consumer markets in india the next big thing

ConsumerCurrents 02Issu

e

for decision-makers in the retail and consumer goods industry

Under the regulatorymicroscope Putting a finger on the controls that govern business risk

India consumer marketsstoryInvestigating the massive growth in the Indian retail market

IFRS and retailA snapshot on the state of play of international retailers’ financial information

Rethinking the Business ModelOne of the biggest drivers of change over the next two years

Corporate IP: management and protectionA key challenge for businesses

For all the wine in ChinaA slowly maturing new market for wine producers.

Spring 06

What’s in a label?

© 2006 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firmsoperating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinctand separate entity and each describes itself as such. All rights reserved.

ConsumerCurrents is published by KPMG for senior executives atconsumer goods companies, suppliers and wholesalers around the world. Here, topical industry issues, global trends and business taxplanning come under the scrutiny of KPMG firms’ industry professionals.

ContentsOpportunity and riskThe opportunities are those presented by fast-growing emerging marketsand a renewed emphasis on growing the top line. Such a fast-movingenvironment can heighten risk, as companies have to manage fasterinternal change and grapple with unfamiliar markets.

Under the regulatory microscopeControls are a combination of people, processes and tools that everycompany should have in place to help prevent, detect or correct potentialrisk. Many companies can now confidently put their fingers on thecontrols that govern their business risk like never before.

India consumer markets story “There is no reason why as many as 300 million new consumers cannot be reached”, says a leading retailer. “Just by increasing thegeographical reach, there will be enormous growth.”

IFRS and retailFor the first time, all listed companies, and therefore all listed retailcompanies across Europe, have had to follow International FinancialReporting Standards as promulgated by the International AccountingStandards Board (IASB). Have the expected benefits occurred?

Rethinking the business model (produced by theEconomist Intelligence Unit)The expectations, requirements and buying habits of customers will be one of the biggest drivers of change in companies’ business modelsover the next few years. This represents a major change in business andprofit-making methodology and means that companies are turning theirattention away from primarily internal issues – like headcount andoperational costs – towards new markets and new customers.

Corporate IP: management and protectionThe management and protection of corporate intellectual property (IP) are rapidly becoming key challenges for businesses, say companiesinterviewed in a forthcoming KPMG International study on IP protection.

For all the wine in ChinaThink China; think beer? Not necessarily. China is slowly maturing as a new market for wine producers. In the long term the commodity could shift from a luxury to a staple as it has in many parts of the Western world.

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Issue 2 ConsumerCurrents 1

© 2006 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firmsoperating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinctand separate entity and each describes itself as such. All rights reserved.

Welcome to the second issue of ConsumerCurrents, KPMG’s new monitor of

key issues for decision-makers in retail and consumer businesses around the

world. ConsumerCurrents offers new research and commentary on the trends

that are driving consumer markets and shaping consumer companies today.

Issue 2 focuses on opportunity andrisk. The opportunities are thosepresented by fast-growing emergingmarkets and a renewed emphasis on growing the top line. Such a fast-moving environment can heighten risk, as companies have to manage fasterinternal change and grapple withunfamiliar markets.

For very many consumer companiesthe environment is indeed changingfast, and companies may have tochange fast in response. New marketsare growing at an astonishing rate;customers are becoming ever moreknowledgeable, powerful anddemanding; and new channels areachieving increasing prominence.Companies need to understandunfamiliar markets, and unfamiliarcompetitors. Above all they need tounderstand and manage risk in theirown businesses.

Change, growth, risk – these are not just buzzwords. Already, in the six months since the first issue ofConsumerCurrents, it has becomeapparent that global consumption isgrowing faster than most analystspredicted. The Chinese economycontinues to expand at somethingclose to 10 percent a year, and recentfigures show there is more domesticdemand in the economy thanpreviously thought.1 Investment in India(in the stock market as well as directinvestment) is hitting new highs, andthe consumer component is growingrapidly. Some of the best SouthAmerican markets are also expandingfast, particularly Brazil, offering highsales growth opportunities but coupledwith high operating risks. The U.S.slowdown may well have reached aplateau, and even Europe seems to bepicking up speed. In early 2006, therisks all seem to be on the upside ofthe growth equation, as strong demandheats the global economy, and perhapsoverheats it.

Neil Austin is Global Chair of KPMG’sConsumer Markets practice with overallresponsibility for services to our firm’sleading clients in the retail, food andbeverage consumer product sectors. As a Corporate Finance partner withKPMG in the U.K., Neil has particularexperience of international divestitures,acquisitions and fundraisings, as well asadvising boards on strategic issues.

Tel: +44 (0) 20 7311 8805e-Mail: [email protected]

Opportunity and riskA fast-moving environment

1. JP Morgan, Global Data Watch, 2006

ConsumerCurrents Issue 22

Yet just as companies are coming togrips with new market opportunitiesaround the world, they are also havingto adjust to a more regulated reportingand governance environment. The challenge of the Sarbanes-Oxley(S-O) legislation in the U.S., the EUcorporate transparency directive, and new demands for heightenedcorporate governance standards areweighing on all responsible companies.Challenge, yes – but the newregulatory environment is also anopportunity, as companies developsystems that can control business risk as never before.

Our article on page 3 demonstrateshow companies can turn thisregulatory burden into a businessopportunity. We conclude that thereare opportunities to improveconsistency of managementinformation throughout businessprocesses, and opportunities to makeinformation more predictive and moreadapted for strategic decision-making,as well more effective for risk reduction.

KPMG has also sought the experienceof retail companies in the practicalapplication of new reporting rules that have come into force with theimplementation of InternationalFinancial Reporting Standards – one ofthe most radical reforms of corporatereporting in a generation. See page 11for an overview of KPMG’s researchfindings.

When it comes to emerging marketretail opportunities, India is likely to topmany companies’ planning agendasthis year. The Indian government has just announced a significantliberalization of direct investment rulesin retail: foreign ‘single-brand’ retailerswill now be able to own controllinginterests in Indian stores. But as thearticle on page 6 shows, within Indiathe retail sector is already evolvingfast. Indian companies are already wellaware that the biggest revenue growthopportunities come not so much fromrising middle-class incomes but fromopening up the hinterland of rural Indiato organized retail. This is one of thebiggest opportunities in globalconsumer markets, but it will takeimagination and local knowledge toprofit from it. Liberalization is likely tobring a new wave of foreign retailersinto India – but they are likely to find a market that is highly individual, and where margins are tight. It issurely a true blend of challenge and opportunity.

We also look at the growing strategicimportance of intellectual property (IP)management. Many consumercompanies understand the centrality of intangible assets to business today:owning brands and the IP assets thatcan help to sustain those brands, theyappreciate the need to communicatewith customers and with policymakersthe value and the vulnerability of the IP portfolio. KPMG International askedcompanies how they are organizing thegrowing need to shape businesses builton intellectual property. Read some ofthe results on page 15.

And if you thought the business modelwas dead – think again. The fact is,some of the most successfulconsumer companies today think interms of innovative business models.KPMG International sponsoredresearch by the Economist IntelligenceUnit (EIU). The EIU asked leadingcompanies what was driving change intheir business models. The answer?New markets, and changing customerneeds and demands. The surveyresults, summarized on page 13, showthat companies increasingly think ofexternal challenges as the keys togrowth and profitability over the nextfew years, rather than the inward-focused cost-cutting measures thathave been the norm over recent years.The results epitomize the change inconsumer companies’ orientation inthe current period, and again the clearmessage is that the customer is king.

Systems and models are only valuableif they can support real products andreal markets. In this issue we look at the realities of the market for winein China, one of today’s toughestmarkets. It is a classic expansionchallenge: at the bottom of the marketthere is no brand integrity, and minimalprofit; at the top of the market there issaturation. The middle of the market ispotentially huge, but only if huge brandestablishment efforts are achieved.How can producers respond to amarket that looks as if it needscellaring for at least another decade?

As always we welcome feedback and comments. Contact details areprovided from the authors of ourarticles so if you have a question or a point of view, please let us know.

Neil Austin

Global ChairKPMG’s Consumer Markets practice

“When it comes to emerging market retail opportunities, India is likely to topmany companies’ planning agendas this year.”

© 2006 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services toclients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

Under the regulatorymicroscope

Regulation can bring massive introspection. For compliant companies it is an opportunity to trawl through their inner workings and tostrengthen and de-risk their global operations.

The biggest corporate clean-up of all time has been the silver lining to global corporate scandal. For all their concerns about increasingcompliance burdens in their manymanifestations (Sarbanes-Oxley, the EU transparency directive and corporate governance), companies can now confidently put their fingers on the controls that govern the business risks in their financialactivities like never before. And that, surely, has to be a significant prize.

Companies have invested much time(the SEC estimates S-O compliancetakes over 383 hours per quarter) andmoney (an estimated US$1 million perUS$1 billion sales)1 in compliance, but does it all stop when the boxes are ticked?

Companies that consider complianceas a one-off, navel-gazing exercise may be missing both the point and the opportunities. For most SECregistrants, the initial hard work isdone. For them the challenge is tocapitalize on it by determining whetherthe organization is controlling the rightthings with the right controls to

Controls are acombination ofpeople, processesand tools that everycompany shouldhave in place to help to prevent,detect or addresspotential risks.



1. Charles Rivers Associates, 2005



strengthen the business, create valueand bolster shareholder confidence.

For businesses not required to complywith S-O, now is the moment to assesswhether competitive advantage isbeing lost from not having this depthof understanding.

Business life through the controls lens

Globally, the game has been raised.Although S-O, IFRS and EU legislationwere designed to improve transparency,accountability to stakeholders andreduce the risk of corporate financialscandal, the knock-on benefits, largelycommercial, are still to be fully realized.

Companies that must comply are taking the relevant legislation and are using it like a microscope to view the inner workings of theirbusinesses. Life through this lens ismulti-dimensional rather than singlevision, allowing scrutiny of business

performance controls that can impactoperational success. Some of the most proactive are looking at what the regulations are achieving and using these principles to help drivecorporate change.

Driving performanceimprovement

Take a large U.S. consumer goodscompany. It has over 10,000 controlpoints and activities, of which 80percent are manual and involvethousands of people. By dint of hardwork it achieves S-O compliance andamasses vast amounts of data aboutits controls portfolio. It knows whichcontrols are in place, how they areexecuted and by whom.

The mandatory introspection done, itgoes further – after all, it makes senseto get some payback for the time andmoney spent on compliance. It looks at how the business affects and is

affected by controls and how they canbe improved to reduce the total cost ofcontrol and increase operating margins.

Now, with a more readily visibleconnection between financial controlsand business performance controls,the company can, for instance, limitthe risk of a mismatch between what it spends on inventory and what itactually needs. The balance sheetlooks healthier, supply and demand are balanced, consumer needs are met and business decisions are madeon the back of more informed and up-to-date data. Everyone is happy.

Companies …are taking therelevant legislationand are using it like a microscope toview the innerworkings of theirbusinesses.

The benefits of understanding the depth and quality of financial controls can help:

• Standardization and simplification

Greater visibility of the company’s processes and controls provides anopportunity to drive consistency across the organization; to rid it ofredundant or duplicated processes and achieve a higher level of quality from more finely tuned processes and controls.

• Data integrity and improved information flows

By moving from manual controls designed to detect error to automatedcontrols designed to prevent error before it happens, data integrity can beheightened. More predictive information flows through the organization to enable better decision-making.

• Business improvement projects

Turning legislation into an opportunity to embed efficient and cost-effectivecontrols within and throughout the business means that compliance cansupport reduced risk exposure and foster business improvement.



Remedial work

So how does a business leveragebenefits from its efforts?

The logical first step is to understandthe current state of a company’scontrols and risk framework and thetrue current cost of control. That givesa starting benchmark. It enables abusiness to identify scope for businessimprovement and to ensure that newlycompliant financial controls aresustainable without going back tosquare one each year.

SEC registrants and other, moreproactive, companies are now likely tohave vast information about their risks,controls, processes and systems inone place for possibly the first time.This is their chance to delve deep intothe inner workings, to understandwhich cogs turn which wheels andwhere controls kick in to betterconnect finance and operations.

The end result should be a cleaner,more transparent and streamlinedorganization where business processesare understood and value is driven out ofgreater visibility. In short, improvementexercises not only help the businessperform better but reinforce whatregulation (S-O or otherwise) sets out to do – to improve transparency in business management and bolstermarket and investor confidence.

David Defroand, partner at KPMG’s U.K. firm, says: “Our experience is that those companies that undertake anassessment of their controls portfolio find them dispersed andduplicated across the business. Many fundamental controls that they thought they had in place have actually eroded over time. Even multinational companies find that they are heavily reliant on manual controls with a disproportionate emphasis on controls that are detective rather than preventative in nature”.

Next steps can include:

• Plan to sustain and gain from the compliance momentum – this is for ever not just a one-off.

• Assess whether appropriate people, processes, technology and changemanagement oversight are in place.

• Improve your internal understanding of risk and how to mitigate it.

• Strengthen, streamline and automate internal controls over financial reporting.

• Examine how controls are embedded in operations across your enterprise – they may run to several thousand.

• Quantify the total cost of control and identify measures to reduce it.

• Drive value – extract ROI through better management of risks along withimproved controls, operational visibility and business performance.

David Defroand is a partner in KPMG’s U.K. firm. He is a member of KPMG’s Global Consumer Markets Steering Group. Prior to rejoining KPMG in the U.K. in 2000, David was Global Head of Internal Audit for a global drinks company. He has extensive experience of many areas of corporategovernance and compliance, including Sarbanes-Oxley compliance, corporategovernance reviews, enterprise risk management and reviews of theeffectiveness of internal audit.

Tel: +44 (0) 20 7311 8161 e-Mail: [email protected]

India consumermarkets storyRetailing in India is set to grow, and grow massively. That is the view of many of the Indian and international retailers and consumer goodsproducers who contributed to KPMG International’s recent report Indian retailing: consumer markets in India – the next big thing?

The growth will come, say reportrespondents, because the entire Indianeconomy is growing fast, and becauseIndians are rapidly becoming moreconsumption-oriented. But above all itwill come because more and moreorganized retailers are reaching outinto the largely rural ‘unorganized’sector of the market that makes upover 90 percent of retail transactions.1

“There is no reason why as many as300 million potential new consumerscannot be reached,” says a leadingretailer. “Just by increasing thegeographical reach, there will beenormous growth.”

The reason that retailers are becomingso excited about India’s prospects isthat India is virtually unique. Otheremerging economies are also growingfast – some of them faster than India’scurrent rate of 7-8 percent.2 Otheremerging economies are also rapidlybecoming more sophisticated as

consumer markets. And like India,other emerging economies areattracting large flows of inward directinvestment – investment that isimproving the infrastructure anddistribution efficiency that retailingneeds in order to be profitable.

But no other emerging economy hasIndia’s attraction of a huge billion-strong market that is almost entirelyuntouched by organized retailing.

Why have India’s consumer marketsremained largely untapped andrelatively undeveloped? In a large partthat is the result of 40 years of relativeisolation from the global economy, aspost-colonial India attempted to build a self-reliant economy behind hightariff walls that discouraged foreigninvestment. That began to changemore than 20 years ago, even thoughchange was painfully slow until 1991when a financial crisis prompted a

“There is no reasonwhy as many as300 million newconsumers cannotbe reached … justby increasing thegeographical reach,there will beenormous growth.”



1. KPMG International and FICCI, Indian Retail: on the fast track, 20062. The Economist, 2006


new package of deregulatory reformswith cuts in trade taxes and sell-offs in the state-owned economy.

Today India is one of the fastest-growing large economies in the world.The two big drivers of growth arespending on India’s investment-starvedinfrastructure, and private consumption.Both are helping to drive expansion inorganized retail, both directly – throughmore personal spending – andindirectly, as new transport andcommunication facilities come on stream.

And there is another change in India – harder to track than GDPgrowth rates and direct investmentflows, but perhaps more important.Attitudes are changing. A conservativesociety that long avoided spending andpreferred saving is becoming muchmore consumerist. Cellular telephones,private motor cars and designer-labelclothes are no longer the exception:suddenly people seem ready to spend.

Companies believe there is moreconsumer confidence than at any timesince independence. “Ten or fifteenyears ago everyone felt they had tosave,” says a manager at a consumergoods producer. “They didn’t knowwhat was going to happen in the nextfew years. But now there is moreconfidence. People feel the economyis more resilient.”

Indian consumers are becoming morelike Western consumers and less likeother Asian consumers, say companies.“Consumption is moving out of thehome,” says a consumer goodsproducer. “It’s moving into lifestyleproducts, eating out, events,entertainment, and that is going to continue.”

Forecasts from the EconomistIntelligence Unit suggest that retailsales by volume are likely to growfaster than overall GDP over the nextfive years, and that growth by valuewill be faster still. Yet those figures

take some explaining: after all, Indiastill has more people living in povertythan any other country. Its populationis less urbanized than almost everyother comparable economy. Literacyrates are lower than in many Asiancompetitors, and income is less welldistributed across the whole populationthan in most Asian competitors. Forexample, according to recent data fromIndia’s National Council of AppliedEconomic Research (NCAER), anindependent research company, Indiahas around 176 million households, but of these only a little over six millionare ‘affluent’ – that is, with householdincomes in excess of US$3,100 atmarket rates.

These are figures that at first sightwould suggest limited potential forretail growth in the near future: India isstill a poor country, where average percapita income at US$620 at marketexchange rates is less than halfpersonal income levels in China.3

(Income adjusted for purchasing power is considerably higher:US$3,100 in India and US$5,530 inChina.) True, some of India’s 29 statesand territories have average incomelevels well above that average, such as the relatively industrialized states of Punjab, Gujarat and Maharashtra, orthe state capital territory of Delhi. Buthuge and largely rural areas of stateslike Bihar, Jharkand, Uttar Pradesh andOrissa are officially destitute.

According to the Asian DevelopmentBank around 35 percent of Indians arestill living on less than US$1 dollar a day.That compares to just over 16 percentof Chinese, less than 7 percent of Sri Lankans, and less than 2 percent of Thais. Retail sales (RS billion)

Retail sales (US$ billion)

15,029

331.8 394.0 448.7 502.4 551.1 608.9

16,743

18,621

21,351

24,248

27,704

Source: EIU Country Briefing on India, 2005

Consumer goods forecast: retail sales

“Consumption is moving out of the home… it’s moving into lifestyle products,eating out, events, entertainment …”


3. World Bank, World Development Indicators Database, 2004



Yet many retailers see growthopportunities throughout India. They believe the affluent segment will grow fast, but more importantly they believe that there is hiddenconsumption power in low-incomerural areas. One large retailer says, “It is not that people don’t have moneyin the rural areas, because they do.The issue is not the spending power of the consumer; the issue is the reach of the product”.

The great majority of retail transactionsin India take place in rural areas, oftenbeyond the reach of surfaced roads, in ‘informal’ shops that may welldouble as the retailer’s living room.Can organized retailers reach out tothat informal market and begin to build awareness of branded productsas well as begin to attract buyers intoorganized retail settings? A leadingIndian retailer believes they can, if they have the products that consumersreally need. “There is no point in goingto a destitute person and saying,‘Here, I’ve got an aftershave lotion foryou.’ You have got to find a relevantproduct, a needful product.”

Many retailers are becomingincreasingly optimistic about findingand offering those ‘needful products.’“We think the best opportunities are in rural markets,” says an internationalshoe retailer and manufacturer. “Ourwhole strategy is to penetrate the rural market.” Other companies agreethat this is a market where there ispotential for a step-change in growth.“In some sectors in an emergingeconomy like this you will seeexponential growth, by value,” says a watch and jewelry manufacturer. “If the market is going from buyingscooters to buying cars, there will be exponential sales growth. But inother sectors that leap may havealready happened, and growth will be in line with GDP growth.”

The ‘leap’ certainly has happened in the affluent layer of the consumermarket. Indian consumers do notfollow the consumption patterns seen

in other Asian countries. As Indianshave grown richer, they have begun to spend more on vehicles, phonesand restaurants, according to recentresearch on consumption patterns by Deutsche Bank.4 Indians’ discretionaryspending is focused outside the home;unlike other Asian consumers, theyhave tended not to increase greatlytheir spending on clothes, personalcare and household goods.

Increasing access to personal credit is one reason why consumption isexpected to rise faster than GDP. The market for credit has long beendominated by government-ownedbanks, in particular the State Bank ofIndia (SBI), but lower-cost and easier-access credit from private banks suchas ICICI Bank (the largest privatelyowned bank) and HDFC Bank areproviding new competition. Consumerlending growth will also be driven bythe likely fall in retail lending rates to a level closer to the main policy rate(which at a current six percent isalready at a 30-year low). Lendingpractices are also growing more

efficient and consumer friendly – large personal loans are now typicallyassessed within three days, comparedto up to three weeks in recent years.

However, one of the most importantdrivers of retail growth is increasingdemand from young and relativelyaffluent Indians. India has ademographic advantage overcomparable emerging economies thatis only just beginning to be felt. India’sworking-age population is likely tocontinue growing for the next twodecades at least; unlike manyemerging economies which may seetheir working-age populations declineas a proportion of the total. Youngworking populations can drive personal consumption, and can help to bring efficiency and innovation to retail markets. A youngdemographic pattern is also helping toencourage the emergence of the kindof trend-conscious consumers thatIndia has not seen in the past. “Indiansare traveling abroad a lot more,” saysthe Federation of Indian Chambers ofCommerce and Industries (FICCI).

China Korea Thailand IndiaEurope NorthAmerica

6.9

13.2

22.7

16.9

7.1

27.4

5.2

11.4

21.1

5.0

8.3

14.8 14.7

21.5

29.2

12.3

18.7

21.4

2000

2025 (projected)

2050 (projected)

Percentage of population aged 65 and older in 2000, 2025 and 2050

Source: UN World Population Prospects: The 2000 Revision, and Taipei, China; Council for Economic Planning and Development Official Communication, 2002

4. India’s Changing Households, Deutsche Bank, November 2004


“They get exposed to what ishappening in other markets, they bringback new attitudes and preferences.”

But the India those consumers return to is still fraught with challengesfor companies. When KPMGInternational asked consumercompanies to cite their mainreservations about the Indian businessenvironment, the top concerns weretaxation and infrastructure. That isbecause both the complex andfragmented regional taxation systemand the very poor state of thetransport system can act as barriers to efficient distribution.

“Understanding the consumer,understanding the marketingenvironment, these are challenges, but distribution is the biggest issue,”says a major personal care productsmanufacturer. A watch and jewelrymanufacturer agrees. “Distribution andmarketing is a huge cost in Indianconsumer markets. It’s a lot easier tocut manufacturing costs than it is tocut distribution and marketing costs.”

Increased foreign direct investment in transport and communications isbeginning to make an impact on India’sinfrastructure deficit. New airports arebeing built, congestion levels at themajor ports on India’s western coastare beginning to improve, and a newnetwork of fast highways is due toopen within the next two years. But India needs more than just betterpaved roads to make distributionefficient. An international logisticscompany believes that one of thebiggest obstacles to efficientdistribution is India’s complex indirecttax system coupled with the routinebureaucracy that adds to the cost of

moving goods between states. “Thedistribution problem is intimatelyconnected with the tax problem,” hesays. “We have an inter-state taxsystem that is impossibly complicated,the bureaucracy is just unbelievable.And that means that efficientdistribution across state lines is justnot possible.”

Taxation is difficult to reform in India,partly because of the decentralizedfederal political structure. But one verysignificant reform that does lie in thehands of central government concernscontrols on foreign direct investment inretailing. In late January 2006 theIndian government relaxed FDI controlson retailing to allow foreign retailers toparticipate directly in the Indian marketfor the first time. Foreign companieswill now be allowed to operate theirown stores – but only if they are‘single-brand’ stores, and only up to 51 percent ownership. The changemeans that own brand retailers likeGap, Bodyshop or Apple Computerswill be able to control Indianbusinesses. However, the majority oflarge retailers, including most FastMoving Consumer Goods (FMCG)retailers, will continue to be excluded.

Such retailers can only participate inthe retail market through indirectaccess strategies, such as wholesaling,franchising or licensing, or asmanufacturing suppliers to Indianretailers, or in businesses upstream of retailing.

According to Indian retailers,liberalization means that growth will be boosted, but so will competition.Foreign retailers themselves are alsolikely to find competitive conditionstough in India’s market of a billion

consumers. There is already a strongemphasis on value, says a leadingIndian fashion company. “It is not likeworldwide fashion, where peoplemight wear a garment three or fourtimes and then discard it. In India youhave to give value.”

In this environment, only foreignbrands that convey value are likely tosucceed. But local retailers know thatlarge international retailers have thebuying power and the organizationalskills to shake up this growing market.Says an international shoe retailer:“Indian companies know Indianmarkets better, but foreign players will come in and challenge the localsby sheer cash power, the power todrive down prices. That will be thecoming struggle”.

“Understanding the consumer [and] the marketing environment, these are challenges, but distribution is the biggest issue.”

Deepankar Sanwalka is theNational Industry Director for KPMGin India’s Consumer Marketspractice and is also Head of theForensic Accounting practice inIndia. His has extensive experienceof advising businesses active in thefood and drink, FMCG, consumerelectronics and retail sectors. These projects have included audits(internal, environmental and social),due diligence, cost reductionstudies, validation of awardschemes, fraud investigations,business ethics and litigationsupport. A qualified charteredaccountant, Deepankar is also a member of the FICCI RetailCommittee (Federation of IndianChambers of Commerce andIndustry).

Tel: +91 (124) 254 9191e-Mail: [email protected]

To receive a copy of Consumermarkets in India – the next big thing?or Indian retail – bridging thecredibility gaps, please contact:[email protected]


As a result, the year 2005 and thebeginning of 2006 have beenparticularly busy. Now that thetransition effort has been completed, it is time to take a step back, to startanalyzing the figures published byretailers … and to assess if theexpected benefits from the IFRSconversion have occurred. For instance:

•Did retailers use the first-timeapplication exceptions and exemptionsin a consistent way? To what extenthas the convergence goal for segmentreporting been achieved?

•Did the communication regardingIFRS transition turn out to be asource of increased transparency, orincreased confusion for the financialstatements’ users?

• In other words, has the conversion to IFRS been the expected revolution,or is it simply an accounting evolutionfor the retail sector?

These questions are addressed in our latest study which encompassesthe analysis of IFRS-relatedpublications issued by a sample of 14 international retailers.

Harmonization – what harmonization?

One of the most promising andexciting outcomes of the IFRSconversion process was the expectedgreater transparency and internationalharmonization in financial information.This conversion to IFRS was to beprepared in accordance with IFRS 1, a standard that sets up the first-timeadoption requirements but also offers

The changes in financial reporting rules, which came into force in Europeand elsewhere around the world during 2005, have been among the mostfundamental changes for over a generation. For the first time, all listedcompanies, and therefore all listed retail companies, across Europe havehad to follow International Financial Reporting Standards as promulgatedby the International Accounting Standards Board (IASB).

For the first time, all listed companiesacross Europe have hadto follow International Financial ReportingStandards

IFRS and retail



Many retailers have been communicatingon IFRS over the last 18 months or more.


a number of optional exemptions ontransition to help companies simplifythe move to IFRS.

The general trend is that retailers have used IFRS 1 exemptions andexceptions in a consistent way, except for those relating to financialinstruments and asset revaluations.Half of our sample have elected torestate comparative information for IAS39 ‘Financial instruments: recognitionand measurement’; less than a thirdhave fair-valued their assets at the dateof transition. These two accountingtreatments have generated verysignificant impacts on transition, andhave revolutionized the balance sheetsof companies that adopted them. The corollary of these treatments isthat they have delayed the prospect of harmonized financial information for the retail sector.

Financial outcomes – anysharp differences from theprevious standards?

In accordance with their regulators’requirements, retailers from our panel have published reconciliationstatements between their formerGAAPs and IFRS. The first lessonsdrawn from this information are uneven.The average impact on opening retainedearnings for our panel is marginal.Conversely, the average restatedincome statements for previous periodsshow an increase by 60 percent whencompared to the former GAAPs.

The primary reason for this increase is in line with financial statementsreaders’ expectations and relates to goodwill. Goodwill is no longer

amortized, and for those groups which,under previous GAAP, accounted forgoodwill against equity on acquisition ofan operation and recycled of goodwillpro rata on subsequent divestments,the transition to IFRS significantly improves divestment results.

One of the many surprises resultingfrom the study is that the highestadjustments accounted for were notthose that generated the most debateamong retailers at the earlier times ofthe transition. As such, the impact on retailers’ income statements ofinventories or lease adjustments is finally fairly marginal.

Comparability and clarity of financial statements

There was a legitimate expectation, at the beginning of the IFRS transition,that the use of a unique set ofaccounting standards in Europe andAustralia would facilitate comparisonbetween peers in the retail sector.

Many retailers have beencommunicating on IFRS over the last 18 months or more. Thiscommunication reflects a greatercomparability in financial statements. It is particularly evident for incomestatements, although some retailgroups tend to differentiatethemselves by using non-mandatoryaggregates such as turnover, grossmargin or EBITDA.

Regarding the balance-sheet structure,disparities in the information disclosedremain for two retail-specific items:investment properties, which are notalways disclosed on a separate balance

sheet caption, and the presentation offinancial services-related captions.

Cash-flow statements are probably one of the areas where retailers needto put a greater effort in the future,some of them only disclosing part of the information required by IAS 7‘Cash flow statements’.

Finally, this study – which benchmarksfinancial information published byretailers – offers insights for all non-listed retail groups that will adoptIFRS in the years to come. It showsthat there has been a clear effort made by retail players to put theirfinancial information in line with IFRS requirements. First trends inharmonization of financial statementsappear, but areas of improvementremain before a high level ofcomparability can be achieved.

All in all, the revolution has at least started.

11Issue 2 ConsumerCurrents

For further information on thestudy please contact:

Eric Ropert is a partner in KPMG’sFrench firm. His focus is audit andadvisory services and he workswith many international groupsoperating in the retail (food andnon-food) sector. Eric is a regularlecturer at business schools suchas ESCP, HEC and Ecole Centrale.He has written a reference bookand a number of articles onFrench consolidation and is the co-author of the benchmark studyby KPMG in France ‘Financialinformation in large retail groups‘.

Tel: +33 1 55 68 71 90e-Mail: [email protected]

This report published in February 2006by the EIU is based on their globalsurvey of senior executives from 336large corporations, over 40 percent ofthem with revenues over US$1 billion.These companies were asked whatshapes the fundamentals of the waythey do business, and who and what

will change that way of doingbusiness. And when asked whichgroups of stakeholders will be thebiggest drivers of fundamental change, over 79 percent of companiescited customers. Other stakeholderstrailed far behind in importance, with business partners cited by 28

Rethinking thebusiness modelMajor changes in the way companies do business and seek profits

The expectations, requirements and buying habits of customers will be

the biggest drivers of change in companies’ business models over the next

few years, according to the new report Rethinking the business model

produced by the Economist Intelligence Unit (EIU) and sponsored by KPMG

International. This represents a major change in the way companies

do business and seek profits. It means that companies are turning their

attention away from primarily internal issues like headcount and

operational costs, and towards new markets and new customers.






percent of companies, employees by 12.5 percent and private shareholdersand home governments both cited by 12.2 percent (surveyed companiescould cite two groups). Regulators,suppliers, other investors and othergovernments all trailed even further behind.

The message from the EIU’s researchis clear: leading companies think that it is not the politician, the engineer orthe accountant who will be shapingthe way business is done in the near future – it is the customer. Says Matthew Szulik, CEO of software services company Red Hat:“Everything begins and ends with the customer”.

Rethinking the business modelrepresents a reinterpretation of ideasthat increasingly preoccupy innovativecompanies. The concept of thebusiness model was first in vogue inthe late 1990s, as the dotcom boomgenerated countless new businesses,all sporting new business models. But as the dotcom boom turned into the dotcom bust, the idea of the business model fell from grace.

Five years on, however, it is clear thatsome of the survivors of the dotcomboom are outstandingly successfulcompanies. What is more, manytraditional companies have embracedthe techniques and technologies ofpure dotcom companies to build new businesses and revive old ones.The success of such companies is theresult of a clear and original vision of anew kind of business model. It turnsout that the business model – as a way of conceptualizing how new kinds ofbusinesses can be built – is far from dead.

Companies participating in the surveywere asked to consider their businessmodels in closely defined terms. Theywere asked to include consideration of their unique value proposition, theirmarket segment by customer, productand geography, the structure of theirrevenue generation and their costs,

and the nature of their value chainfrom conception and procurementthrough manufacturing to marketingand distribution.

Thinking through a business in theseterms can help companies formulatestrategy and allocate resources, andthis is particularly important at timeswhen the business model is evolvingrapidly. In the last three years, reportcompanies in EIU’s survey, businesseshave been focused on refiningproducts and reducing costs. That ishardly surprising: the last few yearshas been a period of relatively loworganic growth and low corporateinvestment, when companies haveconcentrated on growing profits bycutting costs.

However, that era now seems to beover. Companies report that in the next three years the biggest changesin the business model will be in thevalue proposition and in the customersegments that the company seeks to address.

Creating value through customersrather than eliminating costs is likely to mean a new round of corporateinvestment. “We are going to have toinvest quite heavily in understandingwhat customers are looking for, whatthe trends are, how they want toconsume,” says Adam Klein, head of strategy for EMI. “It’s a very bigchange,” he adds.

More investment in the kind oftechnology that helps companiesunderstand consumer behavior will beimportant, says Miguel Diaz, the headof planning for fashion retailer Inditex,

79.8

28.0

12.5

12.2

12.2

11.3

11.3

11.0

8.3

8.3

2.1

1.5

Customers

Business partners/alliances

Employees

Private shareholders

Governments at home

Regulators at home

International/overseasregulators

Suppliers

Institutional investors

Governments overseas

Other, please specify

Credit rating agencies

Source: Economist Intelligence Unit/KPMG International, 2006

“It is clear that some of the survivors of the dotcom boom are outstandinglysuccessful companies.”

Who will drive business model change?Which stakeholders will be the biggest drivers of change in the next two years? (select two options)


which has built a business on closemonitoring and interpretation ofelectronic point-of-sale data. “Our shopsare like a nervous system,” says MiguelDiaz. “They provide us with a constantstream of information on what isselling, what isn’t selling, and what we could sell more of. We try to reactcontinuously to give them what they need.”

The right products for fast-changingcustomer preferences is only part of the story. Companies also seecustomer service emerging as a keyfocus. Almost 60 percent of companiesnow rate customer service as themost important element in competitiveadvantage – they say it is significantlymore important than managementskills (51 percent of companies ratedthis as “very significant”), productquality (45 percent of companies) or employee skills (40 percent ofcompanies). Significantly, companiesalso think that competitive edge incustomer service is going to bedifficult to maintain, with almost 30 percent of companies citingcustomer service as one of the “mostdifficult” areas for competitiveness.

Companies recognize thesechallenges: meeting them may not be so simple. The shift back towardsattracting and retaining customers asthe central theme of business recallsthe early 1990s, when many largecompanies came unstuck in pursuit of ‘customer focus’.

Firstly, there is a danger developingoverly large and complex business andproduct portfolios as companies striveto address every possible sub-segment

of the market. The ever-increasingavailability of consumer data andinterpretive information technologymay encourage companies to pursueevery last possible customer, ratherthan those customers who are goingto generate the best profits for the business.

‘Customer focus’ can also mean lackof focus when it comes to productsand services. Companies now haveaccess to more data about customerpreferences than ever before, but they should be aware of the threat ofbecoming slaves to their databases,KPMG International believes. Thedanger is that when a company knowseverything about what customers saythey want, they will forget the need toinnovate with products and servicesthat nobody yet knows they want.

“Technology alone will not give you abetter understanding of consumerbehavior,” argues KPMG Internationalin the report. “Intuitive thinking andknowledge gained from real dialogwith customers are at least asimportant.”

The report suggests strongly thatmany leading companies believe thereis a deep change of emphasis underway in the way they do business, asnew customers and new marketsbecome the focus of the businessmodel. Change always means risk:KPMG International believes that thecompanies that are successful in thecoming period will be those that notonly understand the need for changebut also know how to manage the

risks of change. “Risk management is not just about avoiding downside,”argues KPMG International. “It is about realizing potential opportunitiesand achieving objectives.”

Companies themselves see this period of change as fraught with riskboth internal and external: the surveyresults show that the uncertainbusiness environment, employeeresistance to change, lack ofmanagement vision and organizationalinflexibility are at the top of corporatestrategists’ concerns. It is not toomuch to conclude that the near futuremay prove more challenging than therecent past.


“Risk management is not just about avoidingdownside’… it is about realizing potentialopportunities and achieving objectives.”

Rethinking the business model

is a KPMG report written incooperation with the EconomistIntelligence Unit.

The author of the report is Gareth Lofthouse, Director, Europe,Executive Services at the Economist Intelligence Unit.

Tel: +44 (0) 20 7576 8238 e-Mail: [email protected]

According to a new report from KPMG International to be publishedthis month, IP Strategies for ConsumerCompanies, the role of IP in businessis changing rapidly as companiesbecome more knowledge-based. The globalization of markets and more rapid technological changes have brought new opportunities and new threats to businesses in the knowledge economy. Where IP was once an administrative andmaintenance function, there is now a management and organizationalchallenge.

“You have to recognize that IP doesn’tjust sit there and look after itself,”says Stuart Lockyear, head of IP atfashion company Burberry. “It needsto be recognized and nurtured.”

High on the IP agenda for manycompanies is the protection of brand value against piracy andcounterfeiting. But the report saysthere is also a deeper challenge to the way that companies think about IP. Companies now need toform business strategies around IP ownership and development:intellectual property is becoming a strategic issue.

How can businesses meet thesechallenges? The report concludes that many companies could learn from industry best practice in leadingconsumer companies to greatlyimprove their IP management, bothinternally and externally. But a singleapproach to the IP managementchallenge is unlikely to work, saycompanies.

“The world is a big place,” says Tim Behean of adidas. “There is nosingle global IP protection strategythat works.”

The internal challenge

It is likely that many companies need to raise consciousness of IP as a business issue within the company,through IP strategy that goes beyondissues of technological capability.

“What we have learned is that youcannot control everything,” says alarge European textile manufacturer.“You can use technology to do water-marking or product labeling; you canset up walls within your database orinternal networks. But in the end it ischeaper to make people more aware

The management and protection of corporateintellectual property are rapidly becoming keychallenges for businesses, say companiesinterviewed in a forthcoming KPMG Internationalstudy on IP protection.

Corporate IP:management and protection





of the IP issue, because there is no software barrier that cannotbe breached.”

Companies are increasingly aware of the need to accurately audit theirmanufacturing and distribution partnersfor IP royalties; they may be less wellaware of the need to audit their own IP legacies for exploitable assets, andbetter to understand the competitivepotential of their IP. According to Mark Cohen, senior consultant in theInnovation Technology Managementgroup of Scientific Generics (aninternational product development,technology licensing and consultingcompany) many businesses may oftenhold many patents that are not beingexploited to their full potential, forexample, within consumer electronicscompanies, despite the high cost ofmaintenance. Changes of businessstrategy, acquisitions and divestmentsall may mean that viable intangibleassets get left on the shelf.“You canalso find that old technologies can begiven a new lease of life by using newmaterials and new processes,” saysTim Behean.

Companies should consider whether they need to upgrade IP management to a more central and strategic role. When KPMGInternational conducted a survey in 2002 on how IP was managed,responses suggested that only aminority of companies had appointedIP directors. Today, however, somecompanies – albeit a minority – arecreating dedicated IP managementroles, with directors of IP representedat board level. “I brief the board atleast quarterly, and there is now agood understanding at board level of what the IP issues are, and howthey can be managed,” says Stuart Lockyear.

Lastly, companies may need toreorganize to fill in knowledge gaps in IP-related work. These may be knowledge gaps regarding newtechnology, or in understanding marketswhere IP threats and opportunities andthreats are developing.

Mark Cohen believes that manycompanies are not yet up to speed onfinding and using IP information. “Youneed to know what IP you have, andwhat IP other companies hold. Somecompanies work in an informationvacuum, and then it often turns outthat they cannot get to marketbecause they are blocked at the lasthurdle by the discovery of someexternally held IP.”

The external challenge

Companies that derive revenue from IP licensed to partners such as manufacturers and distributors may need to review partner auditingprocedures: experience shows that inmany cases revenues can be increasedand partner relationships consolidatedat the same time.

How should companies present theneed to audit to partners, withoutdamaging what may be a long-termbusiness relationship? One answer is to convey that auditing is a routinepart of the business, and that noindividual company is being victimized.Says Philippe Lacoste of Frenchclothing company Lacoste: “Auditingpartners should be an ongoing process– a process where no one sees it asanything out of the ordinary.”

And Alistair Campbell of GlasgowRangers Football Club points out thatIP protection actions can be shown tobenefit licensees as well as IP owners.“Brand protection actions are not justthere to manage licensees,” he says.“We also have to show licensees thattheir investment is being protected.”

Companies may have to devote moretime to learning how to work withnational authorities on IP protectionissues: the rapid growth of IP theftthrough counterfeiting, piracy and graymarkets means that it is no longerfeasible for companies to simplyassume that national police, customsand trading standards authorities willcarry all the burden of dealing withthese issues. Figures from the EUshow that today the majority of anti-counterfeiting actions by Europeancustoms authorities are initiated bycorporate applications: the chartopposite on Europe’s most stolenbrands shows the leading consumerbrand companies that are directing the anti-counterfeiting drive.

“Companies are increasingly aware of the need to accurately audit theirmanufacturing and distribution partners for IP royalties.”

17



Companies should consider developingcollaboration with national enforcementagencies. For example, AlistairCampbell says that Glasgow RangersFootball Club is currently runninginvestigations in Europe, in the U.S., inTurkey, Thailand and China:“Customsofficers, like all enforcement agencies,have many duties to perform and wetravel to various countries to assistthem with training in identifyingcounterfeit goods – often this is donein conjunction with other brands whoare experiencing similar problems.However, with new products comingonto the market and the fact thatcustoms officers are often transferredto different areas every year or so, it is important that this training is anongoing process”.

Companies also need to develop policylobbying positions designed to keep IPon the policy agenda at national andinternational governmental levels.

Many companies and industries stilllack convincing data on economiclosses from IP theft, say many IPspecialists. “The poor quality ofavailable data is a very big problem,particularly in the trademark world,”says Stuart Lockyear. Tim Beheanagrees. “The copyright-basedindustries have been very successful in collaborating against IP theft,” hesays. “Brands are much more diverse,in a way that makes it harder tocollaborate. And some are reluctant toshare data for competitive reasons.”

Companies will also have to reach out to customers, as well as togovernments. Many people still seethe availability of counterfeits as anadvantage, admits Guy Sebban of theInternational Chamber of Commerce.“Companies need to show that IPprotection is not only about jobs andprosperity, it is also about health andsafety,” he argues. “Counterfeit drugsor car parts, for example, represent areal and direct risk to personal health.”

Addressing consumers and the widerpublic raises complex issues forcompanies, as consumer motivationsfor buying counterfeited goods ratherthan authentic products are many andvaried. Yet despite the considerablechallenge of altering public perceptions,a little information can go a long way inchanging attitudes. “The biggestchallenge is often to make peopleunderstand the concept of intellectualproperty and that it may well belong tosomeone else.”

The report concludes that globalcompanies increasingly compete intheir ability to manage intangibleassets, and the quality of intellectualproperty management is emerging as a key to the competitiveness of21st-century businesses. Consumercompanies in particular face thechallenge of protecting IP resources in consumer markets where large ormass markets and increasing freedomof cross-border trade make IPprotection a 24/7 business concern.

These challenges affect companies ofalmost every kind, including companiesthat may not see themselves as

knowledge-based businesses, says thereport. “Ten years ago we were just afootball club that happened to sell afew jerseys and hats,” says AlistairCampbell. “Today we are a globalbrand and that means we have tomanage IP on a global scale.”

15%

8%6%

4% 4% 3% 3% 3% 3% 3%

47%

Nike LouisVuitton

Adidas Diesel FACT * Dior Gucci Ralph Lauren

Puma Rolex Others

Trademark owners Source: EU Commission, 2004

David Eastwood is a partner inKPMG's U.K. firm and is Global Head of KPMG's Intellectual Property and Contract Governance practice.David advises KPMG firms’ clients ondeveloping and delivering complianceprograms in relation to intellectualproperty and self-reportedrelationships and on broader issues of intellectual asset management.

Tel: +44 (0) 20 7694 8206e-Mail: [email protected]

Europe’s most stolen brands, ranked according to number of counterfeiting and piracy casesregistered by customs authorities in the EU in 2004

*FACT (Federation Against Copyright Theft) acts on behalf of brand owners incounterfeiting and piracy cases.


For all thewine inChinaThink China; think beer?

Not necessarily. China is slowly

maturing as a new market for wine

producers. In the long term the

commodity could shift from luxury

to staple as it has in many parts

of the Western world.

With no traditional grape wine culture, consumers who

differentiate by price rather than brand and where value

is determined by level of intoxication, China could be a

tough market to crack. Although trade restrictions have

been relaxed and there are significant opportunities,

it could still take wine distributors between ten and

twenty years to realize a return on what could be a

fairly hefty investment.

Although trade restrictions have been relaxed … it could still take … between ten andtwenty years to realize a return.


From baijiu to Beaujolais?

Traditionally the Chinese tipple hasbeen locally produced beer or baijiu(Chinese white wine made from grain).But with urban sprawl eating upagricultural land at 1 percent perannum1, the Chinese Government hasput the brakes on. It is promoting thedevelopment and consumption ofyellow rice wine and fruit wine toconserve grain supplies, reduce grainimports and encourage healthier living.

This government bias is evident atofficial banquets where red wine (the color is a symbol of happiness,prosperity and good health) isbecoming the approved beverage over traditional grain spirits.

Alexandra McPhee, Associate Directorin KPMG’s Australian firm, has spenttime with wine distributors, food andbeverage managers and other localindustry participants in China. Asidefrom Government pressure, she hasidentified five other factors likely todrive future wine consumption in China.

Room for imports?

So what scope is there for Western

wine importers?

For the world’s most populous nation,the per capita consumption of wine inChina is just 0.2 percent – beer andbaijiu continue to dominate.2 Localproducers account for a good 90 percentof market volume right now3 andbecause there is no label integrityprogram, foreign imports can belabeled as Chinese wine.4

“For now, though, it is the current lowtake-up which effectively creates theopportunity for imported wine to take a slice from traditional beverages,”says Alexandra McPhee.

But where they pitch their wines ismost likely to determine the successof a foreign entrant. Take a locally-brewed bottle of beer, which typicallycosts around 5 Renminbi (RMB),compared with 17 to 33 RMB fordomestically-produced wine. Meanwhilewine imports can cost anythingbetween 50 and 4,000 RMB with manyfilling the 100 to 500 RMB gap.3

More disposable income: Per capitaincome is rising, especially in coastalcities such as Shanghai, Beijing,Guangzhou and Shenzhen. Onedistributor reported increases in salesmanagers’ salaries of between 66 and100 percent in the past 12 to 18 monthsas skills’ shortages drive up wages.

Foreign direct investment: In 2004,foreign direct investment stood atUS$60 billion and is expected tocontinue to grow as internationalcorporations relocate Asian headoffices from Hong Kong or Singaporeto Shanghai.

More fine dining: High quality foodand beverage outlets are putting downroots in China – a trend expected tocontinue in the lead up to the 2008Beijing Olympics. Rooms at five-starhotels are forecast to grow fromaround 3,500 to 9,000 in the next two to three years.

International supermarket chains:

The liberalization of sanctions onforeign-owned commercial enterpriseshas prompted Western supermarketchains and retailers to move in. In 2006, Carrefour plans to roll out 20 new hypermarkets taking its totalto 91; Metro is planning 40 new stores by 2008.

Rise in home ownership: With therise in income and savings in urbanareas, there is a corresponding rise in home ownership. The Chinese areshifting from Hutongs (traditionalnarrow lanes of houses) into multi-storey apartments with modernkitchens. This encourages more eatingat home than eating out and, in turn,drives demand for modern shoppingformats stocked with wine and food.

Five factors likely to drive wine consumption in China

“For now, though, it is the current low take-up whicheffectively createsthe opportunity for imported wine to take a slice from traditionalbeverages.”



1. McKinsey Quarterly ‘What Executives are Asking about China’, March 2005

2. World Advertising Research Center, World Drink Trends 2005

3. KPMG in Australia analysis, 20054. Australian Export Market Grid



While there is still plenty of room forgrowth at the top end of this relativelyimmature market, the longer-termopportunity for importers is to tap intothe middle-income segment and topitch their wine at between 30 and 50 RMB. This will appeal to theburgeoning Chinese middle-class – a by-product of urbanization, currentlyestimated at 50 million people andforecast, according to somecommentators, to top 150 million in the next five years.

Some industry commentators believethat urban Chinese see grape wine asa product that expresses culturalsophistication.

The cost of entry

Currently almost two-thirds of wine isconsumed in restaurants, although thetrend towards home ownership andgrowth in supermarkets couldultimately reverse that.

For now, though, getting into the on-premise trade is costly.

KTVs (Karaoke bars) and nightclubs are where low-end, domesticallyproduced wine is heavily consumed by a relatively unsophisticatedclientele. Mark-ups in the region of 300-500 percent at KTVs and 500-2000 percent at nightclubs aretypical. With a high listing price tosupport low-value wine, this is alimited channel for imported wines.

•Restaurants charge entrance fees –as much as 300,000 RMB (US$42,000)for sole listing rights at top-endChinese restaurants, according to one Chinese brand manager.

•Bottle-opening or ‘corkage’ payments– incentives to waiting staff – arerising as brands try to outdo eachother. Some importers pay as muchas 50 RMB per bottle.

•At retail outlets, mark-ups in theregion of 20 to 30 percent arestandard. But producers need towatch out for festival promotion fees,anniversary fees and payments to permit promotional staff on the premises.

The richest pickings

With local consumers dominant at boththe low and ultra-premium ends of themarket, the richest pickings are mostlikely to be in the middle income (toptier of the mass market) segment.

Local wine producers are making asignificant investment in above-the-lineadvertising. This has helped to providea high level of awareness and comfortto uncertain consumers – resulting in many higher-income consumerschoosing a local branded wine. There will be no loss of face withbusiness partners or friends whenchoosing a brand of wine thatconsumers are aware of.

But presence in this segment comesat a cost. Research by McKinseysuggests that targeting middle- andlower-income consumer segmentscalls for products that are 30 to 50percent less expensive than premiumalternatives. This is the space that localwine producers currently dominate andwhere the cost advantage over foreigncompetitors is as much as 30 percent.It is a tough call for foreign entrants.5

Winning true brand recognition andbuilding volume will be a long andcostly process but likely, as otherforeign consumer goods companiesare proving, to be financiallyworthwhile. Ultimately, though, it is predominantly on image andperception – and appeal to the newlywealthy Chinese – that the Westernwine producer can capitalize.

What you need to knowabout China

•The more affluent regions in Chinaare largely coastal and urban – withmost wine consumed in Beijing,Shanghai, Tianjin and cities such asGuangdong and Zhejiang.6

•The urban shift will expose morepeople to a wider choice of food andbeverages as higher incomescompensate.

•There is no label integrity. Localproducers often omit the country of origin on packaging so most wineentering China may be passed off as locally produced.7

•Chinese consumers will pay more for imported wine which theyperceive as superior to and moreauthentic than domestic brands.6

• In wine tastings, the fruitier wines,such as New World and Australianwines, appeal most to Chinese palates.However, French wine continues to beconsidered the most prestigious.6

Alexandra McPhee is an AssociateDirector in KPMG’s Australian firmand is part of KPMG’s Wine Center of Excellence management team.

Tel: +61 (8) 8236 3343e-Mail: [email protected]

5. McKinsey Quarterly ‘Marketing to China’sConsumers’, March 2005

6. KPMG in Australia analysis, 20057. Australian Export Market Grid

kpmg.com

Global Consumer Markets contacts

Neil AustinGlobal ChairKPMG LLP (U.K.)8 Salisbury SquareLondon EC4Y 8BB U.K.Tel: +44 (0) 20 7311 8805Fax: +44 (0) 20 7311 3311e-Mail: [email protected]

Mark Twine Global Executive KPMG LLP (U.K.)8 Salisbury SquareLondon EC4Y 8BB U.K.Tel: +44 (0) 20 7311 3873 Fax: +44 (0) 20 7311 8936e-Mail: [email protected]

Fiona Sheridan Global Senior Marketing ManagerKPMG LLP (U.K.)8 Salisbury SquareLondon EC4Y 8BB U.K.Tel: +44 (0) 20 7311 8507Fax: +44 (0) 20 7311 8936 e-Mail: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the dateit is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professionaladvice after a thorough examination of the particular situation.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMGInternational (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms arelegally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) toobligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind any member firm, in any manner whatsoever.

© 2006 KPMG International. KPMG International is a Swisscooperative that serves as a coordinating entity for a networkof independent firms operating under the KPMG name. KPMGInternational provides no services to clients. Each member firmof KPMG International is a legally distinct and separate entityand each describes itself as such. All rights reserved. Printed in the United Kingdom.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Publication date: Spring 2006

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