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Brave New World
As we reach the mid 00s, UK retailers seem to be targeting emerging rather than established markets, particularly India and the Middle East. Elizabeth Troake investigates the attraction of warmer climates for our high street favourites.
Major retail brands seeking to extend their successes beyond their domestic borders is not a new phenomenon. For years UK retailers have sought their fortune overseas, with mixed success. But more recently, as the economies of the western world have begun to freeze up, the allure of the untapped emerging market is arguably at its strongest. The potential of growth into countries such as China, Russia, India and the United Arab Emirates has had mouths watering.
However, moving into these markets is not simply a matter of renting a warehouse, buying some shops and shipping all your merchandise and fittings from Cleethorpes to Kuwait. Both the potential and the pitfalls of global expansion came under the microscope at the "Retail in Emerging/International Markets" seminar hosted by specialist recruitment company Harveen Gill Associates. Speaking at the event were key industry figures who know all about the challenges of transferring successful UK business models to the emerging markets. In particular, the speakers highlighted their experience around the borders of the Arabian Sea; the markets of India and the Middle East.
The general view expressed was that any international expansion, irrespective of the market's maturity, faces being hampered by a lack of sufficient local knowledge, logistics and supply chain difficulties and problems in positioning the product correctly to best serve local preferences. However in regions such as the Middle East and India, there are less obvious and more complicated pitfalls to be avoided.
For example, before even entering an emerging market, one of the first and thus most problematic issues that many retailers face is that the government of the country into which they hope to expand may simply not want them to. This has been the case in India, which has for many years blocked any attempts by global retailers to set up shop directly in the country. This policy has forced foreign companies into franchise agreements or joint ventures with local firms. The restrictions have recently been loosened, but restraints are still in place.
The prospect of expanding into India is attractive; it is one of the world's fastest growing economies with even faster growth in consumer spending. Shopping in the country is evolving from a necessity to a hobby, as Western habits are adopted with the rising wealth of the country.
However, the country is still largely fragmented in terms of wealth, religion and cultures. The divide in terms of wealth between rural and urban areas is huge, with the rural Indian consumer comprising almost 70% of the population and making purchasing decisions based on many complex social and cultural factors that can vary from state to state.
Tax regulations also differ across the country, with some states levying not only sales tax but also export taxes and entry taxes whilst other states operate only VAT, creating problems for a large-scale retailer. Then there are the hidden "taxes" that may be imposed on the product by local officials. "Goodwill payments" may have to be made before key parts of a rollout can go ahead. In addition, India has many well-established home-grown brands due to the restrictions on foreign direct investment by the Government. Not least is the Tata group, one of the country's largest and most powerful conglomerates.
The chairman of Landmark Group, Micky Jagtiani, knows only too well how India can present a huge challenge for very few rewards. At the "Emerging Markets" seminar, he warned that retailers hoping to take advantage of India's growth should be realistic as to their expectations.
High duties, sometimes as high as 70%, before the goods even hit the shelves and much lower sales per square foot than markets such as the Gulf States, mean that margins in India can be extremely tight at best. Therefore, companies currently seeing success in India tend to be the behemoths of the retail world such as Wal-Mart and Tesco.
Although he believes that over time it will be extremely profitable for smaller retailers to be in the Indian market, Mr Jagtiani warns that such companies, including his own brands, will need "deep pockets and a lot of patriotism" in the meantime.
And he should know: Mr Jagtiani's UAE-based Landmark Group is extremely successful in the countries bordering the Arabian Sea. The company that started out with a single store is now one of the region's fastest growing conglomerate businesses, having won Dubai's "retailer of the year" at the Retail City Awards earlier this year.
Landmark not only operates its own brands, but also works with big UK names such as New Look, Kurt Geiger and Reiss through franchise agreements. Landmark's most significant markets at the present time are India and its home market of the UAE, specifically Dubai.
Glitzy and wealthy, Dubai is a world away from India, economically if not geographically and known for some time now as one of the world's most high-profile shopping destinations.
Its retail credentials were impressive even before it opened the largest shopping mall in the world last month (pictured left). There are simply hundreds of malls, stores and markets in Dubai. Its rulers also have a reputations for grand projects, be it the world's first revolving skyscraper or the Palm Islands, the world's largest man-made islands that will spawn additional shopping malls, hotels and cinemas. The climate is idyllic for most of the year with an average of only five days worth of rain a year and these conditions have seen tourism overtake oil as the region's most productive industry.
Speaking from the point of view of a UK-based retailer entering the Gulf States, Tim Bettley, managing director of value fashion retailer Peacocks, explained how the Middle East was proving profitable for the company.
Peacocks began its international growth in 2003, when the company expanded its operations into both the Middle East and Turkey, with the assistance of franchise partners, where it trades as Peacocks London.
The business model of the company proved as successful in the new markets as the products. (As in the UK, the company set up smaller stores in suburban areas rather than large stores in city centres.)
However, there are still difficulties to be negotiated when opening in Dubai. Unlike India, however, the potential issues do not lie in the divide between rich and poor, as such a large percentage of the shopping public in Dubai are tourists.
The difficulty most likely to be encountered in Dubai is a potential skills gap. Employees may have to be given training that is much more thorough than in the UK and in some Gulf States such as Saudi Arabia there may be additional cultural restrictions such as preventing women from working, limiting a company's recruitment options.
Despite this, Dubai seems to be the future for Western retailers seeking to expand in the area of the Arabian Sea, with companies yet to see India as a profitable market, rather than a means of attaining cheap labour.
In India, for the time being at least, the more likely success stories will come from the big multi-product brands such as Tesco, (which operates through a joint venture) and M&S, (which is allowed to trade wholly-owned stores in the country because it is a single-brand store). In short, the successful companies will be those with enough money to burn until a return on their investment becomes realistic.
However, with the retail world shrinking, perhaps it will not be long until India too sees its share of shopping malls and high streets as we know them. Moreover with so many UK-based retailers having a tough time of it, it is entirely possible that cash-rich companies from the likes of India and the UAE might seek a gap in the UK - with our high street being their emerging market.
Whatever happens from here, whether UK brands make successful moves to the East or their retailers manage to exploit the cracks in the UK market, it is clear that the world of retail is only going to get smaller.