Table of Contents

Introduction ............................................................................................................................. 4 Objectives of the sector scope study .............................................................................................. 4 Sections of the sector scope study.................................................................................................. 5 Methodology............................................................................................................................ 5 Turkish retail sector at a glance ................................................................................................. 6 Entrepreneurship Ecosystem..................................................................................................... 7 1. Policy ....................................................................................................................................... 7 1.1. 1.2. 2. Leadership ....................................................................................................................... 7 Government .................................................................................................................... 8

Finance .................................................................................................................................... 9 2.1. Financial Capital .............................................................................................................. 9

3.

Culture ................................................................................................................................... 10 3.1. 3.2. Success stories............................................................................................................... 10 Societal norms ............................................................................................................... 10

4.

Supports ................................................................................................................................ 11 4.1. 4.2. 4.3. Non-Government Institutions ....................................................................................... 11 Support professions ...................................................................................................... 11 Infrastructure ................................................................................................................ 12

5.

Human Capital ....................................................................................................................... 13 5.1. 5.2. Labor.............................................................................................................................. 13 Educational Institutions................................................................................................. 13

6.

Markets ................................................................................................................................. 15 6.1. 6.2. Early Customers............................................................................................................. 15 Networks ....................................................................................................................... 15

Interviews .............................................................................................................................. 16 Current activity in the sector......................................................................................................... 16 Expected activity in the sector in the short term .......................................................................... 17 Brand perception of the Turkish consumers ................................................................................. 18 Retail: a challenge for the government......................................................................................... 19 Changes in the stores renting prices and its influence on the profitability of the industry ......... 21 2

Access to funds for entrepreneurs ................................................................................................ 22 Conclusions ............................................................................................................................ 23 Opportunities in the retail industry .............................................................................................. 23 Threats in the retail industry ......................................................................................................... 26 The role of NGOs supporting entrepreneurship ........................................................................... 28 The author ............................................................................................................................. 30 Acknowledgements ................................................................................................................ 30 References ............................................................................................................................. 31

Introduction
In this sector scope study we will provide the reader with unique insights gained from exhaustive research processes and from deep interviews with relevant stakeholders and experts in the industry. This study is useful for those who want to understand at a glance the Turkish retail sector challenges, opportunities and threats. Endeavor Turkey, in collaboration with the Stockholm School of Entrepreneurship, sponsored this sector scope study on the retail market in Turkey, which was finalized in August 2012. Endeavor is a non-governmental organization whose main objective is to promote high-impact entrepreneurs in emerging countries as a source of wealth creation for the societal and economic development of these countries. Since 2006, when Endeavor opened its office in Istanbul, Endeavor Turkey has been helping Turkish high-impact entrepreneurs to transform brilliant business ideas into solid companies. Currently, 47 Turkish entrepreneurs are receiving support from Endeavor Turkey. Although the findings of this sector study should be useful for entrepreneurs in the whole country, the geographical scope of this study will be specifically the Istanbul Region. Regarding to which retail sectors this sector scope study is going to be focused at, we have chosen mainly two: fashion (clothing and accessories) and food & hot beverages. The criteria for choosing the sectors have been the importance of the sectors and also the ease of the entrepreneurs to enter that specific retail industry.

Objectives of the sector scope study

The objective of this sector scope study is twofold: The first objective is to help local retail entrepreneurs to understand their ecosystem with all the important stakeholders they should be aware of; and also to be aware of the opportunities and threats that they face in this industry. The second objective is to explore and identify in which areas of the retail entrepreneurial landscape Endeavor Turkey contributions can create the greatest value for the entrepreneurs and the highest impact on the Turkish society.

Sections of the sector scope study

This report is divided in three different sections: In the first section the Turkish retail sector will be examined following the domains of the Entrepreneurship Ecosystemi namely: policy, finance, culture, supports, human capital and markets. In this section we will explore the influence of these domains on the Turkish retail entrepreneurs and their businesses. In the second section we will conduct interviews with entrepreneurs and other stakeholders of the Turkish retail industry in order to know how the sector performed in the last year, how it is expected to evolve in the near future and what the main entrepreneurial challenges are in the retail sector. Finally, in the last section we will assess the main needs, opportunities and threats for the entrepreneurs in the retail sector as well as assimilating the findings of the report.

Methodology
For the first part of this sector scope study, we have followed the entrepreneurial ecosystem model. This model aims to analyze economic environment of a specific sector and how the entrepreneurs interact with their environment. For this report, we have adapted the model to the retail Turkish economic environment. Additionally we will describe how the domains of the ecosystem, combined all together, influence the entrepreneurs and their businesses. For the second part of the sector scope study, semi-structured interviews with relevant stakeholders (entrepreneurs, managers, NGO representatives, consultants, etc.) in the Turkish retail sector have been conducted. Finally, we have highlighted from the interviews and the research, the findings that are the most relevant for the readers and gained an understanding of the future of the sector.

Turkish retail sector at a glance

Whereas major financial turmoil has been overshadowing the economic evolution of the developed countries, Turkey is experiencing an economic boom in almost every single industry. The competitiveness of the Turkish industry, the security that Turkey offers compared to its other neighboring countries in the Middle East and emergence of a relevant middle class with an increasing purchase power is behind this economic boom. As many other sectors, the Turkish retail sector is growing very fast backed by a strong internal demand. The increase in the purchase power of Turkish families and individuals are making them to embrace consuming habits that until a few years ago were only common in the most developed countries. Demographically, the Turkish population is much younger than its European counterparts: the median age is 28.5 years oldii. This is a tremendous opportunity not only in terms of an increasing consumer base, but also an increasing talent pool of newly graduate students. Although big brands with international reputation generate the highest revenues in the market, consumers are maturating from a brand and price orientation to a shopping experience orientation, in which trying new fashion items and differentiating from the bulk of the consumers are the main shopping motivators. This constitutes an opportunity for new and quality retailers in the Turkish retail sector.

Entrepreneurship Ecosystem

Figure 1: Domains of the Entrepreneurship Ecosystem

Source: Endeavor Turkey

1. Policy
1.1. Leadership
The government is supporting the emergence of entrepreneurship in Turkey as a way to trigger the transformation of the economy. The lack of coordination between universities, both public and private institutions whose rivalry and prestige struggles impede them to cooperate, has made the government to assume a relevant role in the supportive efforts towards entrepreneurs and small and medium Turkish enterprises.

Through this support from institutions, the entrepreneurs are thought to be one of the cornerstones in the growth and evolution of the Turkish economy and society. According to the Union of Chambers and Commodity Exchanges of Turkey (TOBB), although the number of newly established companies went down 27.07%, the number of sole proprietorships in May 2012 increased 16.31% compared to May 2011 and the number of companies that went out of business went down 8.27% compared to the same period last yeariii. Parallel to the economic growth of the country, more Turkish citizens dare to found and manage their own businesses. However the number of entrepreneurs is lower compared to other European countries, especially the number of female entrepreneurs.

1.2. Government
One example of how the government is taking the lead in promoting entrepreneurship and the economic activity in general, in the absence of a meaningful action from universities, is the action taken by the Turkish Under-Secretariat of State Planning Organization in the context of the Development Agencies Support Program. These agencies are promoting the participation of Turkish firms of several industries in both export oriented and domestic activities by providing direct financial support with subsidizes and low interest loansiv. One of the main political players for retail companies in the Istanbul metropolitan area is the Istanbul Development Agency, which sets the guidelines of the local government intervention in the modernization the Istanbul Region economy. For its 2010-2013 Regional Plan, the agency established five key development areas: global competitiveness, social development, environmental and cultural sustainability, quality of urban space and transport and accessibility. Out of these five development areas, achieving global competitiveness is very important in the context of this sector scope study because the first objective within this development area is improving the service sector and increasing its share in the economy. With other industries, retail constitutes the cornerstone of modern and service-oriented economy. It is very relevant that one of the key priorities of the Istanbul Development is to turn the regions economy from an industrial and manufacturer economy to a service-oriented economy. For entrepreneurs interested in retailing fashion and clothing items, there is an opportunity for accessing financial aid through the Agency. Entrepreneurs should consider both the national and local government agencies as allies. Regarding regulatory changes, on January 11th of 2011, the Turkish National Assembly enacted a new major regulation with direct impact on the retail industry: the New Turkish Code of Obligations. Major changes have been introduced in the New Code of Obligations regarding the old one which was approved 85 years agov. Among the most important changes for retailers is an increase in the protection of tenants respectively to landlords: the New Code of Obligations states 8

that if a contracts currency is a foreign currency, for the first 5 years the rent cannot be increased. Also, penalties for tenants leaving prior contract terminations have been introduced by the new regulation.

2. Finance
2.1. Financial Capital

The development of the Turkish funding mechanisms for new entrepreneurs is undeveloped compared to their European and North American counterparts. Whether in more developed countries venture capital and private equity firms have a fundamental role in supplying funds to the entrepreneurs, in Turkey the more common funding sources are the help of family and friends. Borrowing loans from banks is another option, but it is very costly in terms of interests and it demands providing a considerable guarantee for the devolution of the loan. Needless to say, very often these demanded guarantees are provided by family and friends. We should expect a continuous increase in the inflow of capital, especially foreign capital, in the Turkish entrepreneurial landscape. As the second fastest growing economy in the world, Turkey is currently attracting a big amount of investments from big corporations which want to enter or increase their presence in such an attractive market. As a matter of the fact, other investments such as those from private equity and venture capital funds are increasing but are still at a very early stage. A clear example of promotion and integration in the Turkish venture capital industry is the IVCI (Istanbul Venture Capital Initiative), which encompasses a network of VCs in the Istanbul Area. However this initiative is a pioneer one in the Turkish industry. It is expected similar initiatives to emerge in the years to come. An additional and very common funding source for Turkish entrepreneurs is angel investors, especially in the digital and information industry. For example, Galata Business Angels is an important player in this market: it is an organization composed of several angel investors who, through diversifying their investments, want to avoid the associated risks of angel investment ventures. On the other hand, in the retail industry the angel investors are more fragmented, especially in geographical terms. Angel investors strongly prefer to invest in businesses that are geographically close to them: both for the knowledge of the market and for having a greater degree of supervision in their investments. Therefore, an integration of efforts as we see in Galata Business Angels is very unlikely because of the dispersion of the angel investors.

3. Culture
3.1. Success stories
The Turkish government is running an important public relationship effort on promoting the success stories of big corporations that are successfully doing business in Turkey. In the Invest in Turkey websitevi there are examples of big corporations such as Coca Cola, Microsoft or Pfizer that operate in the country with positive results. However, this success stories are oriented towards foreign companies and investors, not towards Turkish entrepreneurs. NGOs like Endeavor are aiming to promote entrepreneurship in the Turkish business culture. However, the Turkish culture, like other Mediterranean cultures that are oriented towards stability and a familiar lifestyle, does not encourage individuals to take risks like entrepreneurship demands, but to find stable jobs. Changing this mindset might take many years among the university and business community, if it is ever achieved. Organizations such as universities, government agencies and NGOs should exploit in a greater extent successful entrepreneurial stories, such as the story of Zeynep Rstemolu, founder of Forum Engineering and winner of the Garanti Banks 2011 Turkey's Woman Entrepreneur prizevii. Another course of action for these organizations in order to promote entrepreneurship could be to attract foreign successful entrepreneurs to Turkey. If these foreign entrepreneurs are successful in Turkey, their success stories might attract not only Turkish citizens to choose the entrepreneurial path for their careers, but foreign entrepreneurs to run their own businesses in Turkey. Other emerging countries such as Chile have chosen this approach with the program Start-up Chile, in which foreign entrepreneurs are encouraged to move to Chile to execute their business ideas and share the success story with local entrepreneursviii.

3.2. Societal norms

Historically the Turkish society has been attached to the traditional family values that often discourage individuals to take risks that might harm the family unit. However, in those parts of Turkey that are more open to the external cultural influence such as the Istanbul Region, an increasing number of individuals are willing to follow the entrepreneurial path for their careers. In addition, the fact that the Turkish population is quite young makes entrepreneurship to be an increasingly popular option. Although entrepreneurship is internationally acknowledged to be a source of wealth creation, it is the task of NGOs like Endeavor Turkey to create awareness of this in the Turkish business 10

community and in the society in general. Both the work of the government and other organizations to spread the success stories are having a positive impact on the perception that Turkish people, especially the young people, have about entrepreneurship.

4. Supports
4.1. Non-Government Institutions

Few Non-Government Organizations such as Endeavor support new retail entrepreneurs. This might be due to the relatively young entrepreneurial culture in Turkey. Also, the fact that the Turkish retail market is increasingly a highly competitive market dissuades organizations to undertake efforts that demand close collaboration on the fear that the cooperation might undermine competitive advantages. One of the fields with the greatest potential is the female entrepreneurship. The family-oriented Turkish culture induces many women to give up their careers in order to take care of the family. Also, compared to the actions that many European governments have taken in the past and are currently taken, there is room for improvement for the actions that the Turkish Government should take in order to promote the role of women as entrepreneurs. Although there is a trend towards Turkish women achieving higher positions in corporations and running their own businesses, there is still a vast potential on this area. KAGDER, the Women Entrepreneurs Association of Turkey, supports 250 female entrepreneurs and provides entrepreneurial education and training to over 1300 womenix. Turkish women have a tremendous potential as entrepreneurs. Women have equal rights in Turkey, but do not have the same opportunities than men and lots of this potential is wasted because of the inactivity of the Turkish Government in this field. More initiatives like KAGIDER would be extremely positive not only for Turkish women, but for the entire Turkish society.

4.2. Support professions

The fashion and retail industry is not considered a highly intensive technological industry that demands a great amount of external support. The technological requirements of the industry are low compared to other industries. This makes the industry to have lower barriers to new entrants, what facilitates the emergence of new entrepreneurs in the sector. The fact that, from a technological point of view, Turkey is less developed than most of the European countries is not a 11

problem for entrepreneurs in the sector. Out of the four factors that we have analyzed in this section, the technological factor is probably the least important of them.

4.3. Infrastructure
Due to its geography, communications in the Istanbul Region, where this sector scope study is focused on, are difficult: it is split in two parts by the Bosphorus Strait and its orography is carved with many hills and valleys. It is expected that a third bridge will be constructed to communicate the European and the Anatolian side. However, despite all the difficulties, the Istanbul region has an excellent communications and infrastructure network. And most importantly, this infrastructure is improving continuously year after year. Regarding ground transportation, road and train transportation are the main communication paths. Only in the last two years, from 2009 until 2011, the total length of the asphalt state highways in Turkey grew from 7.488 until 9.869 kilometers. This is almost than double than in 2000x.

Total length of the highways

10000 9500 9000 8500 8000 7500 7000 6500 6000 5500 5000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 2: Total length of the highways

Length

Source: General Directorate Highways

When it comes to train transportation, the conventional train network has shown little improvement in terms of total length in the last 6 years. The total length of conventional train lines is 11.052 kilometers. On the other hand, as of January 2011 the total length of the high-speed 12

train network in Turkey is 888 kilometers. This is quite significant because in 2008 there was no high-speed train transportation in Turkeyxi. Although there have been important improvements in the railways and roads network, according to the Turkish Ministry of Transport, Maritime Affairs and Communications the top priority has been oriented towards the maritime sector. The sea transportation is particularly important because of the relevance of the Bosphorus strait in the international sea transportation and the fact that most of the Turkish population lives, and most of the economic activity is done, in coastal areas. Regarding telecommunications, the Istanbul region has a very developed telecommunications network that allows individuals and companies to develop their activities in standards that often are better than their European counterparts.

5. Human Capital
5.1. Labor

The Turkish population is one of the youngest in the region: more than one quarter of the total population is under the age of 15, and only 6,3% of the population is older than 65xii. The changes in the demography in Turkey constitute an opportunity both in terms of a broader young customer base and also in terms of an increasing number of people joining the labor market every year. The demographic situation of Turkey and its continuous cultural changes towards a western standard, especially in the main cities, represent an opportunity for entrepreneurs in the retail industry. Small and more flexible companies can fill the gaps created in this new, larger and fastchanging market that big companies cannot fill because they are too slow to adapt to it quickly enough. Under this new scenario, companies with an entrepreneurial profile can achieve growth and profitability.

5.2. Educational Institutions

The number of students enrolled in high education programs in Turkey has increased substantially: 3,3 million of students by 2010xiii. In just two years, from 2008 until 2010 the number of university students grew by approximately 50%. Those students who enrolled in university between 2008 13

and 2010 are expected to incorporate into the labor market by 2012-2014. This brings an extraordinary opportunity for fashion retailers not only for attracting new customers, but as an enormous talent pool for hiring high potential employees.

Number of university students

3500000 3300000 3100000 2900000 2700000 2500000 2300000 2100000 1900000 1700000 1500000 2005 2006 2007 2008 2009 2010

Number of university students

Figure 3: Number of university students

Source: SGB

Despite the vast progress in terms of accessibility of Turkish youth to superior education, no entrepreneurial training is offered by universities or other organizations whether these are governmental or non-governmental. Individuals who want to pursue entrepreneurial education in Turkey often have to attend to programs offered by foreign institutions such as the Global Entrepreneurship Program sponsored by the United States State Departmentxiv. Offering entrepreneurial education constitutes a huge opportunity for NGOs like Endeavor that are in a unique position to fill this value gap that neither the universities nor the government is filling currently.

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6. Markets
6.1. Early Customers
Experts do not agree if Turkish retail consumers are very brand oriented. Although in the past the Turkish customers were strongly oriented to the most popular brands, as the customers behavior matures, they are becoming increasingly experience and price oriented rather than brand oriented. For retail entrepreneurs, the social media constitutes an inexpensive way to reach the young segment of the population who are the ones who use the social networks the most, and to promote their new products and services. On average, by using the social media marketing channel companies achieve a 9% monthly increase in awareness in the targeted market segment; this means that in one year time, companies more than double their market awarenessxv. Turkish customers do not have an extensive knowledge of retail brands beyond the most famous ones, so the efforts towards attracting early customers should be oriented to specific market niches.

6.2. Networks
The main concern that entrepreneurs should have regarding the economic situation of Turkey is the dependency on the exports of Turkey to its main trade partners. Given that the main trading partners are EU countries (especially Germany accounting for 9,6% of the total exportsxvi), an hypothetical recession of the euro-zone might have a negative effect on Turkish Economy growth. Textiles account for a great proportion of Turkish exports, so entrepreneurs in the sector should be aware of the implications that a recession in the EU would have in their businesses. Although this sector scope study is focused on the internal demand rather on the export capabilities of the Turkish retailers and manufacturers, a slowdown in the Turkish economy growth, regardless its causes, would have a negative impact on the internal demand and therefore on the sales prospects of the Turkish retailers. Another negative consequence of a recession in the EU is that some European retail companies might enter the Turkish market as a profitable alternative to their home markets, so local entrepreneurs should expect more competition from companies based in Europe under this scenario.

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Interviews
In this section we are summarizing the opinions and statements that the interviewees did during the interview sessions. Given the big amount of information generously provided by the interviewees, for this section we decided to arrange a standard questionnaire, based on the entrepreneurship ecosystem domains, in order to homogenize the input and findings as much as possible. The questionnaire is divided in two parts: The first part of the questionnaire, right after the introduction, is focused on finding what has the evolution of the activity of the company during the last year been and the expected evolution in the near future. In case that the interviewee is not an entrepreneur but a consultant or a different stakeholder, the questions were rephrased to ask about evolution of the sector in general. The second set of questions of the questionnaire are focused on identifying the main stakeholders in the Turkish retail industry, how these stakeholders influence retailers and what are the main challenges for retail entrepreneurs in Turkey. Topics covered in this section are the role of the government in the industry, the brand orientation of Turkish consumers, stores location evaluation process, evolution of the rent prices, access to funding and investments and exit strategy of the entrepreneurs. Finally, the last part of the questionnaire asks the interviewees about what are in their opinion the greatest opportunities and threats in the industry, and what do they think a NGO like Endeavor could do for the entrepreneurs in the sector. It is important to mention that, given the diverse background and positions of the interviewees, the questionnaire has been adapted to each case. Those questions that did not apply to certain interviewees were not asked and those questions that needed to be rephrased were rephrased as well.

Current activity in the sector

Overall, the experts we have interviewed acknowledge that 2011 has been a very positive year for Turkish retailers in terms of revenue growth, especially if compared with the previous years (20092010) in which the Turkish economy in general suffered from the effects of the international economic turmoil. However, in terms of the real profitability (that is the nominal profitability discounting the effects of the inflation) some managers have raised some red flags because the inflation is high. According

16

to the Turkish Central Bank, the decreasing exchange rate of the Turkish Lira against the US Dollar is the main reason for a higher than desirable inflation rate in Turkeyxvii.

Figure 4: Turkey Inflation Rate

Source: Central Banking Journal

Expected activity in the sector in the short term

Shopping center retail sector In order to understand the trends in the shopping center retail sector (it accounts for 40% of the total retail commercial activity) we interviewed Mr. Nihat Sandikioglu, Secretary General of AYD, the Turkish Council of Shopping Centers; and Mr. Aydin Yurdum, General Manager and Chairman of the Board of AVM MFI Partners, a consulting firm specialized in Shopping Center Management among other things, headquartered in Istanbul. Both managers essentially agreed that there is expected a decrease in terms of the number of newly built shopping centers. As some shopping centers will fail, it is expected that the most successful ones will be involved in acquisitions by foreign investors that were more reluctant to risks that their Turkish counterparts. As Mr. Yurdum points out, Turkish investors still prefer to invest in new shopping centers. However, the construction rate is expected to slow-down in the near future.

Food and beverages retail sector 17

One of the most prominent Turkish entrepreneurs in the hot beverages sector is Isik Kececi, managing partner of Caffe Nero. According to her, one of the main weaknesses of the sector is the high level of fragmentation and lack of transparency. Although it varies a lot depending on the part of the country, still most of the activity in the sector is done in small and local restaurants and coffee shops. Given the problems that eventually big foreign firms have when trying to implement a foreign model in the Turkish market, there is room in the market for a strong local brand. Another business model in the industry that it is expected to keep growing is the fast food model: the growth of the middle class in Turkey during the last years has produced a shift from local food chains to bigger and international food chains that in the past used to be perceived as higher status.

Fashion retail sector The fashion retail sector is expected to keep growing during the next years but at a slower pace. The reason for a moderate optimism is that the main driver of the economic growth in Turkey is the internal demand, and the internal demand remains resilient and strong. However, there are some signals of slowdown in the sector. As Mr. Bugra Toplusoy, manager at Roman, points in his interview for this sector scope study, the competition in the fashion retail sector is expected be more aggressive, especially in terms of price. This will push the margins in the sector down, leaving the weakest brands out of business. On the other hand, Roman is following a different strategy than the commonly applied in the sector: Roman price policy is to remain the prices unchanged, without incurring to aggressive discounts strategies. The rationale behind this is that customers are often confused about what prices they are going to find and, if they expect discounts to be applied soon, the customers will likely postpone their shopping. If a fashion brand like Roman is able to gain customer loyalty, an aggressive price discount strategy is not the most appropriate one. However, according to Mr. Yurdun, in most cases customers are becoming less loyal to brands.

Brand perception of the Turkish consumers

Although Turkish consumers used to be very brand oriented, this attitude is shifting towards an experience and price oriented attitude. Even though those brands with the greatest reputation still have great recognition and certain loyalty from the older customer segment, most of Turkish retail consumers only identify the most famous brands, which usually are foreign brands. Second tier brands and Turkish brands do not have this level of recognition. This provides the top recognized 18

brands a competitive advantage to find and negotiate premium locations for their stores in the shopping malls. Fusun Kuran, head of Stefanel in Turkey, states that the most brand-loyal customers are in the upper-price bracket. These customers, belonging to the wealthiest customer segment, are less sensitive to price and more loyal to the higher-end brands, which are almost exclusively foreign brands. She also remarks that for brands to achieve and sustain brand loyalty, it is very important to be easily identifiable. A distinctive logo, style and even the location where the brand products are sold are very important in order to build an easily identifiable brand. The young generation of consumers prioritizes new shopping experiences with new brands and new products rather than imitating the shopping behavior of others. An interesting finding obtained from the interviews is that for many of the interviewees, the fact of being a new brand in the industry is not a disadvantage. On the contrary, if the new entrepreneurs have a creative drive, they have a good deal of possibilities to succeed in the young segment, especially in fashion retail. This is what we mean by the increasing experience orientation of the Turkish consumer. Mr. Aydin Yurdum from AVM-MFI Partners also points that Turkish consumers are becoming more price oriented: the increase of competition and quality standards in the industry in the last years has made the consumers to take certain features as granted, shifting the value to a lower price or to a better price-quality ratio.

Retail: a challenge for the government

The interviewees agree that the assistance provided by the government to the industry is mainly oriented to the small and traditional retailers. As we have previously explained in the section about the role of the government in the entrepreneurial ecosystem of the Turkish retail industry, the New Turkish Code of Obligations was enacted in 2011. This new piece of regulation implies major changes in the relations that the retailers have with the Shopping Centers and other landlords. However, it is important to mention that the implementation of some of the new regulations regarding the changes in real estate renting contracts has been postponed until 2020. In words of Mr. Nihat Sandikcioglu, there is an important lobbying effort on behalf of the Shopping Center owners. The Turkish Government provides little or no incentives to the retailers that are not following a traditional retail model. Some entrepreneurs like Mrs. Isik Kececi expressed that in their opinion as the services oriented economy mentality improves, regulation will be more convenient for big retailers. However that is not the case nowadays.

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One of the most relevant governmental incentives-oriented programs is Turkuality: in a nutshell, the program provides financial help to cover the costs of Turkish retailers to open stores abroad. However, as Mr. Toplusoy explains to us, the requirements to be eligible for the program are extremely demanding. It takes several months for entrepreneurs to have access to this incentives program. On the other hand, as we said previously, the Turkish government does not support those retailers who do not follow the traditional model within Turkey. An interesting supportive action that the Italian government took to protect its retailers within Italy is to allow the Italian retailers to include in their products the made in Italy statement if they do the lining in Italy, even though it the product is mostly produced in Asiaxviii.

Evaluation criteria of retailers for choosing the location of their stores

Nowadays, fashion retailers are opening new stores almost exclusively in shopping malls. If many years ago most stores were opened on the streets, the trend has switched very fast towards the shopping malls. Fusun Kuran, head of Stefanel in Turkey, explains it: in Turkey there are only a couple of streets in Turkey such as Badat Avenue where Stefanel can target its market niche, the high end customers. On the other hand, shopping malls are becoming the primary option for Turkish customers in terms of shopping and entertainment; and shopping malls have different users depending on the area where they are located, the entertainment options they offer and the shops that are located in the mall. According to the retailers we have interviewed, the main two criteria for choosing where to locate their stores within the shopping malls are: The income level and the education level of the customers that usually go to that specific shopping mall. Most fashion brands are usually targeted to a specific customer segment, so when it comes to decide whether to open a store in a shopping center or not, the profile of the users of the shopping center will be an important criterion in the decision making process. The location of the store in the shopping mall. The best locations in the shopping malls are those where the traffic of customers is higher; however these prime locations are often accessible to the big retailers like Zara or Mango. Smaller retailers have to pay higher rent prices for these prime locations and often these locations turn out to be unaffordable. If the company is able to obtain a good location for its stores at an affordable price is a criterion when it comes to decide whether to choose or not a specific location.

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Changes in the stores renting prices and its influence on the profitability of the industry
Although rent prices have not grown in the last year in the currency they are referred at, the currencies commonly used in the renting contracts in the biggest and most popular shopping centers in Turkey are the US Dollar or Euro. Big enough retailers have access to financial instruments in order to hedge against the variations of the Turkish Lira with the Dollar and the Euro, however this instruments are not unlimited and often are costly. In addition, those retailers who are considered the traffic generators, and which usually are the retailers that can afford these financial instruments, are in a good position to negotiate and push down the renting prices with the shopping centers managers and owners. This is not the case for the rest of the retailers. During the last years the Turkish Lira value has fallen, particularly compared to the US Dollar. This has had a substantial negative effect on the profitability on those retail sectors with the lowest margins. As Isik Kececi pointed during her interview, companies like Caffe Nero did not have a big profitability problem related to this issue because the margins in the food and especially in the hot beverages retail are much higher than in other retail sectors like fashion or electronics. Whereas in electronics the reason why the margins are low is the high intensity of the economies of scale, in the fashion sector the low margins are due to reductions.

Figure 5: Turkish Lira/US Dollar exchange rate

Source: Yahoo Finance

According to Mr. Bugra Toplusoy, under this rent prices growth scenario, Roman is following a cautious expansion approach, choosing very carefully in which shopping centers to open new stores and awaiting renting prices to go down in other locations. The slowdown of the economy 21

and the increasing number of shopping centers that are being built, is leading some to think that the prices will stop growing or even decrease in the future due to an excessive offer of retail space in shopping malls. In order to survive, some shopping malls might be forced to lower their renting prices to attract retailers.

Access to funds for entrepreneurs

The input we have received from the entrepreneurs regarding access to funds is mainly twofold: access to bank loans and funds from investors.

Bank loans In opposition to the risky profile of other economies of the area, Turkey is considered a safe environment for international capital because of its superior financial supervision and regulations. These regulations were enacted in the early 2000s, when the country went through a financial crisis. In the current economic environment in Turkey, most of the interviewees agree that access to bank loans is relatively easy if the company is a sizeable and profitable retailer. Regarding the evaluation criteria that the banks do regarding whether to lend or not to an entrepreneur, Mr. Nihat Sandikcioglu points that a solid business plan is very important for the evaluation process.

Investment criteria of the investors According to the interviewees, the most important facts for investors to invest in retail ventures in Turkey are the following: Potential for scalability: for investors it is a fact that many of their investments will actually fail and will not deliver profits. Due to this, investors demand high scalability for those ventures that actually prove to be profitable. How the company has grown in real terms in the past is important for investors as well. The rationale is the following: it is not the same to grow each year 10% on average in a country with low inflation like Germany that in a country with a high inflation rate like Turkey. In real terms, under this scenario the real growth of a German company is much higher than of a Turkish company. The real growth, understood as nominal growth discounted the inflation rate, is a key indicator for investors.

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Transparency: this is very important for international investors that are not fully familiar with the business culture and practices of the country. Transparency is particularly important in emerging countries like Turkey. Quality of the management team and the employees: it is an extended saying that investors prefer excellent people with regular ideas than regular people with excellent ideas. In order to gain investors confidence, entrepreneurs must have a good record. According to Mrs. Isik Kececi there is a lack of experienced talent in retail in Turkey, so having experienced and talented employees in the company is a very important feature in order to attract investors. We talk more about this issue in the next section. Facts and figures: perhaps the most important feature, for many investors the decision whether to invest or not in a company depends mostly on the evolution of the revenues, margins and profits.

Conclusions
Opportunities in the retail industry
1. Demographic changes Retailers are facing opportunities in the young population and children market segment. As we explained in the entrepreneurship ecosystem section, the demographic characteristics of Turkey are showing a sharp increase in the population in the younger segment, encompassing the ages from zero to 24 years old. In terms of marketability many fashion brands, whose main customer segment is children with ages ranging from zero to five, are already doing business in Turkey. Actually, according to Ibrahim ztuncer, property director at Shaya, some international retailers are achieving more success from their children collections rather than from their adult collections. For the kids clothing industry, the online sales channel is a channel with a huge potential because parents often do not have enough time to go to shop the childrens clothes. However, in the opinion of Mrs. Fusun Kuran, head of Stefanel Turkey, the specific market segment encompassing those customers aging 5 to 14 years old represents an opportunity for Turkish retailers because the offering in this consumer segment is very limited. There are not enough companies selling clothes for this age segment. 23

The changes in the demography of Turkey bring an opportunity for entrepreneurs to take advantage of the gaps in the retail market offering.

2. Entertainment offering in the shopping malls According to Mr. Aydin Yurdum, general manager and chairman of AVMMFI Partners, the large increase in the number of consumers that attend to shopping malls has not been corresponded with an improvement in the entertainment offering in the shopping malls. Although the number of shopping malls has increased a lot in Turkey in the last years, the entertainment offering is still limited to movie theaters in the majority of shopping malls. In addition, the movie theaters in the shopping malls are operated by a small range of companies. This makes it a fairly uncompetitive market in terms of price and also in terms of offer. Given the increase in size and in attendance to the shopping malls in Turkey, there exists an opportunity for entrepreneurs to provide an innovative offer of entertainment. The Turkish retail consumers are becoming more demanding almost in every aspect, however some sectors are not adapting to it at a sufficient pace. In addition to entertainment, there exist also a great opportunity for new concepts in the food offer in the shopping malls. According to Mr. Ibrahim ztuncer, property director at Shaya, in this sector the quality and the newness is even more important than the name, so there are not brandassociated barriers of entry for new entrepreneurs. The entertainment offering in the shopping malls is too limited. It is expected that Turkish retail consumers will demand more entertainment options in the shopping malls.

3. Specialty fashion stores In other countries with a more mature consumer profile, specialty stores are very popular. The specialty fashion stores are stores whose offering is focused on a specific type of client. The concept is oriented towards providing a superior shopping experience; for that purpose, the sales personnel must be well trained, accessible and knowledgeable about the customer specific needs. The product range, although it is lower than in other stores, is oriented to the profile of the customers. According to Mr. Burak vn, sales director at Mavi Jeans, it is a winner sales strategy 24

because the focus in a good marketing strategy should not be on the product, but on the specific needs of the consumer.

Specialty fashion stores provide a superior shopping experience to a specific range of consumers.

4. Demand for large sizes in retail According to Mr. Bugra Toplusoy, although there is an increasing and considerable demand for large sizes in the fashion retail industry, most of retailers do not offer large sizes. For most of retailers in the sector, it was not worth to manufacture this type of clothes because the demand used to not justify such expense. However, as the purchase powers of Turkish consumers increase, entrepreneurs in the sector should see this situation as an opportunity because these frustrated consumers, who have access to a very limited range of well-designed clothes, will be more likely to pay a high price if the design and brand of the clothes satisfy the.

The Turkish consumers have a very limited access to large sizes. However, as the purchase power of the consumers increase, offering these sizes might be worth for retailers.

5. The outlets According to Mr. Burak vn, sales director of Mavi Jeans, the lack of regulations in Turkey regarding discounts on retail makes some retailers to use pricing tactics to deceive their customers. A tactic commonly used is increasing the prices prior a discount period, giving the customers the wrong impression that a discount has been applied to the products. In most of countries, this type of discount practices is regulated and it is expected that in the future the Turkish government will take action regarding this issue. If the regulations are introduced, discount-oriented stores like outlets will have a vast potential in Turkey, where consumers are both price and brand sensitive. However, for big brands selling collections in an outlet format might not be a good strategy in the long run: this was the case of Tommy Hilfiger in the United States, whose large number of outlet stores made American consumers to stop buying Tommy Hilfiger items at normal prices.

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The lack of regulation has impeded outlets to be opened in Turkey. However, if regulations are enacted Turkey will be a good market for outlets because of the customer preferences.

Threats in the retail industry

1. Low influence of the industry in the regulatory decisions Some of the entrepreneurs and managers that we have interviewed complain that the retailers associations are often not helpful because of the power struggles. There is not one unique retailers association that encompasses the common interests and objectives of the Turkish retailers; instead, there are several retailers associations with different objectives that often do not collaborate with each other. This divisive situation makes retailers powerless when it comes to lobby for the common interest of the retailers. The division among retailers is a weakness of the sector due to its inability to influence the government decisions and regulations.

2. Increasing consumer market demands The Turkish consumer is becoming more demanding both in terms of quality and price. When we say that the Turkish consumers are more demanding in terms of quality, we are not referring exclusively to the quality of the material the garments are made of, but also the newness and the design of the fashion items. Newness is a difficult concept to achieve for most retailers: it demands flexibility to adapt to the ongoing changes and in order to be flexible, companies need a logistic structure that often only the biggest brands can afford. This logistic flexibility has been one of the key factors for the success of the Spanish retailer Inditex, owner of brands such as Zara or Bershka. Having a centralized and fast-response design and production system, has allowed Inditex to implement changes very quickly in its storesxix. However, in order to implement such an efficient system, companies need a logistic muscle that most retailers cannot afford. As we explained earlier on the report, Turkish consumers are becoming more prices oriented. In order to be price competitive and to keep acceptable operative margins on their products, retailers need to implement economies of scale on their production lines. However, this is only affordable for the biggest retailers. 26

As customers are becoming more demanding in terms of quality and price, some retailers may lack of logistic and economies of scale capabilities to remain competitive.

3. The franchise expansion model A consequence of the increasing customer demands in terms of quality is that the franchise expansion model is not valid in a market in which customers demand high standard of quality in the service. The problem with franchises is that the quality of service is not standardized and for the companies it is difficult to supervise it. The increasing customers demands of service and shopping experience have made the franchise expansion model obsolete in Turkey.

4. Human capital concerns A major problem for retailers is to retain the most talented and experienced employees. According to Mr. Nihat Sandikcioglu, the retail industry has a high employee rotation ratio; it is very frequent for employees to switch among the different retail companies. This is a problem for the companies both in terms of formation and retention: if the companies cannot retain their employees, it is quite unlikely that they will invest vast amounts of money in the training and formation of their employees. Raising this concern to Mr. Bugra Toplusoy, manager at Roman, he argues that his company manages to train and retain their employees with a twofold strategy: first the Romans human resources department is very careful when it comes to search and select new employees; and second Roman creates employee loyalty through providing its employees more social benefits than its competitors. In words of Mr. Bugra Toplusoy, Roman is a family values driven, with a flat structure, in which employees and managers help each other. Big retailers and some smaller ones have their own education systems. For example, Roman trains their sales personnel prior working with the customers. However, this is not the standard in the industry. According to most of the interviewees, there is room for improvement about the education and training of the employees in the industry. Some universities offer programs on retailing and also training on shopping center management. But this is a minority; most education is gained through hands-on experience. The lack of education in the sector and the high rotation makes it difficult for retailers not only to attract, but also to retain the trained human capital.

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5. Uncalculated growth of shopping centers During the last years, there has been a tremendous growth in the retail sector almost in every industry, but the growth has been more notorious and uncalculated in the shopping centers industry. According to Mr. Ibrahim ztuncer, the gross leasable area in Turkish shopping centers will double in the next years. Although the concentration differs depending on the region (Ankara has the highest shopping mall concentration, with twice as much shopping mall capacity per capita than Istanbul), this is a trend that is taking place in the entire country. This constitutes a threat for entrepreneurs in the sector because they have to be very careful to choose to open stores in shopping centers that will not fail. In addition, the local governments are not taking action to slow down this construction trend. On the contrary, many regional governments keep encouraging the investment and construction of new shopping centers because in their opinion it brings wealth to their regions. Although there is not expected a negative disruption in the shopping center industry in the next years because the Turkish internal demand stays resilient despite the crisis in the Euro zone, the uncalculated growth in the number of newly built shopping centers might be a serious threat in the future for retailers. The uncalculated growth in the number of shopping centers will make many of them to fail, having negative consequences for the retailers located in the centers.

The role of NGOs supporting entrepreneurship

1. To provide training to new retail entrepreneurs Some of the industry stakeholders we have interviewed argue that many entrepreneurs enter the retail market without considering carefully the facts with a quantitative approach. The reality behind this is that most of the new entrepreneurs in the sector lack of management education. Without education, entrepreneurs cannot apply important business concepts that in such a competitive industry can make the difference from one retailer to another. With its network in a wide range of industries, Endeavor can bring experts not only from Turkey, but from many other parts in the world, to train high-impact entrepreneurs that, although have great knowledge and expertise in their fields, lack of business-applied knowledge. The training programs can comprehend several subjects such as multidisciplinary process management, retail management, financial literacy, logistics or distribution channels management.

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2. To provide references to access to rent shopping mall locations Small entrepreneurs who decide to open a new retail stores often have problems when reaching a rent agreement with shopping malls managers because they lack of a valid reference. Shopping mall managers are often reluctant to rent good locations to retailers that they do not know them or have not worked with them before. Endeavor and its board member AYD (Council of Shopping Centers in Turkey) could start a collaboration consisting in a reference chain with the following structure:

Retail entrepreneur

Endeavor

AYD

Shopping mall

This reference chain would enable new retail entrepreneurs to have valid references when negotiating an agreement with shopping malls.

3. To help Turkish entrepreneurs to expand their businesses abroad Endeavor has an extensive international network both on developed and on emerging countries. In addition to entrepreneurs, in this network there are several investors, managers and industry experts that are in a good position to help Turkish retailers that want to expand abroad but have limitations in terms of capital, expertise and staff. One of the most important development stages for high-impact entrepreneurs is to expand their businesses abroad and it is necessary Endeavor to keep its support on entrepreneurs during this stage.

4. To guide multinational investors to invest in the right projects Currently Endeavor Turkey helps high-impact entrepreneurs to have access to funds providing entrepreneurs a network of international investors. However, the reverse approach might be even more efficient and more helpful to those entrepreneurs who might be appealing to international investors. It might be a good idea Endeavor to advise international investors with a portfolio of local entrepreneurs who are seeking capital and, according to the preferences of the investors, customize the offer and advice to these international investors.

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The author
The author of this sector scope study is Alberto Redondo. Alberto is currently a graduate student in the Master in Science program in Business and Economics at the Stockholm School of Economics, Stockholm, Sweden. Prior attending to the Stockholm School of Economics, Alberto earned his Bachelor degree in Business Management at the University of La Rioja, Logroo, Spain. Alberto has done part of his university studies in the University of Guelph, Guelph, ON, Canada; and in the Fuqua School of Business, Durham, NC, USA. After the completion of his undergraduate studies, Alberto joined Accenture to work as a management consultant in the Madrid Office in the supply chain management division. Alberto has also worked at PriceWaterhouseCoopers as a Junior Auditor where he became familiar with the accounting standards. Alberto has some entrepreneurial experience as well, as he is the co-founder of Freshtyle.com, an online social network for shoppers to share what they buy and what they want to buy. 40219@student.hhs.se

Acknowledgements
First of all, I would like to thank Mr. Engur Rutkay for his guidance and help. Without him, it would have not been possible for me to write this sector scope study. I would also like to thank Mrs. Irem Kayacik for being my mentor in this sector scope study and giving me priceless advice. I would like to thank the managers and entrepreneurs that so kindly have agreed to be interviewed for this sector scope study. These are: Mrs. Isik Kececi, Mrs. Fusun Kuran, Mr. Burak vn, Mr. Ibrahim ztuncer, Mr. Nihat Sandikcioglu, Mr. Bugra Toplusoy and Mr. Aydin Yurdum. To all of them, I want to give my most sincere gratitude. Finally, I would like to dedicate this study to the memory of Ulf Lindgren, the person who during years worked hard to make the collaboration between Endeavor and the Stockholm School of Entrepreneurship possible.

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References
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Endeavor Turkey Entrepreneurs Ecosystem Index Mundi Turkey demographics profile 2012 iii AnsaMed Turkey: Number of newly established companies down 27.07% (15-06-2012) iv Invest in future: Bursa Eskisehir Bilecik Region - Exportation incentives (2012) v Todays Zaman New Turkish code of obligations (17-01-2011) vi Republic of Turkey Prime Ministry: Investment support and promotion agency Invest in Turkey: Success stories (2012) vii Garanti Kadin Girisimciler - Success stories (2012) viii The Chilean Economic Development Agency Start-up Chile (2012) ix Kadiger: women entrepreneurs association of Turkey (2012) x General Directorate of Highways Republic of Turkey (2011) xi Turkish State Railways Annual Statistics 2010 xii CIA factbook 2011 xiii Republic of Turkey Ministry of National Education - National Education Statistics: Formal Education (20102011) xiv United States State Department Global Entrepreneurship Program (2012) xv Media Post News Marketers spend more on mobile search (10-10-2011) xvi Turkish Statistical Institute xvii Central Banking Journal The central bank of Turkey predicts the inflation target to overshoot in 2013 (20-06-2012) xviii Italian Trade Promotion Agency xix Planeta Zara. Canal Plus, 2002
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