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NORDIC REBOUND

Scandinavia’s vibrant economy fuels retail growth

By Joel Groover

Scandinavian malls tend to draw their anchors from a short list of dominant Nordic names: H&M, KappAhl, Lindex, and, of course, Ikea. Such predictable rosters make Scandinavia ripe for an invasion of foreign retailers, analysts say.

“I’d say 50 to 60 percent of the tenant mix is the same in all of the shopping centers, especially those that are 15,000 square meters [161,400 square feet] and up,” said Biljana Petrovic, CEO of Centrumutveckling, a Stockholm, Sweden-based development consulting firm. Currently, landlords differentiate their centers through architecture and amenities, Petrovic says. “What else can you compete with in the market? It has to be the design, the atmosphere, how you feel when you walk in.”

But tinkering with the tenant lineup may soon get easier for landlords in Denmark, Finland, Norway and Sweden. The time has arrived, analysts say, for fresh concepts from international retailers to break into these affluent, fast-growing markets.

According to Jones Lang LaSalle’s spring 2006 Nordic City Report, shopping center gross leasable area in Sweden is set to grow by roughly 6.5 million square feet over the next five years. Big-box-dominated retail parks are set to expand by nearly 9 million square feet over that time period. And all of this will occur against the backdrop of an economy with only about 9 million people.

“Retail has been doing very well in Scandinavia for the past decade,” said Agneta Uhrstedt, secretary general of the Stockholm-based Nordic Council of Shopping Centers. “Even when we’ve had downturns, it has marched on. And if you look at econ stats, we’re in the top level, far above England and France.” Uhrstedt is referring to EU statistics that show Denmark’s gross domestic product in the third quarter grew by 4.7 percent, for instance, versus 1.8 percent for Britain and 1.7 percent for France.

In Norway retail sales grew by 3.1 percent in value and 4.2 percent in volume from 2004 to 2005, according to Jones Lang LaSalle. In Denmark, meanwhile, a drop in the jobless rate and a 16 percent jump in real estate prices have pushed consumer confidence to its highest point in 25 years. The economy there is projected to grow by 6.4 percent this year, says ReTeam, a Copenhagen, Denmark-based consulting firm. And though the Finnish economy expanded by 2 percent last year, its retail sector grew more than twice as much, at 4.5 percent, the firm says.

As the spending power of Scandinavian shoppers rises, international retailers are already being lured to the region. Zara, the fashion chain owned by Spain’s Inditex Group now operates a total of 11 stores in Denmark, Finland and Sweden. German supermarket chains Lidl and Aldi have rolled out dozens of Scandinavian stores in recent years, and Britain’s Debenhams department store chain now operates stores in Copenhagen and Stockholm.

As might be expected of a multinational market with some 25 million people, however, the competitive environment in Scandinavia can be complex. Aldi struggled for 10 years in Denmark, for instance, because it had failed to offer popular Danish brands and fresh milk, says Kathrine Heiberg, a ReTeam partner. And the ballyhooed collaboration between French hypermarket giant Carrefour and NorgesGruppen, a Norwegian wholesaler-retailer that controls 34.8 percent of Norway’s grocery market, collapsed in August. One possible lesson to be drawn from these struggles is that lower prices alone may not be enough to change the brand loyalties and shopping habits of affluent Scandinavian consumers, Heiberg observes.

“Sometimes people like to shop for cheaper food, but then, in other situations, they will buy very expensive food,” Heiberg said. “It all depends on their mind-set.” After picking up a few staples from a discount grocer, she says, a Swede might also stop on the street and pay about 80 SKr ($10) for a fresh Thai mango.

When it comes to nonfood items, Heiberg says nearly two-thirds of spending in Scandinavia is driven by desire rather than necessity. “When you buy something — clothes or whatever — usually, you don’t need it,” she said. “You buy it for the fun of it and because you like it.” That means Scandinavians pay extra attention to factors that make one shopping experience more enjoyable than the next. Teen-age girls and young women in Denmark, Norway and Sweden, for example, have responded positively to Bik Bok (one of eight fashion chains owned by Norwegian textile powerhouse Varner-Gruppen), in part because they associate the brand with kindness and respect toward customers. “The managers walk the talk,” Heiberg said. “The employees see them, understand how they think and then do the same.”

Likewise, Zara’s popularity stems not only from the quality and depth of its assortments but also from the sumptuousness of its store environments, says Søren Brogaard, who directs the Copenhagen office of Oslo, Norway-based Steen & Strøm, Scandinavia’s largest shopping center owner. “Zara’s interior, its standard for comfort, for changing rooms, et cetera, is extremely high,” he said. “And people expect that.”

Increasingly, Scandinavians also gravitate toward retailers that offer a high level of personalized service. Indeed, small, city-center shops have gained ground against shopping centers in the past couple of years, says Leif Arne Jensen, a partner in the Oslo office of PricewaterhouseCoopers. But though a large chain might never be able to match the personal touch of, say, a neighborhood baker, some do come close, Heiberg says. Nordic shoppers, for example, love the experience at Natuzzi, an Italian retailer of leather sofas. “You have more than 2 million choices in a store, because each sofa is made exactly for you with the textile or leather or filling you want,” she said. “Isn’t it a nice idea that nobody will have exactly the same sofa as you do? And then they bring it home to you and puff it up so it stands perfectly in your living room.”

But newcomers to the Scandinavian market face some unique logistical challenges, says Juhani Järvi, corporate executive vice president at Helsinki, Finland-based Kesko, a Finnish wholesale-retail conglomerate. Finland’s population of 5.2 million may be affluent, but those people are dispersed over a landmass of about 120,000 square miles. Kesko’s strategy for dealing with the low population density is to operate food stores and do-it-yourself stores in a multiplicity of sizes. “The German do-it-yourself company Bauhaus has entered the Finnish market, and its concept is roughly twice the size of ours,” Järvi said. “To keep the doors open, you need a certain number of customers, and so this larger concept certainly limits the number of stores [Bauhaus] can even think of opening in Finland.”

Precisely because of such dynamics, five or six attempts to launch factory outlets in Sweden have been a “great disaster,” says Magnus Lange, a partner at the Stockholm office of Cushman & Wakefield Healey & Baker who heads the firm’s capital markets group. “If you have a factory outlet too close to Stockholm, you compete with the High Street shops, and that is not accepted by the big brands,” he said. “If you are too far away from the big towns there are no people around.”

National cultures are another consideration. According to ReTeam, Britain’s Vision Express learned the hard way that in Sweden, time is synonymous with quality: In 1999 the retailer closed its two stores there after Swedes showed no interest in having their eyewear prescriptions filled in one hour.

Whichever way it is defined, quality matters in all four Scandinavian countries. “Today much more attention is paid to quality,” said Brogaard. “This is one of those megatrends. You see it in shop design and in people’s way of arranging their housing. You see it in the quality of the leisure they seek, and it is also reflected in their expectations of the shopping center environment.”

And retailers that meet these lofty standards can expect some high-quality returns.