Its recent history of economic growth and political stability helped Chile move up a notch to first place among developing markets in A.T. Kearney’s 2014 Global Retail Development Index.
This story first appeared in the June 16, 2014 issue of WWD. Subscribe Today.
Chile displaced its South American neighbor Brazil, which fell to fifth place from first last year, as the nation’s GDP grew 4.4 percent last year and retail growth, already strong, continued unabated.
China moved to second place in the ranking from fourth last year, Uruguay stayed put in the third slot and the United Arab Emirates moved up a notch to the fourth position.
Rounding out the top 10 on this year’s GRDI, which weighs economic opportunity against risk and considers degrees of market saturation, were Armenia, Georgia, Kuwait, Malaysia and Kazakhstan. Georgia, Kuwait and Kazakhstan gained one notch each, while Armenia and Malaysia improved their standings by four slots.
Noteworthy among markets in the rankings between 11 and 20 were Turkey, down five spots; Russia, up 11; Panama, up eight, and India, down six.
Nigeria, the most populous country in Africa with 177 million people, vaulted to 19th place in the annual rankings, the first nation in sub-Saharan Africa to qualify for the top 20 since South Africa dropped from the rankings in 2012 based on its maturity.
Various countries in the Middle East and North Africa have dropped from the rankings in the aftermath of the Arab Spring that began in late 2010. Egypt peaked in the 12th spot in 2011, but fell off the list the following year because of political and economic instability.
However, Hana Ben-Shabat, coauthor of the study and a partner in A.T. Kearney’s New York office, pointed out that countries like the United Arab Emirates, Kuwait, Saudi Arabia (number 16) and Oman (number 17) have remained attractive because of young, upwardly mobile consumer bases and their relatively smooth adjustments to more formal, modern shopping formats.
“People might not be going to Egypt, but they don’t see the risk from adjacent countries spreading to places like the U.A.E.,” Ben-Shabat said. “In fact, retailers are actively looking for franchise partners and the competition in some of these markets is so heated that prospective partners can be fairly choosy.”
She said that the last two years have seen an acceleration of major retailers moving into the developing markets highlighted in the study, including Inditex’s placement of Zara Home in Uruguay and Forever 21’s expansion into Brazil.
“As these markets develop, as their middle classes get larger and more affluent, you start to see a level of discretionary income and ultimately infrastructure development that lend themselves to more than just grocery stores,” she said.
Because of their close proximity to their neighbors and relatively smaller populations, European retailers were always open to expansion — “Zara couldn’t be Zara if it stayed in Spain and H&M couldn’t be H&M if it stayed in Sweden,” Ben-Shabat remarked — but retailers in the U.S. had been more averse to global expansion.
“Since [the financial crisis of] 2008, American retailers realize they can’t just open stores in the U.S. if they want substantial growth,” Ben-Shabat said. “It became quite clear that global expansion wasn’t just a nice thing, but it was a necessity.”
While the GRDI is focused on the expansion dynamics of developing markets, the A.T. Kearney team weighs market entries against market departures, and this year’s study found the largest ratio of entrances to exits.
“Some people go into a market and just have a disaster,” she said, “but we see now that they’re finally learning from their mistakes and those of their competitors. And they have more tools in their arsenals to reduce risks.”
One of the primary weapons for risk mitigation, not surprisingly, is e-commerce, which, the Kearney official pointed out, allows stores to go through some of the potential growing pains of market entry before opening any doors.
“Retailers are finally getting it,” she said. “They can get a sense of the market and start shipping into emerging markets before they open big stores and back them with large investments. They’re very properly using e-commerce to learn and assess markets before they open them.”
Kearney’s researchers have been keeping a close eye on sub-Saharan Africa for quite some time and earlier this year published the consulting firm’s first African Retail Development Index, a document that weighed the continent’s large population and pockets of growth and stability against the absence of economic opportunity, stable governments and infrastructure in others.
In addition to Nigeria’s appearance on the GRDI’s top 20 this year, Botswana came in at number 26 and Namibia at number 29.
“We see companies already starting to look into these markets,” Ben-Shabat said. “At this point, it’s the grocers, and you’ll see very quickly that sub-Saharan Africa will become like China was 10 or 15 years ago.”
That development will include the entry of consumer products goods companies, often piggy-backing on food retail formats, and, if supported by economic development, retailers of discretionary goods like fashion products.
While many fashion companies will observe first and invest later, the exception, somewhat counter-intuitively, could be the purveyors of luxury goods.
“These companies always seem to identify a layer of the population that can support luxury goods and open boutiques in, for instance, high-end hotels. Later, as in China and more recently Vietnam, a more formal marketplace and infrastructure would develop and they’d go into the luxury malls on their own,” Ben-Shabat said.