With U.S. Growth Uncertain, Global Commerce Offers New Opportunities

As America's economy faces challenges, many retailers are looking abroad to markets such as China for growth

by Retail Touchpoints

Early revenue predictions point to an uncertain year for the retail industry. Although the National Retail Federation forecasts that the U.S. retail market will grow between 3.8% and 4.4% year over year, this growth rate would represent a deceleration from the 4.6% growth achieved in 2018. But even as doubts seep in about the state of U.S. economic growth, retailers have plenty of chances to thrive in a global market that is still very much ripe with opportunity.

When seeking to expand a business globally, retailers should take note of these trends:

  • Even with trade tensions and expected tariffs, e-Commerce growth is set to continue worldwide, so investments in this channel are vital;

  • 48% of global e-Commerce occurred in China in 2018, and the country’s shoppers are primed to buy from U.S. retailers;

  • India has the largest growth potential of any global market, but government regulations continue to make it tough for foreign entities to break through; and

  • The top 10 global retailers operate in more countries and have built a larger percentage of international sales than their major counterparts.

The U.S.-based retailers in Deloitte’s Global Top 250 generate a relatively low percentage of revenue from foreign operations (14.2%) compared to their global counterparts (23.6%). In fact, 40.5% of U.S. Top 50 retailers are still single country operators, indicating that there are plenty of opportunities to gain customers overseas.

“Only the really big brands who’ve been global for a long time are prioritizing earlier-stage markets, where growth is really fast, to get in early,” said Lily Varon, Analyst at Forrester Research in an interview with Retail TouchPoints. “Most brands and retailers are still wrestling with the markets that they’ve been operating in for some time. However, globalization is starting to pick up as a priority again. I think there was some sort of deceleration of globalization, because I think getting domestic business right is really hard these days. Executives are starting to realize that some of the roadblocks are cultural and organizational, and are getting a much better handle on them.”

E-Commerce Set To Grow Despite Trade Tensions

Retailers so far have been able to largely mitigate the impact of new tariffs on steel, aluminum and goods from China imposed in the past year. However, tariffs could drive up the cost of consumer products and affect businesses’ direction and profits in 2019, particularly if tariffs on $200 billion in Chinese products rise from 10% to 25%,according to Jack Kleinhenz, Chief Economist at NRF. This increase was scheduled to take place on March 1, but it has been indefinitely postponed as U.S.-China trade talks continue

Regardless of the tariff outcome, retailers would be wise to continue investing in the e-Commerce side of the business. E-Commerce growth is a worldwide phenomenon — total global online retail growth is anticipated to grow at a 13.3% pace through 2022, according to Forrester.

“History shows that even amidst regulatory challenges, e-Commerce grows,” said Varon. “We’ve seen similar situations in Argentina with import and tax restrictions and Brazil with their own economic uncertainty, and even during the past recession in the U.S. Whether there’s an economic or regulatory uncertainty, e-Commerce has always grown. It’s never shrunk, it just grows more slowly.”

China Claims 48% Of Global E-Commerce, But Its Shoppers Seek Imported Goods

Trade tensions have put the spotlight on the Chinese retail market in general, which is now expected to outgrow the U.S. retail market by more than $100 billion, according to eMarketer. On the back of powerhouses Alibaba and JD.Com, as well as other major players such as Pinduoduo, Suning and VIPshop, the country continues to dominate online retailing, with more than 48% of global e-Commerce occurring in the region in 2018, according to Forrester.

"Establishing strategic partnerships is an effective plan, especially with medium or small retailers, as you could take advantage of these big players and build your first customer base," said Franklin Chu, U.S. Managing Director for Azoya in an interview with Retail TouchPoints. "However, one should be aware that giants such Tmall/JD.com don’t tend to accept retailers any more, as they are building their direct import system and making themselves into a retailer. They prefer having brands listed on their platforms or shopping from those brands and selling on their self-owned direct import stores. We recommend being more selective when looking for partners, as niche, medium size platforms in your vertical industry could be the best option. And we always recommend retailers increase their products’ popularity and earn customers, and expand to self-owned platforms one day."

Nearly 24% of China’s digital shoppers will make a cross-border purchase this year, according to eMarketer’s estimates, meaning that U.S. retailers have opportunities to generate demand and capture share in China.

“There are three primary supports to the growing Chinese demand for imported goods,” wrote Deborah Weinswig, CEO and Founder of Coresight Research in an article on Forbes. “First, it is often cheaper for Chinese shoppers to buy Western brands from cross-border platforms than to buy them in Chinese shops. Second, the continuing increase in disposable incomes and living standards in China is pulling ever more consumers into the market for imported brands. Third, following years of concerns over counterfeit brands and the safety of some domestic products, many Chinese consumers perceive overseas brands to be of higher quality.”

Regardless of what retailers may learn about the Chinese shopper's spending habits, they must understand one reality before making the plunge: it has to be a long-term investment.

"Western retailers have to be ready to lose money at the beginning as they scale up because, unlike doing business in the West, in China you will have to invest a lot to scale before can you earn money," said Chu. "Especially since Chinese consumers are highly demanding and their shopping habits can peak suddenly, up-front investments often need to be allocated toward the supply chain and marketing."

India Is A Fast-Growing Retail Market, But Entry Isn’t Easy

Although China is all the rage in retail conversations, India is the market every major retailer should, at the very least, investigate. It’s the only market that saw overall retail sales growth surpass 10% every year since 2015, even beating out China’s growth totals, according to Euromonitor International. While China will grow 7%, retail revenue in India is projected to jump 10.6% in 2019.

Competing in this growing market (as in any other region) requires adhering to government regulations as well as identifying customer shopping preferences. For one, brick-and-mortar stores are an increasing necessity for international retailers to get a foothold in India, where e-Commerce laws impede foreign competition.

Indian regulations ban exclusive sales; prevent retailers from selling products on platforms they count as investors; and place restrictions on discounts and cashback promotions. The regulation already has dealt a big blow to both Amazon and Walmart, both of which had made massive investments in the country and now have to restructure operations there to comply with the law.

India has outlined another new draft policy that focuses on data localization, improved privacy safeguards and measures to combat the sale of counterfeit products, according to Reuters. These moves would restrict the cross-border flow of data and require all e-Commerce sites or apps to have a locally registered business entity, increasing the cost of conducting business online. Retailers seeking to crack the Indian market will need to factor in the additional costs and time involved as they calculate the business case and potential ROI.

Looking For International Success? Follow The Leaders

Whether a retailer is seeking to enter China, India or another major untapped market, it’s clear that success at the top of the industry is boosted by having an international following. The world’s top 10 retailers by revenue are more globally focused, with operations on average in 13 countries, versus 10 for the overall Top 250, Deloitte noted.

Additionally, these 10 companies garner a larger international chunk of sales (25.1%) than the rest of the top 250 (23.6%). While Schwarz Group, the massive German retail conglomerate that owns supermarkets Lidl and Kaufland, operates in 30 countries — the most among the top 10 — Walmart operates in 29. Believe it or not, Walmart generates as much as 23.9% of its total revenue overseas, showing that even the most American of retailers relies heavily on a foreign presence to remain a global power.

Kroger was the only top 10 retailer that didn’t operate internationally at the time the report was published. But that has since changed, illustrating the urgency for major industry players to get their products out to a foreign audience. In August 2018, Kroger made the decision to sell its Simple Truth products on Alibaba’s Tmall Global platform, China’s largest business-to-consumer marketplace.

The grocer didn’t rely on guesswork to decide which private label operation to offer. Kroger selected the initial line of products to sell in China through consumer surveys, illustrating that even in an era with an endless array of customer data, retailers still must make it a priority to study the local consumer at the most basic level.

“Kroger’s decision to sell its products on Alibaba creates a new outlet for its very popular private brands and demonstrates that Kroger will not remain static in the fast-changing supermarket landscape," said Moody’s VP Mickey Chadha in commentary provided to Retail TouchPoints. “This initiative is a natural progression in Kroger’s strategic transformation to compete on all fronts and not only in its traditional brick-and-mortar comfort zone, as it comes on the heels of its equity stake in British online supermarket Ocado, its purchase of meal kit company Home Chef and the launch of its grocery delivery service Kroger Ship.”

Of course, major retailers such as Walmart, Kroger and Amazon have the capital needed to build out these partnerships, but even merchants with fewer resources should start investing internationally on some level — even if that means starting with just one market. At the very least, retailers who already are operating in a few foreign markets should continue to prioritize growth in those countries, especially as economic uncertainty continues within the U.S. With e-Commerce growth seemingly “bulletproof” to any potential downturn or trade war, retailers already have a major channel that they can optimize to reach new audiences.


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