Asia to lead in retail and consumer goods: PwC and EIU insights

Although many developed economies were weakening in the past years, the government stimulus programmes have triggered the retail and consumer products sectors globally. The Asian region has been doing well compared to other regions; especially due to government incentives that have kept consumers’ wallets open.

By Thanzyl Thajudeen



Succeeding through the financial crisis, multinationals operating in the retail and consumer goods sector have significantly deepened their interest in the Asian region. Asian markets have proved themselves better through the economic crisis. Many organisations which enter the markets try to serve the diversified needs of customers whilst many focus only on China and India. These countries have a significant growth potential.

The Key findings from a report published by PricewaterhouseCoopers (PwC) produced in cooperation with the Economist Intelligence Unit’s (EIU) industry and management research division stated that the outlook for Asia overall remains positive, with average growth of about 6% in 2011 (Figure 1); Growth will continue to be unevenly distributed, with China driving regional momentum, whilst India’s annual growth will increase from 3.9% in 2011 to 5.8% in 2014; and Vietnam will be a rising star, with growth averaging over 10% annually to 2014. The Asia and Australasia regions will lead in global sales followed by North America, Western Europe, and finally Latin America (Figure 2).

Figure 1: Retail sales growth globally by volume (%pa)

Biggest markets: China, Hong Kong, India, Japan and Taiwan

According to the findings in the report, China which is Asia’s biggest regional retail market as well as the world’s second  largest after the United States will remain in the double digits through 2014 (14.6% pa in 2011; 12.4% pa in 2012; 11.6% pa in 2013 and 11.7% pa in 2014)

Retail sales in China in value terms will reach an estimated US$4.6 trillion by 2014 (Figure 3).

Japan, the second biggest regional retail market, will see retail sales stretching around 1% in 2010, while yearly growth will reduce progressively to 1/2% by 2014. Japan will experience a slow growth in its retail sales and is highly likely to reduce consumer purchasing and confidence; all this due to concerns about a weaker economy.

Next to the two biggest markets China and Japan, is India where the annual growth will increase at an average rate of over 4% in 2010 through to 2014. This is all due to: rise in income levels of consumers, increase levels of urbanisation in the country, and many private investments coming in such as multinationals opening up stores and outlets.

Vietnam which is said to be a rising star will experience growth averaging over 10% annually until 2014.

Retail sales growth in Taiwan is expected to resume a steadier average of about 1% yearly; this is due to higher levels of fragmentation in the market, pricing power and depress margins.

Retail sales growth in Hong Kong will grow at an average of 2% annually from 2011 as demand is expected to decline in tourist arrivals and unemployment levels are expected to rise in the country.



Apart from the five biggest markets, growth in Indonesia, Malaysia, the Philippines, Singapore and Thailand is expected average 3%-5% over the forecast period according to the report.

See illustration in Figure 3.    

1.    Food and General Retail

The key findings in the hypermarket, supermarket, and convenience stores sector are that the hypermarket expansion is sweeping across Asia, with China being the lead. Foreign established firms are expected to undertake aggressive expansion; and the challenges for foreign retailers in entering the Indian market are significant, but industry analysts believe it is a matter of time before the retail sector becomes fully liberalised.

Retail giants such as Wal-Mart of the United States and Carrefour of France have the largest presence in China – with 180 and 160 outlets respectively – and are expected to open between 12 and 20 new stores each year. Hypermarkets  are also considering to establish a presence in India’s retail market. However local operators in India are expanding at a higher pace, with Bharti Retail planning to increase its Easyday supermarket operations by investing more than US$2 billion to expand its presence across India by 2015.

Long Chen, CEO of China Resources Enterprise Limited stated: “Our goal is to nearly double the average growth rate to reach 15%. For the retail business, we’ve reached 35% average growth for the past few years largely because we’ve done quite a few big deals, such as the acquisition of Suguo Supermarket in Jiangsu Province. We expect the industry to grow at 10%-15% in the next five years. Our goal is to grow at an average of 20%. To achieve this, we will have to focus on steady average growth per store, M&A and opening new stores.”

China Resources Enterprise Limited operates in the retail, beverage, and food processing and distribution markets in China and Hong Kong with over 2,800 retail, including the supermarkets Vanguard and Suguo, and has 70 breweries across China.

China is stronger when it comes to this sector.  Although Japanese firms such as Aeon which is the largest supermarket operator are slow, their expansion plans indicate that they are now firmly on board. The report stated that generally, foreign firms are expected to undertake aggressive expansion in China in the forecast period.

Taiwan and Hong Kong also represent important markets given their openness to foreign investment and relative affluence, but neither offers opportunities for hypermarket nor supermarket growth comparable to China whilst Japan is not promising given its 13 straight months of decline in same-store supermarket sales.

The key findings from the report on the beverage and tobacco sector in Asia is expected to grow moderately but China is expected to contribute to half of the world’s demand for beer within a decade, branded sports and diet drinks will benefit from the growth of the middle class in India, consumers will look for healthy food products, including organic foods in Hong Kong and Taiwan, and the ageing of Japan’s population is likely to boost the health food sector.

According to the report, the food, beverages and tobacco sector in Asia, although experiencing increasing levels of demand, is expected to grow at a moderate 3.4% in 2010 to 2014. Sales of food are expected to rise from US$2.7 trillion in 2010 to US$4.6 trillion in 2014.

Whilst China will have a stronger demand which is predicted to average 5.7% in 2011 (Figure 4) along with India which will see 3.2% average yearly demand growth, and in Hong Kong, demand will be up 3.3% over 2009, but will average a weaker 2.3% annually through 2014. In Japan, demand growth is expected to decline each year through 2014.

China is now representing a massive market for food and beverage products, and global firms are reacting accordingly. US-based Yum! Brands had more than 3,400 KFC and Pizza Hut restaurants in China in the first quarter of 2010 as well as US coffee chain Starbucks has 700 outlets in China and plans to open 80 outlets annually.

Soft-drink giants Coca-Cola and PepsiCo are also making major investment decisions in China.

The report stated that it will be same in India where beer, processed foods, fast food and coffee will be strong sellers in the forecast period. Alcohol, particularly spirits and whisky, will also see a rise in sales in the forecast period as lower tariffs and higher disposable incomes facilitate increased aspiration buying.

Whilst on the other hand, consumers will be looking for food products considered to be healthy, including organic foods in mature countries such as Taiwan and Hong Kong.

Japan being the world’s third-largest food market is facing intense market competition and has declined sales growth but however, the ageing of Japan’s population is likely to give a boost to the health food sector.

2.    Fashion and apparel

According to the fashion and apparel findings in the report, the clothing market demand in Asia and Australasia is expected to surpass the demand in Western Europe in 2010; Confidence in the Chinese market among global fashion retailers is high.

Asian players such as South Korea, Japan and Hong Kong also have keen interest in China; Hong Kong will continue to be an important market for international brands to showcase their products to Chinese consumers; the Indian apparel market is relatively untapped across all categories, and moderately priced fast fashion is doing well in Japan despite the generally weak demand growth.

The Asian market for fashion and apparel is expected to perform well and will continue to experience healthy average annual demand growth of about 5% through 2014 surpassing demand in the North America as well as Western Europe (Figure 5)

China, Asia’s biggest fashion and apparel spot, is poised to double demand from an estimated US$44 billion in 2010 to US$90 billion in 2014 according to EIU’s statistics. Many firms such as Gap, Hennes & Mauritz, Burberry, Armani, Zara, Adidas and Nike are establishing massive expansion and entrant plans, with increasing presence in China along with Asian players in other regions such as South Korean player Lotte, Japanese player UNIQLO and Hong Kong based player Espirit expanding its outlets massively.

Hong Kong is estimated to grow steadily from 2011, and will continue to be an important clothing market for international brands. On the other hand, India is much smaller in this sector compared to China and Hong Kong. But yet India is experiencing stronger sales due to interests in western clothing, along with many untapped markets in the country where Zara and Chinese player Yishion opening up outlets.

The statistics showed that India will average almost 8% annual volume growth in 2010 to 2014 whilst Taiwan, smaller yet holding high potential, is expected to post average annual increases of about 4% demand growth from 2010-2014. But Japan will have weaker demand growth averaging 1% in 2010 to 2014. Although the Japanese market is declining, the increase in single women households will continue to be a stronger target audience.

3.    Online retailing

The key findings from the report in this sector are that online commerce will be the next major area for retail growth in Asia along with Japan being ahead of its Asian peers, with the innovative-retailer Rakuten, positioning itself for global expansion; Chinese online retailers are poised for massive growth; and online transactions with mobile phones are expected to rise. E-commerce revenues in Japan are expected to grow at nearly 10% annually through 2015.

Christophe Bezu, the President and Managing Director of Greater China, and Chief e-Commerce Officer of the Adidas Group stated that “China is the most important, meaning it is the most important strategically, now and for the future. India is important, but it’s still not as sizeable as China, Japan and South Korea, so we look at India more over the mid-term. That is not to say India is not a battlefield, but in terms of developing the group globally, China is the key.”

According to the China Internet Network Information Centre, in mid-2010, 33.8% of China’s online population made purchases via the Internet, up from 28.1% in January.  IT research firm Gartner estimated that half a billion mobile transactions took place in Asia in 2009 – this tells that online shopping is growing at a fast pace. In the first half of 2010, internet sales in China reached 60% year-on-year growth, according to the China e-Business Research Centre.

Sixty-eight online transactions were valued at RMB2.25 trillion (US$331 billion), compared with RMB3.6 trillion for all of 2009, whilst Hong Kong and Taiwan is all set for a boom in online retailing. In India, however, it is very low due to literacy levels, access to PC’s, low credit card usage levels as well as increasing concerns over online security.

4.    Fast Moving Consumer Goods

The key findings in the report were that the rise of the middle class in Asia, particularly in China and India, brings along a rise in consumption of household goods, and across Asia, the sector presents great opportunity for FMCG manufacturers whilst in China, domestic manufacturers are stealing a march on multinationals in areas such as detergents, while foreign companies retain dominance in sub-sectors such as cosmetics, and in India, the market is expanding across every sector, but the battle for market share among established global players will be an ongoing one.

According to the report, China and India particularly has brought a rise in household goods consumption, including cleaning products, cosmetics and toiletries. Across Asia, demand for soaps and cleansers jumped  in 2009, with growth of 20% in China over 2008 along with both countries expecting to post healthy year-on-year growth in the forecast period, averaging 12% in China and 9.5% in India.

Findings also stated that Japan and Taiwan will also see a boost in 2010, with 3.6% and 7.2% gains respectively, along with Hong Kong not expected to meet pre-crisis levels in the forecast period, but it will average 4.8% a year through 2014. (Figure 6)

Consultancy Datamonitor predicts that the share of FMCG private labels in Indian retail will grow from 7% to 12% in 2011 to 2012.

The cosmetic market particularly in Hong Kong, Japan and China is increasing with L’Occitane, a France maker, raising US$708 million at its Hong Kong initial public share offering in May 2010 with Japan and China being their two core markets whilst French cosmetics group L’Oreal, on the other hand, has said that China’s market for men’s skincare products rose 27% in 2008 and rose at a rate of 40% in 2010, along with Shiseido, Japan’s biggest cosmetics maker, confirming that its sales in China have doubled over the past five years.

(All key findings and data are extracted from the 2011 Outlook Report produced from the Economist Intelligence Unit with PriceWaterHouseCoopers backed up by many other rich sources. Thanzyl Thajudeen, can be reached on [email protected].)

Contd. on page 14

China being the biggest is also confirmed by US-based FMCG giant Procter & Gamble which will invest at least US$1 billion over the next five years to strengthen its manufacturing and R&D capabilities in the country. However, in India, as the market expands across every sector, the expansion of foreign companies like US-based Kraft continues apace with battles from Unilever and Colgate-Palmolive.

Luca Parodi, the VP and Chief Operating Officer, and Head of the business unit for Asia Pacific at Perfetti Van Melle which is world’s third largest confectionery group stated that ‘Asia Pacific represents around 25% of the group’s revenue. Adding India and the rest of South Asia takes this ratio to one-third. Five years ago the revenue generated was less than half of today’s figure. I’m definitely bullish on Asia and I would expect that growth will continue – even if at a slower pace – over the next five years’.

5.    Luxury brands

The findings in the report were that China is the world’s second largest luxury goods market and is expected to take the top position by 2015, along with consumers in China’s second tier cities have both the buying power and interest in luxury brands but the challenges in China are also considerable in terms of sales staff and competition, along with Indian consumers preferring to shop for luxury brands outside India for the higher-end experience, and the outlook for Japan is not promising, but luxury goods remain an important long term growth market in Taiwan and Japan.

Despite the economic crisis, sales in luxury goods sector increased in 2010. LVMH, the world’s biggest luxury goods group, said its profits soared by 53% in the first half of 2010.  Luxury group Richemont, whose brands include Cartier and Montblanc, saw its sales in Asia rise 51% year-on-year from March to August 2010.

According to EIU statistics, luxury sales in China accounted for US$9.6 billion in 2009 (that is 27.5% of the global market) making China the world’s second largest luxury goods market. By 2015, this figure could reach $14.5 billion, putting China in top place.

Research by the China Reform Commission professor Wang Xiaolu, commissioned by Credit Suisse, found that, on average, urban household income in mainland China was RMB32,150 (US$4,746), or 90% higher than official estimates of RMB16,880.

The China Association of Branding Strategy estimates 250 million people in China can now afford to buy luxury goods.

Damien Dernoncourt, the CEO of John Hardy which is a Bali-based luxury jewellery house now carefully expanding its presence in Asia stated that “When the financial crisis arrived, I decided to focus on our core business, which is women’s jewellery in the US. Now we’re re-developing, finalising a permanent store in Hong Kong, and we are going to open a store in Jakarta. We’re very happy with that because the heart of the company is in Indonesia. We plan to expand slowly because I think there’s not one Asian market. Even in China you can say there are two or three different markets.”

In India, however in 2009, luxury spending in the world’s second most-populous country was less than one-tenth of that in China, according to Bernstein Research whilst the outlook is not promising in Japan either, where consultancy Bain & Company predicts luxury goods sales will shrink 3% in 2010.

According to EIU, luxury goods remains important for the long-term growth market in Taiwan whilst in Hong Kong, the jewellery, watches and gift segment is expected to continue its strong growth in line with the expected number of visitors for 2010 to 2014.

6.    Durable consumer goods and electronics

The key findings in the report produced were that across Asia, the outlook for this sector is positive, with a projected average yearly growth of 6% in which China, India and Hong Kong will drive growth in Asia in the appliance and houseware segment whilst government subsidies for rural households in China to buy household appliances will give a boost in sales.

Sales of A/V equipment are forecast to have particularly strong levels of growth across the region. And mobile phone sales will also present growth opportunities, along with China and India representing huge potential markets for PCs.

According to EIU, sales in China are expected to grow by 12.7% in 2011, those in Hong Kong by 10.1% and India by 9.2%. Compared with China, India and Hong Kong, at an annual average of 4.7% from 2010-2014, growth in Taiwan will be more moderate. In Japan, year-on-year growth is only expected to average about 1% in the forecast period. (Figure 7)

Other regional economies in Asia

According to statistics from EIU, retail sales in Indonesia are expected to grow 4.2% in 2011, encouraged by strong economic growth and increasing levels of disposable income. Malaysia, the most developed of the world’s emerging markets, will see growth of 3.3% in 2011 increasing to 5% in 2012.

Singapore, one of the most affluent nations in Asia, is expected to see retail sales growth move up in coming years but with a drop in 2012, averaging 3.4% from 2010 to 2014. Sales growth in South Korea will average upwards of 2% through 2014. Thailand is expected to post retail sales growth of 4.8% in 2011, and annual growth is expected to reach 5% in 2010-2014. In 2011, retail sales growth is expected to average 10% annually through 2014 (Figure 8)

What are Lankan organisations doing?

Along with all the massive opportunities that is happening around the Asian region, Sri Lanka is nowhere in the list. I have noticed that many local organisations go international only through a public relations exercise. Obsessed and addicted to short term profit motives, starving for many local and global awards, not understanding customer needs at all, not bothered to learn customer and market behavioural patterns, not willing to carry out surveys and other research studies, etc.

Many are known as ‘copy-cats’. There is no room for differentiated marketing – differentiated thinking and action plan. I see big local retailers and consumer goods producers taking off big advertising space and huge publicity from the national. These firms are lacking international marketing skills – do they even know what this actually is? I bet they know the basic meaning of it. Many firms still don’t understand that their strategies are wearing out, and that they are almost all out in terms of sustainability and long term market share.

Lankan organisations need to go out there – go to the five biggest markets, or create strategic partnerships and operational plans to work with them – learn these markets, experience them. I have only seen organisations that are already established in foreign countries setting up branches and operations in Sri Lanka, but I have never seen a strategic step from the big local retailers and consumer goods producers trying and getting into other countries.

If Sri Lanka truly needs to be a ‘wonder of Asia’, there needs to be physical and operational presence across Asian regions – not just PR presence.

Conclusion

As with the statistics and insights adapted from EIU and PwC along with many other sources, it can be concluded that the Asian region is all set for a boom in the retail and consumer goods sector globally. Global companies from different industries that did not set up their operations in Asia 15 years ago are now determined to get in on the action.

Although there are many challenges to be faced such as diversity, infrastructures and changing regulations, the opportunity it brings outweighs the challenges. Demand is growing from inexpensive FMCGs to luxury brands mainly by rising income levels, increasing access to technology such as online retailing through PCs and mobile devices. China will remain the biggest as previously said for the Lankan organisations.