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2013 Outlook for the Retail and Consumer Products Sector in Asia

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2013 Outlook for the Retail and Consumer Products Sector in Asia 1

Impacted by the global economicconditions, growth in many Asian

markets has slowed down. However,the region as a whole remains ahead ofNorth America and Europe. Retailsales volume in Asia Paci c isforecasted to grow 6% in 2013 and willmaintain this upward momentumthrough to 2016 with an estimatedmarket worth of US$11.8 trillion, while that of North America andWestern Europe is US$4.4 trillion andUS$3.1 trillion respectively. Home toChina and India, Asia continues to be

the main driver of retail growthglobally and holds out the bestopportunity for growth and pro ts formany international retail andconsumer companies.

The growing critical mass ofconsumers in Asia warrants long-terminvestments and tailored marketstrategies. Indeed, by 2020, thepercentage of the populationconsidered as middle class is envisagedto shift from North America andEurope to the Asia Paci c region. Thisshift may happen even earlier, asChina’s leadership has committed inthe recent 18th National Congress ofthe Communist Party of China, todouble the country’s 2010 GDP and percapita income of both urban and ruralhouseholds by 2020. The expandingmiddle class consumers will be asubstantial force in driving demandsfor a wide spectrum of products,ranging from functional food, personal

care products to the latest smartphonemodels. The same phenomenon is alsohappening across many Asiancountries including India, Indonesiaand Vietnam.

As the largest market in Asia, Chinaremains crucial for many retail and

consumer companies. The Chinesegovernment has reiterated its emphasisin boosting domestic consumption,relative to xed investments andexport, as the key economic driver ofgrowth. While the pace of growth mayhave slowed, the retail industry isforecasted to grow at 10.5% in 2013and 10.4% through to 2016. At thesame time, India, with its huge youngpopulation and growing income of themiddle class, will continue to attract

the attention of international andregional players. This is particular so with the recent relaxation of the limitson foreign investments in Delhi toallow 51% foreign equity in multi-branded retail operation. India’s retailgrowth is forecasted to bounce backstrongly from 1.9% last year to 6% in2013.

However, Asia’s consumer markets arenot completely liberalised and remainhighly fragmented. Traditionalretailing still dominates and localplayers are abound. Apart from thechallenges in navigating throughregulatory hurdles as well as adaptingto cultural differences and consumerpreferences, retail and consumercompanies also have to cope with thein ux of new competitors to themarket, whether online or of ine. Overthe years, some international retailand consumer companies might haveexited from certain markets in the

region, but there are also others

Foreword

Carrie YuChina & Asia Paci c

Retail and Consumer LeaderPwC

making a comeback, and still morethat have turned around successfully

through transforming the operatingmodels and product offerings. In anevolving and dynamic marketenvironment, the strong survivors areoften those who stand rm on theircorporate mission, backed by solidinfrastructure fundamentals andequipped with razor sharp focus toconstantly reinvent themselves tocreate value to stakeholders.

Indeed, we have witnessed numerous

innovations and success stories ofmany local and internationalcompanies in the industry. In thisconnection, I am personally inspiredby the interviews featured in thisreport and hope our readers will ndthe same inspiration. We are honouredto have some of the region’s mostsuccessful companies in generouslysharing their core values and ethics,business visions and consumerinsights. I am deeply grateful to MrMotoya Okada of Aeon, Mr John Lo ofTencent, Mr A. Mahendran of Godrejand Mr Nigel Luk of Cartier for sharingtheir wisdom. I would also like to takethis opportunity to thank ourcolleagues in the region and theEconomist Intelligence Unit for theirinvaluable input and assistance.

Sincerely,

January 2013


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This report was written in cooperation with the Economist Intelligence Unit’s industry and management research division.The economic and industry forecasts included are those of the Economist Intelligence Unit. Due to a change in methodologysome historical gures may be signicantly different to those published in last year’s report.


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4 Executive summary

6 Introduction

Section 1: Retail

10 Food and general retail11 Hypermarkets, supermarkets and convenience stores12 — Q&A with Motoya Okada of Aeon

13 Food, beverages and tobacco14 Private label

15 Fashion and apparel

18 Online retailing20 — Q&A with John Lo of Tencent

Section 2: Consumer goods

23 Fast-moving consumer goods25 — Q&A with A. Mahendran of Godrej

28 Luxury brands31 — Q&A with Nigel Luk of Cartier

33 Durable consumer goods and electronics

37 At a glance: Indonesia, Malaysia, Singapore,South Korea, Thailand and Vietnam

50 Conclusion

Table of contents


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4 PwC

Executive Summary

The outlook for the global economyremains uncertain, as consumers andbusinesses alike wait for cleardirections on a range of economicrisks, from the US de cit to the eurozone crisis. The European Union (EU)is forecast to contract in 2012 and tomuster only marginal growth in 2013.Growth in the US and China is alsoslowing. Although governments inboth countries have introducedstimulus measures, any upturn isexpected to be modest. Asia’s othereconomies will slow as well, but willlook healthy by comparison with theUS and EU, with regional growth(excluding Japan) averaging 5.7% in

2012 and 6.4% in 2013.

Asia will remain the main driver ofglobal retail sales growth, butcompanies will be challenged byslowing economies and high in ationand interest rates. Retail sales are stillexpected to expand by a respectable5.8% in 2012 # and 6% in 2013,although this is down substantiallyfrom 9.6% volume growth in 2010.Companies are responding by

reworking their product, productionand regional strategies.

All eyes will continue to focus onMainland China (China), by far Asia’slargest retail market. For many, thefastest growth will come in the lessdeveloped third- and fourth-tier cities,as disposable incomes there riserapidly. The proportion of Chinesehouseholds earning over US$15,000per year will increase from roughly11% of the total in 2011 to 41% in2016, by conservative estimates.

This report discusses the outlook forsix retail and consumer productssub-sectors in Asia — food and generalretail, fashion and apparel, onlineretailing, fast-moving consumer goods(FMCG), luxury brands, and durableconsumer goods and electronics. Itfocuses, in particular, on China, HongKong, India, Japan and Taiwan, andlooks at how the industry is faring in2012 and is expected to grow through2016, and the opportunities and

challenges in the years ahead.

The main ndings of the report are asfollows:

Major international retailers willcontinue to expand in Asia, withmore tailored strategies beingintroduced in China. By 2016 China will overtake the US as the world’slargest retail sales market, worth someUS$4.2 trillion. India, too, is now

attracting considerable interest, afterits government announced in

September 2012 that it would permitforeign direct investment of up to 51%in multi-brand retailing. Retailers,particularly in China, are beginning totarget customers more carefully. Forexample, CR Vanguard is launching anew high-end chain of boutiquesupermarkets, while Carrefour isstepping up its strategy to cater forconsumers concerned about China’sfrequent food safety problems byfocusing on organic food.

As Asia’s current environment ofhigh in ation and rising pricesdrives customers to seek value,private food labels have newopportunities to increase theirshare. While the private label businesstook decades to develop in Westerncountries and came about only afterthe retail sector matured, the conceptis rapidly catching on in Asia, wherelarge populations and growing

incomes mean that the region willremain the world’s largest food market,

# This gure is expected to be revised downward based on new forecasts for India, which becameavailable just prior to publication of this report.


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Executive Summary

worth US$4.2 tri llion in 2012. India’sbig retailers have been very active inintroducing private label products, which now account for 20-25% ofpro ts for most. In addition to cateringfor the needs of value-consciousconsumers, private label goods canalso ll a void in markets such as India where many categories of goods areunderdeveloped. To overcomeconsumers’ concerns about the qualityand safety of private labels, retailers

are upgrading packaging andpromoting their international backing where possible.

Asian demand for fashion andapparel will continue to lead the world, and international fastfashion brands are expandingaggressively to cash in on Asia’s young demographic and risingaf uence. Asian demand for fashionand apparel will continue to surpass

that in Western Europe and North America and the gap will widen in thecoming years. This has attracted theinterest of many foreign brands,particularly in the area of fast fashion, which targets young, upwardly mobilecustomers. Newcomers to the Asiamarket in 2012 included Topshop ofthe UK and US retailer Forever 21, who join Spain’s Inditex, owner of the Zarabrand, Uniqlo of Japan and H&M ofSweden, all of which have been rapidlyexpanding in recent years, notably inChina.

Online retailing continues to g rowrapidly in Asia, promptingtraditional and foreign of ineretailers and even luxury brands toembrace online sales in the region. According to industry intelligenceprovider eMarketer, from 2013onwards Asia will lead the world inglobal business-to-consumer (B2C)e-commerce sales, with a 41.4% shareby 2016. Traditional retai lers,

including both Asian retail companiesand foreign of ine retailers such as America’s Macy’s department stores,are now expanding their own onlinepresence in Asia in partnership withe-tailers. The online market’s growthin 2012-16 will be aided by increasedbroadband and mobile-phonepenetration, the spread of smartphonesand tablet computers, andimprovements in payments andlogistics infrastructure.

Rising incomes will continue todrive growth in the FMCG sector butcompanies will have to contend withseveral challenges, includingincreasingly demanding, value-conscious consumers and cut-throatcompetition. Consumer spending isbeing hit by high in ation, risinginterest rates and price hikes by FMCGcompanies in response to costlierinputs and commodities. Tough

economic times are intensifyingexisting challenges for foreigncompanies. For example, in December2011, Switzerland’s Nestlé and France’sDanone revisited their China businessmodels in the face of erce localcompetition. In response to all thesechallenges, FMCG companies areplanning their expansions more judiciously, partnering with localcompanies, and better targetingcustomer groups. Many are puttingrenewed emphasis on expansion inrural areas and smaller cities. They arealso looking to acquisitions to buymarket share.

Asian consumers now account forover half of global luxury sales, andthe boom is spurring the growth oflocal luxury brands. According to theWorld Luxury Association, China is setto replace Japan as the most importantmarket for luxury in Asia. Globalbrands will continue to increase theirpresence and efforts to cater for

Chinese and other Asian travellersabroad. But local, home-grown luxurybrands will also emerge, catering to Asian consumers’ rediscovery of theirown long-standing traditions of localcraftsmanship. For example, Chow TaiFook Jewellery Group of Hong Kong isalready twice the size of iconic American jeweller Tiffany & Co interms of revenue. As local brands seekinternational capital and expertise,and global luxury brands remain keen

to appeal to local tastes, partnershipsbetween global and local brands, suchas Richemont’s controlling stake inHong Kong-based fashion labelShanghai Tang, will become morecommon.

Growth in demand for consumerdurables and electronics is slowingbut will remain strong. However,Japanese manufacturers are losingtheir decades-long dominance in

Asia in these sectors. Market demandfor electrical appliances andhousewares will increase 5.9% in Asiain 2012, lower than an earlier forecastof 6.6%. However, growth will recoverto 6.8% in 2013 and expandconsistently through the forecastperiod to 2016. Strong growth isencouraging competition and Japanesemanufacturers, hurt by the globaleconomic crisis, a strong yen andnatural disasters in Japan andThailand, are rapidly losing theirdominance. As they struggle,companies such as South Korea’sSamsung, China’s Haier and Taiwan’sHon Hai, have swooped in to capturemarket share by expanding quickly andoffering lower prices, a wider rangeand adequate technology in anincreasingly commoditised market.


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Introduction

The outlook for the global economyremains uncertain at best. The EU

economy is forecast to contract in 2012and to manage only marginallypositive growth in 2013. Growth in theUS and China is also slowing. Whilepolicymakers continue to work onaction plans, the circumstances aresuch that they are likely to accomplishlittle more than to prevent a deepereconomic downturn. Asia’s economies will slow as well, but will sti ll lookhealthy by comparison, with regionalgrowth (excluding Japan) averaging

5.7% in 2012 and picking up to 6.4% in2013.

Asia will remain the main growthdriver of retail sales globally. Althoughretail sales have slowed from their

9.6% volume growth in 2010 they arestill expected to expand by a

respectable 5.8% in 2012. Next yearthat should accelerate to 6%, with theupturn lasting through the forecastperiod to 2016, when the market willbe worth US$11.8 trillion.

All eyes are on prospects for China, byfar Asia’s largest retail market. Whilethe economy has been slowing, theChinese government has made clearthat it will intervene to stimulategrowth if necessary. China’s GDP is

predicted to grow 7.8% in 2012 and ataround 8% through the rest of theforecast period. Despite high in ationand prices, China’s retail sales willgrow at a still impressive 10.9% in2012, higher than an earlier forecast of

9.8%, on the back of companies widening their reach, themodernisation of the retail industryand the in ux of new consumers.China will overtake the US as the world’s largest retail sales market in2016, when its retail sales are forecastto be worth US$4.2 trillion. Growth will remain high through the rest ofthe forecast period. The fastest growth will come in the less developedthird- and fourth-tier cities, as

disposable incomes there rise rapidly.The proportion of Chinese householdsearning over US$15,000 per year willincrease from roughly 11% of the totalin 2011 to 41% in 2016, by conservativeestimates 1.

In Japan, Asia’s second-biggest marketafter China in dollar terms, retail sales will expand by a modest 1.6% in 2012and contract slightly for two yearsthereafter as Japan’s trade-dependent

economy continues to suffer against abackdrop of weak external demandand a strong currency. Domesticdemand is expected to remain weak,given poor economic growth and anuncertain employment market. Retail


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Figure 1: Real GDP growth (% change)

Region 2009 2010 2011 2012 2013 2014 2015 2016 Asia and Australasia (incl Japan) 1.2 7.1 4.0 4.2 4.2 4.5 4.3 4.3Economies in transition* -5.6 3.4 3.8 2.5 3.0 3.7 3.7 3.9Latin America -1.9 6.0 4.3 3.1 3.9 4.2 4.0 4.1Middle East and North Africa 1.7 5.2 3.4 3.4 3.9 4.7 4.9 5.3North America -3.4 3.0 1.8 2.1 1.8 2.1 2.2 2.3Western Europe -4.2 2.2 1.7 -0.2 0.5 1.3 1.4 1.4World -2.3 4.2 2.7 2.2 2.4 2.9 2.9 3.0

Source: Economist Intelligence Unit*Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine

Figure 2: Global reta il sales growth by volume (% pa)

Region 2009 2010 2011 2012 2013 2014 2015 2016 Asia and Australasia 5.3 9.6 5.2 5.8 6.0 6.9 6.7 6.8Economies in transition -4.4 3.9 6.6 3.4 3.6 4.0 4.4 4.5Latin America 0.1 3.1 5.2 4.9 4.6 5.4 4.7 5.3Middle East and North Africa 1.6 3.6 2.7 1.0 3.4 3.7 4.0 4.1North America -5.8 0.8 3.8 1.6 1.5 2.0 1.9 1.8Western Europe -2.5 0.2 -1.0 -1.3 0.0 0.3 0.7 0.8World -0.6 4.2 3.6 2.9 3.4 4.1 4.1 4.2

Source: Economist Intelligence Unit

Figure 3: Global retail sales (in US$ trillion)

Region 2009 2010 2011 2012 2013 2014 2015 2016 Asia and Australasia 4.93 5.88 6.81 7.43 8.23 9.24 10.43 11.81Western Europe 2.89 2.85 3.05 2.91 2.94 2.97 3.00 3.14North America 3.25 3.36 3.61 3.74 3.89 4.06 4.23 4.41Latin America 1.02 1.17 1.29 1.37 1.49 1.63 1.75 1.89


Figures for 2012 onwards are forecasts. Prior years are actuals or estimates.

sales growth will remain negligiblethrough the forecast period, partlybecause unemployment will remainrelatively high and wage growthsubdued at best. Nevertheless,relatively high incomes and strongdemand for high-end goods will keepJapan’s retail spending among Asia’shighest 2.

India’s economy has started to looksluggish, and GDP growth will slow to5.8% in 2012, while consumer pricein ation remains a high 9.3%. Giventhe uncertain economic outlook andrising prices, retail sales growth willslow substantially to 1.9% in 2012,much lower than an earlier forecast of5.3%, although demand growth formore basic items like food and soapsand cleansers will remain strong. Indiais Asia’s third-largest retail marketafter China and Japan, although it hasone of Asia’s lowest sales per head

ratios. Retail sales growth will bounceback to 6% in 2013 as GDP growthpicks up and in ation abatessomewhat, with growth hoveringbetween 5% and 6% for the remainderof the forecast period, driven byincome growth, increasingurbanisation, and a rising number ofattractive stores and foreign brands.The increase in the number of wealthyhouseholds from an estimated 494,000 with annual earnings over US$50,000in 2012 to 2.4 million in 2016 willdrive demand for non-essential andluxury goods 3. Delhi has once againannounced a relaxation of the limits onforeign investment in its retail sector,saying it will allow 51% foreign equityin multi-brand retail operations.Foreign retailers have expressed keeninterest, but there is still strongopposition to the move from somequarters.

Introduction


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Introduction

Figure 4: Asia retail sales growth by volume (% pa)

Territory 2009 2010 2011 2012 2013 2014 2015 2016 Australia 3.29 2.15 0.10 0.70 1.10 1.30 1.70 2.00China 16.82 19.07 10.90 10.90 10.50 11.10 10.20 10.00Hong Kong 0.01 15.61 18.50 2.70 1.50 3.40 4.50 4.50India -0.37 8.95 3.10 1.90 6.00 5.60 5.90 6.10Indonesia 3.47 4.78 5.20 4.60 5.50 6.70 6.60 6.50Japan -0.93 3.30 -0.60 1.60 -0.10 -0.50 0.30 0.40Malaysia 0.62 5.83 6.70 4.90 5.70 5.00 4.90 4.80New Zealand 0.50 2.50 -0.40 -1.20 2.30 2.30 3.20 3.30Philippines 3.98 5.56 1.80 2.90 4.90 5.00 5.20 5.20Singapore -0.58 6.70 1.30 1.70 2.70 3.80 4.60 5.30South Korea -0.31 4.55 1.90 1.00 2.10 2.20 2.80 2.90Taiwan -1.42 9.10 5.00 0.20 1.80 2.60 3.00 2.70Thailand -0.54 6.70 1.50 7.80 6.90 5.30 4.80 4.70

Vietnam 3.05 4.73 6.30 8.30 11.10 10.30 8.70 6.40


Figure 5: Retail sales in Asia (in US$ billion)

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20162015201420132012201120102009Source: Economist Intelligence Unit


In Hong Kong, retail sales volumes willgrow 2.7% in 2012 as economicgrowth in the territory dips to 1.5% onthe back of a slowing global economyand China’s reduced growth rate.Retail sales volume growth will slow to1.5% in 2013 as unemployment rises.Nevertheless, relatively strongeconomic growth (which is expected toreturn to 4.2% in 2014 based on arecovery in global trade) and risinglocal incomes will provide impetus toretail sales in Hong Kong over themedium term. Though visitor numbersfrom mainland China have increased,growth in sales of luxury products suchas jewellery, watches and clocks and valuables has slowed, indicating that while the uncertain global economicoutlook has not dissuaded touristsfrom visiting Hong Kong, it has madethem more cautious about spending.Given the relatively high cost ofin ation, retailers’ pro tability will

depend partly on their ability to passon rising costs to customers, henceensuring that they are able to developpremium brands for which higherprices can be charged 4.

Taiwan’s retail sales will increase byonly 0.2% in 2012, as its export-oriented economy slows on weakeningglobal demand. However, as growth inthe wider economy picks up, retail volume growth is likely to recover to1.8% in 2013 and to rise to between2% and 3% for the remainder of theforecast period. With a population of just over 23 million, Taiwan is asmaller market than most in East Asia.However, at over US$10,000, annualdisposable income per head isrelatively high, and over 50% ofhouseholds have an annual incomeover US$25,000 (this will rise to aforecast 65% by 2016). Retail sales willalso be supported by more visitorsfrom China, as visa and travelrestrictions continue to be eased 5.


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The future of global retail lies rmly in Asia, but economic growth in the region isslowing and in ation and interest rates are high. Companies are responding byreworking their product, production and regional strategies and looking foracquisitions, while continuing with their organic expansion. China remains the mainfocus for foreign companies across all categories. As international companies try tomake inroads into Asian markets, they will face stiff competition from well-established local brands. Countries across Asia are quickly expanding access tobroadband and mobile phones. This is helping online retailing in Asia to expandquickly and traditional retailers are exploring the online channel.

Section 1: Retail


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Section 1: Retail

Food and general retail Key fndings

• Major international retailerscontinue to expand in Asia,

although sluggish home marketsmean that some are ndinginvestment resourcesconstrained.

• Recognising customer preferencesfor online shopping, traditionalretailers are making the moveonline. According to marketresearcher Kantar Worldpanel, byJuly 2012 the proportion ofChinese households makingFMCG purchases online increased

from 16% a year earlier to 22% inChina’s top tier cities.

• Asia’s current environment ofhigh in ation and rising pricescould trigger greater growth inprivate label goods as consumersseek value for money.

Figure 6: Retail sales of food in Asia and Australasia (in US$ billion)


Figure 7: Food, beverages and tobacco: Market demand growth (% real change pa )

Territory 2009 2010 2011 2012 2013 2014 2015 2016China 3.9 1.9 2.6 2.2 2.9 2.8 2.5 2.2Hong Kong -0.5 5.5 6.7 0.9 -0.2 1.2 1.5 1.3India 6.5 3.3 1.0 4.7 2.7 3.4 4.7 3.9Japan -0.6 2.8 0.2 1.4 1.0 1.1 0.9 0.7Taiwan 0.0 3.0 2.2 0.3 0.9 1.6 2.0 1.7



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Section 1: Retail

As conditions remain grim in theirhome countries, major internationalretailers will continue to expand inhigh-performing emerging markets.India and China place 3rd and 5threspectively in AT Kearney’s 2012Global Retail Development Index, which ranks the attractiveness ofemerging countries to retailers. In aNovember 2011 Economist IntelligenceUnit global survey of retail managers,two-thirds of the respondents said they were redirecting their focus toemerging markets, and three-quartersexpected these markets to take up theslack from the slowdown in developedmarkets. China remains the emergingmarket of choice, although its economyand retail sales growth are slowing 6. According to PwC’s 15th Annual GlobalCEO Survey released in January 2012, which surveyed 1,258 CEOs in 60countries, 60% of CEOs of consumer

goods companies believe thatemerging markets will be the maindriver of growth compared withdeveloped economies.

International retailers are stillexpanding quickly across Asia.Japanese retailer Aeon, which hassome 14,000 outlets across 12 Asianmarkets, is now expanding into Vietnam, Malaysia and China’s smallercities as part of its ‘Asia Shift’expansion strategy 7. France’s Carrefour

plans to open 30 new stores in China in2012, up from 20-25 per year recently 8

and has other plans in addition toChina. India is now attractingconsiderable interest after itsgovernment announced in September2012 it would permit foreign directinvestment of up to 51% in multi-brandretailing. Despite several restrictiveconditions attached, Wal-Mart (US)has already announced entry plans, while others like Tesco (UK), Carrefourand Metro (Germany) could soonfollow 9.

However, retailers are struggling tomanage their large-scale expansionsinto Asia, as dipping sales in theirhome markets tighten availableinvestment resources. Some companiesare now reshaping their strategies asthey enter Asian economies amidstslowing growth and erce competition.

Wal-Mart, for example, says it will slowdown the launch of new stores in Chinain 2012 to focus on operationalef ciency. It was opening more than 40stores annually between 2009 and2011 and is among China’s topretailers, but it has beenunderperforming rivals like Carrefourin terms of average revenue per store 10.Meanwhile, Japanese-owned 7-Eleven, which has over 100 stores in China, is

now experimenting with a franchise

store model, which will allow it toexpand rapidly while limitinginvestments 11 .

Retailers are also targeting customersmore carefully. For example, China’sCR Vanguard, which has over 4,000

stores across China, is launching a newhigh-end chain of boutiquesupermarkets called V+. It will focuson residential communities, targetingmiddle class consumers in 1st and 2ndtier cities, while CR Vanguard’s otherbrands will target busy commercialareas 12 . Meanwhile, to cater forconsumers concerned about China’sfrequent food safety scandals,Carrefour is stepping up its organicbusiness. In May 2012, it added 100new organic products to its list of“lowest price” goods 13 .

Retailers are also moving online,recognising customer preferences foronline shopping. According to marketresearcher Kantar Worldpanel, theproportion of households in China’stop-tier cities making FMCG purchasesonline increased to 22% as of July2012 from 16% a year earlier. Shoppers were drawn by lower prices, theconvenience of delivery and access to

more brands 14. In August 2012,Wal-Mart received governmentapproval to increase its ownership ofonline supermarket Yihaodian fromaround 17% to 51.3%. Yihaodian sellsabout 180,000 products, and has anationwide B2C online groceryservice 15. In addition to physicalexpansion, 7-Eleven also plans to rollout an online sales platform in Chinain 2013.

Hypermarkets, supermarkets andconvenience stores


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12 PwC

Section 1: Retail

What are your expectations for growthin Asian markets?

At the moment, we earn around 80% of ourtotal retail revenue from the Japanesemarket. We have a plan to secureexponential growth in the Chinese and ASEA N markets, with the aim to bringearnings from these markets to the same

level as those in Japan by around 2020.We’ll need around 13-15% annual growthin Asian markets to meet this goal. At themoment, we are still largely focused onmaking the necessary up-frontinvestments.

What do you identify as Aeon’scompetitive edge that would al low it toexperience such high growth in Asia?

One of the biggest changes in Asia is therapid growth of the middle class. And themiddle class is the consumer group that wehave always served—for 250 years, since

we started as a trader of Kimono fabrics inthe Edo Period. We have deep experience inservicing this consumer group, as well asgrowing alongside them, as they grow.

Q&A with Motoya Okada, President, Aeon

You have taken some initi atives to caterfor the needs of elderly consumers.What has been your experience withthese initiatives?

The shopping centre that we opened earlythis year in Chiba, Japan is designedparticularly to meet the needs of our seniorcustomers. Customers enjoy uniqueshopping experiences including access to acomprehensive range of medical clinics andcultural programmes, as well as nancialservices that cater for their lifestyle needs.

The market response has been very good.The Japanese market is a test ground forour effort to shift to a senior-orientedmarket, one of our strategic growth areas.From next spring, we’ll be opening morestores of this kind in Japan with newformats and services to further meet theinterests of our senior customers.

How are you bene tting from groupsynergies?

Our nancial serv ices, for instance, allowus to identify individual (retail) customers.By combining our credit card and retailbusinesses, we have recently completed atest in Japan to operate a high-levelcustomer relationship management systemthat would allow us to personalisepromotion efforts. The card business alsohelps in the running of loyaltyprogrammes. We seek to become thenumber one player in the credit cardbusiness for the new middle class in Asia.So we believe these synergies will be highlyrelevant to the success of our retail businessin Asian markets.

You have been very successful in Japan with Topvalu, your pr ivate label. How do you plan to take this success abroad?

Until recently, we have been bringing theTopvalu products that we sell in Japan tothe Chinese market. But of course it makesmore sense to develop and sell productsaccording to local preferences. We are thusadvancing our localisation effort in Chinaand other Asian markets, and makingprogress towards designing, producing andselling locally. Localisation efforts byregion within respective countries also willbe important for products such as food aspeople’s tastes tend to vary by region.

Can you share your lessons learnt from

last year’s crisis in Japan?

It’s important to be able to gatherinformation and make decisions quickly,

Established in 1758, Aeon has grown to become the largest retailerin Japan in terms of operatingrevenue. Aeon Group, whichcomprises 200 companies, recentlyestablished a new management system based on separateheadquarters for Japan, China and ASEAN and is looking to repeat the success in other Asian markets.

and to take leadership at such times. But attimes of emergency, what is more crucial isto have “survival and ghting spirit”—notfor yourself but for the bene t of others. Forinstance, we had shopping centre managers who made quick decisions to turn thei rstores into temporary shelters. Only with astrong sense of responsibility to serve thepublic were they able to exercise suchleadership and avoid the worst-casescenarios.

Was it the case of Aeon’s “customer-rst” principle contributing to risk

management?

Yes, and our steadfast corporate mission tobene t our customers is not bound byJapan’s borders. After the recent riots inChina, all our Chinese employees workedhard to restore the stores as they believedopening the stores as early as possible would bene t their customers. Not a singleemployee thought about leaving. I wasextremely moved to see the scene in China, which was exactly what I saw in Tohokuafter the disaster. I think t he outcome would be very different depending on theorganisation. You can physically repairbuildings but you cannot restore the storesif your employees do not return.

Last but not least, what do you identifyas the ultimate value that Aeon isbringing to Asia outside Japan?

Making products and serv ices availablethat can help to improve people’s quality oflife is important. The paramount issue,however, is trust—customers need tobelieve you will never lie to them. In theJapanese term, it’s about “establishingNoren” (curtain-like cloths that aretraditionally hung over the entrance ofJapanese stores). This can be translated asbuilding a brand but “Noren” in fact carriesmore meaning—it’s the trust itself, builtbetween customers and the retailer.

I’m talking about the old Japanese ethics ofcommerce, the origins of Japan’s customer-oriented services—which include practices which emerged during the Edo Period, suchas making small units available accordingto customers’ needs, and xing and listingset prices (versus selling with variableprices). I would say these are expressions ofdemocracy and justice. And there isn’t acustomer anywhere in the world who doesnot enjoy being treated fairly and withgoodwill—these are universallyappreciated values.


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Section 1: Retail

Food, beverages and tobacco

Asia’s large populations and growingincomes mean that the region willremain the world’s largest food market, worth US$4.24 trillion in 2012 and setto grow to US$6.92 trillion by 2016. InChina, market demand for food,beverages and tobacco will grow at2.2% during 2012, given high in ationand rising food prices. Demand growth will recover to 2.9% in 2013, and thenrange between 2.2% and 2.8% for therest of the forecast period. Quality

control is a major problem for thesector. Despite government efforts,there is likely to be little progress inaddressing this complex problemduring the forecast period. Moresophisticated rst-tier markets will seea rapid rise in consumption ofimported foreign food products in2012-16, as consumers t ry newcuisines and seek safer food 16.

Japan is the world’s third-largest food

market after the US and China, withretail food sales estimated at US$523billion in 2011. However, the market’smaturity, de ationary pressures in thesector and strong competition willkeep sales growth weak. Demand inthe food, beverages and tobaccocategory will grow at only 1.4% in2012, given Japan’s troubled economy,cautious buying sentiment andconcerns about food safety followinglast year’s major earthquake andnuclear crisis. Demand growth willslow further in 2013, to 1.0%, and willremain weak through the forecastperiod. Japan’s ageing population willboost the health food (or functionalfood) segment in the medium term.Japan is the world’s second-largestmarket for functional food after theUS, and its range of functional foods isprobably the world’s largest and mostinnovative 17.

In India, the market demand for food,beverages and tobacco will rise 4.7% in2012. Although in ation and pricesremain high they are easing from thealarming heights seen in 2011.Demand growth will remain positivethrough the forecast period, rangingbetween 2.7% and 4.7%. Risinghousehold incomes, increasingurbanisation and changing lifestyles will aid demand for packaged food, which has been growing strongly. As

India has South Asia’s lowest spendingper head on packaged food, the sectorholds strong growth potential in2012-16 as incomes increase 18 . India’s wellness products market also offersconsiderable potential. According to an August 2012 report 19, it grew 20% in2011, to Rs590 billion (US$12.6billion), but still represents under 4%of overall consumer expenditure. Thereport forecasts this market to grow ata compound annual growth rate

(CAGR) of 18-20% over the next three years, reaching Rs950 billion (US$18.7billion) by 2014, driven by a number offactors, including increasing healthawareness, interest in preventive care,increased interest from male customersand the growing aspirations ofconsumers in smaller towns.

In Hong Kong, demand for food,beverages and tobacco is forecast togrow by a nominal 0.9% in 2012, lowerthan an earlier forecast of 2.8%, partlydue to the high base effect created by

2011’s strong growth of 6.7%, andpartly because of the high prices offood imports, which dominate thesector. Demand will contract by 0.2%in 2013 and grow moderately duringthe rest of the forecast period.Imported food products with strongquality credentials will see rapidgrowth in sales in 2012-16, asconsumer fears regarding the qualityof food imports from mainland China will increase the pressure on retailersand restaurants to source moreproducts from other countries 20 .

In Taiwan, market demand for food,beverages and tobacco will grow atonly 0.3% in 2012, as the island’strade-dependent economy slows on weakening global demand. Growth will remain sluggish at 0.9% in 2013and will pick up only moderately tobetween 1.6% and 2.0% for the rest ofthe forecast period.


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Section 1: Retail

Private-label sales continue to chartslow growth across Asia. According toLondon-based L.E.K. Consulting,private labels have a much lower shareof supermarket sales in Asia than indeveloped countries, ranging from less

than 1% in Indonesia to between 1.5%and 30% in Thailand, Malaysia, SouthKorea, Singapore and Taiwan, andapproximately 6% in Hong Kong 21.Separate data from Euromonitor showthe share of private-label goods inIndia at 11% and at 4% in China 22 . As Asia’s current environment of highin ation and rising prices drivescustomers to seek value, private labelshave new opportunities to increasetheir share (they are cheaper than

other brands because less is spent onmarketing, distribution andadvertising; retailers push their ownbrands with excellent in-storeplacements and promotions). Toovercome Asian consumers’ suspicionsabout the quality and safety of privatelabels, retailers are upgrading theirpackaging and promoting theirinternational backing where possible.

For example, the UK’s Tesco sells itsTesco private-label products at its 660Tesco Lotus stores across Thailand andin other Asian countries 23 , whileFrance’s Carrefour and the US’sWal-Mart do the same at their storesacross Asia. Many of Asia’s localplayers have also developed successfulown-brands in recent years, includingsome of China’s largest retailers.Retailer Lianhua SupermarketHoldings, which by end -2011 had5,233 hypermarkets, supermarketsand convenience stores in 19 provinces

in China, has also developed its ownprivate-label business 24 .

Private label

Indian retailers have been quick tolatch on to the private-label strategy,even though the sector was opened tomodern retailers only a few years ago.In developed countries, private labelstook decades to take off and were

introduced only after the retail sector was well-developed. Big domesticretailers including the Future Group,Bharti Wal-Mart Retail (a joint venture with Wal-Mart), Aditya Birla Retail,Reliance Retail, Spencer’s Retail andDubai-based Landmark Group’s SparHypermarket, all developed their ownprivate-label brands about ve yearsago, as they began building their retailnetworks. The Future Group, India’slargest retailer, says that since India is

under-branded and under-penetratedin many categories, it makes sense tobuild own-brands while categories arethemselves developing 25 .

In-house brands now account for12-15% of sales and over 20-25% ofpro ts for most Indian retailers 26 .Retailers have focused on goodpackaging, attractive pricing andstrategic in-store placement to attractconsumers. According to marketresearcher Nielsen, Indian shoppersspend over US$100 million on private-label items per year and this is set torise to US$500 million by 2015 27.

At the networks of big retailers, theseproducts now outsell several nationalbrands in some categories. Accordingto data from Nielsen for July-September 2011, at the Future Group’sBig Bazaar and Bharti Retail’s Easy Dayoutlets, these retailers’ own private-label oor cleaners account for over50% of all oor cleaner sales, whiletheir packaged wheat our, rice, tea,spices and salty snacks take shares of

between 16% and 42% 28 . After aninitial blitz of own-label products,India’s retailers are now consolidatingtheir portfolios and aiming to increasemarket share. Aditya Birla Retail’sMore chain launched only 15 products

last year, down from 25 in 2009. Itdiscontinued several brands, andinstead used just one brand across allproducts. It also removed high-investment personal care productsfrom its portfolio 29.

Asia’s players may even be able toup-end some conventional wisdomabout the private-label business. Forexample, while private labels usuallysucceed better in products with low

differentiation, India’s Croma chain ofmulti-brand electronics stores sells itsown brand of durables fromrefrigerators to hair dryers. Theretailer expects to almost double itsrevenues from its own brands to Rs2.5billion (US$48.4 million) in FY13. Thebrand also bene ts from the excellentreputation of its parent, the TataGroup 30 .


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Section 1: Retail

Key fndings• The gap in demand for fashion

and apparel between Asia andthe West will widensubstantially, with demand in Asia growing 3.8% in 2013.

• India will be the star performer,growing by 9.4% in 2012, withsales driven by the expanding

population of young people,rising awareness ofinternational fashion and anin ux of foreign brands. China will follow behind with 7.9%growth.

• Fast fashion brands areexpanding rapidly in Asia butface stiff local competition.

Fashion and apparel

Asia’s fashion and apparel marketgrowth will continue to lead globalgrowth through 2012-16. In 2012,nominal clothing market demand in Asia and Australasia, at US$199.49billion, will continue to surpassdemand in both Western Europe andNorth America and that gap will widensubstantially during the forecastperiod (see Fig 9). In 2012, demand in Asia will rise 4.4%. That is lower thanan earlier forecast of 5.1%, partlybecause of a higher base created by2011’s demand growth of 5.3% (higherthan earlier projections of 4.8%) andpartly a result of slower economicgrowth in the region.

Demand in China is forecast to grow at7.9% in 2012, lower than a previouslyexpected 8.4%, given the slowingeconomy, high in ation and highprices. Still, consumer demand and

Figure 8: Clothing: Market demand growth (% real change pa)

Territory 2009 2010 2011 2012 2013 2014 2015 2016 Asia and Australasia 1.9 5.3 5.3 4.4 3.8 4.5 4.8 5.1China 10.5 8.5 7.8 7.9 7.5 8.8 8.4 8.1Hong Kong -1.4 6.3 8.5 2.8 1.7 2.6 3.0 2.9India 7.8 6.2 5.1 9.4 7.2 7.7 9.0 1.3Japan -1.3 2.3 -0.2 1.0 0.6 0.9 0.7 0.7Taiwan 0.4 3.6 3.0 1.1 1.8 2.6 3.1 3.0

Source: Economist Intelligence UnitFigures for 2012 onwards are forecasts. Prior years are actuals or estimates.

clothing spend will rise throughout2012-16, driven by growing personaldisposable income and higher interestin fashion apparel. Online apparelretailing will become an importantmarket segment during the forecastperiod 31.

In Hong Kong, demand in 2012 willgrow at 2.8%, on the higher base of8.5% in 2011. Robust demand willcontinue during the forecast period, with sales rising steadily through to2016. Despite very high rents, foreignplayers will continue to enter the localapparel retailing market, both to tapincreasing local demand and tocapitalise on the rising numbermainland-Chinese tourists shopping inHong Kong 32 .


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Section 1: Retail

Figure 9: Clothing: Market demand (nominal US$ million)

0

50,000

100,000

150,000

200,000

250,000

300,000

WesternEurope

North America

Asia and Australasia

20162015201420132012201120102009


Figure 10: Clothing: Market demand (nominal US$ million)

Territory 2009 2010 2011 2012 2013 2014 2015 2016China 35,370 41,173 48,893 56,444 64,333 74,563 85,480 98,038Hong Kong 37,913 40,596 45,726 48,732 51,710 55,129 58,852 62,782India 5,397 6,603 7,376 7,755 9,210 10,879 12,602 13,529Japan 24,118 25,861 28,079 28,005 26,788 25,468 25,001 24,395Taiwan 3,274 3,568 3,977 4,035 4,186 4,400 4,669 4,917



In India, demand for apparel in 2012 isforecast to grow at 9.4%, against anearlier estimate of 8.7%. Although highin ation, rising prices and a slowingeconomy may persist in the short term,clothing sales will nevertheless riserapidly during the forecast period,from US$7.38 billion in 2011, toUS$13.52 billion in 2016, driven by agrowing population of young people,rising awareness of internationalfashion, and an in ux of foreignbrands. Disposable income will treblefrom US$1 billion in 2012 to US$3

billion in 2016. However, the market will remain extremely competitive, onproliferation of ready-to-wear apparelshops and as more foreign companiesenter the Indian market 33 .

Taiwan’s clothing market is performingmoderately. Demand growth is forecastat 1.1% in 2012, lower than an earlierprojection of 3.9%. The globaleconomic slowdown in 2012 isexpected to drag down the export-

dependent island’s real GDP growth to1.3% this year. However, demand willimprove during the rest of the forecastperiod as GDP growth rebounds,private consumption expands steadilyand the in ow of Chinese touristsgrows 34 .

In Japan, clothing demand will growonly 1.0% in 2012, lower than anearlier forecast of 1.5%. Althoughreconstruction spending will supportlimited economic growth in 2012,sluggish wage growth will depressconsumer sentiment in 2012 andthrough the forecast period. During2012-16, private consumption isexpected to rise by less than 1% a yearon average. However, clothing sales will continue to be the most importantcategory of retail sales (excluding foodand beverages) in 2012-16, despite

negligible growth in yen terms35

.


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Section 1: Retail

Fast fashion expandsaggressively Under pressure from poor performancein Western markets and rising inputcosts, numerous international fastfashion brands are hoping to cash in on Asia’s young demographic and risingaf uence. The fast fashion industryrelies on bulk production to bringaffordably-priced fashion to market inquick cycles. Fast fashion’s ‘cheap chic’approach plays well with Asia’s young,upwardly mobile customers who havefast-changing tastes and a hunger forbrands but an eye on affordability.

The world’s largest fast fashion retailer,Spain’s Inditex, owner of the Zarabrand, and many of its competitors,such as Uniqlo of Japan and H&M ofSweden, have established themselvesin Asia and are expanding aggressively.Inditex has 5,527 stores around the world including 300 in China, whereit’s one of the most successful foreignretailers. It expects to have 425 stores

across 50 Chinese cities by end-201236

.

Japan’s Fast Retailing, which ownsUniqlo, already has 136 stores inGreater China and 181 in the rest of Asia. It now plans to add 1,000 newstores in each of those markets over thenext 10 years, seeing great potential inmiddle class consumers in China,Taiwan, Hong Kong, the ASEANnations and India 37. US fashion brandTommy Hil ger plans to open 500

stores in India over the next ve yearsthrough a local joint venture; it alreadyhas 58 franchise stores and over 60shops-in-shops 38 . American retailerGap is targeting 20 new stores in HongKong and mainland China by February2013, raising its store count there to45 39. New companies are also joiningthe rush. Topshop, owned by the Arcadia group, the UK’s largest

clothing retailer, has one store in Japanand opened its rst China store in May2012. US retailer Forever 21 alsoopened its rst stores in Hong Kongand Beijing in 2012 40 .

However, these companies will faceformidable competition from localplayers, who have the advantage of Asia’s long-standing strength intextiles, an understanding of localtastes, years of local experience,established distribution networks andan existing real estate bank. HongKong, for example, has a strong set oflocal apparel brands such as Giordano,Baleno, Bossini, I.T and Esprit. These

companies will expand strongly on theChinese mainland and in Southeast Asia in 2012-16, and in some cases alsoin EU markets. Hong Kong’s Li & Fung,among the world’s biggest supply-chainmanagement companies, is movinginto apparel retailing and has boughtseveral Western clothing retailers,marketers and brands to market toChinese customers 41.

China, too, has strong home-grownapparel brands. For example,Metersbonwe has over 3,000branches 42 and a presence in thesmallest of Chinese cities. According toEuromonitor, it is China’s third-largestapparel brand behind Nike and localsportswear brand Anta. Metersbonwenow plans to expand into London,Paris, New York and Milan 43 . Anta had7,807 Anta stores in China as of June2012 and says it will continue toexpand, though at a ‘slower’ pace of100 new stores in 2012 44 . China’sTrendy International Group has 300directly owned stores and hundreds offranchises for its four brands, including

its largest, Ochirly. JNBY, establishedin 1994, runs more than 600franchised stores across China 45 .


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Section 1: Retail

Online retailing

Infrastructure growth will aid a swiftrise in Asian online retailing. According to industry intelligenceprovider eMarketer, in 2012 the Asia-Paci c region will account for31.1% of B2C e-commerce salesglobally, second only to North America’s 33.4% and higher thanWestern Europe’s 26.2%. From 2013onwards, Asia will lead the world insuch sales, with a 41.4% share by2016, when China’s slice of the pie willrise to 23.4%, from 9.9% in 2012 48 .

In 2012, the internet penetration ratein China is forecast to be 42.8 per 100people 49. According to Chinese

research rm Analysys International,

Key fndings• Asia will lead the world in business-to-consumer e-commerce sales from

2013 onwards, accounting for a 41.4% share of the business by 2016.

• Recognising the strategic importance of online retailing as a newdistribution channel, traditional retailers are expanding their own onlinepresence in Asia.

• Luxury companies are overcoming their fears that online sales willcompromise their high-end image. Luxury accessory maker Coach (US)

launched its rst of cial online store in China on Taobao Mall in December2011.

Online retailing will grow rapidly in Asia during 2012-16, aided byincreased broadband and mobile-phone penetration, the spread ofsmartphones and tablet computers,and improvements in payments andlogistics infrastructure. Asiancountries are frantically increasingaccess to the internet and mobilephones. In 2011, China added 30million xed-broadband subscriptions,half the total subscriptions added worldwide, while Singapore and theRepublic of Korea had more mobile-broadband subscriptions thaninhabitants 46 . As of December 2011,26.2% of Asia’s population had

internet access, accounting for 44.8%of the world’s internet users 47.


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Section 1: Retail

India’s internet penetration is forecastto be a low 10.6 subscribers per 100people in 2012, but its 129 millionusers will represent the second-highestonline population in Asia 57. Swiftgrowth in internet access, broadbandservices and mobile internet accesscould rapidly change India’s onlineretail landscape. Meanwhile, onlineretailers in India are adopting conceptssuch as cash-on-delivery to overcomeobstacles such as low usage of creditcards. Overall, online retail revenuesin India are projected to increase bymore than ve times in the next four years, from an estimated US$1.6billion in 2012 to US$8.8 billion in2016, according to ForresterResearch 58 . M-commerce may growstrongly since mobile-phone usage is

rising quicker than xed internetaccess, while innovative offerings likemobile wallet payment services arealso increasing. India had 893.84million mobile subscribers at end-December 2011, including 292 millionin rural India, and a wirelesspenetration of 74.15%. According tothe Internet and Mobile Association ofIndia, India’s overall e-commercemarket grew 47% to around Rs460billion (US$9.2 billion) in 2011 59. The

government’s recent announcementthat it would further open the retailsector to foreign investment did notinclude e-commerce.

Taiwan’s high internet penetration of80.4 subscribers per 100 people 60 andhigh smartphone usage will aid growthof its e-commerce market, which theInstitute for Information Industryexpects to grow by 20% in 2012, aftergrowing by an estimated 25% in2011 61. However, given Taiwan’s smallpopulation, online sales growth willlikely slow down as the marketapproaches saturation in the latter partof the forecast period 62 . An obviousgrowth market for Taiwan’se-commerce businesses is mainlandChina, but many regulatoryrestrictions on the integration of thetwo markets remain in place.

China’s B2C e-commerce transactionsgrew 73% to RMB81.87 billion (US$13 billion) in the rst quarter of2012, and are expected to reachRMB450 billion (US$72 billion) for allof 2012 50 . US-based Boston ConsultingGroup estimates that e-commerce salesin China will account for 7.4% of totalretail sales by 2015 51.

Hong Kong’s current high internetpenetration of 78 subscribers per 100people in 2012 52 , its densely packedpopulation (which makes delivery ofgoods more ef cient) and the quickspread of smartphones make it apromising prospect for online retail. According to a survey from onlinepayments rm Paypal, Hong Kong’sonline shopping value reached US$1.9billion in 2011 and is expected to touchUS$2.5 billion by 2015 53 . Of ineretailers will still thrive since HongKong’s shoppers continue to enjoyphysical shopping and searching forgood deals.

Japan offers huge potential for onlineand mobile shopping. In 2012 it isforecast to have 82.8 internetconnections per 100 people 54 and adynamic mobile-telecommunications

sector. In 2011 roughly 20% of onlineretailers’ sales were made onsmartphones and m-commerce willcontinue to grow. While the largestonline retailers in Japan are generalshopping sites like Rakuten, a local

rm, and Amazon.jp, the localsubsidiary of US-based Amazon,specialised online retailers areincreasing in number and growingquickly. For example locondo.jp sellsshoes and handbags 55 . According to

Forrester Research, e-commerce salesin Japan will grow from US$63.9billion in 2012 to US$97.6 billion in2016 56 .


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Section 1: Retail

There is a lot of concern about theeconomic slowdown in China. What are your expectat ions for growth in thecoming year?

The macroeconomic environment in Chinais challenging but we remain optimistic onthe growth of the e-commerce market.Currently, online shopping sales accountfor around 5% of total retail spending inChina, representing much room for growth

compared to other developed markets likethe United States. In fact, the US has beenexperiencing a faster rate of growth for itsonline retail sales than of ine sales duringthe past decade. According to iResearch,the average growth rate of China’s onlineshopping market is expected to be around30% in the next 3-5 years.

The China e-commerce market isgrowing exponentially. What is thebiggest challenge for Tencent in keepingup with this g rowth? How are youdealing with this challenge?

Tencent has a diversi ed business model which is bui lt upon our huge instantmessaging user base and traf c. Wegenerate revenue from four majorbusinesses, namely internet value-addedservice (including Community and Open

Q&A with John Lo, CFO & Senior Vice President, Tencent

Platform, Online Games, etc.), Wireless Value-added Services, Online Advertisingand e-Commerce transactions. Theuser-paid revenue model and highcash-generative nature of our internetbusiness enabled us to weather theeconomic downturn in 2008/09 andmaintain steady growth in both operatingand nancial performance. We aim tofurther diversify our revenue base andachieve long-term sustainable growththrough investment in our platforms, R&Dand new initiatives. We are now in the earlystage of developing our e-Commercebusiness, which accounted for 8% of our

total revenue in Q2 of 2012.Our primary goal for e-commerce is tobuild a consumer-oriented platform whichdelivers quality services and adifferentiated user experience to meet thechanging needs and growing demands ofour customers for rapid delivery,competitive prices, better product choicesand better after-sales services. These arealso the challenges that e-commercecompanies have to address. We willcontinue to leverage our multiple platformadvantages and deep understanding of ourusers’ needs to customise a dif ferentiated

online shopping experience for customers.Tencent’s e-commerce site PaiPai hasnumerous categories ranging fromsports to moms and babies to redpackets. Which areas are seeing thefastest growth?

We are building a new e-commerce platform,buy.qq.com, to host our B2C and small- andmedium-sized enterprise-to-consumer(SME2C) marketplaces, lifestyle services (e.g.hotel booking and ticketing) and of ine-to-online (O2O) services. Paipai will focus on theconsumer-to-consumer marketplace underthe umbrella of buy.qq.com. We see stronggrowth in our overall e-commerce businessacross all product categories like 3C products(Computer\Communications\ConsumerElectronic), and believe B2C business modelscan better address the increasing demands ofonline shoppers. Hence, in addition to thedevelopment of Paipai.com, we will focus onexpanding our principal business and B2Copen platforms in order to capture thegrowing demands in this area.

What are Tencent’s expectations forgrowth in the mobile commerce marketin China?

Mobile commerce is not only a naturalextension from the desktop, it actuallypresents more potential in terms ofbusiness models and monetisation. Forexample, location-based serv ices offer

Established in 1998, Tencent provides a comprehensive rangeof Internet and wireless value-added services. Through its variousonline platforms, including Instant Messaging QQ, QQ.com, the QQGame Platform, social networking service Qzone and wireless portal,Tencent services the largest onlinecommunity in China and ful lls theuser’s needs for communication,

information, entertainment ande-Commerce on the Internet.

users shopping information while mobilepayment facilitates the completion of thepayment procedure on site. We havepartnered with various of ine merchantsand retailers to experiment with O2Omarketing opportunities. Recently, we havealso launched “QQ Buy” apps for iPhoneand Android phones to offer e-commerceservices on mobile devices. As 3Ginfrastructure becomes more well-established and smartphone penetrationincreases further, we believe there is a hugegrowth potential in mobile commerce.

Tencent’s internet platforms havebrought together the largest internetcommunity in China. What has been thebiggest factor in your success?

Tencent has built a strong socialinfrastructure in China which offers adiversi ed range of products from QQ IM(instant messaging) to QQ Mail (email),social networks Qzone and Pengyou, socialmedia Tencent Microblog and smartphone-based social communication platformWeixin. We believe our success stems fromour focus on user experience. Leveragingon our huge QQ IM user base (784 millionmonthly active user accounts as of Q3 of2012), we are able to create a strongcommunity effect for our users. All thesesocial communications services are closelyintegrated with each other with one singlelogin ID. Users can share their own socialgraph and synchronise comments andphoto uploads across these platforms. Userscan also enjoy uni ed experience across PCand mobile terminals.

What impact is online communication(interactive communities such asQQ.com, and social networkingservices) having on consumer buyingdecisions in China? Are consumer goodscompanies prepared for this?

From a merchant perspective, socialnetworks are a good platform to accesspotential customers and to enable preciseuser targeting and CRM (customerrelationship management). At the sametime, users are highly engaged in socialnetworks and can share virally theirreviews on products and shoppingexperiences with their friends. Nowadays,both online and of ine retailers areincreasingly using social networkingservices (SNS) to build brand awarenessand user loyalty. Leveraging the success ofour SNS platforms, Tencent is alsopartnering with brand advertisers andmerchant partners to broaden access totarget customers for brand building anduser loyalty campaigns.


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Traditional retailers moveonlineRecognising the strategic importanceof online retailing as a newdistribution channel, traditionalretailers are expanding their ownonline presence in Asia. China’s largestdomestic appliance retailer andleading multi-channel retailer, Suning,derived around 4% of its 2011revenues from Suning Yigou, itse-commerce business 63 . Manytraditional retailers across Asia arenow partnering with e-tailers insymbiotic relationships, increasingsales without investing in a separateonline business. For example, India’snaaptol.com was set up in 2008 as acomparison website, but after 18months without revenues, it tied up with suppliers to advertise theirproducts. It now generates business worth Rs20 million (US$376,000) aday, earning commissions of 2-20% of

sales from sellers. Amazon has alsoopened in India in its traditionalformat — as a portal through which tobuy goods from numerous retailers— called junglee.com 64 .

Foreign of ine retailers are alsoreconsidering their past disregard foronline Asian sales. In China, Wal-Martupped its stake in online grocery store Yihaodian to a majority holding inFebruary 2012 65. In May 2012, Americanretail giant Macy’s announced analliance with local e-tailer VIP Stores,owner of Jiapin.com and Omei.com,both multi-brand luxury e-tailers. It isplanning a dedicated section on Omei.com in 2013. Macy’s has been selling

online to mainland Chinese consumerssince June 2011, using ful lmentservices from FiftyOne, a US companythat helps retailers serve clients inforeign markets without investing ininfrastructure 66 . Others, such asBanana Republic and Marks & Spencer, will now begin to deliver to Hong Kong(and some other Asian countries) fromtheir home markets.

Scores of Japanese and South Korean

retailers, whose brands are extremelypopular in China, already use Chinese-owned portals to sell directly tomainland consumers. 360Buy, amongChina’s three largest online retailers,

recently launched Minitiao.com, ane-commerce website for Japanese andSouth Korean goods includingcosmetics and apparel brands, as wellas toys and dry goods 67.

Even luxury companies are overcomingtheir fears that online sales willcompromise their high-end image.They have been alerted by the Asiansuccess of online luxury stores,including the US Gilt Groupe andBrands4friends.jp in Japan, HongKong’s Glamour Sales (operating inChina and Japan), and excluzen.comand 99labels.com in India, which offerheavily-discounted luxury goods 68 .Luxury accessory-maker Coach (US)launched its rst of cial online store inChina on Taobao Mall in a one-monthtrial in December 2011 69, whichrecorded 3.5 million visitors but onlylimited sales. Coach is now reportedlyplanning to launch its own Chinese

e-commerce platform by end-2012. InMarch 2012, US-based luxury retailerNeiman Marcus Group invested US$28million for a stake in Glamour Sales, its

rst international foray, and hopes tolaunch an online shopping website byend-2012 to enter the Chinese luxurymarket 70 .


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Across Asia, economic growth is slowing, while food in ation remains worryinglyhigh. These trends, coupled with high interest rates on consumer loans, mean thatconsumers are allocating their budgets more carefully and looking for value acrosscategories. But underlying fundamentals—rising incomes and relatively stronggrowth—remain in place. Private consumption will continue to rise, feedingdemand for everything from shampoo to luxury watches. As companies of allstripes continue their headlong expansions, modern retail infrastructure isimproving quickly in many countries.

For consumer goods companies, the good news is tempered by numerouschallenges, from cut-throat competition to the need to serve widely differentcategories of customers to the daunting task of managing their enormousexpansions. In response, companies are planning their expansions more judiciously, partnering with local players, better targeting customer groups, andexploring online sales and private labels to provide value.

Section 2:Consumer goods


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In China, market demand for soaps andcleansers will rise by 9.0% in 2013 andgrowth will stay high through 2016.During the forecast period, the fastestgrowth in FMCG sales will occur in lessdeveloped third-and fourth-tier cities,as fast rising disposable incomes give vast numbers of people money to spendon consumer goods, rather than just onnecessities. More af uent consumers will increase consumption of higher-end products, especially cosmetics andtoiletries, which is good news forforeign companies, which dominatethis segment 71 .

Chinese visitors will also supportconsumer goods sales in Hong Kongduring 2012-16. Although localdemand is expected to remain fairlystrong based on steady economic

growth, volume growth in retail salesmay slow because of in ation. High-end products will continue to prosper,as will skincare and cosmeticsproducts, thanks to a rapid increase intourist arrivals and rising sales tomainland Chinese visitors. A record 40million tourists visited Hong Kongduring the ten months to October2012, an increase of 15.8% over thesame period last year, with mainlandtourists accounting for 72% of the totalnumber 72 . Tourist demand in HongKong could be negatively affected by aproposed cut in China’s luxury-goodstaxes that would reduce pricedifferentials, but the strong reputationof the territory’s goods should continueto support sales 73 .

FMCG companies will continue topro t from Asia over the forecastperiod, as well-to-do consumers pushup demand. In 2012, major Asianeconomies are slowing somewhat while in ation and prices remain high.Therefore we now forecast regionaldemand for soaps and cleansers togrow at 6.5% in 2012, still strong, butlower than an earlier forecast 7%.These factors will be at play in China,Hong Kong and Taiwan, which willgrow at 11.8%, 5.1% and 1.6%respectively in 2012. In 2013, Asiandemand will rise at 5.6% and growth will remain relatively robust, led byChina and India, for the rest of theforecast period.

Fast-movingconsumer goods

Key fndings

• FMCG sales growth will slow but remain robust across most of the region.

• FMCG demand growth will be fastest in China, with the soaps and cleansersmarket expanding by 11.8% in 2012.

• Companies are reinforcing strategies to reach rural and lower-incomeconsumers, and expanding distribution networks.

• The trend towards local acquisitions aimed at boosting market sharecontinues, notably in China.


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Figure 11: Soaps and cleansers: Market demand growth (% real change pa )

Territory 2009 2010 2011 2012 2013 2014 2015 2016 Asia and Australasia 7.1 6.3 5.4 6.5 5.6 5.9 5.8 7.5China 18.4 6.7 11.3 11.8 9.0 9.2 7.4 7.1Hong Kong 7.0 9.5 13.2 5.1 2.4 4.3 4.7 4.5India 15.6 11.8 7.1 8.7 9.4 9.8 11.0 11.0Japan 2.2 4.6 -0.2 1.1 0.8 1.1 1.2 1.1Taiwan 2.3 5.1 4.1 1.6 2.5 3.7 4.3 3.9


Figure 12: Soaps and cleansers: Market demand (nominal US$ million)

0

40,000

80,000

120,000

160,000

200,000

WesternEurope

North America

Asia and Australasia

20162015201420132012201120102009



In Taiwan, sales of soaps and cleansersare forecast to grow at 2.5% in 2013, a

strong performance considering themarket’s maturity. Growth in these andother FMCG products will remain goodthrough 2016, as Taiwan’s trade-dependent economy improves intandem with a global recovery,supporting incomes and demandgrowth 76.

In Japan, demand for soaps andcleansers will grow by a modest 1.1%

in 2012 against an earlier growthforecast of 2.4%, since buyingsentiment remains cautious post-earthquake. Growth will slip to 0.8%in 2013 and remain moderate throughthe rest of the forecast period.However, high incomes will stillsupport high-end FMCG products, suchas Japan’s cosmetics and toiletriessegment, the world’s second-largestmarket worth around US$50 billionannually. As in many other sectors inJapan, demand for consumer goods in2012-16 will largely be driven by theintroduction of new products, sinceJapanese take-up of new products andservices is quick, and can createfast-fading consumer fads. Japan’solder, health-conscious demographic will also dr ive sales of anti-ageingproducts and those using naturalingredients 74.

Despite a faltering economy, highin ation and price hikes by FMCG

companies, India’s growing middleclass and its rural consumers areretaining their strong appetite forFMCG products. Demand for soaps andcleansers is forecast to rise 8.7% in2012, lower than an earlier forecast of9.9% but still robust. Demand growth will pick up slightly to 9.4% aseconomic growth improves, and willrise to 11% by the end of the forecastperiod as income rise and consumerslook to trade up to better products.

Leading FMCG companies, includingseveral multinationals, will continue tobene t from their excellentcountrywide distribution networks,consumer insights and high brandloyalty, built over decades. They willcontinue to customise products,package sizes and marketing efforts forIndian consumers, aidingconsumption. Although India’scosmetics and toiletries market isheavily dominated by a few players,rapid demand growth will offeropportunities for new players 75 .


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The FMCG sector in India has beengrowing rapidly. How does Godrejcompare with the industry overall?

The FMCG sector has been doing well inthe last few years with CAGR of 15% acrossthe industry. Godrej has outperformed witha CAGR of 22%. Soaps and householdinsecticides have done particularly well ascompared with hair colour brands.

Is FMCG growth vulnerable to factorssuch as a slowdown in GDP growth andpoor monsoons, such as we are seeingthis year?

For essentials, generally no. But FMCGimpulse buying is affected, for example inthe case of snacks. But impulse buyingitself is only 10% of the market, so it doesnot have much impact on growth of FMCG

sales overall.

Q&A with A. Mahendran, Managing Director,Godrej Consumer Products, India

Is competition in the FMCG sector inIndia increasing? Is competitiveintensity high?

Any market which is growing wi ll havecompetition. But if you compare with say

China and Brazil, in India competitiveintensity is nominal, it is not hyper. In ademocratic country which is opening up,and with laisser faire capitalism, there wil lalways be competition but for us in India itis not as severe.

Large players seem to dominate theFMCG industry in Ind ia. Or are weunderstating the role of the informalsector and regional players?

Everywhere in the world there are smallplayers. All the data is captured in India –the share of the large national brands

across categories is around 60% -70%, andthis is stable. Regional players share therest.

Do regional players have any advantageover large brands in terms of the taxregime or regulatory environment?

No, it is a level playing eld and localplayers have no special advantages, exceptfor some who might not be complying withregulations. When the uniform taxationregime under the GST comes into play theenvironment will further improve. Butthere are some political issues to be

resolved before a uniform GST isintroduced. Smaller players may get somebene ts in terms of, say, excise dutyconcession, but then they also have certainhigher costs to bear and they also have togrow to be viable. Small units need money,and cannot undercut prices beyond acertain point if they want to survive.

Will the new policy allowing foreigndirect investment in multi-brandretailing shake up distributionchannels?

Multinationals have not yet entered intomulti-brand retailing and it is going to be along-drawn process, requiring deep

Godrej Consumer Products is amajor player in India’s FMCGmarket with products spanning personal, hair, and household & fabric care segments.

pockets. The FMCG industry is today worthRs2 trillion (US$37.1 billion). Modernretail chains a re growing relatively well butthey account for barely 5% of sales.

Will modern retail dominate in years to

come?

Modern retail will take its own course.There is a large middle class in India whichis conservative and not quick to changebuying habits. I do not see any urgeamongst consumers to go into modernretail shops. They stil l prefer to buy locallyfrom street corner shops, and they see value in that. Moreover, the consumerperception is that the local retailer ischeaper. He also offers delivery, credit,exchange and so on. There is also the factthat only people with cars can drive to asupermarket and park there to shop.

What will traditional retail do?

There are some 10 million retail stores andthey are growing in number by 15%annually. At present there are only about3,000 chain store outlets shared amongst

ve or six chains. It is not going to be easyfor big chains to catch up. Moreover someof the traditional stores will upgrade intostand-alone self-service stores and these will compete with large chains. This ishappening across India, even in smallertowns.

Will e-retailing grow?This is quite small at the moment andhappening mainly v ia personal computers,of which there are only about 30 millionusers. But there are some 500 mi llionmobile phones and a large proportion ofmobile users are accessing the internet ontheir phones. So this is going to be thedriver to trigger e-commerce, especiallyamong younger people in their twenties.They will drive e-commerce growth inIndia.


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Asia’s economies look prosperouscompared with developed markets, buteven they are showing signs of fatigue.GDP growth is still healthy, but thepace has slowed. In China, forexample, GDP grew 7.4% in the thirdquarter of 2012 according to of cialestimates: enviable compared toWestern economies, but still China’sslowest growth since the rst quarterof 2009 77. India’s economy is falteringas well. GDP grew 5.8% in the year toMarch 2012, down from 6.9% theprevious year 78 . Consumers’ pocketsare being pinched by high in ation,rising interest rates and price hikes byFMCG companies aimed at coveringmore expensive inputs andcommodities. Still, given Asia’s largepopulation, burgeoning middle classesand fast-rising incomes, most FMCGcompanies aren’t very worried aboutfuture growth.

in good times to cater to rural and poorconsumers. For example, companiessuch as Unilever (UK-Netherlands) andProcter & Gamble (P&G) (US) have fordecades been successfully selling theirdetergents and cosmetics in smallsachets that are affordable to Asian

families.

Companies are also expandingdistribution networks quickly toincrease penetration and reap moresales. For instance, Unilever’s Indiansubsidiary Hindustan Unilever hastripled its rural penetration rate in thelast two years 82 . In Vietnam, P&G usesa boat in the Mekong Delta to accessrural shoppers living on the water,selling low-cost lines like sachets of

laundry softener83

. At the other end,companies are also piggybacking onthe rise of modern retail infrastructuresuch as supermarkets. India’s localFMCG company Marico posted revenuegrowth of over 45% from its rural andmodern trade businesses duringFY1284 .

In December 2011, Korean-Japaneseconfectionery maker Lotte said it would release low-priced products tohelp its Southeast Asian expansion. Ithopes to raise sales in that region fromJPY8 billion (US$100.3 million) in2011 to JPY15 billion (US$173 million)by 2014. Its main products in Southeast Asia are priced some 30% higher thancompeting US and European products,but it will now launch cheaperproducts to expand its customer base.Meanwhile, Lotte is also planning toincrease coverage in Southeast Asia bytripling its sales personnel to 3,000 by2014. In Vietnam, Indonesia and

Preparing for slower growth

For example, according to a study byIndia’s Economic Times , in the quarterto March 2012, India’s top ten FMCGcompanies outperformed analystexpectations for both revenue andpro t growth. Performance was drivenmore by consumption than by price

hikes. A separate study found thathistorically, India’s leading FMCGcompanies actually grow much fasterduring periods of high in ation, whenthey are more likely to grab marketshare from the unorganised sector,enjoying economies of scale from bulkbuying and bene ting from the higherpricing their strong brands give them 79.

However, storm clouds may begathering, since the FMCG sector is

usually late to suffer during aslowdown, given that demand for itslow-value products is more inelasticthan for other consumer goodscategories. There are already early warnings, as some fast-expandingcompanies in China nd growthbeginning to decelerate. According toresearch rm Kantar Worldpanel, value sales in China’s FMCG categoryrose by 15% in the quarter to 15th June2012, lower than the annual rate of16% 80 . In July 2012, Mead JohnsonNutrition, a US baby formula maker,signalled slower sales growth in China.Meanwhile Taiwan’s TingYi, a food anddrinks maker which leads China’sinstant noodle market, said drinksturnover fell by more than one- fth year-on-year in the rst quarter of2012 81.

In response, FMCG companies are rstdoing more of what they already know,reinforcing strategies they developed


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Thailand, it will increase staff dealing with small and mid-size stores and hirepersonnel that deal in cash, usingmotorbikes and small cars to delivercandy to shops 85 .

These strategies are mainly aimed atgrowth, but at the same time, will alsohelp companies weather the currenteconomic slowdown. But the downturnalso calls for more to be done. In April2012, Unilever said that despite risinginput costs, it would resist raisingprices in China except as a last resort,instead applying cost-saving measuresin its factories and working on aproduct portfolio with a higher pro tmargin. It said it was still con dent ofachieving its targeted vefold growth

in its China business by 2020, toRMB50 billion (US$7.9 billion), and ofgrowing 50% faster than the industryaverage 86 .

Tough economic times are alsointensifying existing challenges forforeign companies in Asia. Forexample, in December 2011, two of thelargest global food companies,Switzerland’s Nestlé and France’sDanone, revisited their China businessmodels in the face of erce localcompetition. Nestlé closed one of itsthree ice cream factories in mainlandChina and pulled back on retail sales inShanghai in order to focus on morepro table regional markets and onout-of-home sales, such as restaurants. According to Euromonitor, whileNestlé’s share of the RMB30 billion(US$4.8 billion) national ice creammarket still hovers around 3%, the twomarket leaders, Inner Mongolia Yiliand China Mengniu Dairy, have sharesof 17% and 15% respectively. The two

Chinese companies, have alsointroduced new avours and newupmarket products and packaging.

Nestlé said its Shanghai plant did notmeet internal expectations and that itmight now focus on a few particularbrands and products since it no longerhas to support local production in thatcity. Meanwhile, the world’s largest yoghurt maker, Danone, said it has“suspended” operations at its Shanghai yoghurt factory, in line with a newstrategy of focusing more on premiumbrands in China 87. Companies arere-examining not just product andproduction strategies but also theirregional plans. Both Nestlé andDanone chose to cut back in Shanghai,

where competition is intense and thelack of suitable land is a big problem.Labour, logistics and inputs are moreexpensive than in other regions, and

earlier tax breaks have been withdrawn 88 .

Multinationals may be regrouping, butthey are certainly not giving up on Asia’s lucrative markets. Indeed, manyare looking to local acquisitions to buya quick presence and market share. Inearly 2012, Nestlé bought 60% of localfood company Yinlu, and 60% ofcandymaker Hsu Fu Chi. In April 2012,it announced its purchase of P zerNutrition, American pharma giantP zer’s infant-nutrition business, for ahefty US$11.85 billion. Emergingeconomies contribute 85% of sales forP zer Nutrition. The company’s 7.4%market share in China’s promisingbaby food market could be the key

motivation for Nestlé’s buy; givenChina’s one-child policy, mothersusually prefer the most expensive babyfood 89.


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Luxury brands

Amidst the dreariness of globaleconomic growth gures, Asia’sincreasingly rich and luxury-loving

consumers continue to providesurprising cheer for the worldwideluxury market. According toconsultancy rm Bain & Co, luxurysales worldwide will grow at 7-8% to€216 billion-€218 billion (US$280billion-US$283 billion)in 2013, with aCAGR of 7-9% in 2011-2014. Asia’sgrowth of 20-22% driven mainly byChina and South Korea, will be key.Indeed, 30% of global luxury sales nowoccur within emerging markets.

Meanwhile, Chinese consumers frommainland and Greater China(including Hong Kong, Macau andTaiwan) and counting Chinese tourists worldwide, account for over 20% ofglobal luxury sales. Add in Japan,South Korea and Southeast Asia, and Asian consumers account for over halfof such sales 90 .

China will drive global luxury growthin 2013 and through the forecastperiod based on its large population,falling but still-strong GDP growth anda rapid rise in af uence, includingincreasing purchasing power insmaller cities. These trends are coupled

Key fndings

• China will drive global luxury market growth in 2013 andbeyond based on a rapid rise in af uence, including in thesmaller cities.

• Mainland Chinese tourists will remain critical for luxurysales in neighbouring Taiwan and Hong Kong, and salescould suffer if China abolishes or cuts its tax on luxurygoods.

• Homegrown Asian luxury brands are establishingthemselves in the region. Partnerships with global brandowners are likely to become more common as Asian rmsseek capital and international expertise, and global rmsseek to cater more closely for the tastes of Asianconsumers.


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with a strong appetite for status andluxury products. According to Bain,luxury sales in mainland China rose35% in 2011 and are forecast to grow18-22% in 2012 to €15 billion-€16 billion (US$19 billion- US$21billion). Second-, third-and evenfourth-tier Chinese cities will beimportant growth drivers over the nextfew years 91.

Clearly, China has replaced Japan asluxury’s most important Asian market.The World Luxury Association predictsthat China will overtake Japanof cially in 2012, with sales of US$14.6billion 92 . However, during the forecastperiod Japan will still remainimportant and contribute signi cantlyto the revenues of many luxurycompanies. It contributed 8% of

rst-half revenues at the world’s largestluxury goods group LVMH (France) 93 ,17% of jeweller Tiffany & Co 94 globalsales in 2011 and 12% of third-quarter2012 revenue at France’s PPR’s luxurydivision 95 . In future, luxury companies will nurture their decades ofinvestment in Japan and focus ongaining market share, but they willchannel new investments into high-potential markets, particularly China.

According to a World Luxury Association survey, 70% of globalluxury brands in Japan were shiftingtheir commercial plans to China duringthe year to June 2012 96 .

Chinese customers will also remainkey to growth of the luxury market ofneighbouring Hong Kong and

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