Stores 2008 Global Powers of Retailing - (Page 45) 2008 global powers of retailing retailers to avoid the mass market altogether. Instead, focusing on niche opportunities along the so-called long tail can be quite lucrative. But what is the long tail? Consider how consumer income in any country is distributed. It resembles a bell-shaped curve in what statisticians call a normal distribution. The middle of this bell is the mass market where the greatest share of income exists and where most retailers compete. The ends of the tail are smaller, represented a smaller share of income. Yet these ends have often been ignored by retailers intent on reaping the economies of scale associated with the mass market in the middle. This is starting to change. As a result of improvements in information technology, it is now possible to operate a portfolio of small, targeted businesses just as efficiently as one large business. Hence, retailers seeking growth can invest in new businesses along the long tail rather than expanding existing mass market formats. Consider a food retailer operating supermarkets aimed at a mass market. Rather than roll out more supermarkets to an already over-saturated and highly competitive market, this retailer might develop a group of new formats aimed at various consumer niches. These could include affluent consumers interested in organics or non-GMO foods, low income consumers focused on inexpensive prepared meals, or time rich consumers seeking the ambience and excitement of a street market type shopping experience. In the near future, such niche investments are likely to lead to more fragmentation of consumer experiences in retailing. see more news emanating from this country, especially as global retailers and Indian conglomerates seek out one another for joint ventures in order to build on diverse talents. 6. Retail investment in services As countries grow and achieve economic affluence, consumer spending on goods as a share of GDP tends to decline while spending on services grows disproportionately. This has certainly been the case in developed nations such as the EU, Japan, and the US. In part this is due to the higher rate of inflation in services. That, in turn, is due to the lower productivity growth in service industries. The relative decline in the prices of goods leaves consumers with comparatively more cash to spend on services. In saturated, mature retail markets with relatively slow growth, the fact that consumer spending on services is rising represents both a challenge and an opportunity. Retailers that can successfully sell services related to their core merchandise or simply based on the strength of their brand names, can increase their growth through expanded share of wallet. Some retailers are already doing this with considerable success. Consider Best Buy, the US-based electronics retailer. It has developed a service business called Geek Squad that offers after-market servicing for complicated home electronics products that are often confusing to untrained consumers. Tesco, the UK food retailer, offers a wide range of financial and online services. Wal-Mart, the world’s largest retailer, is rapidly increasing its involvement in health services. Other opportunities will emerge. In part, demographics will play a role in driving this trend. As people move from young adulthood to middle age, they tend to spend less on goods and more on services, particularly those related to finance and health. Successful retailers will take advantage of this by using their existing brand equity to build new markets. 5. The fight to plant the flag in India India has become the next big thing for the world’s leading retailers. On the surface, this seems to represent the triumph of hope over experience. After all, India remains relatively closed to foreign retail investment, its business environment is riddled with obstacles (poor infrastructure, corruption, heavy-handed regulations), and its rapid economic growth is so new that it is not clear whether it can be sustained. Despite all of this, retailers have been smitten. India is, after all, a country with more than a billion people whose leaders are dragging it kicking and screaming toward a true market economy. In the process, they have succeeded in generating rapid growth, especially in consumer spending, and in stimulating a degree of optimism not seen in India since independence. Moreover, the leaders of India’s huge business conglomerates have turned their attention to retailing. Companies in such disparate realms as energy, telecoms, and manufacturing are recycling their excess cash flow into creating a modern retailing infrastructure. For the world’s leading retailers, India is a gamble, but one worth taking. Wal-Mart is the first large retailer to take the plunge, but many others are expected to follow. Few of them, in all likelihood, expect instant success. Instead, investing in India is viewed as a long-term proposition, one that can enable a foot in the door and the advantage of first-mover status. Expect to www.deloitte.com/consumerbusiness 7. Emerging market investment in developed retailers One of the notable aspects of the global economy lately has been the huge surpluses of key emerging countries. China, for example, has accumulated $1.4 trillion of foreign currency reserves. Russia and Middle Eastern oil exporters have, likewise, accumulated vast reserves. In the past, such funds were normally invested in low-yielding government securities. Increasingly, however, countries are diverting some of these reserves into investment funds that purchase Western companies or sizable interests in those companies. These “sovereign wealth funds,” or SWFs, are becoming key players in global capital markets. They offer emerging country governments the opportunity to invest in rich country businesses. The global retailing industry has already been targeted by these funds and more are likely to follow. Not only may such funds seek to acquire retail companies, but in some cases they may invest in the development of startup retailers as well. STORES / January 2008 G45 http://www.deloitte.com/consumerbusiness
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