This article was published in the January 2017 issue of STORES Magazine.
The art and science of customers
Deloitte and STORES Media welcome you to the 2017 Global Powers of Retailing. For 20 years, this annual report has been showcasing the changing global retail landscape. This edition identifies the 250 largest retailers around the world based on publicly available data for FY2015 (encompassing companies’ fiscal years ended through June 2016) and analyzes their performance based on geographic region, primary product sector, e-commerce activity and other factors.
The report also provides a look at the world’s 50 largest e-retailers, a global economic outlook and trends for retailers to consider in the coming months.
Retail trends: The art and science of customers
Global economic outlook
Top 10 highlights
Global Powers of Retailing Top 250
Product sector analysis
Top 50 e-retailers
Retail trends: The art and science of customers
Welcome to Deloitte’s annual Global Powers of Retailing report. This report marks our 20th year of identifying the 250 largest retailers around the world and analyzing their performance across geographies, sectors and channels. Over the last 20 years we have seen a seismic shift in retail and the customers that retailers serve. Consider that in 1997, the year of our first report, today’s average Amazon Prime customer was just 16 years old, AOL was pioneering social media and handheld virtual pets were the hottest-selling toys. Today, handheld (or wearable) digital devices are ubiquitous and a younger, social customer has come of age. We are living in an era where customers are in the driver’s seat more than ever before and they are craving authenticity, newness, convenience and creativity. We are living in the customer-driven economy.
The retail trends for 2017 are focused squarely on understanding the art and science of catering to the customer. Here we focus on three main trend areas. The first is changing preferences, including the trend toward owning less and living in the social media-driven economy. The second is changing retail formats through the blurring of sectors and proliferation of on-demand fulfillment. The third is the transformative possibilities from living with exponential technologies, both in the store and beyond.
While these trends are not new, what is interesting for 2017 is that what was once futuristic is now table stakes. Retail innovators know technology is no longer supplemental to the shopping experience, it is fundamental. Technology alone, however, is not enough. Customers are seeking new and surprising products and experiences. At Deloitte, we are marrying the art and science of customer engagement to help clients delight their customers. This means designing fresh experiences, enabling the right technology and ensuring associates are nimble and empowered.
Top 250 quick stats, FY2015 Infographic
Changing preferences: Less is more
Customers are defining themselves less by how many things they own and more by how curated their lives are in terms of possessions and experiences.
“Fewer, Better Things” is the slogan for Cuyana, a San Francisco based e-commerce retailer which has found a market niche by selling customers high-quality, craftsman-made goods. The success of their “lean closet” approach reflects a change in customer preferences away from rampant consumption toward intentional consumption. Customers are defining themselves less by how many things they own and more by how curated their lives are in terms of possessions and experiences.
Consumption of ‘experiences’ has outpaced the consumption of ‘goods’ by a factor of three over the last two years. This means decreased share of wallet on non-durable and durable goods (particularly apparel), as well as declining foot traffic at mass retailers and department stores. We are seeing a movement away from the mass-produced toward the “bespoke.”
Traditional fast-fashion retailer H&M is responding by launching programs like “H&M Conscious” which will debut a new Conscious Exclusive collection of high-end, environmentally friendly pieces each year. This is a shift away from fast fashion’s traditional business model, built on customers buying more frequently at a lower price.
Changing preferences: “Following” economy
Customers are seeking experiences and products that reﬂect the personal brand they promote on social media.
One reason we see this movement toward less consumption is the growing awareness of how our purchases define us as customers. The trends toward personalization and customer experience are not new. What is new is the level to which we define ourselves by the products we buy and the experiences we have. For this, we can thank social media.
Customers worldwide are busy “following” celebrities and brands on social media and simultaneously building their own “following.” They are seeking experiences and products that reflect the personal brand they promote on social media. We saw this manifest initially in the travel and tourism sector. Resorts have focused on being “Instagrammable,” with Conde Nast now aggregating data on geotags and hashtags to inform their reviews. Hotel guests, particularly Millennials, value how their trips are perceived on social media as much as the actual quality of the real experience.
We are now seeing this play out in retail. Customers want authentic, sharable experiences to further their personal brand. Retailers that can consistently deliver these moments will grow a fiercely loyal customer base.
The power of sharable retail experiences can be seen with Australia’s T2, a super-premium tea shop. For the last five years, coffee sales (and the photogenic frothy latte) have outpaced tea sales in almost every country. T2 sought to change all that by bringing the “hip” back to tea. It designed packaging and in-store experiences that pop with vibrant colors and bold patterns, which make for pretty social media posts. T2 boasts a loyal social media following which helped it grow from one store in Melbourne in 1996 to a global brand, acquired by Unilever in 2013.
Changing formats: “Retailization” of the world
The maker movement, the sharing economy and other factors have made it increasingly difficult to define what a retailer is and does.
In years past, it was easy to spot a retailer. It bought and sold goods, either in store or online. The maker movement, the sharing economy and other factors have made it increasingly difficult to define what a retailer is and does. In 2017 and beyond, market fragmentation in the retail space will continue to grow.
Some are attributing this volatility to “retailization” or the explosive growth of non-traditional retailers developing new models to serve customer needs. We are particularly seeing this play out in the developing world, where large-scale leapfrogging is more common.
In China, e-commerce power-players Alibaba and Tmall have competition from Vipshop, which has grown by popularizing the flash-sale model. It sells mid-market clothing and accessory brands, using a time-limited discount model. Interestingly, 90 percent of Vipshop’s sales are outside of China’s Tier 1 cities. In developing economies where customers are gaining purchasing power, we see a greater willingness to rely on less traditional retail models for more purchases.
In established markets, we see less dramatic market penetration from alternative formats, but the level of sector blurring is unprecedented. Low barriers of entry have led to the pop-up of new “retailers” like subscription model Dollar Shave Club, personalized clothing delivery service Trunk Club and Blue Apron, a curated grocery and meal delivery service.
As disruption and alternative business models persist, retailers will need to reinvent themselves. Home Shopping Network, one of the newcomers to our list this year, has done that quite successfully. HSN was born in 1982 as an American order-by-phone television network and has grown into a sophisticated multichannel global retailer. Under the leadership of CEO Mindy Grossman, HSN redeployed assets to build an innovative e-commerce platform, created digital content and sought out new partners. HSN survived and thrived in an area of disruption by reinventing its business model to stay relevant.
Changing formats: On-demand shopping and fulfillment
Relevancy will be determined by the ability of retailers to meet the on-demand mindset of the modern customer.
Relevancy will also be determined by the ability of retailers to meet the on-demand mindset of the modern customer. Amazon and other on-demand delivery options have forever altered customer expectations for fulfillment. This year, Amazon joined our list of top 10 global retailers for the first time. Apparel and hardline retailers have already felt the effect of on-demand fulfillment and the frontier is shifting to grocery, automotive and services.
Europe was the battleground this year for the future of grocery. AmazonFresh rolled out one-hour delivery in 10 cities in the U.K., as well as in major cities throughout Europe. Carrefour responded with its own one-hour delivery service in France, and likely will be followed by other European grocers.
Speed alone, however, will not be enough to compete. Consumers have been conditioned to expect a high-quality, on-demand shopping experience. This includes real-time reviews and local partnerships to provide fresh products. Sprouts Farmers Market, another newcomer on our list this year, has partnered with Amazon to provide fresh products for Amazon Prime delivery in the Dallas area. One trend we see continuing is the transition of bricks-and-mortar grocers into vendors for on-demand “tech” companies like Amazon, Google, Instacart, Curbside and Shutl.
Changing expectations: Exponential living
Exponential technologies are changing how we live and how we will shop.
Our final trend is the arrival of exponential living. Much has been prophesized about the disruption coming from exponential technologies like artificial intelligence, robotics, sensors, and virtual reality. These technologies are no longer futuristic. The most innovative retailers are already using them to enhance interactions with customers and to change the way work gets done.
Expect the use of artificial intelligence or robotics for self-service in the store to continue. EBay, in partnership with Australian retailer Myer, has created the world’s first virtual reality department store. Using eBay Sight Search, consumers can explore over 12,500 products from Myer, access real-time price and product information and add selected items to their basket.
The impact of technology is not limited to the in-store experience. Exponentials are changing how we live and how we will shop. Consider the arrival of driverless cars and the potential impacts on behavior. Un-manned cars will allow smaller or hyper-local retailers to afford personal, same-day deliveries. Imagine buying your baked goods directly from the bakery, while they are still hot. Or being able to program your car to run errands to multiple stores and pick up everything on your shopping list. The impacts to the customer journey from self-driving cars are endless. The same impacts can be expected from the wide-scale adoption of augmented reality, 3D printing, holograms and other technologies.
Global economic outlook
The economic environment for retailers continues to be challenging. It includes slow economic growth in major developed economies, high levels of debt in emerging countries, deflation or low inflation in rich countries, a protectionist backlash against globalization, troubled credit markets in some countries and worsening demographics in many countries. And yet people still need to shop, so the industry carries on. Moreover, in some places and with some cohorts of shoppers, the outlook for retailers is favorable. In what follows, we offer the highlights of the global economic situation and the potential impact on retailers.
Major economic trends
Backlash against globalization
In the world’s leading countries, there is an increasing aversion to freer trade and cross-border migration. Those workers that have suffered job losses and stagnant wages often blame imports and immigrants, rather than technology and imbalances in labor markets. For retailers this is worrisome. They and their customers benefit from expanded and freer trade which reduces prices and boosts real consumer spending power. Moreover, restrictions on trade tend to slow economic growth, another important driver of retail success. Rich countries often benefit from immigration which boosts the labor supply, increases entrepreneurship and by reducing the average age of the population helps to alleviate demographic imbalances that would otherwise require higher taxes. The outcome of elections in the coming year will reveal the degree to which the backlash against globalization proceeds.
Despite unusually aggressive monetary policies in the leading developed countries, inflation remains mostly dormant. Indeed, prices are actually declining in some countries. The failure of inflation to revive has to do with global excess capacity, the temporary effect of declining commodity prices, weak demand and stubborn expectations of low inflation. Only in the U.S. is there a chance that inflation might rise somewhat given a tightening labor market. In most other affluent economies, inflation is likely to remain low. For retailers, this means intense price competition, little pricing power and the necessity of clearly differentiating from competitors in order to regain pricing power.
Low commodity prices
During the past two years, oil prices have been at unusually low levels, although they have risen since the start of 2016. The low prices came about because of a massive increase in U.S. production of shale oil, due to relatively weak global demand. In the past year, as shale producers cut back on output due to low profits, prices started to recover, though they are not likely to go back to previously high levels. We are likely in a new age of relatively low prices, not only of oil but of other mineral commodities as well. For commodity-consuming countries, this means greater consumer purchasing power and better retail sales performance. For commodity producers, especially those in the emerging world, this means a more challenging environment, one that requires greater diversification of economic output.
Governments run out of ammunition
In the world’s affluent countries, and even in China, monetary policy has been the principal policy tool to spur growth and employment. Yet growth remains slow, inflation remains dormant and low interest rates have failed to stimulate the hoped-for investment boom. It appears that monetary policy has gone as far as it can. Thus, increasingly there is a debate about what other policy tools ought to be tried. Among the suggestions are fiscal stimulus (including massive investments in infrastructure), tax cuts, tax reform, deregulation, freer trade, restrictions on trade, more migration and less migration. In Canada and Japan, where fiscal stimulus is being attempted, we are seeing a new approach. And, as of this writing, there is a possibility that the U.S. will embark on fiscal stimulus combined with tax reform and increased deregulation. There is also a possibility that the U.S. will engage in protectionist actions that could have a negative impact on growth.
Developed country growth remains slow
Over the past decade, economic growth in the advanced countries has been paltry compared with the past. This reflects two important factors. First, demographics have played a big role. Working age populations have decelerated and, in some countries, they have started to decline. All other things being equal, this means slower economic growth. Second, productivity (output per hour worked) has stalled after having risen smartly in the previous decade. This may reflect modest growth of investment which has slowed the implementation of new innovations. Can slow growth be rectified? It is not clear, and this question is a source of debate. Either way, it will not change soon. This means that retailers should expect that economic growth will remain modest at best in the near term.
The U.S. economy continues to chug along at a modest pace. The labor market has tightened and likely reflects something close to full employment. That explains why wages have accelerated, especially at the lower end of the income scale. This has led to concerns that inflation could get out of hand lest the Federal Reserve steadily raise interest rates and slow the economy.
Indeed, the possibility of a fiscal stimulus from the new administration in Washington could lead the Federal Reserve to accelerate the pace of interest rate normalization. On the other hand, with labor market participation historically low and with a recent deceleration in job growth, it is argued that the U.S. economy is actually sputtering and is at risk of recession. Thus, this view suggests that the Federal Reserve should not tighten monetary policy too quickly. This view also supports a potential fiscal stimulus.
Meanwhile, the main driver of U.S. economic growth continues to be the consumer sector. This has been fueled by rising employment, accelerating wages, low energy prices, improved consumer finances, greater availability of consumer credit and pent-up demand. These factors have also driven improvement in the housing market which, in turn, influences retail spending on home-related products.
To the extent that there is weakness in the U.S. economy, it has come from business investment and exports. The former has been hurt by weakness in the energy sector, while the latter has been hurt by the elevated value of the U.S. dollar. Of course the high-valued dollar has been beneficial to the U.S. retail industry, helping to hold down the prices of imported goods, thereby boosting consumer purchasing power. Finally, there is a risk of protectionist actions that could boost import prices, something that would likely curtail the growth of retail spending.
One of the biggest news items of the past year was Britain’s vote to exit the European Union. The “Brexit” decision led to a sharp decline in the value of the pound. This was due to the expectation that Brexit could cause inbound investment into the U.K. to dry up. Given that Britain has a large external deficit and relies on such capital infusions, a cheaper pound is seen as boosting exports and suppressing imports, thereby reducing the external deficit. The problem is that a cheaper pound, by boosting import prices, will ultimately make British consumers poorer, especially those with lower incomes. Hence, retailers could be significantly challenged by Brexit. Still, the details of Britain’s exit have yet to be worked out. A “hard” Brexit would likely lead to less investment, job losses and an even weaker pound. A Brexit that retains relatively free trade with the European Union, however, would not be as onerous.
The Eurozone economy is growing at a moderate pace. Yet despite an aggressive monetary policy by the European Central Bank, investment remains weak and unemployment remains high. Too much reliance on monetary policy to the exclusion of fiscal or regulatory policy has prevented an acceleration in growth that might bring unemployment down. The danger is that persistent high unemployment in Europe will undermine political support for European institutions, thus setting the stage for an eventual failure of the Eurozone. That, in turn, would precipitate a deep recession and financial market volatility. For now, Europe’s retail sector is likely to remain on a modest growth trajectory.
China’s economy has decelerated, and may slow down even more in the coming years. That is the bad news. The good news is that there appears to be a shift in growth away from investment and exports and toward consumer spending. There is a reasonably good chance that consumer spending will be the principal fuel for economic growth in China in the coming years. That is, unless China’s imbalances get in the way. The biggest potential problem is the high level of private sector debt which has been accumulated in order to finance excessive investment, especially in property. While this does not represent a systemic threat to China’s or the world’s financial system, it does threaten to undermine growth. Bad debts, left untended, will mean poorly capitalized banks, weak bank lending to new borrowers and the continued propping up of highly inefficient businesses. Meanwhile, capital continues to flow out of China, putting downward pressure on the currency, thus reducing consumer purchasing power.
Most of the recent commentary on Japan’s economy bemoans the fact that, even after several years of an unusually easy monetary policy, the economy is barely growing. Part of the problem is demographics: On a per-worker basis, Japan’s economy has actually been growing at the same pace as the United States, yet the number of workers is declining. Hence, slow growth. That will be little comfort to retailers that want to grow. Rather, Japan should be seen as a cash cow in that it is flush with a steady supply of affluent consumers who will continue to spend. For retailers, growth will have to come either from gains in market share or from investing outside of Japan. Meanwhile, Japan also suffers from persistent deflation or low inflation, thus impinging on margins and forcing retailers to strive for the lowest possible costs and the most competitive prices. This, too, is not likely to change.
Top 10 highlights
Walgreens moves up leader board and Amazon joins top 10
The world’s four largest retailers maintained their positions on the industry’s leader board in FY2015, but acquisitions, divestitures and exchange rate volatility shuffled the rest of the top 10.
Wal-Mart continued its long-held dominance as the world’s largest retailer. However, its revenue shrank in 2015 for the first time since the company went public in 1970. Wal-Mart attributed part of the sales decline to unfavorable currency exchange rate fluctuations. Sales also suffered from lower gasoline prices, which impacted fuel sales, and ongoing store closures including the decision to shutter its smaller Walmart Express chain.
Although same-store sales grew significantly for Costco on a constant currency basis, reported sales grew just 3.2 percent in FY2015, including the negative effects of lower gasoline prices and weak foreign currencies. But it was enough to keep the warehouse club operator in second place. Fuel prices also dampened Kroger’s sales growth. The supermarket giant continued its acquisition spree with the purchase of Roundy’s in December 2015, but its fiscal year revenue included just six weeks of Roundy’s results. Schwarz remained in fourth place with strong 2015 growth despite the impact of a weak euro on its dollar-denominated sales.
Walgreens and Alliance Boots completed the second step of their two-step merger in December 2014, creating Walgreens Boots Alliance, the world’s fifth-largest retailer. The new global enterprise combined Walgreens, the largest drugstore chain in the U.S.; Boots, the market leader in European retail pharmacy; and Alliance Healthcare, the leading international wholesaler and distributor.
Broad-based growth across all divisions and a strong dollar in relation to the euro boosted The Home Depot into sixth place ahead of Carrefour and Aldi. Meanwhile, 2015 was a transformational year for Tesco. The iconic British retailer and Wal-Mart were the only two companies in the top 10 to experience a drop in 2015 revenue. Tesco continued to sell off non-core operations including the Homeplus business in Korea in October 2015. As a result, it fell from fifth place to ninth, but the retailer returned to profitability as it regained competitiveness in the U.K. market.
Amazon continued its rapid ascent, joining the top 10 leader board for the first time in 2015. The world’s largest e-retailer ranked 186th in 2000 when it first entered the Top 250. Fueled by a constant stream of product and service innovations, it has posted robust, double-digit growth since its inception in 1994.
Germany’s Metro Group fell out of the top 10 in 2015 as the company’s transformation process accelerated. One major event was the sale of Galeria Kaufhof to Hudson’s Bay Company in September 2015. Since the end of 2014, Metro Cash & Carry, the company’s largest division, has disposed of its wholesale activities in Denmark, Greece and Vietnam. In March 2016, the company announced that it would split into two publicly listed companies, with one focused on consumer electronics and the other on its wholesale and food operations. The move is seen as a way to facilitate faster and more profitable growth.
* Compound annual growth rates
1 Sales-weigthed, currency-adjusted composites
e = estimate
n/a = not available
Source: Published company data and Planet Reatil
Exchange rate impact on Top 250 ranking
Changes in the overall ranking from year to year are generally driven by increases or decreases in companies’ retail revenue. However, a weaker currency vis-à-vis the U.S. dollar in 2015 meant that companies reporting in that currency may rank lower in 2015 than they did in 2014, all other things being equal. Conversely, companies reporting in a stronger currency may rank higher.
In 2015, the U.S. dollar was rising in value against most major currencies. This reflected several factors including stronger economic growth in the U.S. than in other developed economies, higher interest rates in the U.S., expectations of more aggressive monetary policy in Europe and Japan and expectations of tighter monetary policy in the U.S. On a calendar year basis, the euro depreciated 16 percent against the dollar. The British pound fared better but still dropped 7 percent in 2015 before falling to a three-decades low in 2016 following the June 23 Brexit vote. The Japanese yen continued to slide throughout 2015, as did the Canadian dollar, Mexican peso, Brazilian real, South African rand and nearly every other reporting currency used by Top 250 retailers. Among the hardest-hit currencies was the Russian ruble, down 38 percent against the U.S. dollar in 2015.
Global Powers of Retailing Top 250
Retailers achieve steady growth in 2015 despite challenging global economy
In 2015, the U.S. dollar was rising, oil prices were falling and China experienced extreme financial market volatility. Heightened policy concerns and geopolitical instability, including a growing backlash against globalization, disrupted the world economy. Deflationary headwinds, game-changing technologies and cautious consumers added to the uncertain business environment for retailers. Although the global economy struggled to gain momentum, the Global Powers of Retailing Top 250 achieved profitable growth in FY2015. Retail revenue increased for more than three-quarters of the world’s 250 largest retailers (192 companies), resulting in a currency-adjusted composite growth rate of 5.2 percent. Ninety percent of the retailers that disclosed their bottom line results (172 of 191 companies) operated profitably. On a composite basis, the reporting companies posted a net profit margin of 3.0 percent in 2015 and generated return on assets of 4.6 percent.
Retail revenue for the Global Powers of Retailing Top 250 totaled more than U.S.$4.3 trillion in FY2015, resulting in an average size of U.S.$17.2 billion per company. To join the ranks of the Top 250 in 2015 required retail revenue of at least U.S.$3.5 billion. These figures are down from the prior year’s Top 250 results due primarily to the continued devaluation of most currencies vis-à-vis the U.S. dollar. Nineteen Top 250 companies exceeded U.S.$50 billion in retail revenue in FY2015 while 67 retailers had revenue of less than U.S.$5 billion.
In 2015, the level of retail globalization appears to have stalled. Nevertheless, two-thirds of Top 250 retailers operated outside their home country borders. On average, they had retail operations in more than 10 countries and derived nearly one quarter of their composite retail revenue from foreign operations.
Top 250 Global Powers of Retailing Chart
Top 250 companies that do not derive the majority of their revenue from retail operations are excluded from the composite net profit margin and return on assets calculations. Because these companies are not primarily retailers, their consolidated profits and assets mostly reflect their non-retail activities. Eight such companies were excluded in FY2015: CVS Health Corp., Apple Inc., Associated British Foods, Nike Inc., SHV Holdings, McKesson Corp., Berkshire Hathaway and Tokyu Corp.
The average number of countries with retail operations includes the location of franchised, licensed and joint venture operations in addition to corporate-owned channels of distribution. Where information was available, the number of countries reflects non-store sales channels, such as localized, consumer-oriented e-commerce sites; catalogs and TV shopping programs; as well as store locations. However, for some retailers, specific information about non-store activity was not available.
For the purposes of geographic 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..
Profiles and Level of globalization by region/country, FY2015 Chart
Retail revenue growth and profitability by region/country, FY2015 Chart
Europe’s share of Top 250 retailers drops
The number of Top 250 retailers based in Europe fell to 85 in FY2015 from 93 the year before. A weak euro, coupled with subpar growth, caused the high level of attrition. The group’s composite retail revenue grew 3.7 percent year over year and 3.8 percent compounded annually over the five-year period of 2010-2015. Compared with the other geographic regions, a greater share of European retailers posted negative revenue growth in FY2015 (23 out of 85 companies). Although growth for the Top 250 Europe-based retailers continued to lag, it was an improvement over FY2014, which saw the region’s slowest growth rate since 2009. The composite net profit margin of 3.1 percent also showed improvement over the prior year’s result.
U.K. retailers had an adverse effect on the region’s results. On a composite basis, revenue growth for the country’s Top 250 retailers was negative for the second year in a row, and profits were slim. The pace of growth accelerated for the Top 250 German retailers in 2015, posting the best result since 2010.
The composite net profit margin remained less than 1 percent, but it should be interpreted with caution as 13 of the 17 German companies are privately held and do not disclose their profits. French retailers lagged their European counterparts with meager top-line growth but outperformed them on the bottom line.
European retailers have been the most globally active as they search for growth outside their mature home markets. Nearly 40 percent of their combined revenue was generated from foreign operations in FY2015 — almost twice as much as the Top 250 group as a whole. More than 80 percent of the region’s companies operated internationally, expanding well beyond their home country borders with a presence in 16 countries, on average. French and German retailers have the most global retail networks.
Retailers based in North America represented more than one-third of all Top 250 companies in FY2015, but with an average size of U.S.$23.3 billion, they accounted for nearly half of all Top 250 revenue. The region’s 5.2 percent composite revenue growth and 3.2 percent net profit margin were in line with the Top 250 group’s overall results. However, retailers based in the region made more profitable use of assets — which has been the case historically — generating a composite ROA of 6.4 percent. Results for U.S. retailers, which account for the vast majority of the region’s Top 250 companies, generally mirror the regional results.
Overall, the Top 250 North American retailers operated with a fairly low level of globalization. Although retail operations spanned 9.2 countries, on average, only 13.6 percent of the region’s 2015 combined retail revenue came from foreign operations. More than 40 percent of the North American retailers remained single-country operators.
Asia Pacific retailers have been relatively slow to invest in international operations. In FY2015, nearly 90 percent of the composite revenue for the region’s 59 Top 250 retailers was generated domestically. Almost half of the companies reported no retail revenue from foreign operations. On average, the Asia Pacific retailers operated in just 3.8 countries, compared with 10.1 countries for the entire Top 250 group. Despite the slowdown in the Asian economy, growth for the region’s retailers remained relatively strong at 7.3 percent. Profitability, on the other hand, continued to weaken. The group’s net profit margin fell to 1.4 percent.
On a composite basis, retailers based in China and Hong Kong (considered as a single country for this analysis) generated the strongest growth in the region with combined revenue up 12.9 percent in FY2015, but they posted a meager 0.7 percent net profit margin. However, China’s largest retailer, JD.com, had an outsized impact on the overall results. If the fast-growing but unprofitable e-commerce giant is excluded from the analysis, China/Hong Kong’s composite growth falls by more than half to 6.1 percent while the net profit margin rises to 2.6 percent. After the national sales tax hike put a chill on Japan’s retail sales in 2014, composite revenue growth for that country’s Top 250 retailers rebounded to 6.9 percent in FY2015. Profitability improved for the majority of Japan’s retailers resulting in a 2.4 percent composite net profit margin.
Retailing in the Africa/Middle East region is on a high-growth path. The rising middle class in Africa has contributed to the modernization of the retailing sector, and many African economies are transitioning toward consumption-driven markets. The Middle East also remains an attractive destination for retailers. Together, the Africa/Middle East region’s 19.1 percent growth rate and 5.8 percent net profit margin were the highest among the five geographic regions in FY2015. Top 250 retailers based in the region have a large geographic footprint. All nine companies operated internationally in FY2015 in an average of 11.3 countries. They generated more than one-third of their combined retail revenue outside their home countries.
Latin American retailers also continued to enjoy strong growth and above-average profitability. The region’s 11.3 percent composite growth rate was second highest behind Africa/Middle East. The composite net profit margin of 4.0 percent also was the second-best regional result. With the exception of Grupo Comercial Chedraui’s supermarket chain in the southwestern United States, the nine Top 250 Latin American companies derived all of their retail revenue from within the region in FY2015. Nearly one-quarter, however, came from outside retailers’ domestic borders.
Product sector analysis
This report analyzes retail performance by primary retail product sector as well as by geography. Four sectors are used for analysis: apparel and accessories, fast-moving consumer goods, hardlines and leisure goods and diversified. A company is assigned to one of three specific product sectors if at least half of its retail revenue is derived from that broadly defined product category. If none of the three specific product sectors accounts for at least 50 percent of a company’s revenue, it is considered to be diversified.
Profiles and Level of globalization by product sector, FY2015 Chart
Retail revenue growth and profitability by primary product sector, FY2015 Chart
Apparel and accessories retailers continue to outperform other product sectors
For the third year in a row, revenue growth for Top 250 apparel and accessories retailers outpaced the other product sectors. Composite retail revenue for the 45 companies that made up this group in FY2015 advanced a robust 7.7 percent. Historically, retailers of apparel and accessories also have been the most profitable, and 2015 was no exception. The sector posted a composite net profit margin of 7.1 percent.
Most of the world’s largest apparel and accessories retailers have expanded internationally. In FY2015, foreign markets accounted for nearly one-third of the sector’s composite retail revenue, compared with less than one-quarter for the Top 250 overall. The average company had a presence in 26 countries — far more than retailers in the other product sectors. Although apparel and accessories retailers have the largest global footprint, they are relatively small in size, averaging U.S.$9.4 billion in retail revenue — about half the size of the average Top 250 retailer.
Retailers of fast-moving consumer goods (FMCG) are, by far, the largest companies as well as the most numerous among the Top 250, with average retail revenue of nearly U.S.$21.6 billion. In FY2015, the sector was represented by 133 retailers, accounting for just over half of all Top 250 companies and two-thirds of Top 250 revenue. On the top line, the group generated solid composite revenue growth of 5.0 percent. On the bottom line, the composite net profit margin of 2.1 percent was typical of this historically low-margin sector.
As a result of ongoing consolidation in the grocery industry, former Top 250 FMCG retailers continue to be swallowed up through acquisition, including Safeway (acquired by Albertson’s Holdings in January 2015), Family Dollar Stores (acquired by Dollar Tree in July 2015) and Roundy’s (acquired by Kroger in December 2015). In addition, A&P — once one of the biggest supermarket operators in the U.S. — ceased operations in November 2015 after 156 years in business and began selling off its assets. However, the loss of these companies from the 2015 roster was more than offset by nine Top 250 newcomers that joined the FMCG sector in FY2015 (see page G30). Industry transformation continued in 2016 with the merger of Ahold and Delhaize Group forming one of the world’s largest food retailers — Royal Ahold Delhaize.
Retailers of hardlines and leisure goods have enjoyed fairly strong growth since 2010 when the economy emerged from the global economic crisis. On a composite basis, the group generated retail revenue growth of 7.6 percent in FY2015. The vast majority of these retailers operated profitably, resulting in a composite net profit margin of 3.6 percent. (Note: Apple Inc. is excluded from the profitability ratios.) Nevertheless, individual company results were decidedly mixed. On the top line, the strong growth of e-commerce giants Amazon.com and JD.com gave the group’s composite revenue growth a big boost, offsetting negative growth among 13 of the sector’s 50 companies. At the same time, the two e-retailers were a significant drag on overall profitability.
As a whole, the diversified group has experienced persistently slow growth. (A retailer is considered “diversified” when none of the three specific product-oriented sectors accounts for at least 50 percent of its retail revenue.) Composite retail revenue for the 22 companies in this group increased just 1.3 percent on a compound annual basis from 2010 through 2015. In FY2015 and FY2014, the group’s composite revenue declined as two of the three largest diversified companies posted negative top-line results. Germany’s Metro Group saw sales drop 6.1 percent in 2015 — the third consecutive year of declining revenue — as the company continued its transformation process. Meanwhile, sales continued to sink at Sears Holdings for the ninth year in a row, falling 19.4 percent in 2015.
Thirteen retailers joined the ranks of the Top 250 for the first time in FY2015. Homeplus is the highest-ranked newcomer on the list at No. 163. In October 2015, Tesco spun off the South Korea-based grocery chain to a group of investors as part of its ongoing effort to strengthen the company’s balance sheet. Petco Animal Supplies, which was acquired by CVC Capital Partners and Canada Pension Plan Investment Board in a private-equity-to-private-equity deal in January 2016, entered the Top 250 at No. 208. Actual revenue gleaned from the company’s S-1 Registration Statement filed in August 2015, before the decision to sell the company, exceeded prior-year estimated sales. Based on Petco’s reported results, the pet specialty retailer would have ranked among the Top 250 since FY2011.
While five of the newcomers are based in emerging markets, seven are from the United States. The preponderance of U.S. companies can be attributed at least in part to the strong U.S. dollar, which elevated U.S.-based retailers that were hovering near the bottom of the Top 250 threshold into the dollar-denominated ranking ahead of non-U.S. companies. The U.S.-based newcomers include:
• Non-membership warehouse store operator Smart & Final
• Arts and crafts retailer Hobby Lobby Stores
• Beauty store chain Ulta Salon, Cosmetics & Fragrance
• HSN, a TV home shopping, catalog, and Internet retailer
• Sprouts Farmers Market, a neighborhood grocery chain specializing in fresh, natural, organic and gluten-free products
• Mall-based apparel retailer American Eagle Outfitters
Emerging market retailers making their Top 250 debut in FY2015 include three rapidly growing convenience store chains: South Korea’s BGFretail, operator of 8,000+ CU franchise stores, and Indonesia’s two largest convenience/minimart store retailers, Indomarco Prismatama (which operates under the brand name Indomaret) and Sumber Alfaria Trijaya (which operates primarily under the brand name Alfamart). In the Middle East, Savola Group’s Panda Retail Company operates hypermarkets, supermarkets and convenience stores across Saudi Arabia and the UAE.
Japanese consumer electronics and appliance retailer Nojima Corp. also joined the Top 250 following the acquisition of ITX Corp., Japan’s fifth-largest mobile phone retailer, in March 2015.
The Fastest 50 is based on compound annual revenue growth over the five-year period of 2010 to 2015. Fastest 50 companies that were also among the 50 fastest-growing retailers in FY2015 make up an even more elite group. These retailers are designated in bold italic type on the list.
50 Fastest Growing Retailers Chart
E-commerce and acquisitions drive Fastest 50
Composite retail revenue for the 50 fastest-growing retailers increased at a compound annual rate of 22.2 percent from 2010 through 2015 — more than four times faster than the growth rate for the entire Top 250 group. This robust pace of growth was driven largely by rapidly expanding e-commerce sales and significant M&A activity. More than two-thirds of the Fastest 50 (34 companies) were also among the 50 fastest-growing retailers in FY2015. This contributed to composite year-over-year retail revenue growth of 25.9 percent for the Fastest 50 — five times the growth rate of the Top 250 as a whole. To rank among the Fastest 50 required compound annual revenue growth of at least 12.3 percent over the five-year period.
Strong sales, however, did not translate into superior profitability. The Fastest 50 retailers generated a composite net profit margin of 2.6 percent in FY2015, compared with 3.0 percent for the Top 250. While only four of the companies that disclosed their bottom-line results posted a net loss, low or negative profitability for three of the largest companies on the Fastest 50 list (JD.com, Albertsons Companies, and Amazon.com) had a disproportionate effect on the overall results for the group. Note: Top 250 companies that did not derive the majority of their revenue from retail operations were excluded from the calculation of group profitability as their consolidated profits mostly reflect non-retail activities.
E-commerce is the exclusive focus of the two fastest-growing retailers: Chinese e-retailers Vipshop and JD.com. Vipshop pioneered the flash sales business model in China. Since its founding in 2008, the company has rapidly built a sizeable and growing base of customers and brand partners. JD.com, the largest online direct sales company in China, launched a Russian-language website in 2015 to fuel growth beyond its home market. Amazon.com, the other Top 250 pure-play e-retailer, has been included among the Fastest 50 since Deloitte first started tracking the group in 2004. Amid shrinking store-based sales, Chinese consumer electronics and appliance retailer Suning Commerce Group has made a huge effort to expand its e-commerce business. In 2015, the company’s growth was largely due to online sales, which jumped 95 percent to account for more than one-third of total company sales.
Most of the U.S.-based Fastest 50 companies earned their spot through acquisition activity. Albertsons acquired Safeway in January 2015, nearly tripling in size. In July 2015, Dollar Tree completed its merger with Family Dollar Stores in an effort to enhance its growth potential. Ascena Retail Group, which acquired Charming Shoppes in 2012, purchased ANN Inc. in August 2015 in a bid to attract more working women. Signet Jewelers has continued to build on the positive synergies from its 2014 acquisition of Zale Corp.
Among other companies propelled into the Fastest 50 through acquisition activity:
• Furniture and home goods retailer Steinhoff extended its discount position into the clothing sector with the March 2015 acquisition of South Africa’s Pepkor group.
• In September 2015, Mexico-based convenience store operator FEMSA Comercio acquired a majority stake in Grupo Socofar, a leading South American drugstore chain.
• Swiss duty-free store retailer Dufry Group acquired a controlling stake in World Duty Free, an Italy-based company that operates airport and travel stores, in August 2015.
• Japanese consumer electronics and appliance retailer Nojima Corp. acquired ITX Corp., Japan’s fifth-largest mobile phone retailer, in March 2015.
• In June 2014, Croatia’s biggest retailer Agrokor closed the acquisition of a controlling stake in Mercator, a Slovenia-based food retailer, and then bought out minority shareholders to further raise its stake.
• Japanese department store retailer H2O Retailing Corp. merged with Izumiya, the Japan-based operator of hypermarkets and supermarkets, in June 2014, in a bid to expand market share.
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 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.
Top 50 e-retailers, FY2015 Chart
E-commerce transforming global retail landscape
E-commerce continues to be a major growth engine for the retail industry. As it grabs an ever-larger share of sales, it is transforming the retail landscape around the globe. To better understand the impact of digital channels on retail revenue growth, Deloitte has analyzed the e-commerce activity of the Top 250 Global Powers of Retailing and examined our annual ranking of the world’s 50 largest e-retailers. The rapid shift to e-commerce is leading many retailers to reevaluate the size and role of their physical footprint as they bolster their online capabilities.
E-commerce drives Top 250 revenue growth
For FY2015, e-commerce sales information was available for 182 of the Top 250 retailers (either as reported by the company or estimated by Planet Retail, Internet Retailer, or other sources).
Analysis of these companies reveals the following:
• With the rapid rise of click-and-collect services, more retailers — including those selling primarily food — have established an online presence. As a result, the number of Top 250 retailers without a transactional website continued to drop in FY2015 to 31. Most of these companies are operators of supermarkets, hard discount stores or convenience stores.
• For those retailers engaged in e-commerce, the pace of growth of online sales has decelerated, but it remains much higher than the growth in overall revenue. Online sales grew at a composite rate of 18.3 percent in FY2015 for the 151 Top 250 retailers with e-commerce operations — 4.5 times faster than this group’s total retail revenue growth rate of 4.1 percent. This compares with e-commerce growth of 20.3 percent in 2014 and 21.1 percent in 2013. If Amazon.com, JD.com, and Vipshop — the three web-only retailers among the Top 250 — are excluded from the analysis, 2015 e-commerce growth drops to 15.5 percent and total growth falls to 3.5 percent.
• Although online growth has slowed, a greater share of retail sales continues to shift to digital channels. In FY2015, e-commerce accounted for 8.7 percent of the combined retail revenue of the Top 250 e-commerce-enabled companies, up from 7.6 percent in 2014 and 6.2 percent in 2013. Excluding the three pure-play e-retailers, online sales as a share of total retail revenue in 2015 falls to 5.6 percent.
• For many Top 250 retailers, e-commerce is the primary driver of revenue growth. In FY2015, digital sales generated 35.3 percent of the combined retail revenue growth for the 151 companies with online operations (22.5 percent excluding Amazon, JD, and Vipshop). For 62 retailers, online sales accounted for the majority of their growth, if not their only growth.
• More than one-quarter of the retailers with e-commerce enabled websites (41 companies) reported negative retail revenue growth in FY2015. For the vast majority of those companies (33 retailers), e-commerce helped to offset contracting sales. For another 12 retailers, growth would have been negative without the contribution made by their e-commerce operations.
Top 250 retailers dominate e-50
In addition to identifying and analyzing the 250 largest retailers around the globe, each year Deloitte also compiles a list of the world’s 50 largest e-retailers. Analysis of these companies, known as the “e-50,” shows that:
• The Top 250 Global Powers of Retailing continue to dominate the e-50. In FY2015, 80 percent of the 50 largest e-retailers (40 companies) were Top 250 companies.
• The vast majority of the e-50 are based either in the United States (26 companies) or Europe (19 companies). The other five are emerging-market companies (four from China and one from Brazil). Although some of the largest and fastest-growing e-commerce companies are based in Asia, online marketplaces rather than e-retailers tend to serve as the primary e-commerce model in this region. These third-party marketplaces are excluded from the e-50.
• In total, 12 of the e-50 are non-store or web-only retailers, including two American companies that are new to the e-50 in FY2015: Wayfair, one of the world’s largest online destinations for home furnishings and décor; and Bluestem Group, a multibrand, online retailer of a broad selection of apparel and general merchandise serving low- to middle-income consumers.
• Acquisitions helped boost two other newcomers into the e-50 in 2015. E-commerce sales jumped 47.3 percent for Migros, Switzerland’s largest retail cooperative, following the April 2015 purchase of a controlling stake in Swiss online market leader Digitec Galaxus. FY2015 results for Neiman Marcus benefited from partial-year revenue for German online fashion retailer mytheresa.com, acquired in October 2014.
• Five companies dropped out of the e-50 in 2015. Russia’s e-retail leader, Ulmart, and French international retail group Auchan were victims of currency depreciation in the dollar-denominated ranking. Newegg, a computer hardware and software e-marketer, is making a strategy shift from being primarily a first-party seller to a third-party marketplace. Lands’ End fell out of the e-50 following an 8 percent decline in non-store sales in FY2015. E-commerce sales growth of 8.3 percent was not enough to keep Toys “R” Us in the ranking as the company was surpassed by Neiman Marcus Group.
• On a composite basis, the e-50 derived 15.7 percent of their total retail revenue from online operations — almost double the 8.7 percent share for the Top 250 e-commerce group.
• E-50 retailers grew their e-commerce sales 19.6 percent on a composite basis in FY2015. This pace of growth shows a slight deceleration from the group’s compound annual growth rate of 22.0 percent over the 2011 to 2015 period.
Retailers rethink role of bricks-and-mortar
The rapid shift to e-commerce is quite literally transforming the retail landscape. With online growth outpacing overall growth of retail sales, retailers are rationalizing their physical footprint and intensifying their e-commerce presence. Given the negative impact of e-commerce on store productivity, many have concluded that their existing store base is simply too big. This is resulting in a rash of store closures, a move to smaller-footprint and more flexible store formats and new roles for bricks-and-mortar. Retail locations play an increasingly important part in omnichannel strategies, serving as cross-channel fulfillment centers, pickup stations for online orders and a convenient place for returns and exchanges. They also serve as a product showroom as well as a brand-building and customer acquisition channel.
Macy’s is among the growing roster of department store and specialty apparel retailers that plans to significantly reduce its physical presence in the wake of dwindling mall traffic. In August 2016, the company announced it intends to shutter approximately 100 Macy’s full-line stores whose volume and profitability, in most cases, have been steadily declining in recent years. Most of these stores are slated to close early in 2017. The company plans to elevate the shopping experience in its remaining stores and accelerate its investment in digital and mobile.
Off the mall, declining store productivity also has big-box suburban retailers reevaluating their expansion plans. Both Lowe’s and Target see opportunity in urban areas with smaller, more flexible format stores whose size and assortment will be customized according to the demographics of the neighborhood. Target’s new stores are typically less than 50,000 square feet compared with its average store size of 145,000 square feet. The retailer is planning hundreds of smaller stores, with 30 already operating as of mid-November 2016.
Lowe’s debuted a new urban concept in 2015, entering the Manhattan retail market for the first time with two locations. At around 30,000 square feet — about one-quarter the size of the retailer’s typical big-box store — the new format features a product selection that caters to smaller, urban living spaces, including merchandise from vendors new to Lowe’s. Using 3D imaging, shoppers can view life-size products such as appliances and see what they look like inside. High-tech touchscreens throughout the stores let shoppers browse Lowe’s complete assortment and place orders for delivery.
In China, as large stores approach the saturation point, a cooling economy and the rapid rise of e-commerce are posing a serious threat to many traditional retailers. A move to fuse online and offline is gaining steam as companies reevaluate their expansion plans and seek to establish themselves as serious e-commerce contenders.
Carrefour’s development trend in China is multichannel and multi-format, offering consumers more diversified and flexible shopping options. In order to serve Chinese consumers’ growing desire for convenience, the retailer continues to shift its focus away from its traditional hypermarket business to smaller store formats including Carrefour Express convenience stores and Carrefour Easy, a compact neighborhood supermarket concept. The Easy format is equipped with an LED display at the entrance that allows consumers to scan QR codes and purchase products unavailable in the store. Carrefour began selling online in China in June 2015, using its physical stores to supply items sold online and facilitate returns and exchanges of online orders.
In August 2015, Suning Commerce Group, China’s largest consumer electronics and appliance retailer, forged an alliance with Dalian Wanda Commercial Properties, China’s largest commercial property developer, in an experiment to integrate e-retailing with bricks-and-mortar stores. Faced with an economic slowdown coupled with fierce online competition, Wanda decided to close almost half of the roughly 90 department stores it operated as anchor tenants in its shopping centers around the country and use the space for a new type of Suning-branded store. These so-called “cloud” stores feature a category mix tailored to the population and consumption characteristics of each shopping center. To enhance the product lineup, about half the store is devoted to an area where consumers can see, touch, and try products that can then be ordered online for home delivery. According to a company spokesperson, the typical Suning store offers 20,000-30,000 items, while the retailer offers 15 million SKUs online. The spokesperson said the retailer plans to convert 600 of its 1,600 stores into this format in the next several years. Cloud stores will also be built in new Wanda Plaza malls.
The agreement with Wanda came just one month after Suning announced a partnership with Alibaba, in which the e-commerce giant took a 20 percent stake in its retail rival. After the investment, Suning opened a flagship store on Alibaba’s Tmall.com platform. The deal combines Alibaba’s e-commerce assets and massive online traffic with Suning’s physical stores, distribution facilities and after-sales service centers to make the purchasing of consumer electronics and home appliances easier for consumers.