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India, Eastern Europe Best Bets for International Retail Ops: Study

CHICAGO -- India heads the list as the best international investment opportunity for mass merchants and food retailers, according to management consulting firm A.T. Kearney's 2005 Global Retail Development Index (GRDI), a yearly study of retail investment attractiveness among 30 emerging markets.

Published since 2001, the GRDI ranks emerging countries based on a set of 25 variables, among them economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth.

In this year's index, India moved from second place to first, unseating Russia, which had held the No. 1 ranking since 2003. The reason for India's rise to the top spot is a considerably improved investment climate resulting from the recent relaxation of direct-ownership restrictions on foreign retailers. India's retail market totals $330 billion, is vastly underserved, and has seen 10 percent growth on average over the past five years. It's also one of the most fragmented retail markets in the world, with the combined market share of the five biggest retailers totaling less than 2 percent.

"The message for retailers on India is clear: Move now, or forgo prime locations and market positions that will become saturated quickly," said A.T. Kearney v.p. Mike Moriarty. "Global retailers that missed opportunities to capture first-mover advantage in China can make up for it in India."

A.T. Kearney expects that such international retailers as Wal-Mart, Carrefour, Tesco, and Casino will quickly take advantage of the more favorable FDI rules and enter the Indian market through partnerships with local retailers, while other retailers, including Marks & Spencer's and Benetton Group, which are both currently operating through a franchise model, are highly likely to adopt a hybrid ownership structure.

In response to global retailer's plans, A.T. Kearney anticipates that major Indian retailers such as Pantaloon, Westside, and Big Bazaar will beef up scale and improve logistics and supporting technology.

Russia's slip to second place in the index is due to a continuous stream of foreign retailers flooding into that country's market over the past few years, according to the study. Overall, however, the region of Eastern Europe still offers the best investment opportunities for retailers, with countries in the region accounting for 11 of the top 20 investment destinations in the index. This year, Ukraine rose eight places to third, because of solid increases in GDP and retail sales, a highly fragmented market, and a large urban population. Bosnia-Herzegovina and Macedonia have both entered the index for the first time this year.

The other countries in the top 10, after India, Russia, and Ukraine, are China, Slovenia, Latvia, Croatia, Vietnam, Turkey and Slovakia.

"Eastern Europe really represents three distinct opportunities global retailers should be acting on: Russia, traditional Eastern Europe like Hungary and Romania, and 'new' Eastern Europe like Ukraine, Slovenia, and Latvia," noted Fadi Farra, A.T. Kearney senior manager and leader of the study. "Retailers who plan properly can leverage capabilities across some of these smaller, closely located countries and gain a distinct advantage."

The research additionally found that countries in the top third of the annual index, which features a total of 30 nations, have retail sales growth rates twice as high as countries at the bottom of the index, suggesting that retailers should carefully time their entries into the top 10 developing markets. A.T. Kearney created a GRDI circa 1995 to apply the methodology to the world's developing markets at the time. Not one of the top 10 markets in 1995 is still there today. Between 1995 and 2004, the countries at the top of what would have been the 1995 GRDI saw growth in modern retail sales of 9 percent, while those at the bottom of the 1995 index grew by just 4 percent.

"Many of the top 1995 countries experienced macroeconomic shocks like currency crises and natural disasters, yet their retail sales rate still grew faster than other countries over the 10-year period," said Moriarty. "This underscores the need for retailers to take a long-term view when entering developing markets and realize that economic or political instability could be among the costs of first-mover advantage."

A copy of the 2005 GRDI study and individual destination reports on India, Russia, and Ukraine can be found at,3,1,108.
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