Retail Viewpoint – June 2011

Euromonitor International’s retailing team takes a look at how some of June’s retail news could affect the industry.

UK – media products stores – various

Having already had to adjust to the digital era, life for media product stores – particularly those specialising in the sale of video games – is about to get worse. OnLive, an American company which streams video games software over the internet, has announced that it plans to expand its operations to the UK market in September 2011. If that wasn’t enough bad news for the likes of Game and HMV, EA has also announced a new ‘direct-to-consumer gaming platform’ called Origin. EA’s new digital platform will enable consumers to directly purchase and download gaming content. Origin will also feature a social function and a range of exclusive content unavailable in stores.

  • The gradual shift to digital has already had a severe impact on media product stores. Both Game and HMV in the UK have announced significant store closures following disappointing sales figures. Two new digital retail platforms are likely to exacerbate this situation and further store closures are expected.
  • Grocery retailers are also likely to be impacted by developments in the video games industry as many in the UK have recently tried to tap into this product area. However, grocery retailers attract an older demographic which is likely to take longer to follow the shift to digital platforms.
  • OnLive has already struck a deal with BT, the UK’s largest provider of home telecommunication services, to distribute its hardware via bundled broadband packages. This move illustrates that OnLive is willing and able to circumvent traditional routes to market and signals further worries for store-based retailers of video games.

South Korea/China – hypermarkets – Shinsegae Department Store Co Ltd/E-Mart Co Ltd

Shinsegae spun off its E-Mart hypermarket division in May 2011, but ahead of its listing on the stock exchange on 10 June 2011, E-Mart announced its “Let’s Go 2020” vision. This sets a highly ambitious long-term growth target of group sales of Won60 trillion (US$56 billion) by 2020, almost five times the Won12.4 billion targeted amount for 2011, with international sales to account for a 35% share by the end of the decade.

  • While it will continue to expand in its domestic market, E-Mart plans more rapid growth in other Asian markets, notably China. However, if past performance in China is any indication of whether its goals are likely to be met, results may fall short of expectations.
  • In spring 2009, Shinsegae had declared its intention to have 39 E-Mart stores in China by 2010 and 70 by 2013. The following year, it extended the target to 100 outlets by 2015. However, with only 27 units at the end of 2010, the 2013 and 2015 objectives have become unattainable unless E-Mart has the opportunity to acquire a large Chinese retailer.
  • Faced with slower than expected expansion and having reported losses at its Chinese operations in 2010, the group cut its 2015 store target to a more realistic 45 units in June 2011. Meanwhile, it is attempting to find a buyer for 10 unprofitable stores in Beijing and Shanghai and will focus its expansion efforts on small and medium-sized cities.
  • Domestically, the company plans to rely on the E-Mart Traders warehouse club banner, launched in November 2010, to boost expansion, but whether there is enough growth potential in South Korea to meet the group’s total revenue target in 2020 appears increasingly unlikely.

South Africa – warehouse clubs – Wal-Mart Stores Inc

After a lengthy process, Wal-Mart has gained the approval of South Africa’s competition tribunal to purchase a majority stake in Massmart Holding Ltd. Following this announcement, Wal-Mart clarified some aspects of its strategy for South Africa and other African markets where Massmart operates, calling it “sweat and muscle” expansion.

  • Amid deep-rooted suspicion from unions, local retailers and suppliers that the retail behemoth will wield too much power in the South African market and have a disruptive effect on the country’s economy, Wal-Mart had to accept some compromises in order to appease its critics and meet the tribunal’s requests.
  • It recognised union representation for three years and committed to avoiding merger-related redundancies for two years. Wal-Mart also stated that it will give a high level of autonomy to its local subsidiary to accelerate its expansion and job creation strategy in South Africa, with 140 new stores over three years.
  • In other markets, recognising the challenges of expanding quickly in several African countries, Wal-Mart stated its objective of expanding city by city rather than country by country.
  • On the supply side, Wal-Mart is likely to use its global procurement network to reduce costs, and could undermine the activities of South African producers supplying Massmart stores.
  • However, Wal-Mart agreed to set up a R100 million supplier development fund, designed to help some of its South African suppliers become more competitive. Ultimately, they could benefit from new growth opportunities to export goods to other Wal-Mart stores worldwide.
  • Longer term, the arrival of Wal-Mart is likely to lead to greater consolidation not only in South Africa’s retailing environment but also in some of the industries supplying its stores.

India – retailing – Future Group

India’s Future Group has announced a massive increase of investment into its supply chain, almost doubling the current Rs800 million annual spend to Rs1.5 billion. The company is aiming to almost double the capacity of its Future Supply Chain Solutions division, which will be almost entirely responsible for the distribution of both grocery and non-grocery goods to Future Group’s various banners. Several new high-tech distribution hubs are also being opened during the year in the major cities, most recently a 9,000 sq m facility in Mumbai.

  • Future Group’s move is another sign of the sea change that has taken place within India’s retail landscape over the past three years. Back in 2008, headlong expansion was the norm, with regular announcements from retailers detailing plans for hundreds, sometimes even thousands, of new stores. However, the global economic downturn, the collapse of the prominently expansionist Subhiksha Group, skyrocketing property rental costs and pricing pressures such as rising commodity costs and rising inflation saw many of these plans delayed or cancelled.
  • Focus has now switched from the size of a retailer’s network to its strength, albeit with an eye to future expansion. As well as Future Group’s decision to prioritise its supply systems, other recent developments include Indian clothing retailer Cantabil shutting 150 non-profitable stores and edging away from heavy discounting before it re-accelerates its store opening programme. Private label development has also been affected, with Aditya Birla and Spencer’s Retail among those planning to launch fewer new private label products this year as they aim instead to consolidate their share within core categories.
  • However, the strategy has extra resonance within the Indian retail market, which is continually facing the prospect of a relaxation of the FDI restrictions which have, so far, helped to protect domestic operators. If international chains are given free (or at least freer) rein within India, it is the domestic retailers which have invested in their operations and fortified their business models which will be in the best position to compete.

China – internet retailing – 360buy.com

Chinese e-commerce specialist retailer 360buy.com began a scheme in June to return 3% of book sale revenues to the authors. Writers need to register with the site in order to receive the quarterly payments, which 360buy plans to continue for a period of three years. Chief Executive Liu Qiangdong has also pledged RMB1 million to battle copyright infringements in China and protect authors’ rights.

  • 360buy.com’s entry into the bookselling market has been relatively recent, but the steep discounts offered by the site have already disturbed many publishing houses. Global internet retail leader Amazon has experienced similar controversy in the past, clashing with publishing houses such as Macmillan and Penguin over its pricing policies.
  • Publishing houses are right to feel threatened – not only by the price competition from 360buy, but by the possibility that building a direct relationship with authors could result in publishing houses eventually being cut out.
  • Amazon has already begun selling e-books by the likes of Philip Roth and Martin Amis directly on behalf of the authors. As e-books become more widely accepted, the need for publishing houses is declining. In a sign of the times, June also saw John Locke become the first self-publishing author to sell a million e-books for Amazon’s Kindle reader.
  • With less than one e-book reader per 1,000 people in China (compared to 33 per 1,000 in the US), Chinese publishing houses are not immediately likely to be cut out of the market. However, sales of readers are growing fast, and 360buy’s strategy suggests that it is already anticipating a time when dealing with publishing houses rather than directly with authors could be the exception, rather than the rule.

China – electronics and appliance specialist retailers – Suning Appliance Chain Store (Group) Co Ltd

China’s largest electronics and appliance retailing brand has announced its 10-year global strategy in which it outlines plans to open a further 200 stores across mainland China. In addition to this domestic growth, Suning has also stated that it plans to investigate growth opportunities in Southeast Asian markets by 2012 and European and American markets by 2014.

  • Suning’s emergence as an international retailer began with the acquisition of Citicall in Hong Kong in 2009. One year later, the company purchased a large share in Laox, a Japanese retailer. By the end of June 2011, Suning increased its share in Laox to over 50% and the Japanese retailer has now become a full subsidiary of Suning.
  • Entry into new markets, particularly in Europe and America, is likely to come through a series of acquisitions in order for Suning to make significant progress. Consequently, struggling brands in Europe such as Comet in the UK are likely to be prime acquisition targets, although Suning will be more interested in Comet’s property portfolio than the Comet brand.
  • In addition to the international expansion of Suning, its largest rival GOME is also likely to announce an expansion strategy as the company seeks to grow outside of the Chinese and Hong Kong markets.
  • Although Suning will have to adapt its business and retail model to its new markets, the strong links the company has forged with both Chinese and Taiwanese manufacturers will no doubt help the retailer to occupy the low-mid end of the market.

UK – furniture and furnishings stores – Habitat UK

Habitat, the iconic furniture and homeware brand and retailer, has fallen into administration in the UK less than two years after being purchased by ‘restructuring specialists’ Hilco. Three Habitat stores and its e-commerce site will be purchased by Home Retail Group, but the remaining 30 stores will close later this year.

  • Whilst Habitat UK has been unable to survive in the current climate, its international divisions, also owned by Hilco, have been performing much better. This story of a struggling performance in the UK in contrast with better sales overseas has been reflected at KESA Electricals, whose Comet division in the UK is on the verge of administration, and Mothercare, which is planning to close a third of its UK stores over the next few years.
  • Despite a poor sales performance from Argos in 2011, the Home Retail Group is investing in its future by acquiring not only part of Habitat’s retail operations but more importantly the Habitat brand. Habitat is likely to live on in the UK in the form of concessions within Homebase stores.
  • 2011 has largely been a bad year so far for non-grocery retailers as UK consumers scale back their spending significantly. Retailers which have failed to effectively differentiate themselves from the competition (including grocery rivals) have found it difficult to maintain sales. Compounded by rising input costs, such as fuel and cotton, the UK can expect a few more high street casualties in the short term.

Colombia – supermarkets – Casino Guichard-Perrachon

While the media’s attention has been focused on Casino Guichard-Perrachon’s dispute with Carrefour in Brazil over the control of CBD, in a less publicised move Casino has taken steps to fortify its position in other markets in Latin America. The group announced the sale of its stakes in the Uruguayan chains Devoto and Disco to its Colombian division Éxito, for US$746 million.

  • Casino’s decision to give its Colombian unit control over expansion in other Latin American markets follows a similar model to Wal-Mart’s integration of its Central American activities into its Mexican subsidiary Wal-Mart de México.
  • In a similar fashion to Wal-Mart, Casino will seek to create more synergies between several Latin American markets and take elements from store concepts that have seen strong performances to other countries.
  • Hence, Casino’s new structure could allow Éxito to replicate its successful recent expansion with the discounter chain Surtimax in Colombia to other markets.
  • In the longer term, Éxito may also be given control over Casino’s operations in Argentina, and the opportunity to implement its new market entry strategy in other Latin American markets such as El Salvador and Peru.