Think China and Asia

With all the talk of doom and gloom for Australian retailers from globalisation in the form of overseas e-commerce sites extracting local consumer revenue and global brands entering the Australian market, it’s time for Australian retailers to reverse the trend by looking overseas to expand their business.

We recently completed a strategy project for a global retail brand that wanted to look at the impact of emerging markets on their business.

We started by comparing the top seven emerging markets with the top seven traditional markets, and the results were staggering:

• Five times the population in emerging market
• Dominance of youth in emerging markets – 34 per cent of the population aged between 15 and 34 compared with traditional markets at 25 per cent
• The dominance of small format retail in emerging markets typically 80 per cent or more of the market
• High growth versus low growth in traditional markets

The result was a repositioning of their strategy and a ramp up of investment in emerging markets as western markets stagnated.
There are some shining examples of Australian retail success in developing overseas markets.

Cotton On has 743 stores in Australia and New Zealand and huge growth in overseas markets – 110 in the US, 42 in Singapore, 27 in Malaysia, nine in Hong Kong, four in the UAE and is also now entering Thailand, Philippines, South Africa and Germany. China will not be far behind.

Other Australian retailers with successful export businesses include Witchery, Country Road, Zimmermann, Collette Dinnigan, Harvey Norman, Cartridge World to name a few, however, the number of retailers exporting is small compared to retailers in the US, UK and Europe.

China
Lets look at China as an obvious example of a attractive export market. What are the opportunities and what are the challenges?

Recently Andrew Waters of China Retail Group undertook a road show in the UK to promote China as an attractive export market.

“Our strategy was to generate some interest and we were staggered and swamped by the number and size of UK retailers looking to get into the Chinese markets,” Waters says.  “Everyone from department stores to well known global fashion brands.” he said. David Jones and Myer please take note.

What makes China attractive?
• Its size – the world’s second biggest economy and largest population. The retail market is worth $2.1 trillion and growing at 15.5 per cent annually
• The world’s second biggest market for luxury goods and a growing middle class
• The world’s second biggest online market and expected to surpass the US in 2015
• More than 150 cities with populations of at least 1 million
• A McKinsey report from March 2012 predicts 328 million urban households by 2020. More than 50 per cent will have middle class or better income
• Australian retailers manufacture a substantial proportion of their goods in China or in countries in close proximity
• It’s in our time zone and region
• Generous export incentives by the Australian Government – Export Market Development Grant subsidise up to 50 per cent on marketing and market entry costs.

What are the challenges?
Retailers who wish to enter China must consider many dynamics that may be different to their operations in more developed countries.

China has created a new generation of spenders – they are IT savvy, but the country’s consumers have developed a lot faster than the country’s retail infrastructure.

China has still not developed any real consumer credit market and cash is still the most common method of payment.
Some considerations when developing your market entry strategy include:

• E-commerce. The internet generation is the core, not secondary market. Add to this distribution issues into tier three and four cities and e-commerce will play a vital role in delivering coverage;
• Increasing brand awareness, though not always brand loyalty. Consumers will try several brands within a category. Local consumer trends can differ from other more developed markets;
• Geographical challenges and the different economic cycles between tier one, two, and three cities;
• Logistics and distribution challenges;
• Real estate – continuous changes in key shopping destinations like shopping centres/malls and related leasing issues including managing leases;
• Training issues and rapidly increasing staffing costs;
• IP protection and local branding needs to be a key focus;
• How do you operate under a local cost infrastructure to stay competitive – this is probably one of the most important challenges;
• Corporate structure.

Real estate
Let’s look at real estate in a little depth to illustrate the complexities and challenges of China.

Mark Schaub, a partner with King & Wood Mallesons Solicitors in Shanghai and a veteran in dealing with global retailers entering and operating in China summarises it succinctly: “Retail in China is 15 years behind the west, but the Chinese consumer is five years ahead.

“The major challenges facing foreign retailers are not legal, but rather commercial and operational,” says Schaub.

“Navigating the approval process, finding the right store site and locking it in, doing e-commerce right, building a brand, working out how to penetrate beyond Shanghai and Beijing… these are all major challenges.

“It is a lot all at once, but the good news is that all these challenges are surmountable,” he says.

“Real estate has proven to be a major headache for retailers entering China.

“New developments and sometimes whole new city centres are established very quickly, offering consumers new and alternative shopping hubs.

“Leases generally favour the landlord unless you are a store that will drive traffic. If the shop becomes a success, many landlords will cash in on this success by selling the shop space.

“Leases tend to be short term, less than three years, so if you are successful when it is time for a lease renewal, landlords will increase the rent based on the retailer’s success.”

China and Asia provide a huge opportunity for growth for Australian retailers who put the effort into developing a market entry strategy based on preparation, gaining an understanding of local conditions and regional differences, and developing a short to medium term strategy to develop their brand.

The opportunities are enormous – the biggest market in the world, e-commerce, tier two and three cities, existing supply chain presence in China, and a thriving growing economy.

The risks are known and manageable if you tap into past experience and local expertise.

It is said that China’s success is in taking a long term view and a considered approach. Australian retailers could certainly copy this philosophy if they want to be successful in China and Asia.

* Bill Rooney is a director of 6one5 Retail Consulting Group, specialists in retail strategy, consulting and retail training. He has worked extensively in Asia and can assist with developing an Asian and Chinese presence. See www.6one5.com or email Bill here, phone (02) 94610478, or 0417 362 073.

* This feature first appeared in the October/November 2012 edition of Inside Retail Magazine. For more stories like this, subscribe to Inside Retail Magazine’s bi-monthly print edition here.

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