Euromonitor International's retail sales forecasts to 2015 show a clear picture of strong growth in emerging regions and less activity in developed regions. Using information from the Euromonitor Countries and Consumers system, this three-part article looks at how some specific economic and demographic factors may change and shape how retailing develops.
Emerging versus developed split well entrenched within global retail market
Across the regions, forecast data for retailing sales shows a now familiar picture, with the emerging regions of the Middle East and Africa, Latin America and Asia Pacific leading growth, whilst the mature markets of Australasia and Western Europe struggle to make headway.
Asia Pacific has established itself as the key emerging region in retail, with the exception of the ailing Japanese market. Even excluding Japan, the Asia Pacific regional market is still bigger than the other emerging regions (the Middle East and Africa, Latin America and Eastern Europe) put together, and is forecast to enjoy a CAGR of 6.5% over 2010-2015.
However, sheer size makes the two key developed regions, North America and Western Europe, impossible to ignore. North America has, in fact, remained surprisingly steady in retail terms, despite being at the epicentre of the global fiscal crisis. Although Western Europe faces the gloomiest next five years, with market maturity, continued economic uncertainty and governmental cost-cutting all set to repress growth, the end of fiscal stimulus programmes in the US, combined with rising energy costs and a sluggish labour market, could yet dampen North America's growth prospects.
A familiar story: emerging markets lead forecast retail growth
Workforce demographics and financial dependency to shape progress in all regions
One factor that is set to affect retailing across all regions is the development of the workforce and changing demographic profiles. Here the global picture is slightly different. Although Asia Pacific is again dominant because of the sheer number of inhabitants currently of working age, it is Latin America and the Middle East and Africa that have the strongest prospects for longer-term growth because their populations include a higher proportion of younger inhabitants set to join the labour force. Within Asia Pacific, the ageing of the Japanese population has already caused retailing in that market to undergo many adjustments, while China's 'one-child' policy means an ageing demographic will become a key issue in this market too. A younger working population, meanwhile, suggests higher levels of interest in luxury goods such as consumer electronics, homewares and furnishings as these workers set up their own households and baby and children's products as they start families, alongside a parallel trend now being seen in fast-moving economies towards high value pet care products as consumers put careers before families but compensate by lavishing more income on domestic animals, their 'surrogate children'.
Western Europe has the highest ratio of over 65s and, although this consumer base is relatively prosperous and healthy compared to the same age group in an emerging market, their consumption levels are inevitably declining. With a further 17% of the population aged under 14 and a strong tendency within the region for older children to go onto further education rather than directly into the workforce, the budgets of many wage earners will have to stretch to supporting children as well as possibly providing financial assistance to older relatives. This is likely to result in ongoing interest in value retail formats, particularly those catering for families and younger consumers, as well as in convenience formats that make retail more accessible to elderly consumers.
Demographic profile: how resilient is the working-age consumer group set to be?
Source: Euromonitor International
Asia Pacific: Internet retailing provides a common thread between the dominant markets
Despite the presence of several high-potential emerging economies such as India, Indonesia and Vietnam, the Asia Pacific region is currently still dominated by China and Japan, which accounted for over 70% of regional retail sales in 2010. However, the progress of these two markets differs enormously. While Japan has endured years of shrinking retail sales, the Chinese market is still going from strength to strength.
The Japanese economy's short to mid-term prospects have been further dented by a massive natural disaster, with the full effects of the combined earthquake, tsunami and nuclear disaster yet to become clear, but even without this, the future for retail was looking far from rosy. Just over a decade ago, in 2000, there was still a population peak of Japanese consumers aged 25-29, and therefore at a relatively early stage of their earning careers. By 2020, this same group will be aged between 45-49, with only another 20 years or so of earning capability ahead of them, and dwindling numbers of wage earners and tax payers behind them to replace them as consumers and support pension-based spending.
Japanese retail has already begun to adjust to the reduced circumstances and ageing nature of its consumer base, and may well provide a blueprint for markets elsewhere which also have an ageing population. By providing wider food ranges, cheaper private label products and combining with drugstore chains for better access to medication, the convenience store, ever a popular format in the market, continues to pave the way.
Japan's ageing population: Worse to come
Source: Euromonitor International
Internet retailing is another channel where Japan has been a leading market, and here there is an increasing similarity with China. China's online sales are forecast to achieve an eye-opening CAGR of 42% over 2010-2015, with the channel set to account for over 4% of all Chinese retail sales by the end of the period.
Channel growth will be fuelled by the ongoing rise in internet subscribers, particularly now that broadband has become the norm. Perhaps an even more tantalising prospect, however, is the potential for m-commerce as 3G smartphones begin to take hold in the Chinese market. It is still early days, but the 3G share of the mobile phone market is showing signs of following the same rapid trajectory as broadband, accounting for over a quarter of China's mobile phones by 2009. In the long term, smartphones may prove to be more accessible to emerging market consumers than computers, bringing the potential for remote sales to a wider customer base.
Although Japan was a very early adopter of m-commerce, this was partly because Japanese phones have long used a platform which combined mobile phone connection with other functions such as email and electronic wallets that were more compatible with m-commerce. In most other markets, the development of this channel is only reaching critical mass with the arrival of the smartphone, which is allowing users to connect directly to the internet. Certainly, Japan pointed the way forward in m-commerce, but it could be China that really forges the path.
China: Massive growth in broadband subscription fuelling rise of internet retail - but could smartphones be about to follow the same trajectory?
Latin America: Female consumers become more powerful
Often eclipsed as a retail destination by Asia Pacific, the Latin American region is nevertheless forecast to see strong growth over the next five years. French grocery retail groups Casino and Carrefour have been present in the market for several years, while Wal-Mart built on its successes in Brazil, Mexico and Central America with the acquisition of major Chilean retail group D&S in 2009. More recently, the 2011 edition of AT Kearney's Global Retail Development Index (GRDI)™ saw Latin American markets surge to the top of the rankings, with Brazil in first place, followed by Uruguay and Chile.
A strong trend within this emerging region is the growing importance of the female consumer. Over the past two decades the female economically active population has almost doubled; not only that, but employment levels appear to have become more resilient. Historically, when the region has seen economic difficulty female employment growth tended to be hit much harder than male employment growth, but during the 2008/2009 downturn this was no longer the case.
Over the past two years, Latin America has been the only emerging region where sales of women's outerwear have grown faster than men's outerwear – one of the effects of the improved employment prospects of women. Clothing and footwear specialists is certainly one of the channels likely to benefit from this trend, as will stores specialising in accessories such as sunglasses and jewellery, beauty specialists and department stores positioned towards the premium end of the market. Direct selling, traditionally very strong within this region, may also benefit from the rising spending power of female consumers, although as more women enter full-time employment the pool of representatives could shrink, and limit sales growth.
Over the past two decades, female employment levels have become more resilient, strengthening the Latin American consumer base.
The Middle East and Africa: Traditional lifestyles give way to modern times
Although the Middle East and Africa is forecast to be the fastest growing region in retail terms over the next five years, if the industry is truly to tap into the huge growth potential in this area, it will need to increase retail provision. Currently, there are only 318 sq m of retail space per 1,000 inhabitants, compared to a global average of 649 sq m.
Not only do there need to be more stores, but they need to be of a different format to take into account rapidly changing lifestyles in the region. In 2005, the vast majority of households comprised six members or more, but rapid urbanisation since then, and a shift to more modern lifestyles, means that, by 2015, the number of one and two person households is expected to almost equal the number of traditional 6+ person homes.
Increasing polarisation between traditional-style households of six people or more and modern households of 1-2 people
Source: Euromonitor International
Smaller households and higher levels of urbanisation indicate that the demand for convenience formats – small stores in urban areas with long opening hours that working consumers can easily visit on their way to and from work – will rise. The denser catchment areas represented by cities and towns should also mean growing potential for retail clusters such as shopping malls, and chains – both domestic and international – that prefer mall-based locations should then gain more opportunities for expansion. Formats likely to benefit in particular from more mall-based developments include anchor stores such as department stores and hypermarkets, and non-grocery chains suited to mall environments such as clothing and footwear specialists.