Major Industry Trends
Retailing involves the sale of commodities to the public. Outlets can vary from family-run stores to global behemoths such as Wal-Mart, the world’s largest retailer, with 2 million employees (or “associates,” as Wal-Mart prefers to call them), and sales of US$374.5 billion during the fiscal year ending January 31, 2008. The industry also covers a wide range of sectors, from general products, such as food and clothing, to specialist goods, such as sports equipment and automobile accessories. Despite the diverse nature of the industry, a number of common trends can be identified.
Industry Concentration
Around the world, small independent outlets, known as “Mom and Pop” stores in the US, are coming under pressure from national, and, increasingly, global giants, such as Wal-Mart, which can exploit their vast buying power to extract the best possible price from suppliers. It is often impossible for the independents, or even relatively large retail chains, to compete on price with the largest retailers.
Whereas once a consumer might have visited the butcher, the baker, and the candlestick maker on Main Street, he or she is now most likely to drive to an out-of-town retailer such as Wal-Mart in the US, Tesco in the UK, or Carrefour in France, and buy meat and bread (and candles) under one roof—a phenomenon known as one-stop shopping.
While the power of the giant retailers is already entrenched in advanced economies—the biggest four retailers account for 75% of grocery sales in the UK—these retailers are also making rapid inroads into emerging economies. This is largely because their domestic markets are close to saturation point, and because the biggest retailers account for such a large share of their own market that taking over a domestic rival could trigger opposition from the relevant competition authorities.
The pattern seen in the grocery market is being repeated in other retailing sectors, such as clothing and electronics, with sales increasingly concentrated through a relatively small number of retailers. Many of these companies are also expanding internationally. For example, the Spanish clothing retailer, Inditex, which opened its first store in 1975, now has 4,147 stores in 72 countries, and an international presence that stretches from the Americas to Asia. In 2007, its sales stood at €9.435 billion.
Brands under Pressure
The growth of the giant retailers means that they can now dictate terms to suppliers of even iconic brands. Whereas once suppliers sold their goods through a wide range of small shops, and could tell these retailers how much to charge for their goods and where they should be positioned in the store, the balance of power is now firmly in the hands of the retailer. Companies such as Tesco, which commands nearly a third of the UK grocery market, can have an enormous impact on a brand simply by refusing to stock it.
The growing popularity of own brands, also known as own labels or private labels, has given even more power to the giant retailers. Own-label goods are products sold under the retailer’s brand. Some companies focus solely on supplying own-brand goods. Dailycer, which supplies own-brand breakfast cereals to European retailers, is one example. However, own brands are also supplied by companies that produce branded goods. Indeed, the own brand may be identical to its branded counterpart.
In the 1960s and 1970s, retailer own brands were focused on the “value” end of the market. In other words, retailers focused on supplying goods that offered a cheap alternative to brands, but did not try to compete on quality. That changed in the 1980s and 1990s, as retailers increased the range of own brands that they offered. During that period, many supermarkets offered goods in the value, standard, and premium segments of the market. In the late 1990s and in the current decade, supermarket own brands have become increasingly sophisticated. Now, supermarkets target consumers by lifestyle, as well as by income. Thus, in the food sector, retailers now offer “healthy” own brands, which are low in fat or sugar, as well as ethical “fair trade” products, and brands that appeal to a particular sector, such as organic foods. All this activity has inevitably strengthened the share that own brands take in the average supermarket. In the UK, which is generally thought to have the most sophisticated own-brand market, they account for around 42% of all sales, according to the market-research publisher, Key Note Ltd.
The global economic downturn appears to be giving retailers even greater power over suppliers. Hard-pressed consumers are increasingly turning to own-brand value goods to stretch their spending power. In October 2008, for example, Germany’s largest retail group, Metro, said it was benefiting from a new line of value-for-money, own-brand foods in its hypermarkets, as German consumers cut back their spending in the face of mounting economic uncertainty. It’s a similar story in the US, where, in 2008, the country’s biggest grocery sellers—Wal-Mart, Kroger, Supervalu, and Safeway—reported that sales of their own brands were increasing as customers seek cost savings.
Technological Advances and E-Commerce
The giant retailers have been quick to exploit the benefits of advances in IT, as well as the growth of the internet. The latter medium has created new retailing giants such as Amazon, but it has largely been exploited by established retailers, which view it as simply another distribution channel, and a means to drive sales. Sales via the internet are certainly growing rapidly. ASDA, which is owned by Wal-Mart and is the UK’s second-largest grocery retailer, said that its online sales grew by 40% in 2008. At present, the internet accounts for a relatively small proportion of sales in many sectors; analysts estimate, for example, that online sales of clothing represent just 3–5% of the total clothing market. However, those same analysts expect this figure to grow rapidly.
Advances in IT and communications have been exploited by retailers in a number of other ways. Inditex, for example, is credited with creating the concept of fast fashion, which gives shoppers the latest styles just a few weeks after they first appear on the catwalk, at prices that mean they can wear an outfit once or twice, and then replace it. IT enables Inditex to sell clothes in its stores two weeks after they have been designed. At Inditex, information is also continually transmitted from the company’s stores to a design team of more than 200 professionals, informing them of customers’ needs and concerns, allowing the company to respond very rapidly to changing tastes.
Meanwhile, companies have used IT to harness information about their customers and refine their marketing programs. In September 2008, for example, Tesco, the third-largest retailer in the world, launched an ultra-low-price Market Value range, which spans 350 lines in food, household, and personal care. It used data collected from its Clubcard loyalty scheme to identify shoppers it believed had defected to cheaper outlets, and sent them tailor-made promotions to lure them back.
Global Sourcing
The major retailers are increasingly sourcing goods from around the world, rather than just their own domestic markets. This not only allows retailers to find the cheapest suppliers in the world, but also has other advantages. Grocery retailers, for example, can now supply what were once seasonal foods all year round. In the middle of winter, a shopper in London can buy strawberries flown in from Chile.
Tesco has a global sourcing office in Hong Kong, which supplies more than 60% of all clothing and 40% of other non-food products sold in Tesco’s UK stores, as well as most of the non-food items sold in the 12 other countries in which Tesco operates. The Hong Kong office is responsible for design, sourcing, overseeing production, quality control, and sorting out the customs documentation for around 50,000 Tesco product lines. Many of the goods are sourced from mainland China.
Supermarkets Expand Out of Food
The major supermarket operators around the world have expanded into a whole range of areas beyond their traditional role as suppliers of food and household goods. They now sell clothing, household equipment, music, electronics, health and beauty products, and pharmaceutical goods, as well as financial services, and even cars. This trend is being driven by various factors. For example, in many countries, there are now so many supermarkets that the market has reached saturation point. In addition, items such as electronics offer higher margins than traditional groceries.
Market Analysis
The five largest retailers in the world are Wal-Mart (US), Carrefour (France), Tesco (UK), Ahold (Netherlands) and Delhaize (Belgium). All have long since expanded outside their domestic markets, and now operate on a global basis.
Thus, while Wal-Mart operates more than 4,100 outlets in the US, it has a further 3,100 outlets in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the UK. In January 2009, it announced that it had acquired a majority stake in Chile’s largest food retailer, Distribucion y Servicio D&S SA. The company spent US$200 billion on merchandise in 2007, underlining its immense buying power.
Carrefour operates four main grocery-store formats: hypermarkets, supermarkets, hard discount stores, and convenience stores. It has more than 15,000 stores, either company-operated or franchises, and operates in 30 countries. Indeed, more than 54% of group turnover derives from outside France. The group sees strong potential for further international growth in the future, particularly in such large national markets as China, Brazil, Indonesia, Poland, and Turkey. However, in March 2009, Reuters reported that Carrefour had lost its leadership edge, especially in France, resulting in loss of market share, stalled growth, and unsatisfactory profit margins at its hypermarkets, which have seen their market share eroded by hard discounters and local supermarkets. The news agency quoted Lars Olofsson, who became CEO in January 2009, as saying that the group, which has 3 billion customers worldwide (“it’s as if half the world’s population buy from us”), should focus on turning around its operations in France, its home market, which accounts for 44% of sales.
Tesco operates 3,956 stores around the world, of which 2,184 are in the UK. It employs 440,000 people around the world. It is active in China, the Czech Republic, France, Hungary, Japan, Malaysia, Poland, the Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, the UK, and the US. Tesco says it “has a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into new markets.” It is aiming to “broaden the scope of the business to enable it to deliver strong, sustainable, long-term growth by following the customer into large expanding markets at home—such as financial services, non-food, and telecoms—and new markets abroad, initially in Central Europe and Asia, and now also in the United States.”
Ahold, based in Amsterdam, operates grocery stores in the US, the Netherlands, the Czech Republic, Slovakia, Sweden, Norway, and the Baltic states. In the US, Ahold owns the Stop & Shop and Giant-Landover supermarkets, and in the Netherlands it owns the Albert Heijn grocery network. In March 2009, Ahold reported a higher-than-expected 49% rise in fourth-quarter operating profit, thanks to a revamp of its US grocery stores and strong sales in its home market. The retailer said that quarterly profit excluding interest and taxes reached €365 million (US$462.6 million), against an average analyst forecast of €310 million.
Delhaize has 775 stores in Belgium, but also operates the Food Lion chain in the US. Delhaize is aiming to add between 70 and 80 stores in 2009, to bring its total to about 2,750 stores worldwide, 1,600 of which will be in the US. It has operations in various countries, including Greece, Romania, Indonesia, Luxembourg, and Germany.
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