Global retail market insight

Global retail trends

North America

Latin America

UK Europe

In revenue terms, North America is the leading region in the global retail industry, with a 37 percent share of the largest 250 retailers. Generally the sector has grown over the last few years, showing a direct link to economic recovery and a return to retailer expansion. There has been increased activity in Canada recently, driven by US brands such as Saks, Target and Nordstrom establishing bases there. Though around 90 percent of sales are currently made in store, technology is playing a greater supporting role. Retailers are creating digitally enhanced spaces to showcase their products and providing more information through hand-held technology both pre and post sale.

There has been sustained economic growth of between two and seven percent across Latin America in recent years, driven primarily by rising prosperity in the middle classes. High disposable incomes in the upper middle class and the lack of a culture of saving mean that spending is beating inflation. The growing lower middle class is increasing demand for automotive, household goods and clothing. Young, fashion-conscious consumers dominate, with strong brand awareness and an appetite for the latest high tech products. Brazil is the strongest retail market, with numerous new shopping and automotive retail facilities in planning and construction. Mexico, Chile, Colombia and Peru are also growing, driven in part by US and European investment. Retail banks are also undertaking modernisation programmes across major cities.

2014 has seen an upswing of growth in the UK’s retail sector, driven by an improving economy and resurgent housing market. While still volatile to wider economic shocks, increasing corporate investment is encouraging a slow and steady build for this sector. Food retail still accounts for over 70 percent of core retail spending and we will see convenience shopping grow over the next 12 months. We expect innovative new convenience offers to appear following key acquisitions by a number of food retailers. Though over 90 percent of retail spending is through physical stores, those retailers enjoying the most success combine bricks and mortar with an online presence. Looking further ahead, we can expect more change on the UK’s high streets, and greater scrutiny around investment decisions, particularly for retail banking.

Retail markets across Europe vary widely, depending on their level of maturity and the local economic situation. Investment and development in Eastern Europe is constant and growing. Poland is entering its third decade of dynamic growth with new overseas retailers and luxury brands entering the market. Thirty new global brands set up operations in the country last year. In Russia, a retail boom is just beginning with 63 new complexes in 40 Russian cities completed in 2013. In long-established markets, such as the Netherlands, certain retailers have had a slow year, although growth continues in the food sector. A trend in Western Europe sees investment in outdated shopping centres to allow retailers to expand locally.

37%share of world’s largest 250 retailers

661mpredicted size of Latin America’s consumer population in 2025

90%of retail spending takes place in store

30global retail brands set up operations in Poland last year

The global retail sector is changing at an unprecedented pace. In our first global retail market insight, our experts outline the current trends.

3

AsiaMiddle EastAfrica Australia

Africa’s middle classes are predicted to reach 1.1 billion by 2060, making it the world’s fastest growing continent. The retail market in sub-Saharan Africa continues to grow as African economies stabilise, with maturing markets demanding more advances and readily available consumer goods. The past 12 months has seen retailers expanding aggressively into secondary markets outside of South Africa and Nigeria. The majority of these companies are headquartered in South Africa. Looking ahead, we expect a significant expansion in retail opportunities across the region. Ghana, Zambia, Mozambique, Botswana, Kenya, Tanzania and Uganda will be the main hotspots.

Increasing populations, local and expatriate wealth, strong household consumption and a thriving luxury tourism industry have been the drivers for a growing retail sector in the Middle East. Luxury vehicle manufacturer Jaguar Land Rover experienced a 36 percent increase in sales in the region this year. As one of the fastest growing industries, and the second largest behind oil, retail is a major contributor to ongoing economic growth in the region. The most dynamic markets, and those with the highest potential for growth, are the United Arab Emirates, Qatar, Saudi Arabia and Kuwait. With many substantial developments in the pipeline, international retailers continue to enter the market, competing with established global brands. The Middle East will remain an exciting player on the global retail stage.

Asia remains a hospitable environment for retailers, who are continuing to deliver innovative brand showcases and make large investments to secure prime locations. We have seen a drastic shift from a ‘build it and they will come’ approach to more strategic decision making when it comes to retail facilities. Developed markets such as Hong Kong, Singapore, Malaysia and Japan continue to benefit from both strong domestic demand and an influx of tourist dollars from China, India and the West. There is also growth in India and China, although recent spikes in Chinese consumer confidence have been driven by demand in tier four, and not major, cities. Automotive retailers are anticipating huge growth opportunities in China, where 22 million vehicles were sold last year. Vietnam and Indonesia are still largely based on independent retailers, and are seen as longer term prospects.

Though the Australian retail sector previously sustained a downturn, domestic retailers have emerged in better shape than other developed economies. Retail property in particular is performing well, with revenues growing at 3.6 percent on average over the past five years – mirrored by increased investment from foreign retailers extending or establishing operations in Australia. This is expected to continue for the next five years. The retail market is divided into two sectors – consumer goods and fast-moving consumer goods (FMCG). FMCG has enjoyed a steady average annual growth of 2.4 percent, forecast to continue at 2.3 percent up to 2019. Consumer goods has seen negative growth of nine percent on average, however is expected to return to two percent growth per year for the next five years.

1.1bnpredicted size of Africa’s middle class in 2060

36%sales increase reported by Jaguar Land Rover this year

22mvehicles sold in China last year

3.6%average growth of retail property revenues in past five years

4

Five top tips for successLocal knowledge and insight is essential to success – our regional retail experts share their top tips.

North America 1 An informed e-marketplace

Keep an eye on how e-commerce is developing. The way consumers make purchasing decisions has changed dramatically; many will use smart phones to compare prices and read reviews while in store. There are a growing number of online retailers ready to deliver, often on the same day.

2 Rebranding and redesigning

Retailers are rebalancing their portfolios as the impact of technology means less selling space is required in many sectors. 3D branding, an approach which aligns interior design to brand positioning, is being tied into this. For example, a US$1bn investment in re-imaging 1,400 McDonald’s restaurants in Canada contributed to an 85 percent increase in guest traffic.

3 Three key demographics

Marketing strategies must fit demographics. Baby boomers will account for the bulk of spending growth in categories such as food and homewares; spending by Hispanic consumers will double in the next decade; and Millennials will account for one-third of total spending by 2020.

4 Digital marketing yields results

Personalised digital marketing, using sophisticated algorithms and predictive models to recommend products, is having an impressive impact on purchasing. Maserati North America used this as part of its approach to increase new model line sales by an unprecedented 72 percent in 2013.

5 Destination retail

Consumers are seeking out retailers who provide value and excitement in new ways. Brands such as Apple offer information and expertise in how to choose and use products, and offer them in exciting, interactive environments which become true destinations for customers. Choosing suppliers who innovate and create added value is essential for success.

Regional contact:Matthew Cryer matthew.cryer@turntown.com

Latin America 1 Know your tax implications

Import taxes can be very high, and vary across different retail goods. Manufacturing in-country can sometimes be the only option for retailers to compete with local brands. Local manufacturing is strong, but complicated to set up.

2 Project set up

New entrants often need a local partner due to stringent rules requiring local involvement. Labour costs are low compared to the more mature markets of North America and Europe.

3 Supply chain hurdles

Logistics for the movement of goods are complicated by bureaucracy, poor infrastructure and huge distances, adding to the cost of goods. There are also complicated tax, labour and business laws across the region.

4 Quality management

Though the construction market is sophisticated, there are some significant differences when compared to other regions. Design quality and construction programming need to be closely managed and monitored. Programme and portfolio management is not widespread.

5 Macro environment

The banking industry in Brazil has one of the most attractive interest rates in the world at present. Inflation across the continent is controlled in most locations, but still running higher than in North America and Europe.

Regional contact:Robert Edwards robert.edwards@turntown.com

5

Europe 1 Price points

Price pressures are coming from lower consumer confidence and the growing impact of internet shopping. Any expansion needs to be cost effective. Contractors are pricing low to win work but this can create problems later on.

2 Innovation

Technology is changing the face of retail. For example Bijenkorf in the Netherlands is using 3D modelling so that customers don’t have to try clothes on. Retailers need to keep abreast of the competition and ensure their stores meet demand.

3 Choose suppliers wisely

Choose contractors and architects with local experience in retail projects. The economic crisis has led to supply chains switching sectors and countries, but knowledge of permit processes and local legislation is vital.

4 Tenant expectations

More tenants are expecting a significant contribution to their fit out from landlords. The strongest brands are demanding turnkey fit outs and optimised rents in new shopping centres in regional cities.

5 Know your regulations

Local adaptations of EU Directive 2002/91/EC (recast as 2010/31/EU) on the energy performance of buildings, set minimum requirements that impact thermal insulation requirements and glazing. A retailer’s corporate design manual may be affected by this.

Regional contact:Iain Leyden iain.leyden@turntown.com

UK 1 Omnichannel retailing

Service your customers through a range of channels: high street outlets, online, mobile applications, click and collect and virtual stores. Those retailers with the right balance of omnichannel retailing and great customer service will be most successful.

2 Brand presence

New retailers should use all opportunities available to bring their brands to market. This could be through high street locations, but also consider pop up stores, endorsements, lifestyle stores, alignments with other retailers or concessions. Value, location and target customer are important in this choice.

3 Have a portfolio strategy

Consider your property and asset management strategy carefully with your consultant team, particularly in relation to portfolio development or growth.

4 Know your asset life costs

Make sure your business plan includes a robust strategy for delivering your brand requirements across your portfolio, including refitting, refurbishment and facilities management. It is important to understand the true life cost of asset and development investments.

5 Bring best practice

Look to global retail markets for inspiration and best practice. There are lessons to be learned around risk management, programme management and the impact of capital projects on brand.

Regional contact:Carl Baldwin carl.baldwin@turntown.com

6

Africa 1 Maturing market

The retail market in South Africa is approaching maturity with significant formal retail penetration. Medium and long-term success here will come from gains in market share and the ability to launch new brand formats and products.

2 East = acquire

Retailers wanting to operate in East Africa, particularly Kenya, must look at acquisitions and franchisees. This is a mature market dominated by extremely capable local retailers.

3 West = challenging but rewarding

As the most underpenetrated region, West Africa has the most potential for growth. This is a challenging environment with costly regulatory burdens and store running costs at least double that of South Africa. Profitability of up to four times that in the South, however, attracts expanding organisations.

4 Logistics key to success

Success for high volume retailers depends on reliable and cost-effective logistics. Strategically placed and well-connected logistics hubs are needed to support the market, with upgrades on infrastructure required across the continent.

5 Trade tactics

With trading agreements between African countries largely in their infancy or ignored, moving goods across borders can be prohibitively expensive in terms of open market pricing.

Middle East 1 Partner up

Any new entrant requires a sponsor: a well-established local individual, corporate group or family to partner with. Examples include Al Tayer Group which represents retailers including Harvey Nichols and Bloomingdales in the United Arab Emirates and M. H. Alshaya who represent Starbucks.

2 Hot spots

Retailers should consider where the next potential ‘hot market’ might develop. Dubai has led the way as a primary shopping destination for international and regional visitors, but development and growth could follow in surrounding regions.

3 Destination retail

The Middle East offers a diverse range of retail outlets, souks, community developments and larger regional malls. Entertainment and leisure attractions ranging from skiing and indoor skydiving to play centres now feature within many of these developments, with some even incorporating hotels for transient shoppers. Retailers must select the layout and location which best fits their target market.

4 Contractor quality

It is important to select the right fit out contractor to avoid compromising on the quality of the end product. The Middle East market is flooded with fit out contractors, but capabilities vary hugely. Retailers feeling pressure to make decisions quickly risk poor quality retail environments.

5 Timing is key

Middle East retailers tend to vary their operational hours, particularly into the evening. During religious and public holiday periods mall opening hours can extend as late as midnight. Considering your hours of trade is key to keeping ahead of the competition and meeting customer expectations.

Regional contact:Ross Dunkerley rdunkerley@turntown.co.za

Regional contact:Adam Ralph adam.ralph@turntown.com

Five top tips for successLocal knowledge and insight is essential to success – our regional retail experts share their top tips.

7

Asia 1 Location, location, location

Location planning must be at the heart of every decision made on Asian retail market entry. We have seen some retailers make bad real estate decisions resulting in either a lack of customer traffic or an ill-suited property which, although well located, requires too much ongoing investment.

2 Fit for purpose design

Match your capital spend to the opportunity. The location, estimated footfall and target demographic should all impact on the design and how much to invest. Underinvestment can damage brand, while overinvestment erodes returns.

3 Tailor costs by region

Construction costs vary widely across Asia. As well as understanding local costs, upgrades from standard shop fits to five-star finishes and features – such as architectural facades, elevators or travelators – will ramp up costs quickly. Bespoke estimation will be required.

4 Procurement home advantage

As a large proportion of the world’s fixtures and fittings are made in and around Asia, there is a significant opportunity to make savings through intelligent procurement. Sourcing items such as racks, stands, loose furniture and joinery locally can reduce costs, reduce lead times and in many instances increase quality.

5 The market moves fast

Change comes quickly here, from government regulations to consumer trends. Nothing can be taken for granted, and retailers need to be agile and creative to move with the market and prevent sales erosion. Competitors are quick to react with new product offerings and stores to suit.

Australia 1 Location, location, location

Australian customers generally prefer major shopping centres over strip shopping and neighbourhood centres, with the exception of specialty retail locations and capital city central business districts. International retailers are therefore selective in choosing their initial investment location, with the business model of the brand playing an important role.

2 Quality control

The last ten years has seen most large-scale shopfit manufacturing move to Asia due to high Australian labour costs, with mixed results. To ensure success, tight independent controls accompanied by local expertise are needed on contractual agreements, design standards, quality standards, enforcement and monitoring.

3 Brand protection

Some local retailers are introducing private label or exclusive brand products into their mix due to the high margins these can command. Industry sources suggest these must only be ten percent different from the original design in order to avoid breaching property rights.

4 Service is a differentiator

Service varies between stores, and some retailers – such as Apple, Tiffany, Nespresso and Sunglass Hut – see high customer service levels as a differentiator. The increasingly important Millennial – or generation Y – customers want to relate to the people serving them, responding to product, trend and brand.

5 E-retailing still emerging

The use of technology for product and service personalisation is gradually being introduced by specialty retailers. For online shopping to achieve a competitive edge and meet consumer demands, online and in store strategies need to align with effective supply chain management.

Regional contact:Michael Hobday michael.hobday@turntown.com

Regional contact:Barry Gater barry.gater@turntown.com

8

Turner & Townsend is a leading global programme management and construction consultancy that supports organisations that invest in, own and operate assets.

Working from 83 offices in 33 countries, we are making the difference to projects across the property, infrastructure and natural resources sectors worldwide. We help organisations succeed by managing risk while maximising value and performance during the construction and operation of their assets.

www.turnerandtownsend.com

© Turner & Townsend May 2014. All rights reserved.

For more global retail insight please contact:Peter Cummings, Global Head of Retail peter.cummings@turntown.com +44 (0)20 7544 4015