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BETTER RETAIL, BETTER LIVES

A world in transition

By Curt Hazlett

In January the British Broadcasting Corp.’s international Web site asked its African readers a question that would have seemed absurd 10 years ago: Would you rather shop at a traditional open-air market or at your local shopping mall?

Traditional markets had plenty of support. “The bargaining, the pushing and the shouting from sellers trying to catch your attention all add colour to the shopping experience,” wrote a Malawian named Elvis Sukali in a post to the site.

But others came down squarely for malls. “The heat, the sweat, the issue of parking my car, the constant noisy and chaotic atmosphere are some of the problems I have with local markets,” said Abdulqadir Abdulhameed of Nigeria. At a mall “I get to shop in a very nice comfortable environment, taking all my time walking around the stores and making sure my shopping is more fun than stress.”

That Africans are debating the merits of malls is evidence of a remarkable revolution occurring around the world. Modern retailing has burst out of America and Western Europe and is taking root in places where nothing like it has existed before.

Like all revolutions, this one is bringing big changes to people’s lives. In regions where shopping once meant walking to the souk or visiting the neighborhood shopkeeper, people can now browse aisles of prepared foods at a hypermarket and try on brand-name clothing at a mall — usually one containing a cineplex. Shoppers have morphed into consumers, and consuming has become a pastime.

The shift is bringing benefits beyond mere convenience. It has spurred governments to reduce protectionism and improve highways, and perhaps most important, it has been a catalyst for local economies.

“Job opportunities are created as a result of all this, and that’s not just opportunities for salespeople,” said Fiona McTavish, a senior business analyst at IGD, a U.K.-based marketing consultant firm to the global grocery industry. “It’s also managerial jobs. As these modern retail chains become more developed, we’ll see people being trained in international best-practice management styles, and so the opportunities will therefore increase for lots of people.”

Behind the movement is an increase in prosperity around the planet. The Worldwatch Institute, a Washington, D.C., think tank, estimates that some 1.7 billion people — a quarter of the earth’s population — have joined what it calls “the consumer class” and enjoy lifestyles once found only in the world’s most affluent nations. And, perhaps ironically, as their wealth has risen, they are paying less for a broader array of merchandise.

Of course, poverty is still an enormous problem, even in some of the countries whose economies are growing fastest. But in a 2001 report, J. Bradford DeLong, an economics professor at the University of California at Berkeley, wrote that prosperity is generally gaining. “Since 1975 the world has not only become a richer place, but the world’s poor have seen their incomes grow faster than the world’s rich,” DeLong wrote.

Money and the reach of modern communication are the dual fuels of the retail development boom.

“Retail depends on a couple of things that are driven by society as a whole,” said Tom Moseman, senior vice president of Envirosell, a New York City-based market research firm. “For retail to prosper, you have to have a big enough percentage of the population with disposable income. Beyond that, you need communication. Globalization has meant that people who used to be isolated now see new and different things in the world.”

Fadi Farra, a principal in the New York City office of the A.T. Kearney consulting firm, has followed retail’s expansion as the author of Kearney’s annual global retail development index. “Over the past 10 years, modern retail has been expanding at a very fast pace in the emerging markets,” he said. “In China, for instance, there were eight international retailers back in 2003. You now have more than 35.”

Indeed, the ripples of retail’s spread are most visible in China and India, the world’s pre-eminent new economic powers. With a population of more than 1 billion, India had no enclosed shopping centers until 1999, when the Crossroads mall opened to huge crowds in Mumbai, the commercial metropolis formerly called Bombay. Now there are more than 100 malls across the country, and the number is expected to triple by 2007. The Associated Chambers of Commerce and Industry of India projects that the nation’s retail market will triple in size by 2008 and create about 50,000 jobs a year through 2010.

That explosion in the number of malls has coincided with a surge in the confidence of Indian consumers. An ACNielsen survey released in February found that when it comes to their economy, Indians are among the most optimistic people in the world. Some 92 percent say they believe that their job prospects are improving, and 66 percent say they are excited about being able to sample new products and services.

Such excitement has created big crowds of consumers. “There’s been a huge development in the number of shopping malls in large cities, and it’s evident they’ve become social hubs for young people,” said IGD’s McTavish, who has visited new shopping centers in India and China. “They’re changing the ways in which the young urban population socializes.”

“People are evolving,” said Yogesh Samat, CEO of Mumbai’s Inorbit mall, which is owned by Mumbai-based retail developer K Raheja Group and is considered one of India’s premier shopping centers. “Retail is more an entertainment today than ever before, and it will continue to be for a long time.”

It is much the same story in China, where more than 200 malls are open for business and hypermarkets are being built faster than can be tracked. Among the recent entrants is Simon Property Group, which last year became the first American REIT to jump in, announcing that it will construct up to a dozen Wal-Mart-anchored malls in the Shanghai region.

“To see what’s happened there in the last 10 years and see how it has affected people is amazing,” said Stan Laegreid, a principal partner at Seattle-based Callison Architecture who first visited China in 1996 and has helped design shopping centers around the world. “They have absorbed a whole new model of getting goods and services, and they’ve transformed it by making it their own.”

Laegreid offers an illustration from his first Chinese project, the retail component of the Beijing Oriental Plaza. The developers had heard that French retail giant Carrefour planned to enter the market. “They asked me, ‘Do we want a hypermarket in this project?’ I told them repeatedly, talking like the voice of authority, that a hypermarket was not the kind of store they really wanted,” Laegreid said. “Hypermarkets are about big bulk purchases. Everything I understood was that people lived in cramped quarters and had no room for storing things, so they wouldn’t buy big boxes of toilet paper. And it’s hard for them to travel long distances to buy things in bulk, because many of them don’t have cars.”

Carrefour opened a market a year later, and to his surprise, it thrived. “It turns out that someone would come in from a neighboring town or village driving an old truck and buy enough for the whole village — all this bulk stuff,” Laegreid said. “Everyone in the village would contribute and then pick it up afterward.”

Ten years later the adaptation is continuing. Laegreid notes a recent report in The Wall Street Journal that says enterprising Chinese consumers are now creating Web sites where they can compare their shopping needs and form impromptu bulk-purchasing alliances.

“Ten or more people will come together and agree to show up at a place to demand a group discount for things like electronics,” Laegreid said. “Talk about a drastic change: You’ve gone from The Grapes of Wrath, with everyone piling everything on a pickup truck and driving back on the dirt road to the village, to all of a sudden having guerrilla cybershopping that’s beyond anything we have here in the U.S.”

A byproduct of such widespread change is the broadening effect it has on the people themselves, said IGD’s McTavish. On a trip to Shanghai last year, she visited a Carrefour hypermarket with “a huge range of international products” — including a display of Thanksgiving goods. “It was obviously aimed at expatriate customers, but at the same time it was educating the Chinese consumer about different festivals,” she said. “The Chinese consumer is now being exposed to a lot more international cuisines and cultures.”

To Laegreid, the changes demonstrate how alike people are despite their differences. “Once you have an emerging middle class that has disposable income and is looking beyond basic sustenance, people look and act surprisingly similar in their shopping patterns no matter where you go,” he said. “That’s a positive thing, because people then feel they have access to what the rest of the world has.”

The retail development revolution has hardly been confined to Asia. In fact, six of the 10 nations A.T. Kearney considers to be the best retail opportunities are in Eastern Europe: Croatia, Latvia, Russia, Slovakia, Slovenia and Ukraine.

Kearney considers Russia to be the world’s second most promising retail venue, just behind India. It points to a variety of bullish factors: GDP is growing at 7 percent, the retail markets in the cities “remain untapped,” and demand is growing for apparel, electronics goods and do-it-yourself home supplies.

Among the international retailers that have already embraced Russia is Scandinavian furniture giant Ikea, which has five stores there, three of them in Moscow. In fact, Laegreid calls Ikea’s penetration into Russia “a great case study on the impact that retail can have on virtually everything.”

Russian shoppers clearly like what Ikea offers. The megamalls that some of the stores anchor “have some of the biggest footfalls of any European shopping center,” said Charles Slater, deputy head of retail services at Cushman & Wakefield’s Moscow office. Slater stresses that Russia’s retail rush is still in its infancy, for the simple reason that the country is vastly under-retailed. It has just 16 square meters (172 square feet) of retail space for every 1,000 people, he said — less than a tenth of the amount in the European Union. In Moscow proper, which Slater called “a bit of an oasis compared to the regional cities,” the figure rises to about 880 square feet. “So the market has lots of room,” Slater said. “There are lots of hungry consumers out there.”

As retail grows throughout Eastern Europe, it appears to be following the pattern set earlier in Central Europe, where development began in earnest about five years ago, says Jonathan Hallett, Cushman & Wakefield’s managing partner in the Czech Republic. “Today on average we count about 130 square meters of shopping center floor space per thousand population,” he said.

Throughout the region, the action is being driven by the pent-up demand of people who want the goods they have seen elsewhere. “The countries of Central and Eastern Europe are run by the younger generation, people generally under 35 years old,” said Hallett. “They are very aspirational. They work incredibly hard, they have very high ambitions and goals in life, and you’ll often find that kids will earn more money than their parents. There is a very big emerging market.”

Of course, thriving retail economies cannot develop without the support of — or at least without noninterference by — the government. In the nations of Eastern Europe, for instance, development came only when the last vestiges of the old planned economies were wiped away. That was also the case in Brazil, says Envirosell’s Moseman. When Moseman first visited Brazil in the 1980s, it was ravaged by an annual inflation rate of about 1,500 percent. “In that environment, the stores’ stock would have to be piled high for payday, because people would run in and immediately spend all their money,” he said. “Why save it? It’s only going to be worth less tomorrow.”

After a military dictatorship gave up power in 1985, democracy began to emerge, and the seeds of a better economy were planted. A new currency was issued, and inflation was brought down, reaching 6.8 percent last year.

“So people could start to save money and think about the future instead of just tomorrow, and that has changed society,” Moseman said. “Now you have a middle class with people who are thinking into the future and about educating their kids, and all of a sudden the retail world changed. Now you see a very vibrant retail scene in Brazil.”

Of all the world’s regions, sub-Saharan Africa has participated least in the retail revolution. There are exceptions. In South Africa, retail development “has matured almost to the level of the U.K. or France,” says A.T. Kearney’s Farra. In Nigeria there are three malls in Lagos, and a smattering of others either have been built or are planned. But most of the 47 sub-Saharan nations have seen little retail development.

“It’s not happening much in Africa,” said John Strachan, global head of retail for Cushman & Wakefield. “If you head up toward the Arabian countries there’s been plenty, and certainly in South Africa. But there’s no sign of it in places like Kenya, let alone some of the poorer states. That’s not surprising, because, inevitably, development in these new markets must either be driven through government subsidy or by demand from newly affluent people.”

Affluence is hard to come by in most of Africa, and yet there are signs of hope even there. According to the World Bank, the sub-Saharan countries saw average economic growth of 3 percent last year, while a recent Gallup International Association poll of 50,000 Africans found growing optimism: 57 percent of those surveyed said they believe this year will be better than last, and 55 percent expect more prosperity.

All revolutions have their foes, of course. Farra says there has been widespread local opposition to development in many countries.

“As modern retail grows, it pretty much takes mom-and-pops out of the loop, and that is forcing local retailers to consolidate,” he said. “The question really is, what is the impact of retail on emerging economies, and to what extent is modern retail a good thing or a bad thing? Most people I speak to in different markets say it is usually a benefit.”

Among other things, says Farra, retail development forces governments to build better roads and to improve infrastructure.

Inorbit’s Samat agrees, though he also cautions that change takes time in crowded places such as Mumbai. “There is a synchronization issue,” said Samat. “While it is possible for us to build a shopping center in a couple of years, to build large infrastructure required by cities such as ours takes longer.” The government widened the road in front of Inorbit to 10 lanes, for example, to accommodate shoppers. “But once you go about four kilometers away, it narrows, and you have congestion issues again,” he said. “My sense is that the infrastructure is coming, but it’s only halfway done.”

Modern retailing hinges on the ability to store and transport goods, which in turn depends on good roads, sufficient warehousing and efficient logistics. Many emerging markets, including India and China, leave much to be desired on those counts. In India, for instance, some 40 percent of the country’s perishable food spoils in transit because of a lack of proper refrigeration, according to A.T. Kearney.

“The development of modern retailing depends on the supply chain being efficient, so that there needs to be investment in the infrastructure,” said IGD’s McTavish. Once that investment is made, she says, residents share in the benefits.

To Farra, perhaps the most direct benefit of retail’s arrival is that it spurs competition. “For most consumers, it usually is an advantage when retailers come in, in that it lowers prices,” he said. “Another advantage is that it allows the economy to open up gradually to global vendors, so you not only have products coming in — the P&Gs and Unilevers of the world — but the creation of local jobs.”

Will the retail revolution bring even more change to the world in coming years? Barring a huge economic reversal, it seems likely.

“Once retailing has entered a market, it sets a whole standard of expectations,” said Laegreid. “It takes on a life of its own. Once shoppers see what the offerings are, they expect it. That’s their standard now. They’re not going back.”

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