Top Emerging Countries for Retail Expansion

Retailers are playing leapfrog when it comes to expanding in emerging markets by entering smaller cities. This is one of the findings of the sixth annual Global Retail Development Index (GRDI), a study of retail-investment attractiveness among emerging markets conducted by management consulting firm A.T. Kearney. For the fourth consecutive year, India and Russia occupied the top two spots of the GRDI, followed by China, Vietnam and the Ukraine.

Modern retail formats grew 25% to 30% in India, and 13% in both China and Russia in the last year. Until recently, such rapid growth was confined to the largest cities in the country. But increased competition is forcing retailers to expand into second- and third-tier cities to drive growth. In China, for example, Wal-Mart Stores and Tesco are branching into smaller mainland cities. And Carrefour announced plans to enter Russia via tier-two cities.

The report cautioned that all cities are not created equal.

“Retailers should not go into third-tier cities armed with a first-tier strategy,” said Mike Moriarty, a partner with A.T. Kearney and co-leader of the GRDI. “Successfully entering a new country via smaller cities requires careful identification of cities with consumers who are ready to embrace modern retail formats. Incomes are smaller and products need to be customized for different markets.”

While the window of opportunity for global retailers to expand in major cities in India, Russia and China is closing in, large cities in other countries among the GRDI’s top 20 still offer tremendous growth potential, according to the study, including those in Middle Eastern and North Africa countries. The Eastern European region also remains attractive.

A.T. Kearney recommends that retailers factor in the impact of an available and well-educated labor supply into their expansion decisions.

“Finding a skilled-labor force is just as important to global expansion as an underserved market and ready consumers,” Moriarty said.

A full report on the 2007 GRDI is available at www.atkearney.com.