Macroeconomics Insight Center

Retailing in the Week Ahead, Week 47

Lehman Brothers filed for bankruptcy on 15 September 2008 – 10 years and two months ago. Over the past few months, many newspapers have been ‘memorializing’ the 10-year anniversary of the collapse of the global banking system by discussing how the world worked pre-crisis and comparing how different the world is today. In many instances, the conclusion has been that the world is not so different.

I’ve been waiting to see a piece of analysis on how retail is different or to be asked how global retailing has changed. Unfortunately, I’ve neither seen anything nor been asked to give some perspective. So, I’ll just go out on a limb and say something before time marches on and, instead of 10 years post-crisis, we’re 11 years or some other less than ideal number distant from the collapse. Let me offer three thoughts.

First thought: Consumers
While the initial impact of the financial crisis was to send real estate prices plummeting, it did not take long for property values to return to similar levels when economies began functioning more fluidly. However, the prerequisites for qualifying for a mortgage became more stringent.

The world as it was in 2008: Lehman Brothers on the brink and Walmart pursuing big-box dominance in Brazil... (Source: YouTube, Walmart)

This, coupled with a much tighter jobs market, created a generation of consumers who could neither qualify for a mortgage nor easily obtain their dream job. The gig economy was born. Now, if you don’t think that the gig economy has had an impact on both how consumers think about purchases (highly promotional in nature) and how they think about employment, well, please spend some time talking to retail partners.

Consumer conclusions:  A new generation of consumers has grown up in an age where employment is neither guaranteed nor consistent in how it pays, making big, in-your-face, promotions more important than ever. To understand this, just look at Alibaba’s 11.11 festival or ‘Black Friday’ (happening now).

Second thought:  Shareholder Returns
Another thing that happened after the collapse of Lehman was that all publicly-traded corporations were reviewed using a new lens – were they exposed should property markets continue to tumble? As a result, investors began a long process of downgrading stocks, vis-à-vis others, that had three elements going against them.

First, companies with a big sack of long-term debt began to be viewed unfavourably. Second, companies sitting on large property estates, particularly those without alternative uses, were viewed less favourably than asset-light or ‘new age’ companies. Finally, companies that had a large chunk of fixed-wage staff in unskilled positions became less attractive.

The age of ‘free cash flows’ in retail was born. And, if you don’t believe that this has had an impact on how retailers think about capital investments and property expansion, again please spend some time talking to your retail partners.

Shareholder conclusions:  A new generation of investors has grown up in an age where companies that sit on debt, with cash tied-up in construction projects, and have armies of workers trained to do one thing, are less attractive than new age companies that have waves of funding drives, highly skilled worker, and investments going toward building new technologies or agile partnerships. To see this, just have a look at Amazon’s announcement of the opening of two “headquarters” in New York (Queens) and Washington DC (Virginia).

Third thought:  Globalisation of Retail
Finally, as an analyst before the crash, I was frequently asked the question: “Which is the most competitive country in retail?” I no longer get asked this question. I believe that the reason this question was so important pre-crisis is because global grocery retailers – Walmart, Carrefour, Tesco and Metro, to name a few – had a difficult time gaining access to new countries (such as India back in 2007/08), but once they achieved it were able to completely transform the nature of retail competition in these markets in permanent ways.

...And some signifiers of the world of 2018: on-demand delivery, Amazon's rapid growth, global online sales events. (Source: Deliveroo, City of Arlington, Alizila)

So, back then my answer was that either Brazil or Poland were the most competitive markets in retail. My rationale was always based on the number of highly ranked global retailers operating in the country. For example, in Brazil you had the number one (Walmart) and the number two (Carrefour). In Poland, you had most of the world’s top 25, excluding Walmart.

Today the story is different. Alibaba is the world’s largest retailer as measured by GMV (sales generated through orders on Alibaba platforms). Amazon and/or Apple are the world’s largest retailer(s) as measured by market capitalization – that is, if you consider Apple a retailer.

Each of these companies mentions in the first few lines of their company description that they buy and sell goods and services in every country on the planet. The barriers to market entry have disappeared for one simple reason – you neither have to “own your workers” nor “build properties” to be successful in global retailing.

Globalisation conclusions: A new generation of retailers has emerged that can enter new countries with new services quickly and without having to invest mega-sums to get their businesses up and running. To see this, just compare Walmart’s success in India when trying to build a chain of retail stores to its success after partnering, then acquiring, Flipkart.

The Week Ahead
Now here are the two most important questions to ask as you begin work in the week ahead.

  • First, how do the three changes that changed retail over the past 10 years play-out in the next 10 years?
  • Second, which country is the most competitive in retail, and why, and are you succeeding in that country?

My view:

  • Now that consumers and investors who grew up in the post-Lehman world are the primary force of investment and consumption, we should expect some dramatic changes in what to expect, both in terms of how companies are valued, but also how purchase decisions are made. Expect some volatility and unpredictability as we transition from a world dominated by pre-Lehman thinkers to a world of post-Lehman thinkers.
  • I believe that the Top 6 most competitive markets in retail are South Korea, China, USA, Japan, UK, and France. I don’t think good companies can thrive in the next 10 years if they struggle to find success in more than two of these markets. If you want to hear more about why I think these six countries are more competitive than others, you’ll have to respond using the links below.

In the end it probably does not matter which market I think is the most challenging. What do you think? Which market is your company finding the most challenging? Should you remain in the market and learn from the challenges or take the easy way out and exit? As retail evolves, the number of ‘easy’ markets will probably fall, so sticking with it may be the better bet in the long-term.

Here are links to great pieces of work we published on Retail IQ in Week 46:

Please share your thoughts or questions on ‘Competitive Retail’, or any other topic.  Good luck in the week ahead.

Regards,

Ray Gaul – Ray.Gaul@KantarConsulting.com and @KantarConsulting or @RayGaul on Twitter plus LinkedIn.

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