Selling the World on Modern Retail

From Best Buy in China to Carrefour in Egypt, the world's leading modern retailers are expanding their presence one market at a time. But the real story isn't about foreign companies encroaching on emerging markets—it's about modern retail moving into traditional retail territory. What is the real impact of this ever-growing modern retail footprint? Do communities truly benefit from modern retail or will societies and economies suffer irreparable damage?

When Chinese President Hu Jintao recently visited the United States, he made headlines for international diplomacy and became an unexpected pitchman for one of the world's largest global brands. Dining in Seattle, home to Starbucks Coffee, Hu commented that if his presidential duties weren't so time consuming, he "would certainly prefer to go into one of the Starbucks coffee shops, which are blossoming in Chinese cities as fast as the spring flowers."

Not only was his comment an endorsement of a favorite café but also a reflection of today's increasingly global retail industry. While Chinese coffee connoisseurs are sipping their premium lattes, fashion mavens in Delhi are trying on the latest Jimmy Choo slingbacks, and shoppers in Bratislava are filling their grocery carts at the local Tesco. City by city, modern retailers are moving into every corner of the world. 1 In fact, since 1995 global retailers have entered more than 100 new markets. 2

And business is booming. The global retail industry employs more than 150 million people and accounts for about 9 percent of global GDP—and another 20 percent indirectly. More importantly, global middle- and upper-middle-income groups—which are the target consumer segments—will likely double in size over the next 10 years. As emerging markets attract modern retail, there are many possible benefits, including increased productivity, economic growth, capital investment, job creation and exports. Moreover, greater competition will lower prices for end consumers.

Yet disruptions and controversy are inevitable. Wal-Mart has become the de facto lightning rod for criticism about modern retail. As the world's largest company and private employer, Wal-Mart maintains a low-cost strategy that, according to opponents, sacrifices local businesses, erodes a region's economic value, adds economic and inflationary risks at the country level, and favors foreign shareholders over local companies. On a broader level, these same criticisms can extend to virtually all global retailers.

With both sides drawn, how does globalization of the retail industry affect economic and social growth in emerging markets?

Weighing the Pros and Cons

The evolution from traditional to modern retail fundamentally transforms economies and, to some extent, cultures. Although there are many disruptions along the way, on balance, the overall impact is positive.

Market efficiency. The fiercest argument against foreign retailers is that they will destroy local businesses. It is true that when modern retailers enter new markets, inefficient players should take notice, and some businesses will inevitably close their doors. Most traditional retailers have limited access to capital and a smaller appetite for investing in technology to improve productivity. Their smaller size also means that they can't take advantage of economies of scale.

By contrast, modern retailers have deeper pockets and the ability to make longer-term and larger investments to increase supply chain productivity. They also benefit from scale efficiencies of supply chain infrastructures, significantly larger stores and leveraged buying practices.

Although modern retailers clearly have the advantage of size and power, local companies can survive by adapting. As the newcomers introduce new practices—everything from improved planning and merchandising to branding strategies and category management techniques—savvy local retailers emulate them. Similarly, as modern retailers improve the local infrastructure and expand the supplier base, including additional logistics providers, merchandisers and distributors, local companies can tap into these new resources for their own benefit.

Those able to adjust and tailor their strategies may very well evolve into stronger companies. For example, despite stiff foreign competition from the likes of Wal-Mart and Carrefour, domestic retailers in China, including The Bailan Group, Gome, and Suning, continue to lead the market because they adapted quickly to changing business conditions. The Bailan Group increased its scale by consolidating several companies, which allowed it to buy in volume and develop more efficient processes for its conglomerate of stores.

As productivity and efficiency improve across the board, the entire market can benefit. For example, from 1995 to 2000, a wave of global retailers entered Brazil and contributed to a 4 percent growth in the country's productivity. The increased efficiency and competition triggered lower prices and improved services for end consumers. Lower prices are also good for the economy by helping to counteract inflation. In Brazil, the food components of the consumer price index grew at an annual rate of 39 percent less than other segments between 2001 and 2005.

Job creation. Coupled with the fear of shuttered local businesses is the concern over job loss. As much as corporate public relations departments tout high employment numbers, this growth comes at a heavy cost. One recent study by Global Insight reports that for every 100,000 square-foot store, Wal-Mart creates 97 retail jobs. However, because it brings its own wholesalers into a new market, about 30 local wholesale jobs will be lost, leaving a net gain of about 67 jobs. 3

That's the good news. The downside? Other studies suggest that when the retail giant enters a new area, average employee income declines anywhere from 2 to 5 percent. 4

Labor displacement is another concern as people move from traditional retail jobs to urban modern retail jobs. In some cases, however, modern retail might not be as big a threat to smaller retailers as it appears. In India, for example, traditional retail is often located in residential areas where family-owned stores are generally an extension of the family home. The labor and fixed costs are low, as are the associated break-even points. The result is that significant volume losses would have to occur in order to put these businesses into the red.

In mature markets, the retail sector is a significant source of employment. In the United States, for example, 17 percent of the total population is in the retail industry—almost double that of China and India. And as modern retailers establish their businesses, they help build ancillary industries. Again, look to mature markets where four main sectors directly benefit from modern retail: construction and real estate, supply chain and logistics, packaging, and security.

Accelerated exports. When markets open up to modern retail, export volumes tend to surge, whereas when markets remain closed, exports stagnate. Conclusively attributing the export increase to modern retailing is impossible, but the connections are too compelling to ignore. Consider the contrast between China and India. After the Chinese government opened its market to foreign investments, exports topped more than $60 billion per year. As retailers establish operations there, they increase their exports. In 2004, for example, Wal-Mart exported $20 billion from China. By contrast, India has remained largely closed to foreign investment—and exports have hovered under $1 billion per year over the same period.

Policymakers Must Take The Lead

The benefits of modern retail are significant, but the responsibility for ensuring that emerging markets can tap into the rewards while minimizing the social disruption rests squarely with policymakers.

China's decision-makers have set an example that others would do well to follow. The country's retail policy allows for gradual opening of the market and gives people a chance to adapt to the probable longer-term social disruptions. For example, as discussed earlier, family-owned businesses may be able to survive on fewer customers over the short term but the impact of modern retail will eventually change the social structure of the country. With this in mind, the Chinese government first allowed foreign direct investment in retail in 1992, but capped it at 26 percent; 10 years later, it raised the FDI limit to 49 percent. In 2004, the government finally allowed full foreign ownership, but only in certain cities. This gradual approach allowed local retailers to consolidate before there was a heavy influx of global retailers. Other countries, including Poland, Brazil, Morocco and the Czech Republic have taken a similar path.

With strong GDP growth over the past 10 years, rising employment rates and lower retail prices, these markets exemplify a smooth transition to modern—and global—retail. Now it is time for policymakers in Asian economies, particularly India, to foster their own   smooth transition to modern retail—attracting businesses while keeping retail sprawl in check and respecting social requirements, local cultures and norms.

Consulting Author

Sherif Mityas is a vice president and leads the firm's Midwest region. He is based in Chicago and can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

1 Modern retail is defined as non-traditional, organized retail formats and chains including hypermarkets, supermarkets, cash and carry, department stores, specialty chains and shopping malls.
2 See also, "Emerging Market Priorities for Global Retailers: The 2006 Global Retail Development Index™".
3 "The Economic Impact of Wal-Mart," Global Insight, Inc., November 2005.
4 David Neumark, Junfu Zhang and Stephen Ciccarella, "The Effects of Wal-Mart on Labor Economics," National Bureau of Economic Research, November 2005.