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$419 billion during the fiscal year ending January 31, 2011. 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 United States, are coming under pressure from national and, increasingly, global giants, such as Wal-Mart and Tesco, 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 United States, Tesco in the United Kingdom, or Carrefour in France, and buy meat and bread, towels, duvets, and TVs all 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 United Kingdom—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 4,264 stores, and an international presence that stretches from the Americas to Asia. In the first quarter of 2011 its sales rose by 11% to €2,968 million and included revenue from the Group’s first new store in Australia.
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 United Kingdom, 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. A survey by the website uSwitch.com in August 2009 found that the number of Britons buying own brands had tripled in the previous year, rising from 25% in August 2008 to almost 75%. The change was being driven by economic reasons. It is a similar story in the United States, where Wal-Mart is eliminating slow-moving brands in favor of its own brands, and major suppliers such as Kraft, P&G, and General Mills are planning significant increases in advertising, in-store promotion, and coupons to combat private-label brands. By July 2011, according to the consumer magazine Which?, citing research from Mintel, four out of five shoppers had switched to retailers’ own brands in an attempt to make household budgets go further. Deleveraging by consumers, allied to sharp rises in food commodity prices had also impacted other retail trends, reversing the sales growth of organic produce, for example. The so-called “budget supermarkets” specializing in deep-discounted products have been net beneficiaries of this squeeze, with supermarket chain Aldi up 20.2% and Lidl up 15.6%.
In April 2010, the UK department store Debenhams beat profits forecast with a 19% rise in first-half headline earnings. By April 2011, the group was reporting like-for-like sales being flat with some profit growth due to improved margins. The chain’s chief executive, Rob Templeman, called trading conditions “difficult,” requiring a sustained focus on profit and cash generation. “Looking forward there are some encouraging signs that commodity prices such as cotton may fall, which could be positive for both consumers and retailers in terms of pricing,” he said.
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. Tesco, of the United Kingdom, the third largest global retailer, said that in the year ending February 27, 2010, its online grocery business delivered more than a billion items, while online sales grew by 14%. Tesco said the number of active online grocery customers had grown to more than one million, while basket size had also increased. Wal-Mart said that its online traffic exceeded one billion visits in 2009, growing more than 15% over the previous year.
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 5–10% 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. Tesco, for example, uses data collected from its Clubcard loyalty scheme to identify shopping trends, and refine existing brands and marketing campaigns as a result. In its 2011 annual report, Tesco also pointed out that its advanced weather forecasting system now has a very substantial input into store stocking programs, adjusting both goods carried and quantities based on detailed weather pattern analysis.
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 arranging the customs documentation for approximately 50,000 Tesco product lines. Many of the goods are sourced from mainland China. By 2011, however, a stumbling block to the continued expansion of global sourcing had emerged in the shape of concerns over the contribution of global sourcing policies to global warming. The concept of “food miles,” the distance food has to travel to arrive on supermarket shelves, has started to gain ground as environmental groups focused on the carbon footprint associated with supermarket sourcing habits. This issue still has some way to play out in the next few years, but already many supermarkets are emphasizing a “buy local/shop local” dimension to their activities as they attempt to “green up.”
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 (United States), Carrefour (France), Tesco (United Kingdom), Ahold (the Netherlands), and Delhaize (Belgium). All have long since expanded outside their domestic markets, and now operate on a global basis.
Thus, Wal-Mart operates more than 8,400 stores in 15 countries around the world. Its 2 million employees serve more than 200 million customers every week. 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. In 2010, it had more than 15,500 stores, either company-operated or franchises, and a presence in 35 countries. Indeed, more than 56% 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.
Tesco operated 4,308 stores around the world in 2010, of which 2,282 were in the United Kingdom, and employed 468,508 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 United Kingdom, and the United States. 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 United States, the Netherlands, the Czech Republic, Slovakia, Sweden, Norway, and the Baltic states. In the United States, Ahold owns the Stop & Shop and Giant-Landover supermarkets, and in the Netherlands it owns the Albert Heijn grocery network. At the end of 2009, it had 2,909 stores, 206,000 employees, and total sales of €28 billion.
Delhaize is a Belgian international food retailer with activities in six countries on three continents. At the end of 2009, Delhaize Group’s sales network consisted of 2,732 stores. In 2009, Delhaize Group posted €19.9 billion in revenues and group share in net profit of €514 million. Delhaize Group employs approximately 138,000 associates.
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