It's adapt-or-die time for the mainland's growing retailers

Success lies in aligning strategy with rapidly changing consumer patterns


Asia's consumer growth story is old news - it's the quality of management, brands and growth that matter now, according to this HSBC report on the retail industry


Are you getting a little tired of hearing about the amazing Asian consumer growth story? We are. The rise of the region's middle class and the resulting growth in spending is old news now. Yes, it explains why consumer companies attract such premium valuations - but then why was the sector one of the region's biggest under-performers last year?


Most sell-side analysis is focused on a quantitative assessment of growth and profitability. What is often missing is a qualitative look at the companies, the management and the products. Management teams in Asia are often either small or have few key decision makers. Many companies also have limited control over distribution, especially in China. Some of the brands also have limited track records.


To us, this means it is time to look at Asia's consumer stocks in an entirely different way. To look beyond the growth numbers and analyse the intangibles like brand strength, the products themselves and the quality of management.


Winners need to be identified in a market where too many companies are doing the same things with similar products just as Asians are dramatically changing how, where, why and what they buy.
We asked our analysts to look at the companies we cover through three lenses:


Quality of management: The breadth and depth of the team, overall industry experience, the diversity of the management and its control over the company.


Quality of product: The value of the brand, control over distribution and the focus of the product portfolio.
Quality of growth: How growth is generated, the nature of the growth (acquisitive or organic) and if this growth implies market share gains.


We also look at 57 of our covered companies on a sector-by-sector basis using pricing power (margins) and efficiency (asset turnover) as the two key drivers of profitability. We provide examples of companies that have successfully navigated Asia's rapidly changing terrain and others where things have gone wrong.


First, the numbers. The growth numbers are both jaw-dropping and somewhat familiar. The number of people in Asia's middle class rose from 565 million in 1990 to 1.9 billion in 2008 and their spending grew from US$721 million to $3.3 trillion in the same period.


This group now accounts for three-quarters of total consumer spending in Asia and the OECD estimates that by 2030 Asia will make up 43 percent of total worldwide consumption, up from 23 percent in 2008. The short term outlook is also good - in China, for example, we forecast retail sales growth of 19 percent in 2011-12.


The implication is that if companies can simply grow in line with the overall market, they should expect 15-20 percent top line growth in the coming decade.


 The problem is that it is just not as simple as that anymore. Growth alone is simply not enough; all-round quality and the right strategy are crucial in a tough and changing environment. Rising incomes, car ownership, road networks, urbanisation and new shopping malls are all factors in shifting consumer patterns. Marked differences also exist between countries, suggesting that certain consumer sectors can grow faster than others and growth rates can differ significantly between countries. 


For example, Filipinos appear to own more radios, TVs and fridges than Indians at a similar income level. The Chinese own more of these goods but lag behind in car ownership.


These changes and differences come with significant risks. We believe the biggest risk to Asian consumer companies is the inability of management teams to adapt and those that fail to do so will rapidly lose market share.


Failure can come in different forms - losing focus by not keeping your finger on the consumer pulse, ineffective distribution or simply hanging on to products and sales techniques that did well last year but are ineffective this year.


You simply have to get the strategy right
(Source:http://www.cargonewsasia.com)