government-trade
government-trade

Merchants See More Tough Times Ahead

Retailers delivered a stark assessment of the challenges bedeviling merchants around the world as executives met here last week at the World Retail Congress.

View Slideshow

BARCELONA — Retailers delivered a stark assessment of the challenges bedeviling merchants around the world as executives met here last week at the World Retail Congress.

With the fallout of the subprime mortgage crisis wreaking havoc on financial markets and consumers pinched by rising inflation, retailers said they’ve yet to see the light at the end of the tunnel. Most, in fact, predicted long struggles and great change — including further consolidation and failures — before the situation improves.

“This is as tough as I’ve known it,” said Sir Philip Green, the owner of Britain’s Arcadia group, who noted sales in April have been worse than expected. “It’s ugly. I can’t say when it will improve.”

Myron “Mike” Ullman 3rd, chairman and chief executive officer of J.C. Penny Co. Inc., echoed that assessment.

“I’m not optimistic that it will improve anytime soon,” he said. “People haven’t seen the bottom. I think it’s not going to get better this year. The customer is very concerned about their net worth. These conditions are not good for anybody.”

In a keynote address at the three-day convention, Jose-Luis Duran, Carrefour ceo, said: “We are facing the most significant challenges of a generation. This is a tough environment. Never before has the industry faced so many challenges at the same time. There is no time for business as usual.”

Despite the grim mood, retailers from around the world who attended the second annual congress said the tough environment would create opportunities for savvy executives, from stealing market share from weaker competitors at home to expanding internationally into hot markets like China and India.

“We are blessed and cursed to live in interesting times,” said Paul Charron, former chairman and ceo of Liz Claiborne Inc. “Today, there is downright pessimism and even fear. It is a stretch to think that American consumers will lead us back to some sort of normalcy by increasing spending at retail.”

Charron added: “There will be notable losers — retailers that have lost their way. There is no place to hide today. We are in for rough weather ahead.”

This story first appeared in the April 15, 2008 issue of WWD.  Subscribe Today.

Capitalizing on emerging markets was offered as a means to offset difficulty at home with more robust growth elsewhere. With retail growth in China, Russia and India rising in the high double digits annually, many executives said those markets would continue to deliver sparkling growth for years to come.

“There is a lack of brands and retail models [in the emerging markets],” said William Fung, group managing director of Li & Fung, one of China’s biggest trading firms.

Fung explained that most Chinese are just discovering the “mystery of branding” and that multinational companies have profited in bringing managed supply chains and service to the local marketplace.

“These markets are still very fragmented,” Fung said in reference to the so-called BRIC nations of Brazil, Russia, India and China. “The top 100 retailers in China only account for 10 percent of total retail sales.”

Gordon Campbell, ceo of SPAR International, the food retailer, said, “When you go to Shanghai, Mumbai and Moscow, you feel the drive. They are countries on the move.”

But tapping the potential is not as easy as the numbers suggest, executives warned. Understanding local idiosyncrasies — from shopping habits to local real estate practices — is a major challenge.

Retailers also lauded the long-term potential of India, which is considering legislation that will allow foreign retailers to operate in the populous market, whose retail industry is expected to double in size in less than a decade.

“India is ready for the retail experience,” said Rajan Bharti Mittal, managing director of Bharti Enterprises, which has formed a venture with Wal-Mart Stores Inc. to open stores in India.

Bharti Mittal said he expects to generate $10 billion in sales through his Wal-Mart stores within the next five years, underscoring the scale of opportunity India could offer.

A session chaired by Gilbert Harrison, chairman of investment banking firm Financo Inc., addressed how the current bear market would influence private equity and deal making.

While Harrison said the housing decline and credit tightening would represent a “marked departure” from the wild ride of the past couple of years, he added, “deals are not stopping, but they are slowing and changing.”

He said valuations were falling and that the average debt-EBITA ratio for leveraged buyouts in 2007 of 6.2x should fall to ratios closer to 4.0x.

“But more importantly, the equity ratio required to do a deal will increase,” Harrison said.

Harrison also pointed out that buying in the U.S. by foreign players could rise, particularly as the value of the dollar continues to slide against other foreign currencies like the euro.

Jon Asgeir Jóhannesson, ceo of Iceland’s Baugur Group, which owns 8.5 percent of Saks Fifth Avenue, said he saw “a lot of interesting value around. We are looking for concepts that can travel across countries.”

He added that department stores were interesting. “They will be stronger,” said Jóhannesson, who added that Baugur was not looking to increase its stake in Saks for now. “People have less time to shop.”

One of the liveliest sessions involved Green and Millard “Mickey” Drexler, chairman and ceo of J. Crew, in a panel discussion that touched on their lifelong passion for retail.

Both emphasized the importance of innovation and knowing your customers — especially in hard times. “You cannot learn how to be a merchant,” Green said. “It is instinct.”

As a counterpoint to the potential of the business of retail, another congress session explored sustainability and social responsibility in the changing world.

While executives from Ian Cheshire of Britain’s Kingfisher to Alan Hassenfeld of Hasbro Inc. detailed their growing efforts to improve environmental commitments, Gerd Leipold, international executive director of Greenpeace, said more needs to be done.

“Greenhouse gases are still growing strongly,” Leipold said. “Forests are reducing. It’s no longer about being an optimist or a pessimist. The fact is that we are getting further and further away from sustainability.”

He urged retail executives to exert “genuine” leadership in accelerating their efforts to help create a more green-friendly business model.

At a black-tie dinner, the congress doled out honors to a variety of retailers. Among notable awards, Tesco was named retailer of the year, Hennes & Mauritz was selected as multimarket retailer of the year and Ullman was given the outstanding leader of the year title.

Green, Drexler, Amancio Ortega, who founded Spain’s Inditex, and B.S. Nagesh, who runs Shoppers’ Stop in India, were inducted into the congress’ Hall of Fame.

View Slideshow
load comments

ADD A COMMENT

Sign in using your Facebook or Twitter account, or simply type your comment below as a guest by entering your email and name. Your email address will not be shared. Please note that WWD reserves the right to remove profane, distasteful or otherwise inappropriate language.
blog comments powered by Disqus