This story first appeared in the June 23, 2010 issue of WWD. Subscribe Today.

China returned to the top spot for the first time in eight years while emerging markets in the Middle East and North Africa dominated consulting firm A.T. Kearney’s ninth annual Global Retail Development Index of markets seen as ripe for retail expansion.

China, third in the 2009 study, leapfrogged over India, which fell to third from first, and Russia, down to 10th from second, in this year’s study, while Kuwait, not included in last year’s rankings, moved into the second spot.

Hana Ben-Shabat, co-leader of the study and a partner at Kearney, told WWD that China’s move over the weekend, following the study’s preparation, to allow the yuan to float will mean “the purchasing power of the Chinese consumer is really going to increase. If you’re sourcing there, prices are going to go up, but selling to the Chinese is going to become easier.”

The study measured global expansion opportunities in 30 markets based on 25 different criteria, including retail saturation levels, economic and political risk, retail market attractiveness and the spread between rising gross domestic product and retail growth.

While China rose based on its sheer size and the growing comfort level of its citizenry with Western-style retail formats, India fell back as expansion into the subcontinent by foreign retailers and a dearth of desirable, affordable real estate “pushed the country’s retail market closer to maturity,” A.T. Kearney said.

“Retail executives have learned again that core markets like the United States and Europe are not the powerful engines of growth they would like,” Ben-Shabat said. “Reliance on developing countries for future growth is no longer a ‘nice-to-have,’ but a necessity. Establishing operations in a portfolio of countries both small and large offers the best path to global success for retailers.”

In addition to Kuwait, seven nations in the MENA region placed within the top 21: Saudi Arabia (4), United Arab Emirates (7), Tunisia (11), Egypt (13), Morocco (15), Turkey (18) and Algeria (21). Kearney noted that retail sales are rising, aided by the region’s ample oil supply and, in some markets, fiscal stimuli.

“Local retailers have begun expanding within the region and international names are rushing in as well, many through partnerships using a franchise model due to government regulations,” said Mike Moriarty, the Kearney partner who co-led the study. “Some local partners have also created retail business models by franchising numerous international brands across the region.”

Kearney also interviewed 60 retail executives as part of the study. Among the findings of those discussions were:

• Nearly 80 percent of those polled included China, India, Brazil and Russia among their target markets for expansion.

• Ninety-two percent of retailers in emerging markets hope to expand beyond their national base, with nearly 30 percent eyeing a developed country.

• Whereas retailers were looking for expansion efforts to turn a profit in five to seven years in 2005, their expectations now are for profitability within three years of new-market entry.

Ben-Shabat noted the expectations for a faster return were in some cases based on false optimism that has since been tempered. “Several said, ‘We underestimated the time and money it would take to establish ourselves in a new market,’” she stated. “For some, there’s also simply more pressure to generate results after a couple of difficult years.”

She added that brands entering China no longer have to do so with domestic partners, while India and many of the other markets studied require such relationships. A model that has succeeded for many is working with local firms that are set up to represent a number of global brands and have the operational capabilities, real estate knowledge and personnel to facilitate market entry.

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