Over recent years, we have seen a wave of retail formats and services migrate between continents:
FGRT’s global team of analysts has witnessed a migration of retail formats and services between continents. In this report, we discuss three such flows, which we illustrate below. We conclude by analyzing what the growth of grocery discount and off-price formats, and the emergence of services such as rapid courier delivery, tell us about the nature of consumer demands.
Off-price retailing is a concept that is flowing from the US to Europe, where it is a much more nascent channel. In the US, a number of major retailers offer off-price concepts, but in Europe, TJX Companies—which trades as TK Maxx in countries such as the UK and Germany—pretty much has the market to itself.
TJX Companies has stated that it aims to operate 1,100 stores in Europe and Australia over the long term. The company said that 125 of these would be in Australia, implying 975 stores in Europe. As of January 2017, the company operated a total of 582 stores across these regions. The company plans to open 45 European stores by the end of its current fiscal year, in January 2018. In reported, US-dollar terms, TJX Companies grew its European and Australian revenues by 50% between fiscal years 2012 and 2017.
In addition, Hudson’s Bay Company recently brought its Saks Off 5th off-price format to Europe, opening its first store in Düsseldorf in June 2017. At the time of writing, the company’s website listed five German stores and one Dutch store. A second store in the Netherlands will open in autumn 2017, according to the company.
Data from Euromonitor International show that the off-price sector is still a relatively small part of European apparel specialist retailing, which implies that there are opportunities to build the sector in Europe.
Outlook: Off-Price Retailing in Europe
While off-price may look ripe for development in Europe, we think the relative strength of full-price retailing in Europe compared with the US will make established retailers more reluctant to push into off-price formats in Europe. In the US, aside from TJX Companies, established names such as Nordstrom, Saks, Macy’s and Lord & Taylor have all helped build the off-price channel by establishing off-price operations. As long as established European retailers can sustain full-price sales growth, the risks of cannibalizing such sales through off-price formats gives retailers few incentives to grow the off-price segment.
A second flow of retail formats we have identified consists of no-frills, limited-line grocery discounters such as Lidl and Kaufland migrating from Europe (and specifically Germany) to the US and Australia.
Lidl in the US
Germany’s Lidl opened its first batch of US stores in mid-June 2017. The company has stated that it intends to open 20 stores in the US this summer across three eastern states: North Carolina, South Carolina and Virginia. When we checked the Lidl website on August 23, it said that the company was operating 22 US stores.
In March, ahead of the first US store openings, and again in August, the company was hiring for store-based roles in in eight eastern states: Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia.
We estimate that Lidl will grow its US presence to approximately 300 stores by the end of 2020 and generate almost $4 billion in US sales in the same year.
Rival German discounter Aldi has been in the US for 40 years, but is now accelerating its expansion program. In June 2017, the company announced that it would invest $3.4 billion to grow its US store count from 1,600 currently to 2,500 by 2022.
Tailwinds for Lidl US
We see the following tailwinds for Lidl’s US venture:
Consumer interest in healthy living: Grocery retailers and analysts widely recognize that there is a trend toward healthier living, including increased demand for more natural products and fresh produce. If Lidl can establish strong fresh and natural credentials among US shoppers, it could be well placed to pick up consumers looking for such foods on a budget.
The frugality of millennial shoppers: Millennials—typically characterized as those born between 1980 and 2000—are becoming more significant as a consumer base as their incomes grow and they establish families. And this generation shows significant price sensitivity in grocery, which we noted in a previous report. Earlier this year, we heard former Morrisons CEO Dalton Philips share his views on grocery discounters at the World Retail Congress. He noted that millennials are inherently distrustful of brands and are willing to trade down to value retailers in categories such as apparel and grocery—which bodes well for discounters.
Increased demand for smaller-store convenience: As more and more nongrocery purchases shift online, and as consumers’ expectations of convenience and immediacy in food shopping increase, there appear to be fewer reasons for shoppers to visit large superstores to buy groceries. Lidl could benefit from any ongoing shift to smaller store formats that allow consumers to shop more quickly.
Kaufland in Australia
Meanwhile, a number of media reports suggest that Kaufland, Lidl’s sister discount hypermarket chain, is set to launch in Australia. Kaufland and Lidl are both owned by Schwarz Group, which told us in June 2017 that it was still scoping the Australian market and that it had not yet decided to open its first stores in the country.
Should Kaufland open in Australia, we see opportunities for it to capture grocery market share from incumbents in a supermarket sector that is characterized by an unusually low level of competition and a perception that prices are higher than in some other countries. Two retailers, Woolworths and Coles, account for almost 70% of Australian supermarket sector sales, making the sector among the most concentrated in developed retail markets. Our analysis of crowdsourced food-price data from the Numbeo database suggests that Australians pay, on average, 22% more for their groceries than do shoppers in the UK and 14% more than do shoppers in Germany; the same data suggest that Australians pay 14% less for food products than shoppers in the US do.
Aldi and Costco have successfully tapped the Australian market in recent years, suggesting that Kaufland could succeed with a discount food offering.
Outlook: What Can Incumbent Retailers Do to Battle Discounters?
In markets such as the UK and France, we have seen that incumbent nondiscount retailers typically do not regain share lost to discounters by offering differentiated stores with more premium shopping experiences. Nondiscount European retailers such as Carrefour, Tesco and Morrisons all tried investing in fancy stores, but found those efforts were fruitless in their battles with discounters: these retailers gained momentum only when they focused on lowering prices and, in some cases, simplified ranges to enable this.
At the World Retail Congress 2017, Dalton Philips noted that established grocery retailers that are challenged by discounters need to close the price gap to around 7% to stem loss of share to Aldi and Lidl. Also at the World Retail Congress, we heard from the former CEO of Lidl, Karl-Heinz Holland. He observed that Lidl had tried to be more local than the established local retailers in terms of ranging and sourcing when it entered markets such as Switzerland. Holland said the strategy proved highly successful. Competing nondiscount retailers may therefore find that, although quality and provenance are essential parts of their offering, they are not competitive advantages unique to them.
In short, faced with discount “invaders,” incumbents tend to find they must compete more aggressively on price rather than relying on differentiation.
Crowdsourced Rapid Delivery Services
Our third observed trend is that the kind of freelance, “gig economy” rapid delivery services that are more established in China and India are growing in scale in the US and Europe. In China and India, these kinds of service providers include New Dada and Delhivery, which have scaled up by focusing on e-commerce fulfillment.
The explosion in online shopping has spawned a sizeable market for rapid delivery in Asia. Some $43.5 billion was spent on express delivery services in China in 2016, according to logistics consultancy Armstrong & Associates.
In Asia, such rapid deliveries are often fulfilled by tech-enabled contractors in a form of crowdsourcing. In China, companies such as New Dada operate as app-based hubs that connect freelance workers to customer demand—functioning similarly to the way Uber does in the ride-hailing space. New Dada says it covers 350 major cities, incorporating 80 million business users and 30 million individual users. In October 2016, Walmart invested $50 million in New Dada and Walmart’s Chinese shoppers can now get two-hour delivery of groceries ordered through the service.
Similar services in Asia include Ninja Van in Singapore and Delhivery, which was India’s first logistics firm to concentrate solely on e-commerce deliveries. In China, Huochebang connects truckers with jobs and has been called the “Uber for trucks.” Huochebang raised around $115 million in financing in December 2016, which valued the company at $1 billion, according to Bloomberg.
In the US and Europe, these kinds of rapid delivery services initially tended to focus more on food service than on retail, and a profusion of restaurant delivery providers such as Grubhub, Seamless, UberEats and Deliveroo were established. The last couple of years have seen this rapid delivery model move more meaningfully into retail, with major retailers launching their own logistics services and partnering with specialist firms:
Outlook: Gig Economy Set to Grow Further in the US
In markets such as China and India, an abundance of labor, supported by ongoing urbanization, has facilitated the market for piecemeal freelance work. While developed economies have different labor force characteristics, we are now seeing a boom in casualized freelance contracting in the West as on-demand services blossom.
Bearing this out, research from business services firm Intuit and consulting firm Emergent Research forecasts that the number of on-demand workers in the US will more than double between 2016 and 2021. While this encompasses all types of gig economy workers, the trajectory is suggestive of the potential growth in the freelance delivery provider labor pool.
We expect raised consumer expectations, fueled by the convenience of services such as Amazon Prime Now, to prompt more and more US and European retailers to offer rapid delivery services of the kind that are already commonplace in Asia.
Further Omnichannel Exports from Asia
Chat-Based Customer Service
In China, selected brands and retailers, especially in the luxury sector, have long leveraged the scale of the WeChat mobile app to offer one-to-one customer service and conversational commerce to shoppers. In some cases, these services are enabled by chatbots offering automated responses. For example, Louis Vuitton’s WeChat account reportedly uses the Message API function to enable the company to provide preprogrammed, chat-based customer service to Chinese consumers.
In India, a number of retailers have long been communicating directly with shoppers via WeChat rival chat app WhatsApp. These include brands such as Diesel, Kenneth Cole and Brooks Brothers, operated under franchise by Reliance Brands. WhatsApp is a popular channel of communication for small and medium-sized businesses as well as major names.
In Western markets, we have seen retailers recently move toward conversational commerce, which includes using chatbots within channels such as WhatsApp and Facebook Messenger to respond to customer queries.
A 2017 survey of 500 top North American retailers by research firm BRP found that 14% of them have already adopted artificial intelligence–powered chatbots and digital assistants, while a further 32% plan to introduce the technology in the next three years. We expect to see conversational commerce and chat-based customer service become much more common in Western markets.
There is a case for arguing that the e-commerce marketplace format is another retail export from East to West. In China and India, marketplace sites that simply provide forums for third-party sellers have long held dominant positions in e-commerce: these include Flipkart and Snapdeal in India and Alibaba-owned Taobao, Tmall and AliExpress in China. In the US and Europe, e-commerce has long been led by conventional retailers—eBay being the main exception.
Now, more and more Western retailers are adopting marketplace formats, meaning they are moving from purely selling their own inventory to also acting as portals for third-party sellers. Amazon is the most high-profile example of this, but Walmart and Zalando have also established marketplaces where third parties can sell goods. At Amazon, half of total units sold are now sold by third-party sellers. As Walmart ramped up its marketplace offering, its online product count increased from around 15 million at the end of the company’s fiscal 2017 second quarter to 67 million just one year later.
While the majority of e-commerce in the US and Europe continues to be transacted through conventional retailers that own the inventory they list, we expect to see major marketplaces carve greater share in these regions.
Consumers Have a Pick-and-Mix Attitude Toward Shopping
We think growing demand for the three segments of off-price, grocery discount and omnichannel services reflects a polarization of expectations among shoppers. It is what we term a “pick and mix” attitude toward shopping, whereby consumers switch their focus between convenience and saving money.
Off-price and grocery discounters expect shoppers to put in legwork in return for saving money, and retailing in both sectors remains largely offline. At off-price retailers, shoppers must rummage through a mix of clothing to find what they like, and at grocery discounters, service offerings are minimal and checkout lines can be long.
In contrast, omnichannel services reflect the fact that shoppers are willing to pay for immediacy and convenience when they need or want it. The retail model that enables shoppers to order a product online and have it delivered to their home within an hour is the antithesis of the retail offering in off-price and grocery discount stores.