By  on May 5, 2008

Finding the right real estate is a crucial element in developing countries.

The retail importance of emerging markets has taken on even more urgency as more mature markets in Europe and North America show signs of stress amid sputtering economies.

But entering an emerging market, where culture and politics are foreign, can be a tricky business. Finding the right real estate may also be challenging in unfamiliar parts of the world.

CB Richard Ellis surveyed 300 retailers, including Carrefour, Cortefiel, Debenhams, Dolce & Gabbana, Marks & Spencer, Promod, Saks Fifth Avenue and Hugo Boss, for a research study on emerging markets. The firm presented its findings at the recent World Retail Congress in Barcelona, where the subject was a hot topic. Jonathan Riches, director of retail research at CB Richard Ellis, sat down with WWD to discuss the study.

WWD: Why did CB Richard Ellis decide it was time to issue a study on emerging markets?

Jonathan Riches: There's a massive interest in these markets among our international retail clients. Some are looking to enter for the first time, while others want a steer as to where next to expand their operations. Investors now expect retailers to be global to take advantage of the growth such markets offer. We wanted to pool the experiences of such retailers to help our clients know what to expect in terms of each market, as well as providing a current snapshot of which markets are of prime interest.

WWD: Which of your findings surprised you most?

J.R.: We knew the level of interest was large, but we didn't anticipate how much retailers are relying on these markets to generate their future turnover. Forty percent of them now expect sales to grow most from their emerging market stores in the next five years. At the time of the survey, retailers were beginning to see the impact of the credit squeeze on their customers in Western markets and so placed high expectations on the emerging regions.

WWD: How important is real estate when a retailer moves into an emerging market?J.R.: It's crucial. For many retailers, the look and feel of their stores is fundamental to their brand. Four out of five retailers may decide not to enter a market if their preferred format isn't available. Many retailers use the availability of real estate as an early part of their sifting process when deciding which markets to enter.

WWD: How do you determine the value of the real estate?

J.R.: Local expertise is key to securing the right unit at the right price. Our locals work hard to track marketplace renting and investment transactions to ensure what we offer clients is competitive.

WWD: Which emerging markets are the hottest today?

J.R.: India is the most active. Over a quarter of the retailers we spoke with have just opened their first store or are planning their entrance. It's seen as one of the most economically stable emerging markets and has massive potential — less than 5 percent of its retail sales are generated in chain stores.

Ukraine is seen as the next move for retailers trading in Russia, and likewise Malaysia is attractive for retailers who already operate in Singapore. U.S. retailers are looking at Turkey — pointedly, the Trump Towers Istanbul scheme includes a shopping mall.

WWD: Which emerging markets have the least penetration so far?

J.R.: Some retailers have a well-established franchise model and will open anywhere, except in the least politically stable countries such as Pakistan and Zimbabwe. But these markets are ideally located geographically as next steps for retailers expanding beyond the more established emerging markets, such as India and South Africa. As their situation stabilizes, these adjacent markets become attractive.

WWD: Which are the toughest to get into?

J.R.: Countries that limit the level of foreign direct investment are challenging, for example, India and Vietnam. And retailers can find it difficult to make their business models work where import taxes are high, such as Turkey and Brazil.

WWD: In the study, you came up with a so-called 16 GEMs, or Global Emerging Markets, or the hottest emerging markets around the world, which range from the usual suspects of China and Russia to the likes of Vietnam and Argentina. How did you determine this list?J.R.: We focused on a variety of representative countries, split across the continents, that from our experience are of key interest to retailers. All have fast-growing economies and retail spend.

WWD: How is real estate evolving in these markets?

J.R.: There is a rapid growth in modern shopping center space, as developers look to capitalize on retailer demand. In some cases such as India the supply is growing faster than demand, so the centers are looking to differentiate themselves by securing Western department stores as anchors, the use of standout architecture and positioning themselves as leisure destinations.

WWD: Are prices moving up fast?

J.R.: Yes, in the primary locations. Retailers have become much more open to entering a market through secondary cities. Moscow retail rents are now second highest in the world, having grown 30 percent in the last two years alone. This has led retailers to look at other cities in Russia and also across the border in Kiev.

WWD: Is it important to get into the emerging markets early?

J.R.: It depends who you are. Luxury brands tend to enter first, to give their brand recognition time to develop. They might only need one or two flagships in key cities, where wealth is most concentrated. It's easier for them to secure a distribution channel for the relatively low volumes of product they sell. High-volume retailers are more reliant on the large-scale emergence of midmarket consumers, and generally enter at a later stage.

But the consensus is that it's never too late. None of these markets are "saturated" to a degree we see in Western markets. There are benefits in entering a market later than your competition, such as being able to see how the consumers have developed and setting your price point appropriately.

WWD: Which international retailers are moving fastest in emerging markets today?

J.R.: Typically, these are retailers that utilize franchise partners to enable a rapid rollout. For example, Aldo has entered 40 markets in just the last five years. And Mango is now trading in over 90 countries.WWD: Is corruption ever an issue?

J.R.: It is, but in our experience, it's manageable. The bigger problem is an expectation of corruption putting retailers off markets completely. There's a clear message for the authorities if they want to attract more foreign investment — while they might struggle to deal with a corruption culture directly, they can make their markets more attractive by targeting the transparency of their business environments.

WWD: What are the most important issues for a retailer to address when considering a new emerging market?

J.R.: The quality of real estate is key. The presence of potential franchise or joint venture partners is also important — retailers are nervous about engaging new partners. It is appealing when they can extend an existing partner relationship to a new country.

WWD: Which emerging markets are most attractive for clothing retailers today?

J.R.: Ukraine is the hottest market for clothing retailers. It's a big market, almost 50 million people. Consumers there are very fashion-conscious. Its transport infrastructure is rapidly being upgraded in time for the 2012 [Union of European Football Associations] football tournament, which makes it attractive for retailers distributing large volumes of stock around the country.

WWD: What about for luxury retailers?

J.R.: After India, Brazil is most attractive for luxury retailers. It's the last of the BRIC nations [Brazil, Russia, India, China] to benefit from international retailer interest, and consequently there is thought to be significant untapped potential. Western retailers expect their product to have a strong cultural fit with the Brazilian consumer. High-quality real estate is already present, which makes it easier to enter the market. As to immediate changes, these are driven by relaxation of investment regulation. Vietnam will be big in 2009 once retailers are allowed to enter the market without a local partner.

WWD: What is the most common mistake retailers make when entering an emerging market?

J.R.: It's hard to know how to adapt your branding and product in a market. Clothes sizing in Asian markets often takes several seasons to get right. Western branding can either be a hindrance or a benefit depending on the market. Local consumer research is essential.WWD: Do you recommend franchising?

J.R.: It depends. Franchising is not necessarily the most profitable option. But partners enable quick penetration of a new market to build brand impact, often much faster than retailers going alone could manage. Retailers benefit from the insight and knowledge their local partners offer. In many cases retailers retain a level of control — often keeping a hand in branding and the selection of real estate. In fact, half of new franchise contracts signed in emerging markets make provision for when a retailer wishes to buy back their licence, as we now see happening in Russia and China.

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