2015 Top 250 Global Powers of Retailing
Retail trends 2015: Embracing innovation
Welcome to the 18th annual Global Powers of Retailing report, produced by Deloitte Touche Tohmatsu Limited (DTTL) in conjunction with STORES Media. This report identifies the 250 largest retailers around the world based on publicly available data for fiscal 2013 (encompassing companies’ fiscal years ended through June 2014) and analyzes their performance based on geographic region, product sector, e-commerce activity and other factors.
This year’s report focuses on the theme of “embracing innovation” and looks at the retail trends for 2015, as well as retailers creatively utilizing innovations to address the disruptive changes currently impacting the marketplace. It also provides a look at the world’s 50 largest e-retailers, an outlook for the global economy and an analysis of market capitalization in the retail industry.
Retail trends for 2015 are shaped by the disruptive changes currently impacting the marketplace. Here we focus on five main trends. The first is travel retailing, which is redefining notions of customer base and transforming the role airport retail plays in a company’s strategy. The second is mobile retailing, a rapidly growing business that is expected to approach $640 billion in annual global sales within just a few years. The third is faster retailing, which is just what the name implies: speed to market, speed to response, speed to deliver. The fourth is experience retailing, which takes shopping and adds entertainment, emotion, deeper engagement — and sometimes even an entire environment. And finally there is innovative retailing, which responds to market disruption with disruptive creativity of its own.
While these trends are not new, what is interesting for 2015 is that even though the advances in technologies available to consumers and retailers have been exponential, consumers and retailers are more and more willing and quicker to experiment with and adopt the latest technologies in more creative and innovative ways. Some retailers are even keeping up with the breakneck speed of change by leveraging innovation and big data to their advantage; rethinking their business model and adapting every aspect of their operations; executing marketing, product and service on every channel necessary; and responding 24/7 to 24/7 consumers with increasing expectations
With market disruption comes opportunities; obviously, the retailers who can be nimble, adapt and innovate in the face of these changes will be in a better position for success than those that cannot.
Over 1 billion people travel internationally each year — approximately 15 percent of the global population — and they spend the equivalent of more than $1 trillion in the process. As a result, companies like Pernod Ricard and L’Oréal refer to travel retail as their “sixth continent,” and Luxottica describes airport sales as “the Formula One of retail.”
International tourism continues to rise above expectations despite continuing global geopolitical and economic challenges, and sales have grown by more than 12 percent a year since 2009. Half of that growth has come from an increase in travelers, especially from emerging countries like China. Much of the rest is due to the willingness of travelers to shop en route and abroad — and retailers’ improved capability to serve them.
The expanding middle classes of emerging markets are traveling to the world’s capitals and boosting sales, especially of luxury products, and this is benefiting the developed economies of the United States and Europe. Over half of France’s €16 billion luxury industry depends on tourists. Therefore, in 2015, expect retailers to continue catering to high-spending travellers — especially emerging market tourists — to drive growth.
Travel retail provides new opportunities to engage with consumers. Travelers often have time for leisurely shopping due to lengthy waits at airports and international travel often promotes a sense of personal achievement, both conditions providing a good atmosphere for experimentation and indulgence.
In response to these opportunities, many companies are investing in building brand awareness in emerging countries, even when the targeted consumers may not purchase those brands at home. This is because these consumers are keen to acquire foreign and luxury brands while traveling, especially in developed markets which offer superior product selection and availability as well as advantageous price comparisons due to high import taxes in home countries.
As a result, airports have become retail destinations and airport retail design has evolved, now dominated by luxury fashion trends rather than the duty free shops of the past. Airports have also become laboratories and an important source of data, allowing companies to experiment. For example, World Duty Free Group (WDFG), Heathrow Airport’s “anchor” retailer, uses airport data to better prepare for international arrivals, such as ensuring that speakers of the right languages and cultural sensitivities will be on hand. They can even reconfigure shop displays to suit the national tastes of travelers passing through.
A projected 65 percent of the global population will be using a mobile phone by 2015 and an estimated 83 percent of Internet usage will be through handheld devices. It is no surprise then that mobile retailing is expected to continue to grow aggressively. In the next three years, global e-commerce sales made via mobile devices are expected to top $638 billion, which is about the size of the world’s entire e-commerce market just a year ago.
The introduction of wearables like Google Glass and Apple Watch opens new opportunities for reaching consumers, and retailers will keep an eye on developments in this arena. The smart watch sector is currently estimated at $1.4 billion to $1.8 billion but is expected to surge to $10 billion by 2018. The full range of the wearable technology market is projected to hit $30 billion in sales during the same period. Some predictions have shoppers purchasing via wearable devices as early as 2015.
Retailers will need to respond by offering free in-store Wi-Fi and mobile-friendly retail websites optimized for different kinds of personal devices. Mobile payments will play a large role — Forrester expects mobile payments to amount to $90 billion by 2017— as will location-based marketing. Wal-Mart, eBay and Amazon have already created convenient mobile customer experiences, and others will follow. However, while shoppers want real-time, relevant and personalized information and offers, retailers will need to surround this service with very strong privacy and security. Trust, transparency and protecting customer information will be critical in retaining loyalty as mobile retailing becomes the norm.
Speed has been an important trend in retail for over a decade. This includes: “fast fashion” (getting runway styles to the stores as soon as possible); limited-time-only products and flash sales to drive urgency and immediate purchase; pop-up establishments to quickly get products and services to market and build buzz; and self-service check-out and kiosks to reduce or eliminate waiting.
In 2015, expect retailing to get even faster to meet consumers’ desires. Millennials will be driving much of this as they are the largest generation, have a great deal of spending power and carry a lot of influence. They prefer fast response and immediate gratification, and retailers will cater to that. With Amazon and Google offering same-day delivery in certain areas, expect other companies to follow; the delivery window will become more narrow and specific.
This won’t happen overnight, of course, but the first-movers in this area are aggressively testing possibilities. Amazon expanded its same-day delivery service in parts of the United States to certain cities in the U.K., Germany and Canada. It recently tested delivery by taxi, and is waiting for FAA permission to begin their Prime Air service in which drones will deliver packages within 30 minutes. The ability to meet the consumer’s need for speed makes an efficient end-to-end supply chain more important than ever.
While same-day product delivery will not likely be the norm for everyone, instant availability of information will be: More and more consumers are expecting it and retailers will need to deliver. Retailers will need to optimize their information to provide as much content as shoppers need without the load time, especially over Wi-Fi and cell networks on mobile devices, so shoppers can easily and quickly find the information or product they need.
Retailing is no longer just about the product, but the experience. Consumers want shopping to include entertainment, education, emotion, engagement and enlightenment. Retailers are exploring innovative ways to enhance the buying experience for their customers: fashion shows; music festivals; tablet and interactive displays; social media campaigns; and product and marketing co-creation. The Legaspi Company has even rebuilt failing shopping malls into Hispanic cultural centers serving all the needs of a family — grocery stores, dental and medical care, clothes, entertainment, banking, a department of motor vehicles and spaces for religious activities — and seen income and foot traffic increase at these locations, typically by 30 percent.
It should be noted that with all these new forms of engagement, regardless whether it’s in-store, online, at home or on the street, consumers still want a seamless and consistent experience. They expect to be able to view online information, access coupons, learn about promotions and review inventory at any time on any device. They expect messaging and product and pricing information to be consistent across all channels: advertising and social media; in-store and online; pushed or pulled; the sales people on the floor as well as the customer service representative on the phone. They want to order, pick up, ship, receive and return anywhere. To become nimble enough to respond to these consumer expectations, some retailers may have to change their internal operations, removing silos and improving cross-functional collaboration.
Personalized websites and emails have become the norm, and consumers are looking for this personalization to extend into their in-store experiences. Retailers can now send customized text messages to shoppers in-store, and adapt interactions to each individual. Retailers will therefore be investing in analysis of big data to enable personalization. However, trust will be critical since violation of privacy will be a concern for consumers. Retailers will need to be transparent in their collection and use of data, and educate shoppers about the value they are delivering with personalized shopping experience.
In 2015, the retail industry will continue to be disrupted by new technologies and innovative competition. There will be no single formula for success, which will come in all shapes and sizes, formats and channels. We will continue to see the blurring of sectors as well as the growth of single-product retailing, such as with Warby Parker. There will continue to be non-traditional retailers innovating in the retail space, such as Verizon with its Mall of America destination store. Mobile point-of-sale systems will continue to enable inventive pop-up stores, trucks and kiosks. Retailers like Zady will be vertically integrated and vertically transparent. In some cases the middleman will be cut out completely — no physical stores, inventory or warehouses — replaced by made-to-order direct from manufacturer, such as Awl & Sundry and Made.com. The line between retailer and producer will begin to blur in new ways.
Expect more retailers to be innovators. Numerous retailers have invested heavily in their own innovation labs, including Nordstrom, Wal-Mart, Staples, Amazon and The Home Depot. Retailers are embracing technology and using it in creative ways. For example, Lowe’s has introduced a multilingual robot that can scan a part a shopper brings in, identify it, instantly access information about it and help the customer find it in the store. With the Internet of Things, we can soon expect retail innovations like automatic purchasing and delivery with connected homes and refrigerators.
The near future of the retail industry is about adaptation and embracing change. The speed of innovation and the disruption it causes won’t decrease, and the demands of customers will continue to escalate. To thrive in this environment retailers will respond quickly to threats and opportunities with innovations of their own. This requires connecting strategy, capabilities and specific initiatives, guided by the insights provided by market data.
The right talent with the right skill set is key to successful execution, of course. Retailers will need to focus on finding, recruiting and retaining the best people. But the reality is that no retailer will have all the appropriate talent in-house, making it essential that they develop an arrangement of partnerships and specialized resources. When needed, they will be able to quickly call upon the right expertise to drive the kind of innovation in product offerings, business models and customer engagement that will enable them to stay ahead of the competition.
Global economic outlook
The global economy appears to be decelerating as several large economies face increasing trouble. Of primary concern are China and the Eurozone, as well as a few key emerging markets like Brazil and Russia. China has experienced decelerating growth as it struggles to balance the need to avoid excessive credit growth with a desire to keep the economy moving. In Europe, weakness in credit markets is preventing economic growth from resuming at a normal pace.
On the other hand, the brightest spots in the global panorama are the U.S. and British economies. The United States appears to be on a self-sustaining path of faster growth combined with low inflation. One factor driving that growth is the huge increase in oil production which, in turn, has led to lower energy prices globally. The low energy prices are a problem for oil exporters like Russia and Venezuela, while benefiting oil consumers like India and Japan.
Among the big issues having a global impact are:
The shift in U.S. monetary policy
The Federal Reserve has ended its program of asset purchases and is now assessing when to raise short-term interest rates for the first time in eight years. This transition, and the expectation of higher rates, is driving up the value of the U.S. dollar and putting downward pressure on other currencies. That, in turn, has forced emerging market central banks to raise interest rates, thus slowing the growth of these economies. That slower growth is evident in such disparate places as Brazil, Turkey, Indonesia, South Africa, Russia and Argentina. Once U.S. monetary policy returns to normal, emerging countries will be better able to shift toward stable interest rates.
Energy production in the United States
This has risen precipitously due to the new technology of horizontal hydraulic fracturing of shale rock — better known simply as “fracking.” The rise in U.S. energy output has lowered global energy prices, reduced the U.S. trade deficit, boosted U.S. economic growth, improved the competitiveness of energy-intensive U.S. manufacturers and suppressed global inflation — especially in developed economies. It has also hurt competing energy producers like Russia, Venezuela and Nigeria. Lower energy prices have added to the purchasing power of consumers in energy consuming countries, thus providing a boost for retailers.
The crisis in Ukraine
The conflict between Russia and the West over Ukraine, which has resulted in punitive sanctions imposed on Russia by the EU and the United States, is hurting the Russian economy and, by extension, the Eurozone economy. Fear of further sanctions is having a chilling effect on investment in Russia as well as in Germany. The German economy has slowed significantly, due in part to problems in Russia. About 6,000 German companies have investments in Russia and are dependent on sales of their products and services in Russia. Each time the crisis worsens there is a flight to safety which results in a stronger U.S. dollar and lower U.S. bond yields.
A slowdown in Chinese investment
The deceleration of the Chinese economy, which has involved a slowdown in the growth of fixed asset investment, has led to a sharp drop in global commodity prices. This has hurt such countries as Australia, Brazil, Indonesia and Chile. In addition, China’s financial system is at risk due to a sharp rise in shadow banking debt, thus boding poorly for growth if a financial crisis emerges. For the world’s leading commodity producers, this suggests a need to focus on other sources of growth in the future.
A slowing of labor force growth and an increase in the retired populations of the United States, Japan, Europe and China are all playing a role in reducing growth prospects. In addition, these demographic trends are putting pressure on governments to spend more on pensions and healthcare. Different countries are approaching the problem in different ways. In China, the government is gradually lifting the restrictions on numbers of children and, in the process, promoting a higher birth rate. In Japan, the government is encouraging greater female participation in the labor force. In Europe and the United States, a debate rages as to the degree to which immigration should be allowed and encouraged. Supporters of immigration see it as a vehicle for boosting the ratio of workers to retirees and, in the process, alleviating pressure on pensions. In addition, immigration is a tool for boosting the rate of economic growth. Meanwhile, those countries with youthful demographics are poised for relatively strong economic growth. These include India and much of Latin America, the Middle East and Africa.
The ubiquity of the Internet
This has already significantly altered countless industries like bookselling, music, travel, insurance, banking, entertainment and even tax preparation and consulting. The effect is to put downward pressure on the prices of everything, eliminate countless mid-level jobs, increase demand for highly skilled workers and exacerbate income inequality. The Internet is also leading more people to work and shop from home, thus reducing demand for cars, energy and commercial property.
What follows is a closer look at the world’s major economies and the implications for the retailing industry:
The U.S. economy has been doing very well. Most indicators now point to the likelihood of strong growth in 2015 and possibly beyond. Industrial output, employment and retail sales have been performing well. Even housing, which had shown signs of trouble early in 2014, has lately staged a modest comeback. The end of aggressive monetary policy (quantitative easing) is being absorbed well by the economy. The only uncertainty concerns when the Federal Reserve will eventually raise short-term interest rates — something it hasn’t done in eight years. As of late 2014, inflation remains very low and the labor market continues to exhibit slack as evidenced by weak wage growth, thus possibly extending the period of low interest rates. The Federal Reserve is tasked with balancing two goals: low inflation and low unemployment. A decision about the timing of an increase in short-term interest rates will depend on where these indicators stand and, perhaps more importantly, where expectations of inflation stand.
Consumers, having substantially paid off debts, are spending at a brisk pace — even though wages have been relatively dormant. Businesses have hoarded cash and engaged in a flurry of stock buybacks. Yet there is reason to expect a boost to investment in the coming year given rising demand. Despite weak overseas growth, exports are performing reasonably well due to increased competiveness, especially on the back of low domestic gas prices. Fiscal policy is essentially neutral and is not likely to change much for the remainder of the current presidency.
On the other hand, income inequality continues to increase, thus hurting consumer spending because only a small share of consumers are experiencing significant income gains. The failure of the government to enact immigration reform means that the country continues to face a shortage of skilled workers, especially in the realm of information technology. Finally, there is a risk that some members of Congress will, once again, make raising the debt ceiling a contentious issue. If this happens, it could have a temporary negative impact on asset prices, business investment and hiring.
The Eurozone is in trouble. After a promising start to 2014, the region’s economy has decelerated quickly, led by Germany — traditionally the engine of European growth. France is also weak and Italy is back in recession. Among major Eurozone economies, only Spain is experiencing a significant rebound in growth — although unemployment remains ruinously high. The region suffers from several problems:
- Credit markets continue to fail. Despite an increasing money supply, bank lending is declining. This reflects the fact that many banks in the region remain laden with bad debts and are attempting to recapitalize by cutting lending and selling risky assets. This is especially problematic in southern Europe where, as a result of perceived banking problems, risk spreads remain high. This discourages borrowing. Additionally, the fear of deflation is discouraging businesses from borrowing for the purpose of investment.
- Fiscal austerity has had a negative impact on growth. In Germany, where there is now a balanced budget, the government insists on further cuts in spending in order to produce a surplus. Some critics, including the International Monetary Fund, the U.S. government, the European Central Bank and many countries within the Eurozone, have called on Germany to borrow cheaply in order to boost spending on infrastructure. The idea is that such spending would boost domestic demand in both Germany and the rest of Europe, but Germany insists that it will not revert to fiscal stimulus.
- Many countries, such as France and Italy, remain mired in onerous regulations — especially as pertains to their labor markets. This depresses productivity, elevates unemployment and hurts exports. While both governments intend to reform their labor laws, the pace of reform has been modest.
- Fourth, the Russian/Ukraine crisis has had a negative impact on Europe’s economies, especially those of Germany, Finland, Poland and the Baltics — all of which have significant economic relations with Russia.
The only major effort to reverse Europe’s dilemma comes from the European Central Bank, which has implemented a more aggressive monetary policy involving low interest rates, direct loans to banks and purchases of securitized assets. Some critics fear that the program will not be sufficient. Moreover, it is not clear that the ECB will be willing to go further and purchase government bonds given substantial German opposition. Initially, the take-up on the lending program was weak given that banks are not confident that there would be sufficient demand for cheap loans. Hence, the outlook for the Eurozone is modest at best. There remains a significant risk of a regional recession.
There are a few bright spots in Europe: Britain, Ireland and Spain. The British economy is growing rapidly following an aggressive monetary policy and government subsidies for housing. On the other hand, there is increasing concern that Britain may ultimately exit the EU. In Ireland, growth has resumed at a strong pace as the economy recovers from a very deep recession. The Spanish economy is rebounding nicely following productivity gains and wage restraint, both of which have buttressed export competitiveness. Yet Spain faces very high unemployment as well as a separatist movement in Catalonia.
China’s economy has slowed and continues to show signs of weakness despite government efforts to reverse the slowdown. Growth is now slightly above 7 percent which, if sustained, would be the slowest pace of growth in nearly two decades. While this seems high in comparison to developed economies, it is low by recent historical standards in China. Moreover, growth below this level would mean an inability to absorb workers migrating from rural to urban areas. The result would be high unemployment and social unrest. And, if the workers don’t migrate, China won’t grow since there would be zero productivity gains that come from switching workers from farms to factories. Thus, China cannot afford to grow any slower. Why is China decelerating?
- Export markets like Europe have been dormant. Even the U.S. market isn’t what it used to be for China. Plus, China’s wages and currency have increased, thereby reducing the competitiveness of Chinese exports. The result has been that some manufacturing capacity has moved outside of China. Basic assembly, for instance, is moving from China to Vietnam, Indonesia and elsewhere.
- The government has attempted to limit the growth of the shadow banking system. Lending outside traditional banking channels has resulted in excess investment in property, infrastructure and heavy industry. The result is a growing volume of non-performing assets that threatens the stability of the financial system. Yet efforts to limit this activity have contributed to the slowdown in growth. The government is torn between the desires to limit financial risk and to avoid a sharp slowdown. It has taken measures to limit the growth of shadow banking while, at the same time, attempted to stimulate more traditional forms of credit. Yet it has so far failed to liberalize the financial system.
- A modest fiscal stimulus implemented in 2014 appears to be unwinding, thus removing stimulation for the economy.
- A government crackdown on corruption has had a chilling effect on high-end retail spending as well as on some areas of business investment.
Going forward, China will require significant reforms if it is to retain strong growth. The government has proposed such reforms, but has not acted. These would entail liberalizing financial services, improving management of state-run companies, creating a level playing field for private companies, protecting property rights, boosting the social safety net for consumers in order to stimulate more spending and investing more in education and public health. For now, the outlook for reform is murky as the leadership struggles to choose between short-term and long-term goals.
Under Prime Minister Shinzo Abe, Japan has engaged in a very aggressive monetary policy involving massive purchases of assets — similar to the quantitative easing undertaken by the U.S. Federal Reserve. In late 2014, the Bank of Japan increased the pace of asset purchases in an effort to boost expectations for higher inflation. The policy boosted inflation, suppressed the value of the yen, increased equity prices and reduced real borrowing costs. Although the policy initially boosted economic activity in early 2013, it has since abated. Moreover, a major tax increase in April 2014 caused a rapid drop in economic activity from which Japan is still reeling. Another scheduled tax increase scheduled for this year threatens to undermine recovery and, as of this writing, it is not clear if the government will go through with it. Wages are not rising in line with inflation, which means that real consumer purchasing power is declining. And businesses are reluctant to invest until it is clear that inflation is here to stay. They fear that a return to deflation will reduce the return on any investment. Thus, the growth outlook is uncertain. Many businesses are hoping that Prime Minister Abe will implement the deregulatory component of “Abenomics.” But Abe has been reluctant to act on issues that are politically difficult.
The one issue on which the Prime Minister has been quite aggressive is his effort to boost female participation in the labor force. In Japan, female participation is considerably lower than in other developed economies. Abe believes that, if participation increases, economic growth will accelerate. In addition, increased participation would alleviate pension difficulties. From a retail perspective, increased female participation would probably lead to increased modernization and consolidation of retailing.
Other emerging markets
Brazil’s economy is in recession. This is due to a sharp drop in commodity prices (due to China’s slowdown); a central bank policy of high interest rates to fight inflation and to stabilize the currency; and business lack of confidence due to a government policy of high regulation and protectionism. The election in late 2014 resulted in a second term for President Dilma Rousseff. As of this writing, it is not clear if she will shift toward the center and endorse more market-oriented policies that the business community has urged. Her major platform has been an effort to boost the spending power of the poor through government transfers.
The economic outlook is poor as there is likely to be continued downward pressure on the currency due to the impending shift in U.S. monetary policy. Thus, the central bank will likely be compelled to keep interest rates high. In addition, Brazilian domestic demand is likely to be constrained by the high level of consumer debt relative to disposable income. Exports of commodities are likely to be restrained due to the slowdown in China and manufactured exports’ lack of competitiveness.
India had a highly significant election in 2014, resulting in the election of Narendra Modi as Prime Minister. For the first time in more than 30 years, a Prime Minister’s party has a majority in the Parliament, thus boosting prospects for enacting reform legislation. Yet in his first six months in office, not much reform legislation was proposed, disappointing supporters who were euphoric following Modi’s victory. They are hoping he will deregulate industry and labor markets, reduce costly subsidies, boost infrastructure investment, negotiate freer trade and ease restrictions on foreign investment. If he does these things, India’s growth outlook will likely improve dramatically. Meanwhile, growth is recovering from its doldrums but remains below potential. The central bank has managed to reduce inflationary expectations, which should have a positive impact on growth.
Russia’s economy is in bad shape. Following the crisis in Ukraine and the implementation of sanctions, there was massive capital flight from Russia resulting in a sharp drop in the currency. This, in turn, led the central bank to significantly raise interest rates several times. The result has been that investment dried up, including foreign investment. Moreover, the declining global price of oil has contributed to downward pressure on the currency and concerns about the ability of Russian debtors to service their external debts. The sanctions that have been imposed mean that some large Russian companies will have trouble rolling over foreign debts due to limited access to foreign financial markets. Some energy companies will lack access to technologies that are needed to tap into Arctic reserves. This means that oil production is likely to decline absent an end to sanctions.
To deal with the deteriorating economic relations between Russia and the West, the Russian government is attempting to pivot toward China as a source of capital and as an export market. This is unlikely to be an adequate replacement for Europe, however. Longer term, Russia faces competition as the United States is likely to export more oil and liquid natural gas to Europe. Thus, the outlook for Russia is uncertain.
Mexico’s economy is not growing strongly, but that hasn’t stopped investors from bursting with enthusiasm. There are two major reasons. First, Mexico’s reformist government has liberalized foreign investment in energy, deregulated telecoms and media and attempted to end public corruption. Second, Mexico is experiencing a renaissance in manufacturing due to higher wages in China (and therefore more competitive labor costs in Mexico), lower energy prices in North America and a rebound in U.S. demand. Thus, the outlook for Mexico is quite good.
Sub-Saharan Africa is the second-fastest growing economic region of the world after East Asia. This is due to a confluence of positive factors including substantial inbound investment in commodity production, strong commodity exports, better governance in several countries, an end to civil conflict in a number of countries, youthful demographics that have boosted the labor force and increased domestic demand in Africa’s largest economies. Although commodity prices have declined, Africa’s growth prospects still remain positive. The rising middle class is contributing to the modernization of retailing and greater consumer market opportunities. Moreover, Africa has become a surprising laboratory for experimentation in mobile commerce.
Global Powers of Retailing Top 250 highlights
2013 a challenging year for retailers as global economy decelerates
As a whole, the 2013 fiscal year was another challenging one for retailers. Europe remained in recession during most of 2013: It began to recover modestly by the end of the year, but growth remained poor. The economy continued to be afflicted by weak credit markets, fiscal austerity and weak export markets. The U.S. economy grew slowly in 2013 largely due to a tightening of fiscal policy. Wages were relatively stagnant except for households at the upper end. In Japan, there were signs of an economic recovery owing mainly to the government’s economic stimulus measures, but the economy slowed in the second half of the year. Efforts to create some inflation did not yield wage gains, and real purchasing power for consumers continued to decline.
The Chinese economy decelerated sharply in 2013, and similar slow growth continued into 2014. Inflation decelerated and producer prices declined, indicating lots of excess capacity in the economy. The government cracked down on lavish spending by officials and luxury gift giving, creating problems for high-end retailing. On the positive side, a shortage of labor boosted wages.
Many emerging countries saw their economies decelerate during this period as capital flowed back to the United States following talks of a change in U.S. monetary policy. Emerging market central banks tightened monetary policy in order to stabilize their currencies. This had a chilling effect on investment and slowed growth.
The continued weak global economy left many consumers financially constrained and retail sales under pressure. Revenue growth for the Top 250 Global Powers of Retailing, which began decelerating in 2011, continued to slow in 2013. Sales-weighted, currency-adjusted retail revenue increased 4.1 percent in 2013 for the Top 250, following a 4.9 percent gain in 2012, 5.1 percent growth in 2011 and an increase of 5.3 percent in 2010. Although growth continued to decelerate, nearly 80 percent of the Top 250 (199 companies) posted an increase in retail revenue in 2013.
Despite softer growth, profitability for the Top 250 improved. Net income/loss figures were available for 195 of the Top 250 companies in 2013: Of those, more than 90 percent (179) were profitable, a slight increase over 2012 results. The composite net profit margin advanced to 3.4 percent from 3.1 percent the year before. A higher profit margin boosted composite return on assets to 5.3 percent from 5 percent in 2012. (Note: Comparisons with prior year Top 250 results should be interpreted with caution due to changes in the composition of the Top 250 over time.)
The Top 250 Global Powers of Retailing generated retail revenue approaching $4.4 trillion in 2013, with an average size of more than $17.4 billion. To earn a spot on the list required fiscal 2013 retail revenue of $3.7 billion, down from 2012’s $3.8 billion. The lower threshold is the result of a decision to exclude convenience store companies from consideration if the majority of their retail revenue is derived from the sale of motor fuel. This resulted in the elimination of seven former Top 250 companies.
Competition to be among the Top 250 is keen at the bottom of the list as most retailers are not mega-sized companies. More than one quarter of the Top 250 (68 companies) had retail revenue of less than $5 billion in 2013. Only 46 companies, or less than 20 percent, had retail sales of $20 billion or greater. Knocking on the door were 39 companies between $3 billion and $3.7 billion in 2013 retail revenue.
Revenue declines for three top 10 retailers; Costco moves into second place
Costco’s steady sales growth boosted the company into second place in 2013 from third in 2012. Carrefour, Schwarz Group, Tesco and Kroger — ranked in marginal descending order — all achieved 2013 retail revenue of more than $98 billion. Despite lower sales in 2013, Carrefour, which ranked fourth in 2012, assumed third place, while Schwarz Group moved up two spots into fourth place. Tesco dropped from second place in 2012 to fifth in 2013 as a result of both declining sales and a weaker British pound against the U.S. dollar. Sixth-ranked Kroger may overtake all three of these companies in the future as a result of its January 2014 acquisition of Harris Teeter Supermarkets, which had revenues of $4.7 billion in fiscal year 2013.
Despite a 2.5 percent sales decline, Metro maintained its ranking as the world’s seventh-largest retailer based on 2013 annualized sales. (Metro changed its fiscal year from the end of December to the end of September. The company’s 2013 results reported here include the nine months ended September 30 — its shortened fiscal year — plus the three months ended December 31 to create a 12-month period equivalent to prior years.) Aldi overtook The Home Depot on the back of a stronger euro, moving into eighth place. Tenth-ranked Target, which joined the top 10 for the first time in 2012, retained its position, but will likely be surpassed in 2014 by 11th-ranked Walgreen Co., which acquired the remaining 55 percent of Alliance Boots in August 2014.
Compared with the Top 250 overall, the 10 largest retailers have a much bigger global footprint. On average, the top 10 had retail operations in 16.5 countries compared with 10.2 countries for the Top 250. Nearly one-third of the top 10’s total retail revenue came from foreign operations, while the entire group derived about one-quarter of its collective business outside the retailers’ home country. Four of the world’s largest retailers — Carrefour, Schwarz, Metro and Aldi — depended on foreign markets for the majority of their sales. Target’s expansion into Canada in 2013 left Kroger as the lone single-country operator among the world’s 10 largest retailers.
Global Powers of Retailing geographical analysis
For purposes of geographical analysis, companies are assigned to a region based on their headquarters location, which may not always coincide with where they derive the majority of their sales. Although many companies derive sales from outside their region, 100 percent of each company’s sales are accounted for within that company’s region.
Growth falls to four-year low for European and North American retailers in 2013
The European region, with 90 companies, accounted for the largest share of the world’s Top 250 retailers in 2013. However, North America, with 88 companies averaging nearly $22 billion in retail sales, maintained the largest share of Top 250 revenue. Despite their number and size, the European (2.6 percent) and North American (3.1 percent) retailers posted the lowest composite growth rates in 2013. For both regions, top-line revenue grew at the slowest pace since 2009.
Nearly one-quarter of the Top 250’s European retailers (22 of 90) and North American retailers (20 of 88) experienced declining retail revenue in 2013. Many of these companies continue to rationalize their portfolios and disengage from difficult markets with the effect of reducing the overall size of their businesses.
Tesco’s operations in China, the United States and Japan were all treated as discontinued in 2013. Tesco has teamed up with China Resources Enterprise to combine its 134 Chinese stores with CRE’s Vanguard unit, which operates almost 3,000 hypermarkets and supermarkets across China and Hong Kong. Tesco will be a minority partner in the joint venture. This move follows decisions to abandon the United States and Japan and focus on investing in its home market.
In line with Carrefour’s turnaround plan that includes reducing its presence in Asia and refocusing on core activities, the French retailer sold its 60 percent stake in Carrefour Indonesia to its local partner CT Corp in January 2013. This came shortly after the sale of its Malaysian business to Aeon. Carrefour also reorganized its partnership in Turkey, with its Turkish partner becoming the majority shareholder of the joint venture. Metro, Dixons, Delhaize, Makro, Darty and Dia also disposed of non-core operations in 2013.
In North America, Safeway completed the sale of Canada Safeway to Sobeys, a wholly owned subsidiary of Empire Company, in November 2013. With Canada Safeway considered a discontinued operation, the company’s revenue dropped 19.2 percent. (Note: In March 2014, Safeway announced it had entered into a definitive merger agreement with Albertsons.) Best Buy divested its Best Buy Europe joint venture in June 2013, resulting in a 14.5 percent revenue reduction.
While growth moderated, profitability improved in both regions in 2013. North American retailers reported a 3.5 percent composite net profit margin; for the European region, the composite net profit margin was 3.2 percent. North American retailers made more profitable use of their resources compared with European retailers, generating a 6.8 percent return on assets versus Europe’s 4.5 percent.
Among the big three European economies, German retailers saw the strongest top-line growth, albeit a modest 3.5 percent. This compares with 3.3 percent for the French retailers and no growth for the U.K.-based companies on a composite basis. More than one-third (five of 14) of U.K. companies witnessed declining sales in 2013. On the bottom line, French retailers were the most profitable, posting a composite net profit margin of 3.6 percent.
European retailers are, by far, the most globally active — especially those based in Germany and France, where revenue from foreign operations exceeds 40 percent. On average, Europe’s Top 250 retailers operated in 16.2 countries in 2013 compared with 10.2 for the Top 250 as a whole and 7.8 for those based in North America. While the share of Top 250 retailers that operate outside their home country continues to grow, the North American region maintained the highest percentage of single-country operators (44.3 percent in 2013).
In the Asia/Pacific region, retail revenue grew a robust 9.7 percent in 2013, fueled by Japanese retailers’ 10 percent increase in sales. Nearly one-third of Japan’s Top 250 retailers (10 companies) enjoyed double-digit sales growth in 2013. Part of the increase — especially late in the fiscal year — was the result of a consumer spending spree that occurred prior to the national sales tax hike that took effect on April 1, 2014.
Acquisitions also played a significant role. Japan’s leading electronics and appliance specialty retailer Yamada Denki increased its shareholding to a majority stake in Best Denki in December 2012, making it a consolidated subsidiary and boosting the company’s revenue 11.3 percent in 2013. Aeon undertook a series of acquisitions that helped grow the retail giant’s 2013 retail revenue by 11.9 percent. Revenue for Bic Camera soared 56.2 percent in 2013 following the acquisition of a controlling stake in its smaller rival Kojima, creating the second-biggest group in Japan’s electronics retail industry. Japanese drug store retailers Tsuruha Holdings and Welcia Holdings also made acquisitions during the fiscal year, driving further consolidation in that industry.
It should be noted that the continued depreciation of the Japanese yen in 2013 eliminated a number of Japanese retailers who, except for the currency headwinds, would have remained among the Top 250. In 2013, there were 31 Japanese retailers in the Top 250, down from 39 in 2012.
All but one of the 10 Latin American retailers in the Top 250 saw their top-line sales increase in 2013 — seven at a double-digit pace. As a result, composite revenue growth was up 10.4 percent, second only to the Africa/Middle East region. Nevertheless, both sales growth and profitability for the region declined from their 2012 levels, dragged down by Chilean retailer SMU’s results as the company implemented a plan to strengthen its financing, including the sale of assets.
Strong growth continued to yield above-average profitability in the Africa/Middle East region in 2013. All seven of the region’s Top 250 retailers posted revenue increases, which ranged from 6.5 percent (Pick n Pay Stores) to 21.6 percent (Steinhoff International) and resulted in composite retail revenue growth of 12.9 percent — the highest of any region. The group’s composite net profit margin of 4.7 percent also led the industry. The region’s six publicly held retailers all operated profitably during the year.
Global Powers of Retailing product sector analysis
The Global Powers of Retailing analyzes retail performance by primary retail product sector as well as by geography. Four sectors are used for analysis: Apparel & Accessories, Fast-moving Consumer Goods, Hardlines & Leisure Goods and Diversified. A company is assigned to one of three specific product sectors if at least half of its sales are derived from that broadly defined product category. If none of the three specific product sectors account for at least 50 percent of a company’s sales, it is considered to be diversified.
Softline and hardline retailers outpace fast-moving consumer goods in 2013
Retailers of food and other fast-moving consumer goods continue to dominate the Top 250 in number and size of companies. However, unlike in 2011 and 2012 when this sector enjoyed stronger growth than the other product groups, it took a back seat to both softlines and hardlines in 2013. Still, composite retail revenue grew 4 percent, and profitability remained solid at 2.8 percent. In the aggregate, the 132 FMCG retailers accounted for over half of Top 250 companies and more than two-thirds of Top 250 retail revenue.
Despite their large size — retailers of fast-moving consumer goods generated average 2013 retail revenue of more than $22 billion — companies in this sector are the least geographically dispersed, concentrating their operations in an average of 4.9 countries. More than 40 percent continue to operate only within their domestic borders. Nevertheless, foreign operations generated a sizeable 23.2 percent share of FMCG retailers’ combined sales. And, it should be noted, the overall sector results disguise the global expansion activity of several of the largest companies that operate in dozens of countries and derive the majority of their sales from foreign operations.
The high-margin apparel and accessories sector was the fastest- growing product group in 2013 with 5.8 percent composite revenue growth. This group of companies — although relatively small in size with average retail revenue of $9.1 billion — has the distinction of being the most global. Thirty-seven of the 44 Top 250 apparel and accessories retailers operated internationally in 2013. On average, retailers in this product sector have expanded their operations to more than 27 countries around the globe and generated nearly one-third of their revenues outside their home country.
International expansion also continues to be an important growth strategy for many retailers of hardlines and leisure goods — particularly for European companies, many of which have expanded into a number of neighboring countries within their region. In 2013, the 52 companies in this sector operated in 8.7 countries, on average. As a group, they generated one-quarter of their total retail revenue from foreign operations. In 2013, this sector saw an improvement in both top-line sales and bottom-line profits. Composite retail revenue grew a healthy 5.3 percent, and the group produced a composite net profit margin of 3.8 percent.
Diversified retailers sell a broad product offering and often operate a range of formats including department stores, hypermarkets, general merchandise discount stores, specialty stores and non-store channels. This group was represented by 22 companies in 2013. Including the likes of Germany’s Metro group, Target and Sears Holdings in the United States and British retailer Marks & Spencer, the average size of the companies in this group was more than $16 billion.
Historically, the diversified group has underperformed compared with the three specific product sectors, and 2013 was no exception. Composite revenue growth was an anemic 1 percent. The group’s composite net profit margin, at 2.1 percent, was also subpar. However, diversified companies from emerging growth markets — South Korea’s Lotte Shopping Co., Chile’s Falabella, Brazil’s Lojas Americanas, Thailand’s Central Retail Corp., Philippines’ SM Investments Corp. and South Africa’s Woolworths Holdings — greatly outperformed the group’s composite results.
Global Powers of Retailing Fastest 50
The Fastest 50 is based on compound annual revenue growth over a five-year period. Fastest 50 companies that were also among the 50 fastest-growing retailers in 2013 make up an even more elite group. These retailers are designated in italicized bold type on the list.
Chinese online retailer JD.com heads Fastest 50
Retailers headquartered in emerging markets accounted for the majority of the Fastest 50 in 2013 (29 companies). In particular, Chinese retailers (including Hong Kong-based companies) and Russian retailers are well represented among the 50 fastest- growing retailers over the 2008 through 2013 period, with nine and six companies, respectively.
Thirty-three Fastest 50 companies in 2013 were also among the Fastest 50 in 2012, as they continued to be propelled by acquisitions made over the five-year period and/or robust organic growth. Eleven companies on the list are 2013 Top 250 newcomers.
JD.com, the largest online direct sales company in China, was the fastest-growing Top 250 retailer with compound annual growth of 123.6 percent. The company was founded in 2004 and went public in May 2014. In March 2013, Albertson’s LLC — third on the list — acquired 870 Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market sites from SUPERVALU Inc., which had owned them since 2006 when Albertsons Inc. was broken up and sold. As a result, Albertson’s generated the fastest year-over-year growth in 2013 — 489.7 percent.
Chilean supermarket operator SMU has the dubious distinction of being the only company in the Fastest 50 to report a decline in revenue in 2013. Although the company’s compound annual growth rate ranked among the Fastest 50 due to a flurry of acquisitions over the five-year period, 2013 saw major financial restructuring as SMU closed a number of outlets and put three chains up for sale.
As a group, the 50 fastest-growing retailers increased retail revenue at a compound annual rate of 20.6 percent between 2008 and 2013, nearly five times the rate of the Top 250 overall. Fastest 50 retailers also significantly outperformed the Top 250 on the bottom line with a composite net profit margin of 4.9 percent, 1.5 percentage points higher than that of the Top 250. Twenty-nine Fastest 50 retailers were also among the 50 fastest-growing retailers in 2013.
Top 50 e-retailers
E-retailing, as defined in this analysis, includes B2C e-commerce only, where the business owns the inventory and sales are made directly to the consumer. Companies that primarily operate as e-marketplaces or facilitators that aggregate many sellers are excluded from the Top 50 e-retailer analysis as their revenues are largely derived from fees and commissions on sales from third-parties — consumers or other businesses that own the inventory — rather than directly from the sale of goods.
Retailers extend online presence with multiple e-commerce models
Global Internet penetration continues to rise — particularly in Africa, the Middle East, Southeast Asia and Central Asia. Along with a greater number of Internet users is a dramatic increase in the number of mobile Internet-enabled devices like smartphones and tablets. The embrace of these technologies is having a dramatic impact on media usage, marketing and e-commerce, as well as enabling new consumer shopping behaviors.
As e-commerce competition heats up, retailers pursuing greater online sales face an increasingly crowded, complex and fragmented market. In order to grab consumers’ attention and extend their online presence, many sellers are utilizing multiple online models including:
- Directly operated online storefront
- Online storefront on third-party marketplace
- Incorporating third-party marketplace into retailer’s own online storefront
- Expansion of click-and-collect services
- Selling products to other e-retailers on a wholesale or consignment basis
- Social networking and commerce applications
- Affiliate marketing programs, where one business sells the products of another in return for a commission
- Paid search and comparison shopping sites as key influencers of consumer purchase decisions
As online sales accelerate, especially in developing markets, retailers are increasingly viewing e-commerce as a key element of their global expansion strategies. The opportunity to engage in international e-commerce is helping drive the growth of e-marketplaces and alternative online channels.
This rapidly evolving e-commerce world is evident in the composition of e-50, the world’s 50 largest e-retailers, which collectively employ all of the e-retailing channels and online consumer touchpoints outlined above.
Amazon continues to dominate world of e-retailing
Analysis of the e-50 retailers shows:
- Amazon continued to dominate the world of e-retailing, with 2013 net product sales (i.e., sales where Amazon is the seller of record) of nearly $61 billion. JD.com, formerly known as Beijing Jingdong Century Trade Co., Ltd. and 360buy Jingdong Inc., ran a distant second with e-retail sales of $10.8 billion, followed by Wal-Mart with approximately $10 billion in e-commerce sales.
- The Top 250 Global Powers of Retailing accounted for nearly three-quarters of the e-50 in 2013 (37 companies). Although the world’s 250 largest retailers continued to dominate the list, they accounted for two fewer top 50 e-retailers than they did in 2012.
- The majority of the e-50 (39 companies) are multichannel retailers with bricks-and-mortar stores as well as online or other non-store operations. This is down from 42 such companies in 2012. While many pure-play e-retailers are growing rapidly, with more likely to join the e-50 in the near future, only two of the 11 non-store or web-only e-50 retailers in 2013 were large enough to rank among the Top 250 — Amazon.com and JD.com.
- Half of the e-50 are based in the United States (down from 28 in 2012), followed by Europe (19 companies — 10 in the U.K. and five in France); only five are emerging market companies (four in China, one in Brazil). Online marketplaces rather than e-retailers tend to serve as the primary e-commerce model in Asia and Latin America (see “The growing power of the e-marketplace” below).
- e-50 retailers grew their digital sales at a rapid pace in 2013, averaging 26.6 percent.
- Among the e-50, e-commerce still accounts for a small share of mass merchants’ and food retailers’ revenue — typically just 2-4 percent. For department stores and specialty apparel retailers, online sales accounted for an 8-16 percent share and reached 20-plus percent for several consumer electronics retailers.
In addition to identifying the world’s 50 largest e-retailers, e-commerce activity for all Top 250 retailers was analyzed. For 2013, information was available for 185 companies (either as reported by the company or estimated by Planet Retail or Internet Retailer). Of these 185 companies:
- About one-fifth (40) did not have a transactional e-commerce website in 2013. This is down from more than one-quarter in 2012 as more retailers got in the game. Most of the companies without e-commerce were supermarket operators and hard discount retailers.
- The 145 Top 250 companies with e-commerce operations generated 6.2 percent of their combined retail revenue online in 2013. Without Amazon.com and JD.com — the two online-only retailers among the Top 250 — e-commerce as a share of total retail revenue falls to 4.2 percent. On a geographic basis, e-commerce accounted for the largest share of retail revenue for North American retailers — 8.9 percent. However, if Amazon is factored out of the North American calculation, online sales as a share of total sales was highest for Latin American retailers (7.1 percent). E-commerce produced the smallest share of sales (3.6 percent) for European retailers — a reflection of the relatively low level of online sales penetration among some of the region’s biggest companies, many of which are primarily food retailers. E-commerce accounted for 4.7 percent of sales for the Asia/ Pacific retailers. Excluding JD.com, this region’s online share drops to just 2.4 percent.
- From a product perspective, hardline and leisure goods retailers derived a larger share of revenue from e-commerce operations than did the other sectors — 20.8 percent on a composite basis. Excluding Amazon.com and JD.com, this sector still had the highest e-commerce penetration, although it drops by more than half. Not surprisingly, e-commerce penetration was lowest among retailers of fast-moving consumer goods at just 1.9 percent of sales.
- Online sales grew at a composite rate of 21.1 percent for the 145 Top 250 retailers with e-commerce operations. From a regional perspective, e-commerce sales growth ranged from 16 percent for the European retailers to 42.5 percent for the Asia/Pacific retailers. However, Asia/Pacific drops to 23.8 percent without the region’s largest e-commerce retailer JD.com, which grew its direct sales 66.2 percent in 2013. If JD.com is excluded from the Asia/Pacific result, the Latin American retailers have the highest online sales growth — 27.3 percent. On a product basis, composite e-commerce growth was fairly consistent across the three primary product sectors, ranging between 21 and 22.4 percent. The diversified group reported the lowest composite growth rate in e-commerce sales.
The growing power of the e-marketplace
As many globally minded retailers have already learned on the ground, competing against well-entrenched domestic players is difficult. To gain acceptance with foreign consumers online is no different than through bricks-and-mortar expansion — you need to localize your offer and your operations.
Capitalizing on that reality, third-party marketplaces have become an increasingly important driver of growth for online retailers. This is especially evident in developing markets where consumers often navigate directly to these marketplaces, many of which have become well-recognized and trusted brands. Their selection and convenience provide value for consumers, while their scale and reach provide merchants access to a large base of potential customers.
In addition to cost-effective customer acquisition in often unfamiliar territory, the marketplace infrastructure offers sellers a range of essential support services — including payment, fulfillment, customer service, marketing and promotion — necessary to operate their businesses. Without the capital investment, time and risk required to launch their own country- or region- specific e-commerce operations, many retailers are finding that e-marketplaces can be a quicker, easier and more efficient way to tap into growth markets around the world.
Alibaba Group, China’s most popular e-commerce destination, is the world’s largest e-marketplace company with gross merchandise value — the value of all merchandise sold — of $272.8 billion in 2013, nearly twice that of Amazon. Alibaba exclusively operates a third-party platform business model consisting of two main e-commerce sites: Taobao, where consumers sell to other consumers, and Tmall, where retailers sell directly to consumers.
Amazon, the world’s largest e-retailer, offers products from its own inventory as well as products sold by others on Amazon Marketplace. The company’s total 2013 GMV is estimated at more than $140 billion, with $73.5 billion generated by third-party sellers.
Amazon continues to disrupt markets whenever it enters a new category. The company is expanding AmazonFresh, an online grocery service it first began testing in Seattle in 2007. Amazon Fashion is another emerging business. While Amazon has sold apparel, shoes and accessories for years, the company has intensified its focus on the fashion category in the past few years, targeting contemporary, high-end brands.
eBay ranks as the third-largest e-marketplace with total GMV of $76.4 billion. While it offers only third-party products, the company’s reported GMV does not distinguish its B2C business from its C2C business.
Japan’s Rakuten operates the world’s fourth-largest e-marketplace. Total GMV of $18.1 billion is derived primarily from its domestic online shopping mall, Rakuten Ichiba. The company launched its first e-commerce operation overseas in Taiwan in 2008. In 2010, Rakuten acquired Buy.com, one of the leading U.S. e-marketplace companies (now Rakuten.com).
MercadoLibre (literally “free market” in Spanish) hosts the largest online commerce platform in Latin America. It began operations in Argentina in 1999 and rapidly expanded to Brazil, other South American countries and Mexico. In 2001, MercadoLibre entered into a strategic alliance with eBay, gaining proprietary market information and acquiring eBay’s Brazilian unit, which helped to consolidate the company’s leadership position in the region. The strategic alliance ended in 2006, just prior to MercadoLibre’s IPO in 2007. The company’s GMV in 2013 was $7.3 billion.
In addition, a growing list of retailers including Sears, Wal-Mart, Best Buy and Tesco are incorporating third-party marketplaces into their own online storefronts. This provides their customers with much greater choice without having to look elsewhere and allows the retailer to capture a greater share of e-commerce revenue.
Q ratio analysis for Global Powers
Over the last 10 years, this report has offered an analysis of the Q ratios of publicly traded retailers from our Top 250 list. Before explaining the inferences to be drawn from this analysis, let us consider the meaning and importance of the Q ratio.
What is the Q ratio, and why is it important?
In today’s world, the global business environment is characterized by intense competition combined with downward pressure on retail prices, slow growth in major developed markets, slower growth in emerging markets than in recent years, volatile input prices combined with consumer resistance to higher retail prices, excess store capacity in many developed markets and a continued shift toward online retailing in which consumers often perceive everything to be a commodity. What this means is that, in order for retailers to prosper, they must distinguish themselves from competitors in order to have pricing power that leads to higher margins. This means having strong brand identity, offering consumers a superior shopping experience and being clearly differentiated from competitors. The latter can entail unique merchandise offerings including private brands, unique store formats and designs and superior customer experience. If a publicly traded retailer has these characteristics, the financial markets are likely to reward such a retailer. That is where the Q ratio comes in.
The Q ratio is the ratio of a publicly traded company’s market capitalization to the value of its tangible assets. If this ratio is greater than one, it means that financial market participants believe that part of a company’s value comes from its non-tangible assets. These can include such things as brand equity, differentiation, innovation, customer experience, market dominance, customer loyalty and skillful execution. The higher the Q ratio, the greater share of a company’s value that stems from such non-tangibles.
A Q ratio of less than one, on the other hand, indicates failure to generate value on the basis of non-tangible assets — meaning that the financial markets view a retailer’s strategy as unable to generate a sufficient return on physical assets. Indeed, it suggests an arbitrage opportunity. That is, if a company’s Q ratio is less than one, theoretically a company could be purchased through equity markets and the tangible assets could then be sold at a profit.
In our analysis, we have calculated the Q ratio for all 156 publicly traded retailers on our top 250 list. The calculation is based on companies’ assets at the end of the latest fiscal year, as well as the market capitalization as calculated in late October 2014.
Which companies have notable Q ratios?
Once again, the top spot on our Q ratio list goes to H&M, the legendary Swedish apparel retailer. H&M has been at or near the top of this list since we started compiling this information. It is clear that H&M has been successful in differentiating from competitors and building strong brand equity around the world, so its position on the list is no surprise. This, however, is not a skill possessed by H&M alone. Seven of the top 10 retailers on our Q ratio list are in the apparel/footwear specialty category. Four are European, two are from the United States and one is from Japan. In addition, the top 10 includes two discount stores, and two of the seven apparel/footwear specialty retailers (TJX and Ross) are principally discount-oriented. Thus, four of the top 10 are focused on offering consumers low prices.
Also, of the top 20 retailers on our Q ratio list, 11 are in the United States and three are based in emerging markets, down from four last year. On the other hand, of the bottom 20 retailers on our list, nine are based in Japan, down from 11 last year. Evidently, U.S.-based retailers account for a disproportionate share of those that have generated considerable value through their non-tangible assets. Japanese retailers disproportionately represent those that have not — although the situation for Japanese retailers has evidently improved, possibly due to greater optimism about the future of the Japanese economy.
This year we analyzed the financial results of 156 publicly traded companies on our list of the top 250 retailers in the world. This is down from 159 companies analyzed last year. The composite Q ratio for all companies was 1.130, down from 1.297 last year and well below the 1.57 recorded in 2008 just before the start of the global financial crisis. Of the 156 companies on the list, 73 have Q ratios above one and 83 have Q ratios below one. We also examined the composite Q ratio by country, region, retail format and dominant product category. We only calculated a composite ratio when there were three or more companies in a particular category.
The retail formats with the highest composite Q ratios are electronics, apparel/footwear, home improvement and other specialty. The electronics specialty category is dominated by Apple Inc. which accounts for more than 94 percent of the market capitalization of the electronics specialty companies on our list. If Apple is excluded from the list, the composite Q ratio for the electronics category drops from 2.392 to 0.512. This is not entirely surprising. Most electronics retailers now face considerable competition from online sellers, online sites of manufacturers and discounters. It is difficult to differentiate when selling products that are often perceived as commodities.
Apparel retailers have become extremely important global players, with a combined market capitalization more than three times higher than the department store industry. The Q ratio of apparel retailers (1.727) is nearly three times higher than that of the department store industry (0.599). Yet this is down from last year, when apparel retailers beat department store retailers by nearly four to one. The lowest composite Q ratio belongs to the electronics industry less Apple; after that, the lowest ratios are for convenience retailers and hypermarkets. The latter is an industry that has faced considerable competitive challenges in recent years. Moreover, it is a format where clear differentiation is difficult and where price competition is brutal. Hence, the low Q ratio is not entirely surprising. Notably, the composite Q ratio for discounters is considerably higher than that of hypermarkets. This is not surprising given that two discounters are among the top 10 retailers ranked by Q ratio.
Of the four merchandise categories, the two with the highest composite Q ratios are hardlines/leisure (2.085) and apparel and accessories (1.230). Yet given the dominance of Apple in the hardlines category — accounting for more than half the market capitalization of the category — it is notable that the apparel and accessories category has the highest composite Q ratio when Apple is excluded from this analysis. As usual, the category of diversified retailers has the lowest composite Q ratio. Of the 15 retailers in the category, only three have Q ratios above one. Retailers specializing in fast-moving consumer goods, once again, have a composite Q ratio lower than one.
We also analyzed the composite Q ratios of countries, provided that there are three or more companies from a given country. The weakest composite Q ratios are those of China, Germany and South Korea in that order. The highest composite Q ratios are found in Sweden, the United States and Russia. By region, there is a stark divide between North America (1.760) and the Africa/Middle East region (1.315) and every other region (ranging from 0.469 for Asia Pacific to 0.847 for Europe). Moreover, the higher Q ratio for North America is due to the higher Q ratio for the United States. The other North American country, Canada, has a relatively low Q ratio. There are many possible explanations for the relatively high Q ratio for the United States. Some observers will say that it reflects strong brand equity, clear differentiation and a successful transition to online retailing in the United States. Others will note that these trends are often absent in other regions. Still others, however, might argue that the higher ratio for the United States simply reflects the inflated values of U.S. equities in general, itself the result of aggressive U.S. monetary policy. Of course Japan has had an aggressive monetary policy and its equity market has soared; still, the composite Q ratio for Japan is relatively low. As for Europe, its economy has been weak and this has been reflected in poorer performance of its equity market in general.
Study methodology and data sources
Companies were included in the Top 250 Global Powers of Retailing based on their non-auto retail revenue for fiscal year 2013 (encompasses fiscal years ended through June 2014). To be included on the list, a company does not have to derive the majority of its revenue from retailing so long as its retailing activity is large enough to qualify. Private equity and other investment firms are not considered as retail entities in this report — only the individual operating companies.
A number of sources were consulted to develop the Top 250 list. The principal data sources for financial and other company information were annual reports, SEC filings and information found in company press releases and fact sheets or on company websites. If company-issued information was not available, other public-domain sources were used, including trade journal estimates, industry analyst reports and various business information databases.
Much of the data for non-U.S. retailers came from Planet Retail, a leading provider of global intelligence, analysis, news and data covering more than 9,000 retail operations across 211 markets around the world. Planet Retail has offices in London, Frankfurt, New York, Tokyo, Hong Kong and Qingdao, China. For more information please visit www.planetretail.net.
Group Revenue reflects the consolidated net revenue of a retailer’s parent company, whether or not that company itself is primarily a retailer. Similarly, the income/loss and total assets figures also reflect the consolidated results of the parent organization. If a privately held company reports gross turnover only, this figure is reported as Group Revenue and footnoted as “g.” Revenue figures do not include operations in which a company has only a minority interest.
The Retail Revenue figures in this report reflect only the retail portion of the company’s consolidated net revenue. As a result, they may reflect adjustments to reported revenue figures to exclude non-retail operations. Retail Revenue includes foodservice sales if foodservice is sold as one of the merchandise offerings inside the retail store or if restaurants are located within the company’s stores, but excludes separate foodservice/restaurant operations where it is possible to break them out. Retail Revenue also includes sales of services related to the company’s retail activities, such as alterations, repair, maintenance, installation, etc.; fuel sales; and membership fees. However, retailers that derive the majority of their retail revenue from the sale of motor fuel are considered to be primarily gas stations and are excluded from Top 250 consideration.
Revenue figures do not include the retail banner sales of franchised, licensed, or independent cooperative member stores; they do include royalties and franchising or licensing fees. Group Revenue includes wholesale sales to such networked operations — both member stores and other supplied stores.
Retail Revenue includes wholesale sales to affiliated/member stores but excludes traditional wholesale or other business-to-business revenue (except where such revenue is derived from retail stores), where it is possible to break them out.
For e-commerce companies, retail revenue includes only direct B2C sales where the company is the seller of record. It excludes the sales of third-party sellers as well as third-party seller fees and commissions.
In order to provide a common base from which to rank companies by their Retail Revenue results, fiscal year 2013 revenues for non-U.S. companies were converted to U.S. dollars. Exchange rates, therefore, have an impact on the results. OANDA.com is the source for the exchange rates. The average daily exchange rate corresponding to each company’s fiscal year was used to convert that company’s results to U.S. dollars. Individual companies’ 2013 year-over-year growth rate and 2008-2013 compound annual growth rate (CAGR) for Retail Revenue, however, were calculated in each company’s local currency.
Group financial results
This report uses sales-weighted composites rather than simple arithmetic averages as the primary measure for understanding group financial results. Therefore, results of larger companies contribute more to the composite than do results of smaller companies. Because the data has been converted to U.S. dollars for ranking purposes and to facilitate comparison among groups, composite growth rates also have been adjusted to correct for currency movement. While these composite results generally behave in a similar fashion to arithmetic averages, they provide better representative values for benchmarking purposes.
Group financial results are based only on companies with data. Not all data elements were available for all companies. Top 250 companies that did not derive the majority of their revenue from retail operations were excluded from the calculation of group profitability ratios as their consolidated profits mostly reflect non-retail activities.
It should also be noted that the financial information used for each company in a given year is accurate as of the date the financial report was originally issued. Although a company may have restated prior-year results to reflect a change in its operations or as a result of an accounting change, such restatements are not reflected in this data.
This study is not an accounting report. It is intended to provide an accurate reflection of market dynamics and their impact on the structure of the retailing industry over a period of time. As a result of these factors, growth rates for individual companies may not correspond to other published results.
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