GDP growth, annual

Retail sales per capita

9,000 8,000 in US$, billion, current 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 2009e 2010f 2011f 2012f 2013f 2014f Source: National statistics, Business Monitor, Davis Langdon China India Brazil

rise to over 340 million people by 2016 (Understanding Chinas Middle Class, chinabusinessreview.com, JanFeb, 2009). This urban middle-class will be a force in driving the Chinese retail boom. The Chinese retail market is highly fragmented but is consolidating, with the Top 20 retailers increasing their share from 4.9% in 2004 to 8.6% in 2009. Retailer demand is robust and global retailers have made a beeline to grab a share of the booming market, including Wal-Mart, Carrefour, Auchan, Tesco, South Koreas Lotte and RT-Mart. Others are looking to enter. For example, J Sainsbury is looking at targeting Chinas growing middle class for a possible expansion into the country. Sainsburys will have a long way to go to catch up with its UK rival Tesco. Tesco already

has plans to develop more retail and leisure space in China over the coming five years than it operates in the UK, with the aim of opening 80 shopping centres in China by 2016, amounting to 40m sq ft and 2bn of expenditure in the five year period. The organised retail makes up about a quarter of the total retail market for China. Hypermarkets are becoming increasingly popular, especially in big cities. The development of hypermarkets has been led by global retailers, including Wal-Mart, Carrefour, Vanguard, Tesco, Metro, RT Mart Shanghai and Trust-Mart. The supermarkets sector is a highly fragmented market dominated by domestic players. Convenience stores are rapidly expanding, but are still very much in developing stage and dominated by local players.
24

USD, billion

1,400 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f
Retail sales in dollar converted at average annual USD/Yuan exchange rates

14% 12% 10% 8% 6% 4% 2% 0%

Regional development is very disparate in China, and retail opportunities vary accordingly. The retail landscape in the coastal regions has become increasingly crowded after years of rapid developments, particularly in the mall segment. Eastern China is the most developed and prosperous region, with an average GDP per capita of about US$5,000 and 30% of Chinas population. Three main economic zones are located in the East: Bohai Rim, the Yangtze River delta and the Pearl River Delta. Average GDP per head in Northeast China, the countrys heavy industrial heart, is roughly half of that of Eastern China, at around US$2,800. Central China has been developing slower than other regions, and its GDP per head is slightly less than US$2,000. Western China, with 27% of Chinas population is the least developed region, with an average GDP per capita of US$1,800. As China strives to promote balanced regional development, inland areas are expected to continue to show strong growth momentum. Many retailers are still cautious about expanding into the rural regions, due to vast geographical span, less developed logistics infrastructure, and lower purchasing power. However, urbanisation, rising disposable incomes, fast development of highspeed railway and intercity rail transit network are set to bring huge retail growth potential to lower-tier cities and the rural market. Consequently, many lower-tier cities are now on the radar screen of many retailers.

Source: National Bureau of Statistics

Top Retailers in China Total retail sales ($, m) 1 2 3 4 5 6 7 8 9 10 Suning Appliances Gome Home Appliances Bailian Dashang Group CR Vanguard RT Mart Shanghai Carrefour China Anhui Huishang Group Walmart China Wumart Group 17,206 15,706 14,399 10,373 10,000 5,946 5,382 5,056 5,000 4,809 Number of stores 941 1,170 6153 160 2926 121 156 2,884 175 2,333

Retail sales in million yuan converted to USD at average 2009 exchange rate of 1:6.8

Source: Li & Fung Research Centre, June 2010

Regional retail potential

China retail potential Retail market, % of total

Tier 1 - The Big 4

Beijing Shanghai Guangzhou Shenzhen Chengdu Chongqing Foshan Hangzhou Changzhou Ningbo Dongguan Suzhou Taizhou Changchun Changsha Dalian Harbin Jinan Kunming Qingdao Nanjing Shenyang Tianjin Wuhan Wenzhou Wuxi Xiamen Zhonshan Shantou Shijiazhuang Tangshan Xian Zibo Zhengzhou Taiyuan 40 cities +600 cities

9 11 5 7

Tier 2 - High flyers

Tier 2 - High flyers

Tier 2 - Modest neighbours

68

Tier 3 - Developing provincial centres Tier 4 - Poor relatives

Source: China Cities Statistical Yearbook

Annual %, nominal

Department stores were popular earlier, but are now facing intense competition and are battling to stay ahead. Franchising constitutes about 3% of Chinas total retail market, but appears to have huge potential for future growth.

Total retail sales of consumer goods

2,200 2,000 1,800 1,600
Retail sales YoY growth (nominal)

22% 20% 18% 16%

25

India
India is ranked third on this years A.T. Kearney Global Retail Development Index, highlighting the potential of the Indian retail market. India has been one of the economic star performers in recent years. It is often compared to China, due to the size of its population, fast growth and foreign investor interest. However, Indias economy, demographics and retail market are very different. Firstly, it is on average much poorer. Among the three most dynamic emerging economies, Indias consumers have the lowest purchasing power. GDP per capita is less than half that of China and less than a third that of Brazil. Foreign investment is far more welcome than in the past, but it remains a protectionist country and restrictions are high in some sectors, including retail. India is not a single market, which makes trade more difficult, in particular as the transport infrastructure is poor. States have different legislation, with some preventing large scale retail development. Despite difficulties, India is an attractive market for retailers. It has a large, young and growing population. Incomes are rising, with more households entering the middle class. Less than a third of the population live in urban areas, but urbanisation is increasing and there are several very large cities with a large middle class. All of this bodes well for consumer and retail demand in the years ahead, and should augur well for the development of a modern retail market. The retail market is worth between US$375 and US$430bn, according to varying sources. However, organised retail accounts for just 5% of the market, though this share is expected to rise in the future, as domestic retailers expand. Increasing purchasing power, changing lifestyles and western culture influence are also key factors driving Indias organised retail market. The Indian retail sector is one of the least concentrated in the world, with the top five retailers accounting for just 2% of the market. There are many obstacles for foreign retailers to enter the market, so that local players dominate. With the market set to grow strongly in the years ahead, domestic retailers
India - Economic and retail indicators 2008 Population (mn) 1,182 GDP (US$, bn, current) 1,260.6 GDP growth (%, real) 6.4 GDP/ capita (US$, PPP) 2,868 Consumer spending (US$, b 664.9 Retail sales (US$, bn) 457.6 Retail sales/ capita (US$) 327 2009e 1,199 1,236.9 5.7 3,015 679.3 461.8 320 2010f 1,216 1,430.0 9.7 3,291 812.7 545.4 368 2011f 1,233 1,598.4 8.4 3,563 895.1 610 495 2012f 1,249 1,762.3 8.0 3,847 986.9 670 536 2013f 1,266 1,955.2 8.2 4,168 1,094.9 740 585 2014f 1,282 2,174.4 8.1 4,524 1,217.7 798 622

Consumer spending and retail sales are estimates only

Source: IMF, BMI, Davis Langdon

are looking to expand fast. Initial expansion plans of major retailers proved too ambitious and regulation prevented them in some cases from rolling out large-scale developments. Nevertheless, these investments have started to change in the retail environment. Reliance, Pantaloon and Bharti in particular, who have emerged as major players in many market segments, plough on with expansion plans across a wide range of formats. Bharti Retail for example, plans to expand its Easy Day stores across the country, planning 125 Easy Day supermarkets and 13 Easy Day Market hypermarkets. Over the next five years, Bharti Retail aims to be present in each Indian city of more than one million people, investing up to $2.5bn.
Key retail players in India Pantaloon Retail Shoppers Stop Lifestyle Reliance Retail Aditya Birla Retail Bharti Retail

from land ownership. In addition, whilst there has been considerable mall construction, retailers argue that there is still a lack of quality sites in urban locations. Boosted by growing demand, the Indian retail sector should continue to grow rapidly, with the share of organised retail expected to double in the four years ahead, as a growing middle class demands higher-quality shopping environment. While political obstacles remain, foreign retailers are ready to venture into India.

Brazil
On the back of economic reforms and high commodity prices, Brazils economy has performed strongly since 2004. It has come out of the global recession with little damage and there is a general consensus that the outlook is strong. Brazil has many appealing features for global retailers. It is a large and growing market with 190 million people many of which are young making it the fifth most populous country in the world. Strong economic growth has boosted average incomes, with GDP per capita rising from US$7,203 in 2000 to US$11,290 in 2010. In addition, social policies of the current government have led to a fall in income inequality. The number of people moving from poverty into the middle class is substantial and increasing. Today roughly half the population is considered middle class, which is generating significant growth in consumer and retail spending, and represents a massive opportunity for retailers. The euphoria surrounding Brazils winning bid to host the 2014 World Cup and 2016 Olympics has led to infrastructure investments, including commercial centres and shopping malls.

Foreign players continue to monitor the Indian retail market, with major global food retailers either having a presence or studying market entry. Restrictions on foreign ownership pose the biggest challenge to retailers. Full foreign ownership is only allowed in the single brand format, i.e. vertically integrated specialty apparel retailer, or if retailers were already present in India prior to 1997. As a consequence, foreign retailers are allowed to invest in wholesaling (cash & carry), but cannot open their own retail stores. Walmart and Metro have entered through this route, while Carrefour and Tesco plan to follow. Many global retailers are waiting in anticipation for a relaxation of foreign direct investment restrictions by 2012/13. Retail real estate is also a major challenge. The price of land is high and foreigners are prohibited

26

Brazil - Largest cities Region So Paulo Rio de Janeiro Salvador Braslia Fortaleza Belo Horizonte Curitiba Manaus Recife Belm Porto Alegre Guarulhos Goinia Campinas Inhabitants, million 11.04 6.19 3.00 2.61 2.51 2.45 1.85 1.74 1.56 1.44 1.44 1.30 1.28 1.06
Source: Wikipedia

Brazil - Economic and retail indicators 2008 Population (mn) 189.6 GDP (US$, bn, current) 1,635.5 GDP growth (%, real) 5.1 GDP/ capita (US$, PPP) 10,526 Consumer spending (US$, b 952.8 Retail sales (US$, bn) 716.7 Retail sales/ capita (US$) 3,780 2009e 191.5 1,574.0 -0.2 10,499 909.8 702.0 3,666 2010f 193.3 2,023.5 7.5 11,289 1,114.5 862.3 4,462 2011f 194.9 2,193.0 4.1 11,805 1,206 905 4,641 2012f 196.5 2,326.8 4.1 12,355 1,280 960 4,884 2013f 198.0 2,471.5 4.1 12,951 1,359 1,019 5,148 2014f 199.5 2,626.3 4.1 13,615 1,444 1,083 5,431

Consumer spending and retail sales are estimates only

Source: IMF, BMI, Davis Langdon

Brazil - Top 5 grocery retailers 2008 Carrefour Casino Wal-Mart SHV Makr Cencosud Other No of Stores 550 611 340 65 90 n/a Sales Area (sq m, million) 1.34 1.42 1.56 0.51 0.13 n/a Grocery Banner Sales ($ billion) 3.8 3.6 2.1 1.1 0.4 51.5 Market Share (%) 6.1 5.7 3.4 1.8 0.7 82.3
Source: PlanetRetail

In addition to sophisticated domestic retailers, Brazil is a major destination for foreign retailers. Food retailing is already highly consolidated and dominated by foreigners, including Carrefour, Casino, and Walmart, who have all been in the market for many years. The large chains are pursuing multi-format strategies including hypermarkets, supermarkets, discount stores and convenience stores. Nonfood retailing remains fragmented, but foreign retailers such as Leroy Merlin, C&A, Zara and H&M are active. Overall, the retail industry is relatively mature and consolidated for an emerging market. Despite consolidation, Brazil remains attractive for major retailers, who are now expanding into second-tier cities in the Northeast and Centrewest regions. Major retailers indicate that they are planning to invest some $8.5bn over the next three years, including over 2000 new stores in 2010 (Source: Deloitte). For example, Carrefour is continuing expansion, with 100 new stores planned including 38 hypermarkets. Walmart is also ramping up expansion, announcing in 2009 that Brazil was among its top priority markets for further investment. Brazils growth outlook is strong and confidence is high among the global business community, so that the retail playing field remains attractive in the years ahead.

3.6 Beyond the BRICs the Championship economies

The Championship Economies GDP, US$, billion Mexico Korea Turkey Indonesia Poland Saudi Arabia Argentina South Africa Egypt Vietnam 874.8 832.5 614.5 539.4 430.7 376.3 310.1 287.2 188.0 93.2 GDP PPP per capita GDP 2009 13,609 27,938 12,466 4,151 18,050 23,272 14,525 10,229 6,114 2,942 2014f 17,290 36,725 15,641 5,690 23,382 27,503 18,110 12,410 7,821 4,155 %, 2009-14f 27% 31% 25% 37% 30% 18% 25% 21% 28% 41%
Source: IMF

The term BRIC has entered the average consumers lexicon over the past two decades, but there is a group of sometimes overlooked emerging markets, with huge retail growth potential the 10 Championship economies. Different authors include different countries into this group, but generally these are middle-income emerging countries with large populations. Together they account for the worlds fourth largest economic group, after the EU, the US, and the BRICs. These countries are characterised by a growing population, rapid urbanisation, rising middle class, industrialisation and changing lifestyles, all of which is attracting retailer interest.
Population growth
14% Forecast growth 2009-2014 12% 10% 8% 6% 4% 2% 0% -2% -4% 0 40 Poland 80 Argentina South Africa Turkey Vietnam Saudi Arabia

Mexico Indonesia

120

160

200

240

Population in million

Source: IMF

27

Turkey
Turkey, at the crossroads between Europe, Asia and the Middle East, is certainly an economic heavyweight. After a deep recession in 2009, Turkeys economy has bounced back this year. Turkey should perform well in the years ahead, in particular if market-oriented reforms continue. Relatively cheap labour and easy access to the European market has made it an attractive location for production. Turkey has a fast growing population of more than 70 million people today, the majority of which are young. Whilst income distribution is skewed, in particular between the urban and rural areas, it can be considered as a middle income country. GDP per capita in purchasing power terms is nearly double that of China and ahead of Brazils. With the economy expected to expand rapidly in the years ahead, the number of middle class households is set to grow significantly, increasing discretionary spending power. The majority of spending power is in the Western regions, in particular Istanbul. Turkey is also rapidly urbanising, with more than 12 million people living in Istanbul alone. Foreign retailer investment in Turkey has been significant over the past decade and is expected to remain strong in the years ahead, as retailers capitalise on a growing economy and rising middle class. In contrast to many other emerging economies, the regulatory environment is benign, which makes it relatively easy for foreigners to enter. Turkish retailers are also important. Migros Trk, acquired by a private equity company in 2008, remains the market leader. Other local retailers are making significant investments abroad themselves, including in Russia, Central Asia and the Middle East. The Turkish retail market is fragmented and dominated by small independent stores. The top five players have a combined market share of less than 20%. However, shopping habits of Turkish consumers are changing, in particular in urban areas, which has already led to a growing number of modern (grocery) retail formats. The hypermarket format is dominated by foreign players such as Metro, Tesco and Carrefour.

The discount segment has grown in popularity in recent years and is expanding rapidly, due to local and foreign retailer expansion. BIM, for example now has over 2,600 stores, compared to just 21 at the end of 1995 (Source: Planet Retail). Other significant players are Sok (Migros Ticaret), Dia (Carrefour) and A101. On the back of a fast growing consumer sector, retail property development has been strong in the years before the economic crisis, in particular shopping centre construction. The recession has caused a sharp slowdown in shopping centre projects in 2009, with the increase in GLA slowing from 26% in 2008 to 17% (Source: Colliers International). However, the slowdown has not been universal across the country, with development in Istanbul continuing through the crisis. Retailers and retail development in the recent past concentrated on the largest cities in the country, i.e. Istanbul, Ankara and Izmir. However, retailers are now increasingly expanding into secondary cities across Turkey. As the economy recovers, more retailers will be attracted to Turkey and the retail development market is expected to expand rapidly in the years ahead. M&S, H&M, Zara and Mango announced plans to add further outlets and stores, while Harvey Nichols, present in Istanbul since 2006, has this year opened a branch in Ankara.

Turkish chains both food and nonfood are also expanding, including the Boyner Group, which already has several department stores as mall anchors, with more planned.

Turkey 2008 Grocery Market Banner Sales Share (%) ( bn) 5.6 2.5 4.8 2.2 3.2 1.5 2.1 0.9 1.4 0.6 82.9 37.8 100 45.6 2013 Grocery Market Banner Sales Share (%) ( bn) 6.7 4.7 6.1 4.2 4 2.8 3.1 2.1 1.9 1.3 78.2 54.0 100 69.1
Source: PlanetRetail

Migros Ticaret BIM Carrefour Metro Group Tesco Other Total

BIM Migros Ticaret Carrefour A101 Tesco Other Total

Turkey: Economy and Retail Indicators GDP, current (US$, bn) GDP growth (real, %) GDP/ capita (US$, PPP) Population (million) Consumer spending (US$, bn) Retail sales (US$, bn Retail sales/ capita 2008 730.3 0.7 13,124 69.7 507 248 3,560 2009 614.5 -4.7 12,466 70.5 425 208 3,950 2010f 729.1 7.8 13,392 71.4 483 234 3,280 2011f 789.6 3.6 13,880 72.3 529 259 3,585 2012f 845.8 3.7 14,402 73.2 575 282 3,850 2013f 902.9 3.8 14,982 74.2 623 305 4,120 2014f 966.0 4.0 15,641 75.1 667 327 4,350

Source: IMF, Deloitte, Business Monitor, Davis Langdon

28

Indonesia
Indonesia, with more than 230 million people and a fast growing economy is an emerging star with a potentially bright future. On the back of a relatively stable political environment over the last decade, the economy has expanded at a firm pace, exports have grown rapidly, public finances improved and foreign investors have returned. During the global economic crisis of 2008/09, Indonesia has done well, with growth slowing only slightly in 2009. This has much to do with economic and financial policies implemented after the 1998 Asian crisis, in which Indonesia suffered dearly. Looking ahead, Indonesias economy is expected to continue to perform strongly, with consumer spending increasingly driving growth.
Top 5 Indonesian Retailers by Number of stores Indomaret Alfa Mart Dairy Farm Matahari Carrefour Stores 3,500 3,300 470 305 90

stores dominating. The organised (modern) retail sector remains small, but the number of different channels is rising, as leading retailers expand multiple formats. Domestic players dominate the retail scene, in particular Indomart, Alfa Mart and department store operators such as Matahari and Ramayana. Foreign retailer investment has also increased. However their expansion has been slow, which may relate to experience during the 1998 Asian crisis, when many global retailers exited the country or stopped plans to enter. However global retailers are likely to become increasingly important as expansion plans are resurrected. The regulatory environment is not benign, but has improved over the last 15 years. Foreigners can directly invest in the retail market, but do face restrictions regarding location, store size and format, and types of acquisition. Carrefour is already a significant player (the leader in hypermarket sector) and is implementing an aggressive expansion plan. Hong Kongs AS Watson, Koreas Lotte and Germanys Metro have also recently entered. To capture a share of this rapidly growing consumer market, many more global retailers are now either entering the market or are examining opportunities. Initially investment will be concentrated around Jakarta, but in time more opportunities will open up in the provinces as well.

Source: Planet Retail, at end December 2009

Indonesias population of more than 230 million people is the fourth largest in the world, after China, India and the US. Demographics are favourable, with the majority of the population young and growing fast. Indonesia is still relatively poor, with a per capita GDP roughly a third lower than Chinas. There is a significant difference in purchasing power between urban (mainly Jakarta, the capital) and rural areas. Nevertheless, the number of people in the middle class is rising, driven by strong economic growth. Urbanisation is increasing quickly, with already more than two-fifth of the population living in urban areas. All of this augurs well for retail sales growth, retailers and their expansion plans. The Indonesian retail sector is highly fragmented, with the top five retailers accounting for a market share of just 5%-10%, and small independent
Indonesia: Economy and Retail Indicators GDP, current (US$, bn) GDP growth (real, %) GDP/ capita (US$, PPP) Population (million) Consumer spending (US$, bn) Retail sales (US$, bn ) 2008 511.5 6.0 3,985.4 228.6 311.8 193.1 2009 539.4 4.5 4,150.8 231.5 315.0 193.5

2010f 695.1 6.0 4,380.3 234.6 417.0 232.2

2011f 777.0 6.2 4,647.9 237.6 466.2 279.7

2012f 850.1 6.5 4,953.5 240.7 510.1 306.0

2013f 932.0 6.7 5,296.7 243.8 559.2 335.5

2014f 1,020.3 7.0 5,690.3 247.0 612.2 367.3

Source: IMF, PlanetRetail, Davis Langdon

29

Vietnam
Vietnam is considered as one of the fastest growing and most lucrative retail markets in the world. Vietnam is often compared to China twenty years ago: a single-party government undertaking market-oriented reforms, relatively poor with low wages, a popular production location attracting foreign investors, and a large (and in contrast to China) fast growing population that is increasingly urbanised. And like China over the past twenty years, Vietnam has seen very rapid economic growth over the past decade. The global crisis was felt in Vietnam but growth slowed only modestly from 6.3% in 2008 to 5.3% in 2009. Growth rebounded in 2010 and is expected to average more than 7% in the four years ahead. This strong growth should help increase the purchasing power of Vietnams population. Vietnam has one of the largest populations in Asia, with 87 million people, which is set to further grow rapidly. Only about one quarter of the population lives in urban areas but this is rapidly changing. This is important for the retail sector, as like in many emerging markets, purchasing power varies dramatically between the urban and rural populations. Consumer spending is still limited and per capita retail sales are the lowest in East Asia, though this is also changing rapidly. Indeed, Vietnams retail sector is expanding fast thanks to its increasing population, increasing incomes and the rise of organised retailing. Retail sales in Vietnam are expected sharply in the years ahead. The Vietnamese retail sector is highly fragmented and dominated by small independent shops. By far the largest local player is Saigon Co-op, the

state-owned superstore chain. Other important local players are Fivimart, Citimart, Maximart, Intimex and Hapro Mart. Vietnam opened up to foreign retailers only recently, but today they can open wholly owned businesses without a local partner. Until recently, the only major foreign retailer was Casino and the Metro Group. However, recognising the markets potential others have entered recently or are planning to do so soon, including Malaysias Parkson department stores, FamilyMart, Dairy Farm, Carrefour, Walmart and Tesco. South Koreas Lotte plans to spend US$5bn developing 30 department stores and supermarkets over the next ten years in major cities. In terms of organised retail, Vietnam remains largely underdeveloped. Only in the two main cities, Ho Chi Minh City and Hanoi, there has been a modest level of retail development. This is expected to change in the years ahead and the Vietnamese retail market is likely going to be characterised by increasing modernisation and growing presence of large global retailers.

Vietnam: Economy and Retail Indicators GDP, current (US$, bn) GDP growth (real, %) GDP/ capita (US$, PPP) Population (million) Consumer spending (US$, bn) Retail sales (US$, bn Retail sales/ capita) 2008 90.3 6.3 2,800.8 86.2 57.7 38.7 449 2009 93.2 5.3 2,941.7 87.2 59.7 39.6 454 2010f 102.0 6.5 3,123.1 88.3 66.8 43.8 496 2011f 113.6 6.8 3,339.4 89.3 73.9 48.7 546 2012f 125.4 7.0 3,579.0 90.4 81.5 53.8 595 2013f 137.9 7.2 3,848.9 91.5 89.6 59.2 647 2014f 151.5 7.4 4,154.6 92.6 98.5 65.0 702

Source: IMF, Deloitte, PlanetRetail, Davis Langdon

30

4.0 rETAILEr TrENdS

4.1 Consumer habits
Retail in the age of austerity
The recession has changed consumer behaviour. Consumers have become more value conscious, trading down, less likely to purchase big-ticket items and more careful about leisure spending. The scale of the downturn could lead to a permanent shift in spending pattern, particularly in those markets where consumer spending was excessive and fuelled by debt in previous years, like in the UK. Retailers will have to adapt to new consumer behaviour, and the values and priorities that will drive decision making. As more retailers drive the value proposition, they have to clearly differentiate themselves from competitors, which could include brand management, investing in the development of discount concepts, and expanding in newer markets.

Ethical retailing
Consumer spending on ethical products, including fairtrade, organic, free range and dolphin friendly products, increased almost threefold in the last decade, from 1.9bn in 1999 to over 6bn in 2008. According to IGD, households have not dramatically compromised on their values during the 2008/09 recession, but they are certainly scrutinising products closely to get the best price for their values. Ethical shopping is becoming more mainstream, but barriers to buying ethically remain, including price, lack of availability across more stores, categories and brands, and lack of trust. Looking ahead, while the pace of ethical retail sales growth is likely to slow, it is now firmly established in the UK and consumers do not want to compromise on their values. Many food and grocery retailers are also making long term ethical commitments.

$37bn in 2009 to $146.2bn in 2013. This will have a substantial impact on store retailing, and store retailers will have to offer more entertaining and interactive shopping experiences. Retail marketing through social media Social media is becoming a major influence on consumers buying decisions and retailers are increasingly focussing their marketing budgets on this area. As social media is evolving, it is becoming a viable channel via which retailers engage customers and build online communities to support their brands. In particular, the growing popularity of networking sites such as Facebook and Twitter have caused retailers to shift their focus from mass marketing to individual marketing. In addition, retailers are using social media to convert loyal customers into active supporters, influencing others buying decisions. Furthermore, retailers are using social media not only to promote sales, but also to research consumer opinion to establish closer relationships with their customers.

Multi-channel retailing
Consumers today prefer to browse through multiple retail channels, rather than relying solely on brickand-mortar stores, in order to inform themselves about products before making purchases. This has prompted retailers to broaden their multichannel retail practices (Source: Verdict). The additional channels that retailers use include the internet, mobile devices and catalogues. Retailers today aim to utilise the best attributes of both store-based and online shopping channels to maintain their competitive edge.

4.2 Retail categories

Discounters to outperform the market
Value retailers across the globe have emerged as the winners during the 2008/09 recession. While other retailers sales have weakened, discount stores continued to expand swiftly, taking up newly vacant space in order to capitalise on growing demand. This trend is set to continue, as consumers eye their balance sheets more carefully.

Green issues still on the agenda

Sustainability and green issues took a back seat during the economic crisis in 2008/09, but are now set to reemerge as key trends. However, with value a top priority for households, retailers will need to work hard to convince consumers of the benefits, particularly as many now expect retailers to offer sustainable products without having to pay a premium. Increased consumer awareness of environmental issues, together with government regulations, is putting retailers under pressure to adopt sustainable practices such as recycling, energy efficiency, reducing packaging, or collaborating with suppliers. Whilst adopting these practices offers retailers an opportunity to gain customer loyalty, it can also bring tangible financial benefits. In particular, cutting waste, reducing energy and improving the performance of the supply chain can cut costs and lead to enhanced efficiency.

Online-retailing
Internet retailing will continue to increase over the coming decade, as more households around the world will be connected. It is nearly impossible to predict what share of retail sales will take place online, but estimates show that online retail sales in Europe are to grow from US$83.2bn in 2009 to US$140.2bn in 2014, at a compound annual growth rate of 11%. US online retail sales are expected to grow from US$155.2bn in 2009 to US$248.7bn in 2014, while Chinese online retail sales are predicted to increase from

Supermarket dominance
Grocery retailers, in particular discounters continue to expand. In the UK, the big four grocers are dominant, accounting for over 60% of the total supermarket floor space, pushed up by Asdas recent purchase of Netto. However, others are also expanding, with for example Waitrose rolling out a new convenience store format. Grocery expansion is increasing demand for suitable space. Indeed, whilst the shopping centre
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and retail warehouse construction pipeline has shrunk markedly over the past two years, the grocery pipeline is increasing rapidly. A trend that has emerged recently is the move of grocery retailers from the high street to out of town locations, where 80% of the total supermarket pipeline is now located (Source: CBRE). This trend looks set to continue. Supermarkets are increasingly acting as anchor tenants. For example, Silverburn (Glasgow) is jointly anchored by Tesco, Debenhams and M&S. Tesco anchors the St Stephens (Hull) and Ellesmere (Walkden, Manchester) shopping centres. Other supermarkets are also expanding through this format, including

Sainsburys, who is co-anchoring the Trinity Walk scheme (Wakefield).

4.3 Supply-chain dynamics

Shift of power to retailers remains in place
On the back of the deep recession in 2008/09, the retail tenant-landlord relationship is being tested in new ways. How both sides respond could go a long way in determining the health of the industry in years

to come. Market conditions have prompted a substantial shift in the balance of power from landlord to tenant. The prospect of vacant space and loss of income streams has increased retailers bargaining power and was key for the decline in rental values. Retailers have become more influential in negotiations with landlords and are unwilling to compromise their business needs. They aim to reduce their risk to the minimum. Today, retailers seek to secure locations in high profile high street locations and shopping centres at better conditions and are renegotiating terms and conditions in both existing and planned spaces.

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Retail landlords adapt to changing requirements

The change in consumer spending patterns over the past three years has caused many retailers to rethink their store networks and expansion plans. Shopping centres have been particularly vulnerable to the change in strategies. Location, access, concept design, best terms and conditions, as well as proven performance for an existing centre or track record of the developer for a planned project will determine the success of shopping centres going forward. In particular, improving shopping centre management, for example with regards to presentation and tenant mix will be critical in todays retail environment.

inventory management. To achieve this, retailers are now collaborating more closely with their suppliers. This includes removing middlemen to tighten supply chains, increasing direct sourcing of products, keeping track of supplier service levels, and collaborating with regards to ethical and sustainable practices

4.4 Store location, layout/ design

New trading formats
The retail construction pipeline has shrunk dramatically over the last couple of years, which is increasingly causing problems for retailers that are pressing on with expansion plans. In response, retailers are developing more sophisticated and flexible trading formats, which enables them to adapt to the market rather than wait for construction pipeline to catch up. Moving to out-of-town locations has been a strategy for some retailers, with for example John Lewis developing their at home format in out-of-town stores. Multi-

channel offers and shared space are other strategies. For example, Waitrose and Boots tied up, while HMV and Waterstones have create the entertainment hub format. New formats have also been rolled out in the grocery sector by, for example ASDA, Morrisons and Waitrose. Grocery anchors are becoming increasingly popular in shopping centres and retail warehouse developments, though the decline in shopping centre and retail warehouse development will slow this trend.

Back to basics approach in store layout

Developers building new retail centres and repositioning old ones in todays market climate can take comfort in the fact that they can still create exciting space without spending a lot of money. The trend is going back to basics. Customers are not likely to avoid a shopping centre just because it doesnt have features that give it an extra oomph. What they care most about is convenience and ease of use and many of these features, including better access to the
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Evolving retailersupplier collaboration

Due to the economic slowdown, retailers are having to place increased emphasis on cutting costs and improving supply chain efficiency. Strategies include costeffective product sourcing and better

property or more natural light can be achieved without costing a fortune. The biggest change is likely to be the trend toward minimalism, creating timeless spaces that showcase the retailer, not over-building. When it comes to re-developing existing retail space, the back-tobasics approach can also work. For example, every shopping centre comes with a different shopper profile, so developers might want to conduct customer surveys to figure out exactly who their customers are and what design features are important to them. Responding to the needs of customers is likely to make the scheme more successful.

4.5 Retail globalisation

Expansion strategies
Retailers go global for a number of reasons. Some retailers seek to capitalise on fast growing consumer markets, especially when their home markets offer limited expansion opportunities, due to market saturation, stagnant growth and high competition. Less mature markets often offer the opportunity of substantial long term growth. Others expand to leverage their existing assets, i.e. global supply-chains, a unique format or a well known brand. In some markets, e.g. Europe, retailers face restrictions on development, as due to regulations, they cannot easily open new stores in their home market. Consequently, they seek growth in other markets. According to Deloittes Global Power of Retail, on average the top 250 global retailers operated in 6.9 countries in 2008, up from 5.9 in 2005. European retailers are the most global, operating in an average 11.7 countries. In recent years, the market concentration of the top 10 global retailers has slipped, due to the rising of emerging market competitors. In recent years major global retailers have shifted their focus towards strengthening their presence in existing markets ahead of expanding into new ones, but nevertheless, global retailers are constantly taking up expansion opportunities when they arise. Overall, European retailers dominate global retailing, in part due to the fact that European retailers are inhibited from domestic expansion, which is stimulating their global ambitions. Walmart, Carrefour, Metro and Tesco rank as the major global grocery retailers by turnover. The worlds centre of gravity for retailers is moving towards the emerging markets, with the BRIC markets offering the most significant growth prospects for retailers and suppliers. China is expected to become the worlds largest grocery retail market by 2014, overtaking the US.

The fashion trend of whats old is now in also applies to retail stores
US lifestyle retailer Urban Outfitters restored a 1930s art deco movie palace in Stockholm and re-opened it. When it opened the revamp was spectacular. The trend can also be seen in the UK, where Abercrombie & Fitch set up shop in London in a former branch of the Bank of England. With the outer skin of a Georgian townhouse on the outside and the ambiance of a nightclub within, shoppers have flocked to it. It has proved a sound investment: the store has the highest sales per square foot compared to any other Abercrombie & Fitch outlet and is hoping to find similar spaces across Europe.

Value end retailers look for quality store design

The success of value retailers such as Lidl, Primark or Uniqlo shows that consumers value costs and retial experience. Primark opened on Oxford Street in 2007 and it plays all the midmarket merchandising tricks. Designed by London-based Dalziel + Pow, it has dark wood perimeter panels, blue neon strips above the central escalator and mannequins placed casually around the store. Down the street, Uniqlos flagship would not disgrace some nearby Bond Street operations. In contrast, Aldi had fallen back last year, as consumers perceived the shopping experience in their stores as not desirable.

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There are four main routes to international expansion, each of which are characterised by a different riskreturn trade off.
1. Organic expansion: the potential returns are probably the highest, but there are significant risks. Organic expansion can be a slow and cumbersome process, and it can take a long time for the operation of break-even. There is the risk of failing to understand the local market. 2. Acquisition of domestic retailer: this route provides quicker access to operational scale and local market knowledge. The risks are mainly associated with the large up front investment and the cultural differences. 3. Joint venture with domestic retailer: this has been the main option in historically closed market, i.e. India or China, where outright acquisition of a domestic retailer is legally not possible. The risks are mainly the same as with acquisition. 4. Franchising: this has been a popular option, as it is considered the lowest risk strategy. However, it is also likely to provide the lowest potential profits for the retailer. In particular, high street retailers rather than food or retail warehouse operators have taken this strategy to enter a foreign market.

World-class emerging markets retailers

Many global retailers have expanded into the emerging markets over the past decade, but at the same time emerging market retailers are rapidly becoming global players in their own right, expanding into Asia, Africa, the Middle East and South America. This trend is set to continue. Some emerging-market retailers are indicating that they see investment opportunities in more affluent developed markets. Generally these are vertically integrated speciality players rather than mass merchandise or grocery retailers. Many of these retailers have easier access to capital than their Western competitors, i.e. they can obtain capital from private savings or sovereign wealth funds. As such, these companies are able to increasingly compete on a global scale.
Top 10 Global Grocery Markets 2010 e 1 2 3 4 5 6 7 8 9 10 Country US China Japan India France Russia Brazil UK Germany Italy bn 638 529 345 279 205 186 185 170 160 130 2014 f 1 2 3 4 5 6 7 8 9 10 Country China US India Japan Russia Brazil France UK Germany Indonesia bn 761 745 448 360 322 284 228 198 168 167

Source: IGD Research

In terms of retail market development there are a number of models, none of which are universally acceptable or universally applicable. One model divides retail market development into eight phases, some of which can occur at the same time.

Retail market development stages 1. Entry of international cash & carry retailers 2. Entry of large international grocery retailers 3. Entry of large international bog box retailers 4. Entry of specific luxury brands, opening up in prime areas 5. Entry of major international high street brands 6. Development of modern shopping centres in capital 7. Entry of additional players, rising shopping centre stock 8. Development of modern retail facilities in regions

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4.6 Retailers strategies for success

Amid continuing tough market conditions in many countries, retailers will have to continue to focus on retaining their competitive edge and gain market share. Two attributes are typically associated with successful retailers: efficient supply chains or a successfully managed brand. Cost consciousness remains high on the agenda for the majority of retailers, which includes:
o Controlling costs and prices: Consumers remain strongly valueoriented, so the focus remains on discount retailers. Those retailers with a low-price offer (i.e. Aldi, Lidl) and more price-focussed mainstream grocers (i.e. Wal-Mart) are faring well as consumers have traded down. But some upmarket players (i.e. Waitrose) are also doing relatively well, as they target a niche. The worst position for retailers remains the middle ground. To cut costs retailers will have to rationalise

supply chains, re-negotiate leases to cut operational costs and strengthen their position in core market segments. o Re-think supply chains: Retailers have developed highly sophisticated global supply chains over the past two decades. However further economies of scale are likely to be more limited, given that energy and transport costs are likely to remain relatively high in the future. In addition, with rising living standards in many emerging economies, labour costs could also rise, forcing retailers to start shifting supply chains gradually to other low cost locations or closer to home to avoid transport costs. o Improve risk management: Postrecession, retailers will need to continue to adjust to a more volatile business environment. Major changes in exchange rates, interest rates, capital costs and energy costs will affect operating incomes and cash flow. The economic downturn has demonstrated that a more comprehensive understanding of risk is needed, and there is a need

to improve the adaptability of business models. Retailers will have to develop more sophisticated risk mitigation strategies, which would help to diversify risk, reducing the business vulnerability to a severe shock. o Customer experience and change in shopping pattern: Retailers have to find ways to differentiate themselves from their competitors in order to build brand loyalty, generate business and gain market share. Customer experience can make a large difference in the performance of a retailer. Retailers will need the ability to constantly innovate to maintain differentiation, which will help retailers to preserve their pricing power. o Portfolio optimisation: the bulk of retail property downsizing occurred in 2008 and 2009. However, retailers have to continue to optimise their real estate portfolios in a more competitive retail environment, and the demand for professional asset management services is increasing.

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4.7 Other issues

Retail cost inflation
Retailers could come under pressure to absorb higher raw material and energy costs to ensure their products remain attractive for cost conscious consumers. A number of factors are combining to currently create the most inflationary environment in the retail sector since the mid-1980s. This is a marked change from the past ten years when clothing and food prices fell markedly, which was mainly driven by the growth of value players. A combination of higher supply chain costs, transport costs, increases in VAT, and raw material price increases have pushed up input costs. For example, cotton prices in China are nearing their historical peak, squeezing garment manufacturers, while the drought in Russia this year has pushed up wheat prices. Agricultural prices are likely to remain significantly above their levels in the early years of the decade and will be much more volatile than in the past, due to short and long term supply and demand issues. In addition, having already secured many of the benefits of international sourcing, it will become more difficult for retailers to extract significant extra savings from moving production to ever cheaper locations. Indeed, over the medium term wage inflation in China and other emerging markets could push up clothing production costs. Retailers will seek to pass on input costs increases, so that food and clothing could become more expensive in the years ahead.
Inflation/ deflation in the clothing market
5 4

Annual Inflation/ Deflation, %

3 2 1 0 -1 -2 -3 -4

2010f

2011f

2012f

2013f

Source: Verdict Consultancy

Top 20 Retailers Worldwide European retailers are the most global

High

Promodes No. of countries with operations Aldi

Tengelmann

Intermarche Auchan Wal-Mart Tesco Kmart KKR Sears Ito Yakado Daiei Le Clerc Edeka Rewe

JC Penney Low Low

Kroger Dayton Hudson

No. of operating formats

High

Source: Company Annual Reports and Retail Forward, Inc.

Grocery Turnover League 2009/10 Retailer 1. Wal-Mart 2. Carrefour 3. Metro Group 4. Tesco 5. Schwarz Group Country of Origin US France Germany UK Germany Net sales, 2009/10 $ million 404,743 163,852 91,412 90,091 77,279

Source: IGD Retail Analysis Datacentre, 2010

2014f

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-5

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CONTACTS

Paul Zuccherelli Head of Retail Europe paul.zuccherelli@davislangdon.com

Lionel Dore Head of Retail Middle East lionel.dore@davislangdon.com

Mren Baldauf-Cunnington Economist EME maren.baldauf-cunnington@davislangdon.com

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