RETAIL OPERATIONS INDEX - Arcadis58AB33FB-94AD-4CB2-ACF5... · world making it impossible to adopt a single solution. ... video and bookstores. ... The Retail Operations Index offers

RETAIL OPERATIONS INDEX: WHERE IN THE WORLD COULD YOUR RETAIL PORTFOLIO THRIVE?

Understanding how to flex and adapt your branch portfolio is a critical success factor for modern retailers. Relying on customer base,

brand strength, and market confidence alone will not guarantee success. Retailers need to be empowered with data and insight that not only takes these elements into consideration but also reviews the varying factors that impact portfolio success. This will not only ensure risks are successfully mitigated and managed, but will also lead to higher returns from retail investment.

The Arcadis Retail Operations Index offers insight into which locations are most and least difficult to execute, scale and flex large retail programs based on an in-depth analysis of the global retail market over 50 countries.

Looking at market demands, economic climate, quality of infrastructure, and ease of establishment and operation, we have identified both the key challenges and the opportunities faced by the world’s largest retailers when opting to expand or reshape their store portfolios.

ARCADIS • RETAIL OPERATIONS INDEX

HEADLINES AT A GLANCE

Brazil has a growing market demand due

to a rapidly growing middle class and increased foreign interest. However, its low position in the index is reflective of the challenges of an over-regulated labor market, low degree of trade transparency, high inflation and currency depreciation.

Despite being the largest consumer market in the world,

China’s significant barriers to entry, including strict regulations, economic slowdown and a fragmented market structure, have led to a lower rating on our attractiveness scale.

Hong Kong tops the ranking as the easiest market for retailers to enter.

In spite of this, the latest market insight suggests that increasing operating overheads such as high property costs and softening sales will likely have an impact on local performance in 2015.

Market demand in the US

strengthens with interesting polarisation in certain retail categories and specific locations.

The UAE ranks highly

overall with both a strong quality of infrastructure and a robust economic environment.

The majority of the Western

European countries are concentrated in the top half of the index, indicating that the well-established retail markets continue to present sound opportunities for optimizing store performance.

ARCADIS • RETAIL OPERATIONS INDEX 2CONTENTS →← START I

CONTENTS

6OUR RESEARCH


4THE REVOLUTION OF THE RETAIL STORE

ASIA12 THE USA21 THE MIDDLE EAST24

WHAT CAN RETAILERS DO TO ENSURE OPTIMUM RESULTS FROM THEIR STORE PORTFOLIOS ACROSS THE GLOBE?25

EUROPE17 LATINAMERICA22

CONTACT US28

3CONTENTS →← START I

THE REVOLUTION OF THE RETAIL STOREEvolution is part of the fabric of life within the retail world. However, the retail store environment has seen little change over the years – that is, until the birth of the digital world and, more importantly, the explosion of mobile technology and social media that has pushed evolution into revolution.

The net result is that retailers have had to cope with and respond to both the technology enabling change and to the consumers who are dictating it. The challenge is then compounded by cultural and developmental differences across the world making it impossible to adopt a single solution.

The key to keeping pace with this revolution is adaptability, flexibility and an absolute focus on really knowing your consumer.

THE IMPACT OF DIGITALneed for lower cost, flexible, reusable store formats that can be relocated to suit a rapidly changing environment. This is already being played out through the explosion of the ‘Pop-Up’ store environment.

Retailers with a heavy focus on services, such as retail banks and mobile phone operators, will be equally challenged as their own services continue to trend towards increasing online transactions. The number of bricks-and-mortar touch points for these types of retailers are likely to reduce and be focused on premium locations and premium customer experiences. They will offer higher levels of service to their VIP customers to generate the returns required from such premium locations.

Online retail revenues are expected to double over the next four years, led by China and the US. Asia has overtaken the USA in online sales for the first time and Europe and emerging markets are growing exponentially. Retail property portfolios are expected to shrink by 30% over the next 10 years as retailers are under more pressure to maintain performance in their bricks-and-mortar assets. So how will this affect portfolios in the future?

This depends heavily on the type of retailer you are and the multi-channel strategy adopted. But we can certainly expect a heavier emphasis on flagships for brand building and showcasing products, supported by a variety of flexible store formats driving core sales through localized access for the consumer. There will be a greater



OMNI-CHANNEL IS CRITICALThere is a race on to find the optimal omni-channel solution but it would fair to say that there is no single model for success. Determining exactly how to provide customers with the most efficient seamless balance between in-store, online and mobile shopping experiences remains one of the biggest challenges for most retailers.

Perhaps one of the best pioneering examples of successful omni-channel retailing could be found with Apple where the consumer experience is absolutely consistent. Even their physical store networks have a blend of high impact city flagships surrounded by an ecosystem of smaller distributor stores and kiosks providing tremendous flexibility to shape their retail real estate portfolio quickly and efficiently.

CONVENIENCE IS KINGIn this rapidly changing environment, the consumer is demanding convenience throughout the experience. Now, more than ever before, convenience is truly a critical success factor for retailers.

Retail stores and branches will need to be multi-functional and accessible as the brand experience touch-point for consumers in the real world. The seeds of the revolution were planted many years ago, perhaps as long as three decades ago when catalogue and mail order companies pioneered what has become ‘Click-and-Collect’. In a pre-digital age, this provided catalogue customers with the ability to place orders and then collect in store at their convenience.

Most major retailers are adapting their existing store formats to incorporate a form of ‘Click-and-Collect’ allowing their online shoppers to not only collect goods at a convenient time and location, but also to handle returns, resolve customer service issues and make cash payments.

Although “Click-and-Collect” is less common in Asia where consumers are not as likely to drive to stores, it is becoming an increasingly popular retail concept in the Americas and Europe where the car still dominates. Many have increased sales by embracing an adapted “Click-and-Collect” concept. The UK department store John Lewis, for example, has leveraged its sister company, supermarket Waitrose, adding almost 320 collection points across the region. Reducing the necessity for customers to make longer journeys into major towns has made the experience more convenient and attractive to consumers. Changes such as this can result in an increase of up to 20% in online sales.

Online retailers are also seeing a growing need to adapt. When Amazon opened its first store early in 2014 in the US, its entry into the ‘real world’ bricks-and-mortar environment was an irony not lost on many. Amazon had pioneered the demise of many high street retailers, particularly music, video and bookstores. But the core intention was to provide a physical touch-point with the consumer, a place to experience the brand physically, and to pick up and drop off goods; proof to many that even the digital world requires real world stores in order to satisfy the consumer.

THE FLEXIBLE PORTFOLIOMost retailers have developed a toolkit of formats ranging from flagships and brand centers to kiosks and corners. Modifying an existing portfolio of formats requires a ground-up approach incorporating the needs of the chosen multi-channel strategy, demographic and customer research, and detailed local knowledge in each market.

The virtual modelling of this data using different formats in various densities and locations will generate scenarios upon which these formats can be fine-tuned, together with real performance metrics from stores.

The variety of formats needed will differ significantly between retailers depending on many factors including range and geography. But key to the formats is the ability to rapidly change and flex in response to performance and opportunity.

The rapid depreciation of the capital cost of store developments has also become a priority, pressured further by a need to be opportunistic and an ability to respond to higher property costs. These factors all point to an increasing demand for a highly cost efficient and rapidly deployable arsenal of store formats at the disposable of retail executives.



OUR RESEARCHWhen determining how to develop and optimize store portfolio for maximum performance, retailers need to consider a number of factors. Knowing where to locate stores, the size and volume of the footprint needed, the right channel mix and the local demographics are all key components to getting the balance right. The use of a number of different store formats which can be applied to different locations types and demographics can then provide a framework upon which to move forward.

The Retail Operations Index offers some insight into how easy or difficult it is for retailers to scale or flex their portfolios in response to changing market conditions by considering the following five key factors:

3. Market demand - level of disposable income, domestic market size, passenger cars and competitive environment. CLICK HERE TO VIEW RANKINGS ►

4. Economic environment - labor costs, inflation and availability of technologies. CLICK HERE TO VIEW RANKINGS ►

5. Ease of operating - prevalence of foreign ownership, trade freedom, labor freedom, logistics performance and freedom from corruption. CLICK HERE TO VIEW RANKINGS ►

OVERALL TOTAL RANKINGS

CLICK HERE TO VIEW OVERALL RANKINGS ►

1. Infrastructure - quality of transportation, such as ports, roads and rail links. CLICK HERE TO VIEW RANKINGS ►

2. Ease of getting up-and-running - quality and quantity of local suppliers, rules on Foreign Direct Investment (FDI) and business freedom. CLICK HERE TO VIEW RANKINGS ►











INFRASTRUCTURE RANKINGS VIEW OVERALL TOTAL RANKINGS ►











EASE OF GETTING UP-AND-RUNNING RANKINGS VIEW OVERALL TOTAL RANKINGS ►











MARKET DEMAND RANKINGS VIEW OVERALL TOTAL RANKINGS ►











ECONOMIC ENVIRONMENT RANKINGS VIEW OVERALL TOTAL RANKINGS ►











EASE OF OPERATING RANKINGS VIEW OVERALL TOTAL RANKINGS ►



ASIAAsian countries feature at all points across the index, illustrating the differing opportunities and markets, with Hong Kong sitting at the top of the ranking and Indonesia, India and Pakistan occupying the bottom.

HONG KONG Hong Kong in the top spot means that it offers the best conditions in the world for retailers to operate within. Hong Kong provides some of the most advanced infrastructure in the world through world-class air and seaports, state of the art telecommunications and efficient local and regional transportation. It also benefits from stable and efficient business operating conditions and a strong economic climate supported by a high influx of Chinese mainland visitors taking advantage of tourism and access to international and luxury brands at tax free prices. As a result, most international brands have established multiple high-end flagship stores here.

Despite the ranking, retailers should exercise caution in 2015. Economists predict slow growth in retail sales due to a reduction in cross-border tourist numbers and a general slowdown in China. This is already evident as we saw a steady decline in sales volume in 2014 compared to the previous year. In addition, rents have continued to rise to unsustainable levels making portfolio flexibility more important than ever.

Hong Kong key stats:

GDP: $291bn (IMF Oct 2014)

Real GDP growth: 2.5% (IMF Oct 2014)

Population: 7.24m (IMF Oct 2014)

Unemployment: 3.3% (2013)

Consumer Price Index: 4.4% (2014) worldbank.org

Retail Growth: 7.5% growth y/y (Nov 2014) tradingeconomics.com

SPOTLIGHT ON: HONG KONG ► SINGAPORE ► CHINA ► INDIA ► INDONESIA ►

1Hong Kong

2 SingaporeSri Lanka

1333

India4321

Malaysia

41 Vietnam

Thailand

36 Philippines

42 Indonesia

11 Australia

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1627

Taiwan

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4 JapanChina


http://databank.worldbank.org/data/home.aspx

http://www.tradingeconomics.com/hong-kong/retail-sales-annual

Singapore key stats:

GDP: $308m (2014)

Real GDP growth: 2.92% (2014)

Population: 5.47m (2014)


Consumer Price Index: 1% (2014) worldbank.org

Retail Growth: 6.5% y/y (Nov 2014) tradingeconomics.com

SINGAPORESingapore occupies second place in the rankings as a country with outstanding ease of operations, business and economic environment. Grocery stores, primarily NTUC FairPrice, and Dairy Farm, dominate the retail market together with major department store operators such as Takashimaya and Robinsons. The highly successful urban malls have attracted international brands and created a strong platform for retailers to operate successfully in Singapore.

However, Singapore is constrained by being a small island nation and the significant volume of international brands has largely saturated the market. This success has driven up rents and made consumers more value focused.

To feed growth ambitions, international brands are being forced to explore the out of town suburban retail landscape with mixed results. It has also forced an explosion in e-commerce activity.

A number of foreign retailers with a rigid approach to retail and unwillingness to adapt to local conditions are struggling to move to profitability and several have exited.

Whilst recent retail sales have been under pressure and reducing, the overall local economic conditions are still strong.




1Hong Kong


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http://tradingeconomics.com/singapore/retail-sales-annual


China key stats:

GDP: $10,360bn (2014)


Population: 1.364bn (2014)



Retail Growth: 11.9% y/y (2014) tradingeconomics.com

CHINAAt no 27, China’s ranking is much lower than its regional counterparts. This is primarily due to the difficulties retailers face in getting up and running in a challenging business environment. Tightening of regulations and the imposition of heavy fines over the past few years has forced some of the luxury retailers, and grocery stores such as Walmart, to deliver optimisation or consolidation strategies in China. Other retailers are pulling out of the market altogether.

Attracted by the size and scale of the consumer base, many retailers in the past had rapidly expanded in China but in many cases had not carried out sufficient research on reliable customer demand to be successful. Potential for growth and domestic competition had been overestimated. For many, incorrect predictions have led to portfolio underperformance and, as a result, investors in stores in China are increasingly cautious.

That said, for many retailers China is viewed as ‘long-play’ where it is important to be there and build brand awareness and loyalty. Although it is fiercely competitive, it also holds massive potential for those who are well prepared and knowledgeable about the market. Having the right local partner to help navigate the unique pitfalls and prizes of local markets can ensure a more successful entry.

A principal issue facing retailers in China is its fragmented market structure: the combination of small and medium-sized retailers and a large disparity of regional consumer purchasing power means consumer demand can differ greatly from one end of the country to the other.

Due to the much higher income levels, the major urban areas of Beijing, Shanghai and Guangzhou make up the majority of China’s retail sales. Although international chain stores are growing, expanding from the major centers has proved very challenging due to provincial barriers to market and the difficulty in getting business cases to ‘stack up’. Confidence is easily bruised.

Although as much as 80% of demand comes from the Tier 1 cities, high rental rates faced in cities such as Shanghai and Beijing are driving some retailers away from the market altogether.

A balanced portfolio with flexible formats that can be easily scaled is the most successful retailer platform.

In spite of these restrictions, there is no denying that China is set to be one of the fastest growing e-commerce markets in the world - but not at the rate of growth that we have previously experienced. Overall, China anticipates a moderate retail sales growth of 8% over the next five years and a positive growth in middle-income earnings. Such growth forecasts point to China surpassing the US in retail sale volumes over the next few years and, therefore, is still very much a country in the spotlight for retailers.

Casual and fast fashion retailers such as H&M and GAP, sports apparel retailers and many international automotive retailers are all underway with large-scale expansions and a focus on the lower tier cities. To operate successfully, retailers will need to plan their portfolios carefully, understand the market conditions for the sector in which they operate and undertake thorough due diligence studies around customer sales demand. Above all, China is a long-term investment and expectations should be tempered accordingly.



1Hong Kong


1333

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Malaysia

41 Vietnam

Thailand

36 Philippines

42 Indonesia

11 Australia

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1627

Taiwan

South Korea

4 JapanChina



http://www.tradingeconomics.com/china/retail-sales-annual


India key stats:

GDP: $2,067bn (2014)


Population: 1.267bn (2014)



Retail Growth: 13% forecast to 2018 ibef.org.

INDIAA poor economic environment score leaves India at a very low 43 in the rankings. This may appear a surprising result when comparing the position of other Asian countries, especially with India’s burgeoning middle class and a consumer culture. However, challenges regarding the operating environment together with high inflation have created a difficult environment for retailers to expand.

In the past, India has been restricted by a lack of quality mall space outside of the major cities as well as on-going regulatory challenges for foreign retailers. In spite of this, retailing records healthy growth due to rising income levels in the middle classes and an improvement in the presence of consumer marketing, which has boosted the awareness of brands and products and supported growth during over the past year.

The Indian government through Prime Minister Modi is recognizing the regulatory issues FDI companies are experiencing and is starting to relax these, introducing free trade and beneficial tax initiatives to promote retail growth.

The Indian retail market reached US$490 billion in 2013, 69% of which came from food. In recognition of this, India is identified as a hot spot for expansion, specifically in grocery, with Metro and Spar experiencing significant growth and Walmart and Tesco planning ambitious rollout programmes. Alongside this, Internet retailing of non-grocery products is seeing strong growth and is now posing huge competition to store-based retailing. Retailers remain undeterred with Ikea, Uniqlo, Burger King and other food and beverage retailers planning expansion into India during 2015. Therefore, given the positive outlook of this country, we expect India’s position in the ranking to climb during 2015.



1Hong Kong


1333

India4321

Malaysia

41 Vietnam

Thailand

36 Philippines

42 Indonesia

11 Australia

12

1627

Taiwan

South Korea

4 JapanChina



http://www.ibef.org/industry/retail-india.aspx


Indonesia key stats:

GDP: $889bn (2014)


Population: 253m (2014)


Consumer Price Index: 6.4% worldbank.org

Retail Growth: 18.6% y/y (July 2014) euromonitor.com

INDONESIASlower economic growth and diminishing purchasing power, especially for the lower income class, has dampened any potential retail growth in Indonesia. Nevertheless, throughout 2014, major retailers continued to expand into developing cities to capture the growing middle class. One example is Ikea who established their first store in Indonesia last year and are moving ahead with further stores.

As the economic recovery gains some pace, retailers should expect to see sales growth of at least 10% this year and this is being recognized by new international retailers who have entered the market, including H&M and Uniqlo,who recently opened their first stores in Jakarta.

For many, barriers to entry make the only route of entry into Indonesia through a joint venture or franchise model, which can be a lower risk but often less successful model. It is our opinion that caution should be taken when considering entering the market, however, due to challenges with importing materials and products where regulations and transparency issues continue to impact time and cost.

Looking ahead, we expect slower yet positive sales growth across Indonesia, and although there are uncertainties around the economic environment we should expect it to remain positive due to increasing consumption and the expanding presence of leading brands.



1Hong Kong


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India4321

Malaysia

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Thailand

36 Philippines

42 Indonesia

11 Australia

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1627

Taiwan

South Korea

4 JapanChina



http://www.euromonitor.com/retailing-in-indonesia/report


UK key stats:

GDP: $2,941bn (2014)

GDP growth: 2.55% (2014)


Unemployment: 6% (Aug 2014) (lowest since 2008 and largest annual fall)

Consumer Price Index: 1.5% (2014) imf.org databank.worldbank.org

Retail Growth: 2.7% y/y (2014) reuters.com

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UNITED KINGDOMThe United Kingdom ranks fifth overall, reflecting a retail market in growth mode once again, driven primarily by the gradual economic recovery.

There is major structural change underway with most large scale retailers reducing or halting their network expansion programmes for larger formats. Demand for innovative retail experiences will continue to grow in popularity, perhaps driven harder by the recent issues faced by major UK supermarkets who are challenged by over-sized and inefficient store footprints. Investment capital is being spent on improving and remodelling existing stores to protect market share (against tougher competition from the hard discounters Aldi and Lidl), and growing the convenience store-base. But some commentators argue that there is overcapacity amongst the major grocers and it remains to be seen whether further consolidation activity occurs. This will test the flexibility and adaptability of their formats.

Even though e-commerce is rising in popularity in the UK, 90% of sales revenue is still generated in the physical store with food retailers continuing to dominate the market in 2015. Tesco maintains that their ‘in store picking’ approach for online shopping remains the only way to operate profitability.

SPOTLIGHT ON: UNITED KINGDOM ► GERMANY ► POLAND ► THE NETHERLANDS ►EUROPEThe well-established retail markets of Europe present sound opportunities for optimizing store performance. Many countries benefit from strong supply chains and our results demonstrate that overall the ease of doing business and becoming operational is far easier across Europe than in other regions.

That said, the recent economic crisis within the Eurozone has left its mark on the retail sector; on-going uncertainty over interest rates, employment levels and overall economic stability are still weighing heavily on the continent with, perhaps unsurprisingly, Greece and Italy performing comparatively poorly. Only time will tell how long it takes the individual European economies, and consequentially the retail sector, to achieve something by way of recovery.

Despite its high ranking, the UK is let down by its infrastructure, scoring 18 in that category. This is primarily based on negative public perception of issues such as road congestion that is affecting traditional out of town malls, and limited public transport investment. This is then impacting more recent town center schemes, resulting in the construction of fewer new shopping centers.

The rise of “super regions” shopping centers such as Bluewater, Kent, the Trafford Center, Manchester, and the two London Westfield centers is attracting trade away from regional or neighbourhood shopping centers. As a result, local retailers and owners need to reassess their retail proposition and target customer demographics to re-align these assets to the available market.


http://www.imf.org/external/datamapper/index.php?db=FM


http://uk.reuters.com/article/2014/09/09/uk-britain-economy-retail-idUKKBN0H32EI20140909


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EUROPEThe well-established retail markets of Europe present sound opportunities for optimizing store performance. Many countries benefit from strong supply chains and our results demonstrate that overall the ease of doing business and becoming operational is far easier across Europe than in other regions.


Germany key stats:

GDP: $3,852bn (2014)

GDP growth: 1.6% (2014)




Retail Growth: 2.6% on previous month (Aug 2014) reuters.com

GERMANYGermany ranks seventh overall. Annual sales in goods and services topped €2 trillion in 2014 making it the world’s fourth largest economy. An area holding back Germany, however, is its business environment and, in particular, its labor restrictions with strict regulatory control and high unionisation. Furthermore, Germany also controls credit card/store card uptake at source so access to easy credit is restricted.

Like the UK, Germany is experiencing a polarisation effect in the retail sector. Mid-range retailers are being driven out of the market due to the growth of the personalised experience high-end retailers are creating in store. Retailers are optimising omni-channel strategies as a result of a 0.5% decline in in-store sales since 2007. With general living costs predicted to rise, consumer spending may show signs of slowing in several sectors, although as the economy is in a strong position, the government may resolve this through easing of taxes over the next few years. Despite a robust economy, Germany, like all EU countries, is at risk from a decrease in market demand due to EU-Russia sanctions and the Eurozone fragility, which leave it vulnerable.

Nonetheless, over the past year the grocery retailers such as Lidl, Edeka and Aldi have reported strong sales in Germany, as have pharmaceutical retailers. GDP is forecast to rise 1.6% in 2015, indicating a boost in consumer confidence and a potential increase in retail sales.

Looking forward, high-end retail is expected to be a driver of growth in Germany over the next 5 years.

SPOTLIGHT ON: UNITED KINGDOM ► GERMANY ► POLAND ► THE NETHERLANDS ►



http://uk.reuters.com/article/2014/09/30/uk-germany-retail-idUKKCN0HP0H920140930


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Poland key stats:

GDP: $548bn (2014)

GDP growth: 3.37% (2014)




Retail Growth: 1.7% y/y (Aug 2014) tradingeconomics.com

POLANDWhilst Poland sits in the top half of the index rankings, the country’s downfall is its infrastructure, ranking below even the developing economies of Thailand and Morocco. Technological improvements in Poland’s transport systems and more efficient power infrastructure are desperately required, but funding new projects is constrained due to high public debt. Alongside this, Poland’s government remains prone to bouts of instability, making this country a little risky for major retail investment.

Irrespective of that, Poland demonstrates strong market demand and the encouraging result in our ‘business environment’ category shows the potential in this market.

Poland is fast becoming an inspirational target for retailers, in particular retail banks, who are planning small expansion strategies underpinned by a strengthening labor market. Growth has been apparent amongst the discount retailer chains, particularly in the grocery and apparel sectors due to stronger consumer confidence. Such discount retail chain expansions are, however, pushing out many of the independents causing a corresponding reduction in their store portfolios. There have been fewer new overseas entrants into the market over the past few months, primarily due to instability in neighbouring Ukraine.

E-commerce is also becoming increasingly popular in the Polish market with a steady growth in online revenues. But it is the closing price gap between bricks and mortar and digital sales, alongside a predicted uplift in market conditions which could mean a rapid growth in store outlets for the major market players.

Looking ahead, retailing in Poland is expected to continue developing in constant value terms. It is our opinion that retail chains looking for expansion opportunities will need to look more towards the small and medium sized cities as well as retail parks, currently dominated by larger homeware stores such as Ikea.




http://www.tradingeconomics.com/poland/retail-sales-annual


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The Netherlands key stats:

GDP: $870m (2014)

GDP growth: 0.87% (2014)




Retail Growth: 0.7% y/y (July 2014) tradingeconomics.com

THE NETHERLANDSThe Netherlands high ranking in our index is primarily due to slower market demand and economic environment following the prevailing influence of Europe’s recession. After a few years of economic turmoil and cuts in government spending, many Dutch households have faced financial difficulties that have impacted consumer spending. Although real GDP has started to show some signs of recovery, the economic environment for retailers has remained relatively low as consumer confidence and there-fore spending remains modest.

Internet retailing continues to have an impact as major chains dominate at the expense of independents, and in recent years this grip has strengthened.

Real GDP is projected to see some growth in 2015, and inflation and unemployment will likely fall. In light of this, retail conditions are predicted to improve in the Netherlands. Whilst growth is predicted to be modest and slow, growth will return as confidence returns.




http://www.tradingeconomics.com/netherlands/retail-sales-annual


THE USAThe USA, the global leader of the retail industry by revenue and third in our rankings, boasts strong market demand and a good business environment for retailers to operate successfully. That said, it does rank lower in the quality of its infrastructure, which is a barrier to operations. Although recently the price of petroleum has fallen, easing the cost of logistics and shipping, there has been a reduced investment in freight rail, roads, bridges and ports relative to other regions over the past few decades, and journey times in comparison are long and uncompetitive. As a result, the US has a growing need to invest in infrastructure, as shown in Arcadis’ report Global Infrastructure Investment Index 2014, placing the USA tenth out of 41 countries for the greatest potential for growth and investment in their economic infrastructure. There is a growing need to renovate and upgrade existing assets, with costs estimated by the American Society of Civil Engineers at $3.6 trillion by 2020.

The highly fragmented nature of the US retail market has meant that its gradual revival is not homogeneous and has generally been focused in major cities, with many suburban areas still experiencing downsizing and closure of stores.

Despite a tepid economic recovery in many parts of the US, certain locations and sectors remain strong. Overall vacancy rates are at their lowest levels in three years resulting in a corresponding rise in rental rates particularly seen in the major cities such as Houston, Chicago, Boston, New York City and San Francisco. Some of this can be attributed to longer opening hours which are generating higher revenues, as evidenced in Trader Joes for example, where substantial customer numbers are frequenting the stores until their 10pm closing time. Furthermore, we are seeing markets strengthening in New England, the West Coast, the Gulf Coast, and to some degree, the South East.

There is real consolidation in US grocery wholesalers that could change the availability and pricing structures for retailers in subsequent years. In this market there is shift towards ‘high end’ and specialty foods that are more profitable, especially in those more affluent regions.

Many of the food retailers have been traditionally very regional and we are starting to see expansion beyond their small cluster of states, such as is evident with Meijer, Marianos and Heinens in the Mid-West. Contrary to some other retail sectors, many food retailers are experiencing a shift from destination big box single tenant stores to convenience locations. Focus is on attracting increased footfall through creating bespoke customer experiences in an effort to lift revenues and reduce footprint.

USA key stats:

GDP: $17,419bn (2014)

GDP growth: 2.39% (2014)




Retail Growth: 5% y/y (Sep 2014) tradingeconomics.com -0.3% m/m (Sep 2014) reuters.com

3 USA

SPOTLIGHT ON: USA ►

Many of the larger chains (JC Penny, Macys, Walmart, and Sears) and teen-focused stores (Aeropostale, Abercrombie, Wet Seal and American Eagle) announced significant closures across their portfolios in Q1 as post-holiday underperformers are outed.

In contrast retailers such as Walmart, Home Depot and Lowes are providing a strong online experience. Mobile apps that navigate stores, find products and direct orders to fulfilment centers are common-place and growing.

The US retailing environment was irrevocably changed by the recession and, while parts of the economy look ready to surge ahead, the picture as a whole is a mixed one.

Retailers should be aware that recent regulatory enforcement initiatives focused on the retail market at the national and state levels (US Environmental Protection Agency, Occupational Safety and Health Administration and equivalent) have also presented challenges and have the potential to increase operational costs in the year ahead. However we believe that consumer spending will grow steadily over the coming months, supported by stronger job creation, low interest rates and lessening levels of household debt.

To operate successfully in the USA, the retailer should understand the fragmented nature of its market; much of the consumer spending will be in food and high-end retail due to increasing disparities in household earnings. The polarisation affect is driving out mid-range retail players and this is particularly impacting the saturated department store retailers in a similar way as the trends we are seeing in the UK and Western Europe. This should be considered carefully in expansion or optimization strategies.


http://www.arcadis.com/Content/ArcadisGlobal/Docs/publications/Research/Arcadis_global_Infrastructure_Investment_Index_2014.pdf



http://www.tradingeconomics.com/united-states/retail-sales-annual

http://www.reuters.com/article/2014/10/15/us-usa-economy-idUSKCN0I41E220141015


SPOTLIGHT ON: BRAZIL ► MEXICO ►

Brazil key stats:

GDP: $2,346bn (2014)

GDP growth: 0.14% (2014)




Retail Growth: -0.9% y/y (July 2014) www.arcadis.com

LATIN AMERICAIn spite of fractured markets and continuing economic uncertainty in Latin America, a growing consumer class has proven resilient against entrenched corruption, roller-coaster inflation and eroding currencies. Throughout the majority of the region’s commercial markets, falling commodity prices and a strong US dollar have slowed growth in larger cities, notably Sao Paulo, while oversupply and slow demand continue to push vacancies up and rents down. Nonetheless, there are positive signs and many retailers are taking advantage of changing franchise regulations and the lack of modern formats to push ahead with expansion plans.

3 USA

Costa Rica

25 Mexico

28

34

Columbia

19Chile

31Peru 40

44

Brazil

Uruguay

48 Argentina

47 Paraguay

6 Canada

BRAZILWith poor infrastructure and economic and business environments, Brazil nears the bottom of our index at 40.

A principal reason for its low ranking is high tax levels, particularly import and distribution tax. These taxes combined make imported goods almost a third more expensive than equivalent local goods and this understandably is discouraging consumers and retailers alike. Brazil’s highly regulated labor market and consumer debt have resulted in low investment in infrastructure leaving much of the networks in need of intensive upgrade. Only 1.5% of GDP is invested in infrastructure development.

However, Brazil’s growing middle class and reasonably unsaturated retail market is providing some incentive for retailers. Retailing continued to show healthy sales growth in consumer goods and midrange fashion as well as electronic appliances and pharmaceutical retail.

The competitive landscape is growing and we are experiencing greater competition between retailers in Brazil. Multi-channel strategies are growing in popularity, GDP has increased in recent years, and despite an uncertain economic outlook, it is predicted that the retail sector will experience steady growth in 2015. Although local players dominate much of the market, many international retailers see this as an opportunity and several of the grocery retailers, including Carrefour and Walmart, have experienced successes to date.

The main caution for international players considering entry is the deficiencies in the country’s infrastructure and a failure to address complications in regulatory issues for FDI.





SPOTLIGHT ON: BRAZIL ► MEXICO ►

Mexico key stats:

GDP: $1,282bn (2014)

GDP growth: 2.12% (2014)




Retail Growth: 1.2% y/y (Nov 2014) tradingeconomics.com

MEXICORanked at number 25 in the index, Mexico is proving an interesting country to watch. A weak economic climate has typically led to caution in this market historically, but with a growing middle class, reduction in petroleum prices and administrative reforms attempting to create a more stable business environment, we are seeing a trend of foreign retailers entering the market. Luxury retail, pharmaceutical retail, apparel and several retail banks are all in competition for prime space.

Where existing retailers, particularly in food, are reaching saturation in Tier 1 cities such as Mexico City and Monterrey, plans to expand into Tier 2 cities are underway and here lies the biggest opportunity for retailers entering the market.

Retailers are up against significant challenges which are highlighted by the lower scores of infrastructure and economic environment in our index. These include Mexico’s high unemployment, income level inequality and elevated inflation.

Retailers considering Mexico in their portfolio should also be aware of, and learn from, mistakes made in China where a lack of data around sales and consumer statistics led to the closure of underperforming stores. Plans should most definitely consider the Tier 2 growing cities but also factor in the challenges around availability of sales data and infrastructure quality for logistical purposes as well as closely monitoring the economic recovery.

LATIN AMERICAIn spite of fractured markets and continuing economic uncertainty in Latin America, a growing consumer class has proven resilient against entrenched corruption, roller-coaster inflation and eroding currencies. Throughout the majority of the region’s commercial markets, falling commodity prices and a strong US dollar have slowed growth in larger cities, notably Sao Paulo, while oversupply and slow demand continue to push vacancies up and rents down. Nonetheless, there are positive signs and many retailers are taking advantage of changing franchise regulations and the lack of modern formats to push ahead with expansion plans.

3 USA

Costa Rica

25 Mexico

28

34

Columbia

19Chile

31Peru 40

44

Brazil

Uruguay

48 Argentina

47 Paraguay

6 Canada



http://www.tradingeconomics.com/mexico/retail-sales-annual

THE MIDDLE EASTOverall, the retail market is booming across the Gulf Cooperation Council (GCC). High levels of wealth and disposable income for the majority of GCC nationals and sections of the expat communities are driving a high level of spending. Whilst the majority of major brands are already located in the region, many more are looking to enter the market and or to further increase their presence. A growing population, and one that is increasingly fashion conscious, is attracting all the major fashion brands.

Automotive retail is enjoying a boost with Infiniti reporting Q2 sales increase of 31% compared to the same period last year. A surge of high-end retail malls has also attracted the retailer and this makes the UAE one of the most lucrative markets for foreign investors.

Key stats:

GDP: $402bn (2014)

GDP growth: 3.61% (2014)




Retail Growth: 5% (2014) gulfnews.com emirates247.com

45

815

32

17

United Arab Emirates

Saudi Arabia

Qatar

Kuwait

UAEThe UAE ranks eighth overall, with a strong economic environment and infrastructure ranking. Much of the UAE retail is driven by the tourist industry that further boomed in 2014 due to government efforts to maintain a wide number of tourist attractions, and a high calibre infrastructure in the country. A healthy performance is forecasted and consumer confidence will be boosted as a result of economic stability, which will in turn lead to more spending, higher employment and increased numbers of expats and tourists.

Retailers entering or optimising portfolios in the UAE need to be aware of these demographics and market demands and tailor their portfolios accordingly. Most retail categories are expected to thrive, with the exception of grocery retail which has been constrained by government price controls that protect consumers from inflation of imported foods. This in turn has affected revenues for the grocery retailers.

SPOTLIGHT ON: UAE ►



http://gulfnews.com/business/sectors/retail/uae-s-retail-sales-grew-5-per-cent-in-2013-1.1349103

http://www.emirates247.com/business/uae-retail-33-growth-forecast-for-2015-2014-09-18-1.563359

WHAT CAN RETAILERS DO TO ENSURE OPTIMUM RESULTS FROM THEIR STORE PORTFOLIOS ACROSS THE GLOBE?

The success of a retailer’s portfolio lies in integrating demographic and market information into a robust omni-channel strategy based around consumer preferences.

Retailers will have detailed information on sales per store and on various fixed and variable operating costs, but the key to a successful portfolio is in understanding the variables that affect these figures and the relationships between them.

These variables include: ■ Location ■ Footprint ■ Functionality ■ Flexibility ■ Fiscal Impact ■ Design Impact. ■ Socio-economic market dynamics.

Knowing how to optimise these variables, and comparing them for each store across an entire portfolio, can lead to faster and more accurate decision-making, and consequentially to achieving greater and more sustainable financial returns.

The graph below illustrates areas for portfolio optimization by highlighting the highest and lowest performing stores against the highest and lowest flexibility scores to potentially improve sales. The flexibility score measures the retailers ability has to change property attributes of a location e.g. ability to relocate, terminate or sub-let).

ASSESS100

1000.0

ASSESS

RENEW LEASE/ ACQUIRECLOSE

SALES PER STOREBEFORE TRANSFORMATION

PRO

PERT

Y FL

EXIB

ILIT

Y SC

OR

E

AFTER TRANSFORMATION


CASE STUDY

T̀he Challenge

A retailer with a large store portfolio across Asia had expanded at pace and scale over the past five years resulting in an inconsistent customer experience and subsequently, poorly performing stores. The retailer was looking for ways to achieve higher returns from their store portfolio.

The Approach

The first step to solving the problem was to understand why some stores were achieving higher returns than others in the portfolio, and to consider which lessons they could apply to the poorer performing stores to reduce unnecessary operating costs and help improve sales.

The next step involved collating a large amount of detailed information, such as performance figures, location demographics, space efficiency, condition of the store property etc. in order to get a clear picture of the current situation.

In order to fully understand this information, the data was entered into a model which generated simulated results that could test the impact of various strategic decisions on the retailer’s portfolio and help make the right investments or divestments to improve portfolio returns.

A Positive Outcome

The results were significant, providing the retailer with a reduction in operating expenditure and square footage and improving the customer experience in selected stores through added innovative design. This led to a portfolio that generated greater returns, as can be evidenced in the graphic on the right.

BEFORETOTAL STORE NO. 12FLAGSHIP 4STANDARD 3MINI 5SQFT 38,000SALES HEADCOUNT 200REVENUE 45MEXPENSE 20MROI 2.3

BEFORE CLICK HERE TO VIEW THE PORTFOLIO AFTER OPTIMIZATION ►


`

CASE STUDY

The Challenge

A retailer with a large store portfolio across Asia had expanded at pace and scale over the past five years resulting in an inconsistent customer experience and subsequently, poorly performing stores. The retailer was looking for ways to achieve higher returns from their store portfolio.

The Approach

The first step to solving the problem was to understand why some stores were achieving higher returns than others in the portfolio, and to consider which lessons they could apply to the poorer performing stores to reduce unnecessary operating costs and help improve sales.

The next step involved collating a large amount of detailed information, such as performance figures, location demographics, space efficiency, condition of the store property etc. in order to get a clear picture of the current situation.

In order to fully understand this information, the data was entered into a model which generated simulated results that could test the impact of various strategic decisions on the retailer’s portfolio and help make the right investments or divestments to improve portfolio returns.

A Positive Outcome

The results were significant, providing the retailer with a reduction in operating expenditure and square footage and improving the customer experience in selected stores through added innovative design. This led to a portfolio that generated greater returns, as can be evidenced in the graphic on the right.

AFTERTOTAL STORE NO. 20FLAGSHIP 1STANDARD 4MINI 15SQFT 28,000SALES HEADCOUNT 150REVENUE 52MEXPENSE 15MROI 3.5

AFTER CLICK HERE TO VIEW THE PORTFOLIO BEFORE OPTIMIZATION ►


To speak with any of our experts to find out more about how we can enable optimum results from your store portfolios across the globe, please do not hesitate to contact us:


CONTACTJulia HarveyPartnerE [email protected]

Catherine TobiasinskyRegional LeaderE [email protected]

Chris SeymourClient Development DirectorE [email protected]

Kevin ChrispPartnerE [email protected]

Matt FletcherSector Leader - Retail & ConglomeratesE [email protected]

Ciara WalkerSenior Strategic Regional LeaderE [email protected]

John AtkinsNational Account DirectorE [email protected]

9168

FEB

15E

C


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