China leads among East-Asian nations in the Global Retail Development Index, ranking second globally. Other Eastern Asian nations in the index include Malaysia (9), Indonesia (15), Sri Lanka (18), India (20), the Philippines (23) and Vietnam (28).
The Global Retail Development Index (GRDI), published by A.T. Kearney, ranks the top 30 most attractive developing countries for retail investment based on macroeconomic and industry-related factors. These factors are:
- Market attractiveness;
- Country risk;
- Market Saturation; and
- Time pressure.
According the GRDI report, there is a “window of opportunity” that retailers must heed when investing in developing markets. Retail markets go through four stages of development as they progress from emerging markets to mature ones: opening, peaking, maturing and closing. This process often takes between five and 10 years.
The window opens when a given population acquires more disposable income, logistics flow improves, ownership regulations become more favorable for international investors, and political, social and economic climates are stable. The window begins to close when markets become saturated and basic retail provisions no longer appeal to refined consumers, logistics are sophisticated and widespread enough that they do not provide a competitive advantage, regulations are steady and therefore not a deterrent to market entry, and risk to investors’ persons and property is minimal.
Many rapidly developing countries in Asia present prime opportunities for retailers. Rising incomes, growing populations and widespread modernization are creating “windows of opportunity” across the continent. With retail sales on the rise, and the utilization of modern distribution methods such as e-commerce, retailers are expanding beyond urban centers into less developed, untapped parts of emerging Asia.
Although economic growth has slowed recently, retail growth is expected to continue in China. Retail sales grew 13 percent in 2013, totaling US$2.6 trillion. The retail market in China is maturing, but remains moderately attractive. Saturation is increasing rapidly however, making entry extremely time critical.
Revenue growth for supermarkets and hypermarkets, especially multinationals, is plateauing, while costs are on the rise. Labor costs are increasing more than 15 percent a year, and the cost of rent in some cities is climbing 10 percent annually. Foreign retailers are hit hardest by these increases due to their central positioning in cities where rent costs are growing the most.
Department stores have been similarly affected, losing profits as their products fail to attract enough consumers. Sales have dropped more than four percent and total revenue growth is lackluster. Conversely, convenience stores are experiencing rapid growth, with robust sales rising 10 percent. Lengthy operating hours, close proximity and value-added services all draw customers to these retailers.
China’s e-commerce market is also showing substantial growth, and currently accounts for eight percent of the entire retail sector. Last year, e-commerce sales amounted to US$305 billion.
Malaysia has a small population of almost 30 million, nearly half of which are under the age of 25. This young demographic, paired with a high income per capita of US$10,600, tends to result in a stable market full of potential. Fashion, sporting and electronic goods are growing in demand due to high disposable incomes. Food and beverage goods are lagging however. Modern retailers have seen the most growth in cities, while basic and traditional formats remain more prevalent in rural areas. Modern grocers are expected to have a 53 percent market share by 2020, using add-on services and competitively priced goods to attract customers. Malaysia continues to draw international retailers with favorable investment regulations. Online retail is expanding rapidly. Worth US$1 billion as of 2012, current estimates suggest that amount can triple by 2017.
Indonesia’s economic growth has sunk to 5.2 percent, its lowest rate since 2009. This has hindered short-term growth, but mid-to-long term prospects remain promising. Sales have plateaued due to slowed economic growth and low consumer confidence, but overall sales saw robust growth, demonstrating retailers’ expectations for healthy, long-term growth due to swelling urban populations, increasing disposable incomes and development of infrastructure.
Sri Lanka (18)
Private consumption is increasing in Sri Lanka as the country’s economic situation continues to improve. Its retail market, valued at US$25 billion, is still largely traditionally formatted, with only three percent of sales transactions being conducted through more modern methods. Eight malls already exist in its largest city and commercial hub, Colombo, and plans exist for 10 more to be built within five years. Infrastructure development is expected to open up cities such as Kandy and Jaffna for more commercial purposes in the future and rising amounts of tourism will likely effect retail growth as well.
In 2013, economic growth in India was at 4.7 percent, far behind the highs of previous years. High consumer price inflation, fluctuations in currency, government debt and strict FDI policies among other factors are contributing to India’s sluggish growth. This has caused it to fall six places to 20th on the GRDI, its lowest rank to date.
India still remains promising for long-term retail investment. It has a population of 1.2 billion people, half of which are under the age of 30. A third of these people live in cities and urbanization is projected to continue increasing substantially in coming years. Disposable incomes are on the rise. Movement from traditional retail formats to modern ones is ongoing, but slow. Modern formats account for only eight percent of the overall market.
The business environment in the Philippines is lot friendlier and more secure following recent reforms. Infrastructure development is robust and steady. Disposable incomes are rising, as well as consumer confidence, leading to more sales of nonessential goods. Retail sales are expected to grow more than 10 percent annually for the next three years. Traditional retailers such as sari-sari (convenience) stores hold 70 percent of the retail market, but modern retailers have been making successful entries.
Decreasing inflation, lowered trade restrictions and reductions in corporate tax rates have all drastically increased the appeal of Vietnam’s business climate, sending retail growth soaring. The majority of modern retail has been confined to major cities, but many companies intend to extend their reach to smaller urban centers. The Ministry of Industry and Trade in Vietnam aims for 40 percent of the market to belong to modern retailers by 2020. Several regional companies have moved into Vietnam to capitalize on the low-cost of production and growing consumer base, and larger, international retailers are expected to enter soon.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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