Cautious consumers put the brakes on global retail sales growth, but profits increase

• More than one-third of world’s largest retailers suffer declining sales
• Fewer retailers in the red; profitability shows marked improvement

More than one-third of the world’s 250 largest retailers suffered a decline in sales in fiscal year 2009 (encompasses June 2009 through June 2010) as the global economic downturn led to more cautious consumer behaviour and a drying-up of available credit.

However, the 2011 Global Powers of Retailing report released last week by Deloitte Touche Tohmatsu Limited (DTTL), in conjunction with STORES Media, reveals that the efforts of many companies to cut costs and adjust their inventory levels have paid off, with net profit across the top 250 retailers increasing from 2.4 percent in 2008 to 3.1 percent in 2009.

While approximately one-third of the 188 retailers that disclosed their bottom-line results saw their net profit decline in 2009, this is a significant improvement compared with 2008, when two-thirds experienced falling profits. In 2009, only 13 companies operated at a loss — less than half the number of unprofitable companies in 2008. Profitability improved in every product sector, with fashion retailers showing a particularly strong performance, increasing their profit margin from 4.1 percent to 7.6 percent against overall sales growth of just 0.7 percent. Even the bottom line for the historically low margin Fast Moving Consumer Goods sector improved, increasing 0.3 percent year-on-year.

Every region suffered a decline in sales growth, but all regions saw an increase in profitability, with the exception of Africa and the Middle East. The biggest increase was in Latin America, with the profit margin increasing from 1.4 percent to 3.3 percent. Retailers in the U.S. saw profitability increase by slightly more than 1 percent to 3.4 percent in fiscal 2009, while those in the UK had the highest profit margin of any country at 3.5 percent (up from 2.5 percent in 2008) and also one of the highest growth rates (7.1 percent).

Dr. Ira Kalish, Director of Consumer Business for Deloitte Research, part of Deloitte Services LP in the United States, said: “These figures demonstrate the efforts of retailers around the world to manage the bottom line. Just a year ago we reported falling profits for retailers as consumers cut back, and bloated inventories led to deep discounting. Retailers have acted quickly to identify where savings were possible and are reaping the benefits. It will be harder for retailers to continue to boost profits through these measures, and instead they will be hoping economic recovery can put sales growth back on track.

“However, as 2011 begins, retailers worry about inadequate demand in developed countries and overheating in emerging countries. They also face concerns about exchange rate volatility, changing fiscal policy and the sustainability of recovery in some markets,” he said.

The composition of the Top 10 retailers in the world remained the same in fiscal 2009. However, sales declined for four top 10 retailers – Carrefour S.A., Metro AG, Costco Wholesale Corporation (Costco), and The Home Depot, Inc. (Home Depot). Another three saw sales grow 1 percent or less. Tesco plc and hard discounters Schwarz Unternehmens Treuhand KG (Schwarz) and Aldi GmbH & Co. (Aldi) were the only companies among the Top 10 whose sales growth outpaced the Top 250 average. (A table of the Top 10 is included in the About the Report section below.)

A new age of retail globalisation?

For the first time since DTTL began tracking the level of globalisation among the Global Powers of Retailing in 2005, foreign operations as a share of Top 250 retail sales declined. However, this was a small drop — from 22.9 percent in 2008 to 22.2 percent in 2009 — and it comes in a year in which 38 retailers began operations in a new country for the first time, with a combined total of 57 new market entries involving 42 countries.

Said Kalish, “As success in developed markets becomes more challenging, the emerging world becomes more compelling. The experiences of some global players have taught the industry valuable lessons, most notably that it is not sufficient simply to enter a promising market; there has to be a strategy. It is also key that global retailers make the most of local knowledge: understanding local tastes and culture, using mostly local managerial talent, and developing local relationships.

“Retailers embarking on a period of globalisation should be prepared to make significant investments for the long-term, helping to convince local suppliers and vendors that the retailer is there to stay and build a following among consumers. They should also not be afraid to make mistakes, sometimes big ones. There are probably more stories of global retailers making initial mistakes along the way to success than there are stories of instant success.

“For the better part of two decades, retail pundits have been predicting the globalisation of the industry, but now they might be right. While it will never be easy, many more companies are now ready to take the plunge. We may be on the precipice of a new age of retail globalisation,” he said.