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08/01/2013

To Europe, China and Beyond

Many of the same trends retailers and food manufacturers are grappling with in the United States also are playing out in the U.K. and Europe, where channel-blurring has amplified competition and cash-strapped consumers are cutting back in an uncertain economy.

Emerging markets, however, offer new growth opportunities as shoppers, flush with more discretionary income, are clamoring for foreign products perceived to be of higher quality. Retailers and CPGs are sitting up and taking notice. "The race is on for us to secure and expand our positions in these fast-growing markets," Mondelez International Chairman and CEO Irene Rosenfeld said at the Citi 2013 Global Consumer Conference in late May. "Our competitors also find emerging markets attractive, so competition will intensify in the near term. That's why stepping up our investments now is critical to deliver long-term shareholder value."

Mondelez is investing about $100 million in focused emerging markets this year with plans to spend $200 million in 2014 and as much as $300 million in 2015. Much of the spending will be used for marketing support of the company's well-known brands, including the launch of Stride gum in China, FoxBusiness.com reported.

GLOBAL INFORMATION AGE

People the world over know about popular brands in part due to growing use of the Internet and social media. As the information age has gone global, consumers increasingly are demanding to know what they are consuming and where it came from, says Andrew Swedenborg, executive vice president at King Retail Solutions in Eugene, Ore. That's causing a trend toward localization and well-curated merchandising, as well as growth through mergers and acquisitions.



"With social media, what we know here they're going to know in London very fast."

– Andrew Swedenborg,

King Retail Solutions


"It is very much a global world. It's very global; it's very quick. With social media, what we know here they're going to know in London very fast," Swedenborg says. The trend toward healthier eating, including more organic products and local foods, also is an international one, he says.

"People are so empowered by information on what they want and what they seek out that it has caused retailers to change their merchandising strategies," Swedenborg says. The channel-blurring that is taking place in the United States also is occurring in Europe and the U.K., with food retailers expanding to offer apparel and hard goods, and drug stores adding food products, he says.

The rapid growth of digital information is also encouraging more competition on price at Tesco and other U.K. retailers. "The price-matching is more of a [phenomenon] of consumers having information and retailers having to react appropriately....There are programs where you can sit here and scan a barcode, and it will tell you where that rib eye steak is cheapest," Swedenborg says.

But quality still reigns supreme with affluent shoppers, contributing to the success of some up-market retailers, such as Waitrose, while Tesco's market share has been declining. "People are seeking out value and are seeking out indulgence on the high end. The middle is what is being lost," Swedenborg says.

As in the United States, retailers in mature markets abroad are facing greater competition from the presence of more outlets. Mature countries "can only house so much square footage of grocery retailing. At a certain point, you've become saturated," Swedenborg says.

Retailers also have been impacted by a significant weakness in consumer spending. The Office for National Statistics said food sales in the U.K. declined 4.1 percent in April, representing the biggest dip since May 2011, Bloomberg Businessweek reported.

A global marketplace doesn't mean a more stable playing field. Challenging economic conditions in Europe, coupled with supply shortages, are encouraging global players to develop redundant supply chains. Many are learning from other companies' disappointments, and they're looking for ways to control the supply chain to avoid disruptions or food safety issues.

"One of the things we've been seeing on a global basis is the ability to have very good sustainability of product," says David Braun, CEO of Capstone Strategic Inc. in McLean, Va. "Historically, we have had very localized food, both manufacturers and distributors, and that's changing. We've got more regionalization going on around the world." As a result, retailers want to be sure they can get the products in a consistent, sustainable way.

One response has been more acquisitions, joint ventures and strategic alliances, Braun says. Another approach involves building operations in several regions, so a disruption in one area won't wipe out a company's entire supply of rice, sugar, wheat or seafood, he says. "In a number of these areas, we have been establishing relationships with supply chains in Asia, North and South America and Europe. We didn't used to do that," he says. "For the foreseeable future, in order for these companies to be global and to be successful, they're going to have to be vertically integrated," Braun says.



"For the foreseeable future, in order for these companies to be global and to be successful, they're going to have to be vertically integrated."

–David Braun,

Capstone Strategic Inc.


Some U.S. manufacturers have started producing their own food overseas, while others are acquiring ingredient manufacturers so they are guaranteed transparency. For example, Tyson Foods is producing its own chickens in China so it knows for certain what the poultry was fed and how it was treated.

Europe's slow-growing economy is encouraging some U.S. companies to acquire European companies while their valuations are under pressure. Walgreen Co. bought a 45 percent stake in U.K.-based pharmacy Alliance Boots last year that is expected to drive synergies of $125 million to $150 million. In turn, the two companies acquired a 12 percent stake in Nanjing Pharmaceuticals in China in September 2012 for more than 67 million euros, the Irish Times reported. The acquisitions have propelled Walgreen Co. which had been a strictly domestic retailer, onto the global stage. Industry analysts said China is eager to bring major pharmacies to the market because of their strong reputations and their ability to meet growing demand.

A number of food safety scandals have created demand for U.S. brands in China. But U.S. companies must take steps to ensure they're working with the best partners there or build production facilities from the ground up, experts says.

Walmart In China

Bentonville, Ark.-based Walmart, which is No. 3 in market share in China and plans to add 30 new stores to its existing 380 in China, said it would invest 100 million yuan ($16.3 million) to improve food safety in its China stores by expanding supplier training, food inspections and supply-chain management, The Wall Street Journal reported. The retailer is expanding the use of mobile food-safety labs to run food-quality tests at 70 stores in the Guangdong province.

Walmart began shoring up its food safety practices in China after a 2011 scandal involving mislabeled pork led the company to close 13 stores and resulted in two arrests and a $575,000 fine. More recently, Nanning officials accused Walmart of selling baked goods made with expired eggs, though the company denied the allegations.

Corruption reportedly is rampant in China, increasing the risk of uncertainty for foreign retailers and food manufacturers planning to expand there. After Chinese infant formula tainted with melamine was linked to the deaths of six infants in 2008, the government welcomed foreign formula makers. But five years later, Chinese authorities have accused formula makers Abbott Laboratories, Nestlé, Danone and Mead Johnson of price-fixing and anticompetitive behavior. The companies announced in July they would reduce prices, sending down share prices and calling into question the U.S. companies' future prospects in China, according to Crain's Chicago Business.

To avoid run-ins with authorities, Braun recommends foreign companies team up with a partner who speaks the language and knows the local officials. "We can bring in MBAs, but you have to have people who really know the local process and how to get things done," Braun says.

Braun recommends starting with customers and business advisers to find trustworthy companies to work with. "We'll talk to banks, law firms, retailers, and major business people that are established in that area and ask them to identify for us who are some of the better manufacturers, the better distributors," he says.

At the same time, China clearly remains interested in U.S. food companies, as Shuanghui International Holdings' proposed acquisition of Smithfield Foods suggests. That $4.7 million deal is under review by the Committee on Foreign Investment in the United States.

The Smithfield acquisition is significant to China because Shuanghui will be acquiring the people who know how to run businesses, Braun says. "China doesn't have enough MBAs who know how to run businesses. So part of the reason you see a Chinese company buying Smithfield is they want the brand, the pork, but what they really want is the talent."

While India and some other emerging markets are just now opening their doors to foreign investment, retailers and CPG companies are expanding in Latin America, Europe, the U.K., Canada and China. But increasingly, the M&A activity is a two-way street. In Canada, grocery retailer Sobeys' parent, Empire Co., said in June it would acquire Safeway's Canadian assets for $5.7 billion, allowing it to better compete with Target and Walmart as they expand, Reuters reported. The announced plans for new Target and Walmart stores have encouraged Loblaw Cos. to offer $12.4 billion for Shoppers Drug Mart Corp.

In India, infrastructure such as refrigeration and passable roads, along with bureaucratic red tape, have been an impediment to foreign expansion. Walmart reportedly is postponing until 2016 its plans to open stores in the country with Bharti Enterprises.

Over the long term, companies might find it is easier to partner with an existing business than it is to build their own infrastructure. Either way, it is bound to be a bumpy ride for the foreseeable future.

Latin America Draws Strategic Retail Investments

Despite the new attention multinational players are giving to China and India, the data show many retailers are focusing their strategic investments in South America and Latin America, according to A.T. Kearney's 2013 Global Retail Development Index.

Brazil ranks No. 1 on the index, scoring a perfect 100 for market attractiveness, 86 for low country risk and a 43 for market saturation. Chile and Uruguay follow in second and third place. "South America is really going strong," says Althea Peng, partner at A.T. Kearney in San Francisco. A strong middle class is paving the way for retail development, she says.

The report identified Uruguay as a "little gem," because of its wealth and consumer focus. Other gems include Mongolia, Georgia and Armenia. Latin America overall is attractive to retailers because it offers a strong middle class, economic growth and economic and political stability.

2013 Global Retail Development Index™
Notes: 2012 rankings have been updated to include revised data from Planet Retail to take into account prevailing macroeconomic conditions in the retail space. MENA =Middle East North Africa.
Sources: Euromoney, Population Data Bureau, International Monetary Fund, World Bank, World Economic Forum, Economist Intelligence Unit, Planet Retail; A.T. Kearney analysis

China ranks fourth in the index, moving down from third place a year ago, while India dropped nine places in the index to 14.

A.T. Kearney, which has published the index for more than a dozen years, points out, "Every market has unique challenges that require unique strategies for success. And this year's GRDI finds several examples of countries where global retailers are taking a step back from the aggressive expansion of the not-too-distant past in favor of more cautious strategies."

In many areas, retailers have become more cautious than they were a year ago. "We're seeing some plans scale back on expansion. Retailers are really focusing on how to profit," Peng says. "They're thinking about all of the aspects from supply chain to marketing. We also see a lot of retailers doing a little bit more of a 'one country at a time' approach, rather than saying we're going to be present in all of South America, let's start with Brazil and then Chile."



"We also see a lot of retailers doing a little bit more of a 'one country at a time' approach, rather than saying we're going to be present in all of South America."

– Althea Peng,

A.T. Kearney


In Brazil, which has held the top spot on the index for three years in a row, retail spending is expected to increase 11 percent in 2013, due to continued expansion and growing consumer confidence. "We see Brazil as one of the most attractive markets," due to strong employment rates, increased credit access and improved infrastructure as a result of investments related to the World Cup and Olympics, Peng says. Regional and international retailers are expanding there.

Brazil's middle class is forecast to total 56 percent of the population by 2014, and the rising standard of living is attracting private equity investment and retail expansion. Among supermarkets, Pao de Acucar and Polishop are adding new locations, along with giant Walmart.

In Chile, disposable incomes have increased about 10 percent in the past year, while inflation remains low at about 3 percent. The strong economic growth coupled with political stability has attracted Walmart Chile, which is now the leading supermarket.

Improved retail conditions in Mexico, such as a 5 percent annual increase in per-capita spending, a growing population and improved job market, are luring retailers. While mom-and-pop stores control about half of Mexico's $211 billion in retail sales, Walmart and Costco are expanding locations.

In Asia, consumer spending continues to grow despite a slowdown in the overall economy, providing a backdrop for retail expansion, but many companies are exercising caution. China lost some of its luster in the index, as luxury retailers saw customers defect to foreign competitors. Higher real estate costs are changing the landscape. Among grocery retailers, however, Hong Kong-based ParknShop plans to open 300 supermarkets in South China, while Walmart has been opening convenience stores and Sun Art Retail Group is adding locations, A.T. Kearney says.

India, where the gross domestic product fell to 5 percent in 2012 from a 10-year average of 7.8 percent, has seen retail sales volume decline while operating costs have increased, curtailing many companies' expansion plans. Some retailers are slashing operating costs and reducing store size to boost profitability. "The infrastructure and real estate costs and availability make it challenging for retailers," particularly those with limited local knowledge, Peng says. "Many retailers are in a wait-and-see mode. But India is a tough one to get right."
– Ann Meyer

Ann Meyer, who is president of media services firm L3C Chicago, serves as senior editor of Retail Leader magazine.