By Mark Potter
LONDON, May 1 (Reuters) - Retailers may have survived the worst of the global recession better than they feared, but long-term challenges facing the industry mean the mood is still likely to be sombre at an industry gathering next week.
Competition from the Internet, a shift to more cautious consumerism in the United States and Europe, and an end to big benefits from moving to suppliers in low-cost Asian countries mean growth in the future is likely to be lower than before.
The successful will adapt their product offerings, maximise their presence online, expand in growth markets like China and look at innovative mergers and acquisitions.
But there will also be casualties.
"The virtuous circle has ended," said Michael Jary, global managing partner at OC&C Strategy Consultants, referring in particular to the savings from buying goods in Asia, which have allowed retailers to both cut prices and boost margins.
"I think the restructuring of the industry that is required will be very painful."
Around 800 to 1,000 delegates will gather next Wednesday at the World Retail Congress in Barcelona, only a little below the numbers that attended last year, according to organisers.
They will meet amid growing optimism that the worst of the global economic downturn is over and that, helped by interest rate cuts and huge government spending plans, retailers will avoid the bloodbath that many were predicting just a few months ago.
Consumer confidence measures are improving in the United States and Europe, while retail sales are growing in China. [ID:nN28304426] [ID:nLT865400] [ID:nBJB000598]
"We are seeing positive signs. At the very least the global economy seems to be bottoming out," said Ira Kalish, director of consumer business at Deloitte Research.
Kalish sees a recovery in U.S. retailing by the end of this year and an acceleration of growth in China, with both benefiting from big government stimulus plans. Europe will follow in 2010.
Stock markets are also growing in optimism. In the United States, the S&P Retail Index <.RLX> is up 22 percent this year, outperforming the broader S&P 500 <.SPX> by 25 percent. In Europe, the DJ Stoxx European Retail Index <.SXRP> is up 10 percent, beating the FTSE-Eurofirst 300 <.FTEU3> by 11 percent.
But recovery will not necessarily be quick, and retailers themselves remain cautious as consumers, burnt by the financial market crisis, look to pay down debts.
"It's not a "V" recession where we're just going to bounce
out and come back," Mike Duke, CEO of Wal-Mart
BEYOND THE RECESSION
Aside from the economic backdrop, retailers face longer-term challenges, not least as the benefits from shifting to suppliers in low-cost Asian countries come to an end.
"There's no doubt that in areas like non-food outsourcing or IT outsourcing, a lot of people have already done that, so the potential upside has already been achieved in many cases," said Bryan Roberts, global research director at Planet Retail.
As the Chinese currency appreciates and living standards rise, imports from China are likely to become more expensive.
Retailers also face growing competition from the Internet.
While many are tapping into rapid growth in online shopping, the industry as a whole will struggle to absorb the huge amount of "virtual" capacity the Internet is bringing on stream.
Michael Poynor, Managing Director of Retail Expertise and chief retail adviser to PricewaterhouseCoopers, estimates that in the UK alone the Internet accounts for the equivalent of 40 million square feet of shopping space -- the same as the total area of physical retail space currently in the pipeline.
"Even in normal circumstances such excessive development would be presenting tricky challenges to existing outlets, especially those in sub-prime locations," he said.
Lasting changes in consumer behaviour may also be underway.
Lower-cost "value" products are becoming of better quality and more socially acceptable, leading to a polarisation between spending on staple products and luxuries, which could leave mid-market retailers squeezed out, OC&C's Jary said.
Deloitte's Kalish also sees a change in the global balance of consumer power, as U.S. shoppers move to pay off their debts while domestic demand picks up in emerging markets like China.
Retailers will have to adapt by bearing down on costs, differentiating themselves from competitors, embracing the Internet as part of a "multichannel" strategy and looking at opportunities in faster-growing emerging markets.
But growth is likely to be crimped until capacity comes out of the industry, either via business failures or consolidation.
Scale will become increasingly important, OC&C's Jary said. He predicts a new bout of mergers and acquisitions as non-food players in sectors like clothing club together, and grocers seek to extend their power, possibly swooping on department stores. (Editing by Rupert Winchester)