The Consumer Goods Industry in 2014–an EIU webinar


On Wednesday, January 15, 2014, the Economist Intelligence Unit hosted the first in a series of six webinars on Industries in 2014.  This first webinar is on the consumer goods industry, and was presented from London by John Copestake, the Retail & Consumer Goods Editor at EIU.

1.  INDUSTRY SURVEY

The EIU looked ahead at various industries in 2014 using a combination of forecast data, a survey of industry professionals, and insights from industry analysts.  Global aggregates allowed EIU to forecast sales growth in 2014.  The survey was done by asking 647 industry executives about various issues in the industry.

Respondents to EIU’s global survey were largely optimistic for the year ahead, although optimism was largely reserved for the specific company they represented.  Expectations for the retail and consumer goods industry and the global economy as a whole were both more muted.  This is cautious optimism rather than a “ringing endorsement.”  Note that as many as quarter of the respondents thought that, rather than improving, that conditions were worsening for the consumer goods sector, which is line with the sentiment the respondents expressed regarding the global economy.

Expectations for 2014 Better Same Worse
For your company 50.0% 35.3% 14.7%
For the retail and consumer goods industry 32.4% 44.1% 23.5%
For the global economy 42.4% 36.4% 21.2%

2.  GROWTH RETURNS TO EUROPE

Europe in particular will swing from declining volume in 2013 (-1.0%) to modest growth in 2014 (about +0.2%).  Out of all the regions in the world (North America, Western Europe, Asia-Pacific, Latin America, MENA, and transition economies), Latin America will record the strongest increase in growth from 2014, from 1.5% in 2013 to 4.0% in 2014.  There were two reasons for this:  in Latin America, there is a return to earlier trends for the entire region.  In addition, the fact that Brazil is hosting the World Cup will bring some one-off gains to that economy.  Asia will experience the highest growth but not a big increase from 2013, up to 4.5% from 4.2%.

In Europe, particular markets such as Greece will continue to see declines, but at least the declines will be of lesser magnitude than in 2013.

3.  CHINA & INDIA ADD UNCERTAINTY

In China fears of a slow down in demand have been compounded by campaigns against corruption, against conspicuous displays of wealth and by increased regulatory scrutiny.  China has been the subject of the rumor of slower growth for about a decade, but it looks like it is finally starting to happen.  There have been high-profile examples of Western firms facing regulatory pressures regarding issues of price fixing and food safety.  Foreign firms seem to be singled out, and so this has an effect on foreign investment.

When asked whether they think that slower growth and greater scrutiny on foreign firms will detract from China’s appeal in 2014, half of the respondents agreed with this statement (as opposed to 20.6% who disagreed, and 29.4% who neither agreed nor disagreed).  In the luxury goods market, those firms selling luxury goods are being streamlined; for example, Revlon will quit the market.

In India,  weaker consumer spending and ongoing uncertainty over multibrand foreign direct investment in retail have undermined opportunities.  Only TESCO has formally expressed interest in investing in India.  Many are waiting for the results of the election in May.

This has forced firms to revisit strategies.  Many firms are both slowing down investment in China and halting plans for India until the issue of foreign direct investment is FDI is resolved.  When asked whether elections and the resolution of concerns around FDI legislation would prompt significant inbound retail investment in 2014, 23.5% of the respondents agreed, 17.7% disagreed, and 58.8% neither agreed nor disagreed .

4.  BEST IN SHOW

The five individual countries showing the fastest growing retail markets in 2014 will be

  • Algeria (13.8%)
  • Azerbaijan (9.6%)
  • China (9.5%)
  • Vietnam (8.0%)
  • Thailand (7.6%)

Algeria and Azerbaijan are showing the fastest growing retail markets, but from a relatively small base.  We still expect China to be among the fastest growing retail markets in 2014.

Others set to experience fast growth will be smaller markets and in some cases, such as Algeria, will also have risk attached to opportunity based on political instability.

The presence of Vietnam and Thailand highlights the emergence of new Asian retail markets.  Asian countries are beginning to step out of the shadows of China and India.

5.  MIXED MARKET OPPORTUNITIES

Since much of the focus is on the BRIC economies (Brazil, Russia, India, China), the EIU did a survey of 10 markets beyond the BRIC economies that had a mixture of developed and emerging markets.

The question was asked “Beyond China, Russia, India and China, in which three countries do you see the greatest opportunities for growth in 2014?”  The countries are listed in order of which received the total “votes” for either 1st, 2nd, or 3rd choice for having the greatest growth opportunities in 2014.

  1st 2nd 3rd TOTAL
USA 9.1% 12.5% 8.0% 29.6%
Mexico 12.1% 6.3% 4.0% 22.4%
South Africa 6.1% 3.1% 0.0% 18.3%
Turkey 15.2% 3.1% 0.0% 18.3%
Germany 3.0% 6.3% 8.0% 17.3%
Indonesia 3.0% 3.1% 8.0% 14.2%
Vietnam 3.0% 6.3% 4.0% 13.3%
UAE 6.1% 3.1% 4.0% 13.2%
France 6.1% 0.0% 4.0% 10.1%

Uncertainty in China and India has allowed a number of smaller markets such as Indonesia and Vietnam to step out of the shadows.  Recovering confidence in Europe has also led to a renewal of interest in markets in countries such as Germany and France.  But there are some surprises, such as South Africa Turkey and the UAE, which will also experience high growth in the retail and consumer goods industry in the coming year.

6.  E-COMMERCE

What is driving this moderate growth in 2014?  For one, e-commerce will continue to be a game changer.  The movement of e-commerce into the mainstream will be matched in 2014 by the accelerated role of mobile devices. This is expected to come at the expense of brick and mortar stores, and closures of these will be inevitable.  However, traditional retailers remain valuable and will continue to evolve through technology and service-led innovations.

About three-quarters of the respondents felt that

  • Store closures in mature markets will continue in 2014 as E-commerce sales grow
  • M-commerce (purchasing via mobile phones) will be a strategic priority in 2014 as showrooming and smartphone penetration rises.

The only areas that will continue to thrive in terms of brick-and-mortar stores will be highly populated business centers in large urban areas.

However, when it came to the following statements, only about half of the respondents agreed.

  • Pure-play (online-only) retailers will make inroads into developing physical stores and showrooms in 2014
  • Consumer behavior will be more influenced by ethical and sustainability concerns in 2014

Regarding this last issue, although only about a half of respondents felt that consumer behavior would be influenced by ethical and sustainability concerns in 2014, this figure is up from previous years.  This is because as the global economy recovers, those issues regarding ethical and sustainability concerns that had taken a back seat to other issues of pricing that had higher priority will now start to become more prominent once again.

7.  FIVE TRENDS IN RETAIL AND CONSUMER GOODS INDUSTRY IN 2014

a.  Data data data!

The use of data will become a crucial factor influencing retail strategy and purchase decisions.  PayPal and Ebay are currently at the forefront of mobile data. This however could turn out to be a double-edged sword, as issues related to government spying  and cyberattacks (Target) became prominent in people’s attention.

b.  Shopping Experiences

Shopping experiences Bricks & Mortar will create retail experiences to drive footfall and maintain loyalty.  Mobile phones will be a big part of this, as those going to consumer electronics shows, for example, use app-based QR coding to get more information on products, and then use social  media to broadcast their experiences at those venues.   Showrooming is increasing, as stores like TESCO for example buy up cafes in order to allow people to experience leisure while they are shopping.   Luxury firms in particular are working to create a space conducive to increased sales.

c.  Personal services

Online sellers are ramping up services to compete with traditional retailers.  For brick-and-mortar stores this is crucial because it is one of the few things that they can use to distinguish themselves from online stores.

d.  Race to the doorstop

The race to the doorstep using anything, from drones to courier company acquisitions, continues apace as the reduction of delivery times are a crucial new battleground.  Obviously here brick-and-mortar stores have an advantage.  Amazon is buying smaller warehouse spaces closer to population centers in contrast to its earlier strategy of relying on out-of-town megasheds.   Ebay has bought up shuttles to outsource delivery to courier companies in order to reduce delivery to as little as 1 hour in some select areas.  Drones won’t appear in 2014, but will be in place by 2020.

e.  Social branding

The events in Bangladesh in 2013 have pushed such ethics back up the consumer agenda.  Last year, there were plenty of stories about the growing dangers of climate change, and there was a big focus on the factory collapse in Bangladesh.  This has always been an underlying trend.  In 2007, the credit crisis hit, and cost consciousness became key for the next few years.  Consumers have been slowly recovering income, however, and in 2014 they are looking again ethics so that they don’t compromise value for money.  The problem is that firms will have to meet these consumer demands without adding a price premium to their goods.  Before 2007, people were actually willing to pay more for ethically-branded goods, but now they are not willing to pay as much.  Companies will be focusing more on accentuating ethical claims in their media.

8.  QUESTIONS & ANSWERS

a.  Does the growth in Asian markets mean that it will remain the focus of FDI?

Yes.  India in contrast has a challenge in proposed FDI laws at the moment, so investment there will be put on hold until the outcome of the elections in May becomes clear.  There is still an appetite for investment in China, despite talk of slowdown.  The retrenchment in FDI is not a result of the rejection of BRIC countries as much as it is the result of investment coming back to home markets where there are finally signs of growth starting to occur.  In addition, there will be a lot more domestic demand from China and India.

b.  What insights could you give on the US retail and consumer goods market?

The US market is difficult to call.  There are a lot of mixed messages; it is relatively positive in terms of positive growth in the aggregate, but individual stores face a difficult operating environment.  There are huge losses:   Best Buy, Target, and WalMart are all facing difficulties.   There is a msmatch between profitability of retails companies and the state of the overall economy.  It is a tough operating environment although it is relatively stable.

c.  What can you say about the Japanese retail market?

Fiscal stimulus dubbed “Abeconomics”continued. Traditionally Japan has been a stagnant market with negative inflation.  Because of the sales tax increases that will take place in 2015 and 2016, the sales increase in 2014 that will occur in order to beat the looming sales tax increass may create a short-term inflationary spike.  It’s still highly profitable market, although growth is slow.  It makes a lot of money for those companies that have invested in Japan.

d.  What are the particular challenges in the Chinese retail market?

In China the problem is exposure to investment.  China is going to be the 3rd highest economy in 2014; it will overtake the US in 3 or 4 years to become the world’s largest.  Relative to its historical performance with double-digit growth, the current growth rate is perceived as slow performance.  Many investments are operating on slim margins, because they have previously been expecting double-digit growth.  It is a difficult operating environment:   increased regulatory scrutiny, changes in government policy, and more frequent media campaigns are all taking their toll on foreign companies.  Starbucks had recent problems, for example, because of their pricing policy.

e.  What are your thoughts about E-commerce regulations in India?

India FDI commerce regulations are still up in the air.  There is a greater appetite for e-commerce in India, but the outcome of the May elections will be crucial to this.

f.  What about M-commerce and S-commerce (social-media commerce)? 

Social media commerce (e.g. Facebook) is waiting to explode.  It has been predicted as a trend since 2011, but it still hasn’t materialized.  The highest growth rates in the Facebook user market are coming from Brazil and Latin America.  Pinterest in particular was a great traffic driver in 2013.  We haven’t seen, however, viable S-commerce growth.  It is used as a tool for consumer engagement and brand promotion, however.  The real strength of S-commerce has in terms of peer reviewing and direct sales.

The problem is about data—consumer goods firms may be reluctant to use Facebook, because proprietary data is owned by Facebook, not by the retail firm.

g.  What about the retail market in Russia?

Russia’s retail market is growing along with the economy at about 4.5%, but other elements are undermining that potential growth.  Just remember that Russian growth levels were in double-digit territory before the 2008 global slump.  There has been increased taxation of beer, vodka and tobacco.  Inflation undermines real growth.  A lot of Russia’s trading partners are in Western Europe which had been some of the hardest hit by the global slump after 2008.  However, as their economies start to grow, albeit slowly, Russia will experience some increase as a spillover effect.   trading partners are in W Europe which have been hard hit.  There is increased spending on malls in Russia.  The luxury goods market is being driven, as you would expect, by the oligarchs; it is the key market for luxury goods in the world outside China and Dubai.

h.  What about the retail market in Latin America?

There has been much emphasis on Brazil in recent years.  The real surprise has been Mexico; Mexico could well be the new Brazil in the region, due to its ties with the US through NAFTA.   Columbia and other Latin American markets are smaller than Mexico and Brazil, although there is significant growth in both Argentina and Venezuela.

i.  Are the megasheds in danger of disappearing?

Megasheds are here to stay; they are prevalent because they are in places where real estate prices are very cheap.  They are still within commuting distance from towns and centers, in a sort of wheel-and-spoke arrangements.    Level of demand is already there; Amazon sales were $50B last year.

The real development isn’t in megasheds; although they are developing in East Europe, they already exist elsewhere.  The megasheds however are being supplemented by smaller sheds that are closer.  Only in key markets around key cities will same-day delivery be a viable option in 2014.

j.  What about retail tourism in 2014?

Other than the obvious case of Brazil because of the World Cup, thebig growth driver is China, which overtook the US as the biggest destination of retail tourism spending.  The other world leaders in retail tourism are London, Paris, NY, and dedicated retail hubs like Dubai, Abu Dhabi.

Brazil is tangential.  It will experience a spike in sales, but those who are going to Brazil are visiting for the World Cup, not for shopping.  The trend to watch will be how London, Paris, NY, etc. address the Chinese propensity to spend abroad.  The demand for Mandarin speakers in tourist destinations is on the increase.  UK has a convoluted system to allow Chinese visitors, and so is in a disadvantage vis-à-vis Europe, where the visa system is simpler and they can go to several countries based on a single visa.   The UK will have to address this issue to remain competitive.

The other development related to the rise in Chinese retail tourism is the fact that many Chinese consumers are being served in countries in South East Asia like Vietnam and Thailand.

 

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