Us Retail Globalization

8/6/2019 Us Retail Globalization

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Deloitte Research – Revisiting retail globalization

Revisiting retailglobalization

A Deloitte Research Global Retail Study




Revisiting retail globalization

In the year 1298, the Venetian navy was defeated in

battle by the navy of Genoa. One of the Venetian

commanders committed suicide in disgrace. He is long

forgotten. Another surrendered calmly and lived to

write about his experience and much else. His name

was Marco Polo. The importance of Polo was his ability

to observe and learn from experience — the experience

of defeat, and especially the experience of entirely alien

cultures.

This is a lesson of importance to retailers interested

in being global companies. For if we know anything

about this topic, it is that much is to be learned from

failure and much is to be learned from observing the

unfamiliar. Plenty of retailers have failed in globalizing,

and many have succeeded. In the spirit of Marco

Polo, this essay offers some lessons learned from both

experiences.

Why think about this now?

At a time when the global economy faces

unprecedented uncertainty, when U.S. retail sales are

falling, when Europe’s economy is on the verge ofrecession, and when the big emerging markets are

showing signs of significant slowdown and financial

risk, now does not seem the best time to discuss retail

globalization.

Yet, whatever economic doldrums retailers find

themselves in, the reality is that economic growth

will eventually return and surviving retailers will need

to seek new arenas for expanding. Home markets

for developed country retailers are going to be slow

growing, saturated, and prone to excessive regulatory

interference. To achieve rapid growth, successful

retailers will be wise to seek out new territories. What

better time to think about the dawn than when things

are darkest?

Of course, we’ve been down this road before. Indeed,

Deloitte itself wrote about the imminent globalization

of retailing several years ago. And while many

retailers have taken their stores on the road, the

industry remains far less global than many comparable

consumer-oriented businesses. Think about the

leading companies in consumer products, hospitality,

food service, telecommunications, and entertainment.

These industries are far more global than retailing, with

the leading players achieving a much higher share ofrevenue and profits from outside their home markets

than is true of retailing.

What went wrong?

Why have so many retailers failed to go, much less

succeed, outside their home markets? The answer

is that retailing is a uniquely complicated business.

It is the industry that maintains the closest and

most personal relationship with consumers, often

intersecting their lives on a weekly and even daily basis.

Thus, achieving a successful personal relationship is far

more challenging when doing it in an alien culture. In

addition, successful global retailing entails undertakinga wide range of tasks. These include managing

diverse human resources who must engage in

personal interaction with customers, managing foreign

human resources from afar, managing complex and

differing supply chains, managing relationships with

thousands of suppliers and other vendors in multiple

business and regulatory environments, meeting the

requirements of multiple regulatory regimes, and all

the while understanding the changing needs of diverse

consumers. Clearly, this is not easy.



2 Deloitte Research – Revisiting retail globalization

So why bother?

Retailers go global for a number of reasons. European

retailers are more prone to globalization than

American retailers because they often face restrictions

on development in their home markets. French

hypermarkets come to mind. Due to regulations, they

cannot easily open new stores in their home market.

Consequently, they principally seek growth in other

markets. This is why the lion’s share of global retailers

are based in Europe.

Some retailers invest globally in order to latch on to

fast growing consumer markets, especially when their

home markets are stagnant. Germany and Japan come

to mind. Retailers expand globally in order to leverage

their existing assets: global purchasing relationships, a

global supply chain, a unique product, a unique format,

or a well known brand. Finally some retailers globalize

because foreign markets offer them low hanging

fruit. That is, foreign retailers can bring leading edge

practices to relatively unsophisticated markets. In doing

so, they might blow away the competition (or at least

that is their hope). Indeed, despite the challengesmentioned earlier, some retailers have actually been

successful in doing this.

What have global retailers done right?

Choose a strategy — and then execute

It is not sufficient to decide to enter a promising

market. There must be a strategy and it must make

sense in the context of the market chosen. This is

not a simple task and there is no scientific method for

determining the appropriate strategy. Some pundits

suggest that the strategy must be geared towards the

unique qualities of the market. That is, they say it is

most important to adapt. Others, however, argue that

a retailer must bring to a new market the strengths it

possesses at home. In other words, rather than adapt

the retailer to the market, introduce a new idea to the

market. Yet there are plenty of examples of success

and failure for each strategy. In other words, there

appears to be no good rule of thumb. Still, one rule

does seem to apply. Whatever the strategy, the devil is

in the execution.

Find a competitive advantage

If there is no rule for choosing a strategy, then what

is a retailer to do? The answer is to figure out what

the retailer might bring to the market that would

enable it to beat the competition. This can vary

greatly and depends on the nature of the competitive

environment. In an emerging market that lacks much

modern retailing, simply bringing modern supply chain

management and merchandising as well as large

financial resources might be sufficient. In a moresophisticated market, competitive advantage can come

about by offering a well known global brand, a unique

format, a higher level of customer service, a more

entertaining and informative customer experience, or a

more efficient supply chain that enables low pricing.




Learn much about local tastes and customs

The best global retailers spend substantial resources

and time in learning about the local market. This

entails understanding supply chains, regulation, sources

of merchandise, and, most importantly, consumer

tastes and habits. The latter is the most challenging.

There are examples of retailers which, even after years

of research, fail to develop the right merchandising.

Understanding an alien culture is enormously difficult

under the best of circumstances. Hence, using a mix oflocal and expatriate managers can help to get it right.

Some of Europe’s largest food retailers, in developing

new markets, have sent teams of managers to other

markets. Often, they spend months and sometimes

years learning about consumer tastes, shopping and

living behavior, cultural attitudes, and sensitivity to

branding and pricing. The end result is a compromise

between using the strengths of their core business

at home and adjusting to differences in the foreign

market. Sometimes it takes a period of tinkering

before a foreign retailer finds the appropriate such

compromise.

It should be noted that European retailers have

engaged in globalization far more than those of the

United States. As such, they have gained greater

experience in adjusting to local cultures. That is

because, in order to achieve scale, Europe’s retailers

must operate outside their home countries. Thus,

even before reaching Asia and Latin America, many of

Europe’s global retailers have invested in neighboring

European countries. In the process, they have learned

valuable lessons about adaptation.

Use mostly local managerial talent

The best global retailers tend to rely on the fewest

number of expatriate managers. The ideal situation

is for most stores to have local managers. There are

several reasons for this. Local managers often possess

connections to the local business community and

government. They usually have a better understanding

of local consumer culture. Finally, they often engender

greater loyalty within the organization than foreigners.

The problem with expatriates is that, although they

understand the company culture and processes, theydon’t necessarily understand the local market very

well — especially when there is a language barrier.

In addition, they may not be able to exert the same

degree of authority on local employees as a local

manager. Finally, expats often are uninterested in

staying in a foreign market for very long as it can

represent a burden on their families. One British

company, operating in Hungary, found that the British

employees in Budapest intentionally failed to learn

Hungarian lest they be asked to stay longer.




The challenge is to develop local talent in a way that

is consistent with the values, culture, and processes

of the parent company. Moreover, in many emerging

countries such as China, a larger challenge is to retain

well trained talent. The problem in such markets

is that rapid economic growth and massive foreign

investment are conspiring to create huge demand for

skilled managerial labor. Yet, despite increases in the

number of university graduates, supply has not kept up

with demand. Thus, labor costs are rising and goodworkers have multiple choices. Foreign retailers report

that, after spending considerable resources to train

managers, they struggle to retain workers. Often, local

employees, having been trained by a reputable global

retailer, will be sought after by local retailers eager to

develop world class processes. These local companies

offer large increases in compensation in order to poach

global retail talent. Retaining such talent will require

not only good compensation but the promise of long-

term career success. This will be more likely if a global

company is seen as having good prospects in the local

market and a long-term commitment to that market.

One way around a shortage of skilled local managers

is to seek out nationals that have worked for other

global companies or, at the least, have been educated

in the West before returning home. In some cases,

companies have sought local nationals who have

spent entire careers in the West but have an interest

in returning home. On the other hand, some global

retailers choose to locally employ an expatriate CFO

from the parent company. The idea is to provide a

linkage between the home office and the subsidiary so

that financial processes can be tightly aligned.

Develop a hybrid culture

Global retailers face a conflict between maintaining

their own traditional way of doing things and adapting

to the local culture. The solution might be to develop

a hybrid that takes the best of both worlds. In some

cases this has been brought about through joint

venture arrangements between a global and a local

retailer. Of course the history of joint ventures is

littered with the remains of failed attempts to integrate

differing cultures. Still, it can be done if the joint

management is committed and humble.

Utilizing the best of both worlds entails combining

the things the global retailer offers (superior use of

technology, logistics, merchandising, and customer

experience as well as access to a global supply chain)

with the attributes of the local market (business culture,understanding of the local market, and local supplier

relationships).

Develop local relationships

In China, a major European food retailer had trouble

achieving success largely because of a failure to build

strong local supplier relations. In Indonesia, a large

global food retailer ran into difficulties when the local

franchisee company opened a competing store on its

own. The franchisee had acquired knowledge in the

process of working with the foreign retailer which

it then applied to its own start-up chain. Finally, a

global food retailer made countless errors in SouthAmerica when it failed to listen to the cultural advice

of its local partner. Thus, there are three lessons: First,

local relationships are critical. Even if you don’t have a

partner or franchisee, you still need local suppliers and

vendors. Developing such relationships in a favorable

manner requires work. Second, it is important to

find the correct local relationships. Making sure that

interests are properly aligned is important. Finally,

global retailers should listen to their local partners

and suppliers in order to better understand the local

market.

These lessons are particularly apt for food retailers.

As for non-food, such as apparel or home related

goods, local supplier relationships are not necessarily

as important as in the case of food. Yet other kinds

of relationships are still necessary and require effort in

order to make them work.




Be prepared to make big mistakes

It should be evident to even the most casual

observer that global retailing has a steep learning

curve. Mistakes will be made, sometimes big ones.

The capacity to learn and change is critical, and a

commitment of time is necessary to do that. There

are probably more examples of global retailers making

initial mistakes along the way to success than there are

stories of instant success. Yet acceptance of error is

not something that is part of every company’s DNA —and with good reason. Investors often punish mistakes

in ways that affect executive compensation and even

job security. Thus, it must be acknowledged from the

start that, to a large degree, an investment in global

retailing is a gamble. Moreover, the gambler is willing

to stay at the table for more than one game.

The good thing about making mistakes is that they

provide the information necessary to ultimately get

things right. Unlike true gambling, investing in global

retailing does not yield random results. The trick is to

infuse the organization with the lessons learned from

erring. The most successful global retailers have donethis. They have frequently shifted merchandise mix,

pricing, marketing, store layout, and even overall entry

strategy, in order to adjust to an alien market.

Be prepared to invest on a large scale

Often, retailers dip their toes in the water in order

to get a sense of the market. This is sensible up to a

point. Yet a profitable enterprise will only come about

with sufficient economies of scale. Thus, opening a

handful of stores here and there will not suffice. Yet

many retailers have tried this. There are a number of

retailers that have opened small numbers of stores

in multiple markets, only to find that none of them

yielded a positive return. Nearly all success stories have

entailed being selective about the choice of markets,

and then delivering sizable resources to those markets.

Scale is not only important for operational efficiency.

In addition, it enables a retailer to build a following

among consumers. It also convinces local suppliers and

vendors that the retailer is there to stay. Otherwise,

they are often reluctant to enter into new relationships

lest they offend existing customers.

Be prepared to operate in a niche

Although scale is important, it is not always necessary

to saturate a market, nor is it essential to appeal to a

wide range of consumers. In many locations, existing

local and foreign retailers have already grabbed a

considerable share of the market. For a new retailerentering such a market, it is not helpful to simply

replicate what others have done especially if the

market is relatively saturated. Instead, a new player

might be able to find a niche in which to operate. In

some emerging markets where global hypermarkets

have invested heavily, other food retailers have found

that simply investing in the hypermarket format will

not suffice. Instead, they have sought to connect with

consumers through smaller, niche formats such as small

supermarkets, discount stores, and convenience stores.

In the case of electronics retailers, rather than invest in

a superstore format, a smaller neighborhood format

might be appropriate given competitive and regulatory

constraints.




Standardize processes and technology

To offset the costs of localization, some successful

retailers focus on standardizing certain aspects of

managing a retail business in order to achieve global

economies of scale. These include basic business

processes such as pricing, sourcing, payroll, loyalty

programs, and other management and back-office

functions. They seek to develop standardization

through management training sessions that are

dictated from the head office. Such retailers alsoattempt to standardize information technology

infrastructure globally.

Deep pockets

It is no surprise that many globalization failures were

experienced by companies with poor performance

in their home markets. They lacked the resources to

persist. Their shareholders often complained about

too much focus on longer term projects while the

core business deteriorated. Examples abound of

companies that invested overseas, performed poorly,

and exited rather than trying new strategies. On the

other hand, the most notable successes were achievedby companies with strong success at home. They

had deep pockets and could afford to fail, learn from

failure, and try again. Of course there are those that,

after lengthy and costly failure, ultimately — and wisely

— gave up.

Know when to get out

Finally, retail globalization will not always work no

matter how hard a company tries. Again, it is a

gamble. At some point, the gambler must exit the

casino and find sufficient cash to get back home.

The same is true for retailers. Some of the best

global retailers have failed to master certain markets.

Consider Japan, for example. This country is littered

with the remains of several leading global retailers that

failed to succeed. The country has a tough regulatory

environment, an unusual and inefficient supply chain

with vendors unwilling to offend newcomers, and

consumer tastes that have puzzled foreigners for

generations. Exiting Japan made sense for these

retailers after a valiant attempt. Such failures should

not discourage other efforts.

What have global retailers done wrong?

Arrogance

One Western retail chain, known for appealing to a

mid-market audience in its home market, built a series

of gold plated palaces in an emerging market. The

stores were large and clean with bright lighting, wide

aisles, neatly stacked merchandise, and flashy design.

They were designed to roll over the local competition.

They never worked. Instead, local retailers, with far

more ordinary stores, appealed to the nascent middleclass in this market with greater success than the

global retailer. The latter was perceived as too upscale

given the relatively immaculate nature of the stores.

Ultimately the company was forced to retreat from

that market after sizable losses. This story has been

repeated more than once in a variety of formats. It

reflects a degree of arrogance on the part of home

country management. They believed that simply

bringing the best of their world to a new world would

be sufficient. It reflected a failure to learn about the

needs and attitudes of the local market.

Interestingly, such stories demonstrate retailerswilling to undertake sizable capital expenditures in

order to develop a new market. Yet the money is

misspent. In the situation noted above, rather than

focus on opulence, more should have been spent on

understanding local consumers and simply meeting

their needs.

Insufficient commitment of time and resources

Successful retail globalization requires time to learn

and scale to achieve efficiency. Some retailers have

entered markets timidly, taking the view that they can

quickly retreat if things don’t work out. For a well

known apparel brand that enters a market through

franchise or licensing, this approach may be correct.

Yet for a large food or specialty retailer, scale matters.

Moreover, the efficiency that comes from scale will take

time to develop as the retailer is introduced to local

consumers. Mistakes and subsequent corrections will

be made. Thus patience is essential.




No good reason to enter a market

Some retailers have entered new markets assuming that

their success at home will easily translate into success

abroad. They lack recognition of what the market

requires and what they can uniquely offer that market.

If the only reason to enter a market is that it is growing,

then there is no good reason. Again, retailers need a

strategy that reflects the needs of the market and the

competitive advantages that a retailer can offer.

Underestimating the local competition

Global retailers often enter new markets thinking that

they will roll over the local competition, what with their

backward information systems, poor merchandising,

and 1970s style store design. Yet, often the opposite

happens. Often, locals demonstrate the true value of

market knowledge, a local supply chain, and long term

brand equity. Examples abound of unsophisticated

local retailers who gave global retailers a hard time and,

in some cases, chased them back home. A healthy

respect for the success of existing local retailers would

serve global retailers well.

Interestingly, some of the most notable success stories

involve emerging market retailers investing in other

emerging markets. Perhaps companies that are able to

succeed in such challenging places, often competing

against world-class foreigners, are well equipped to

navigate the minefield of other emerging markets.

What about the hot markets?

China

As of this writing, China’s economic growth is slowing

considerably. At the same time, the retail markets of

China’s big coastal cities are already dominated by a

handful of global and local retailers. This raises the

question as to whether China is still a good place for

global retailers to invest. The answer is yes.

First, while the economy is in the doldrums, this is a

temporary phenomenon and should not influence

expectations about long-term future growth.

Moreover, the Chinese government appears to be

doing all the right things to get growth back on

track. Recognizing that the slowdown in the global

economy is hurting China’s exports, the government is

boosting spending in order to pump domestic demand,

especially consumer demand. Moreover, the gradual

appreciation of the currency sets the stage for a shift of

growth away from an export focus and more towarddomestic demand. Thus, in the longer term, consumer

spending growth should be strong.

In addition, as the economy grows, large numbers

of households will shift from poverty to the middle

class, especially in China’s secondary cities and rural

areas. These markets are only now starting to witness

investment in modern retailing. Thus, opportunities

abound in those cities that have not already

experienced large-scale foreign retail investment.

Yet, that is not the end of the story. Even in the big

coastal cities, opportunities exist. First, these cities will

continue to grow, in part due to migration from other

parts of China. Thus, the market will enlarge. Second,

as consumers in these cities become more affluent,

their spending behavior will change. There will be

more spending on discretionary items. This offers the

possibility of more investment by non-food specialty

retailers.




What about the climate for investment? For now, it

remains good. In 2004, the regulatory environment

for foreign retailers improved when China enacted

commitments made when it entered into the World

Trade Organization (WTO). It has remained favorable

ever since, despite periodic expressions of discontent

by government authorities. The latter are concerned

that too much foreign investment will yield an industry

without strong local retailers.

To deal with this concern, the government has

encouraged consolidation on the part of local retailers

in order to achieve scale and joint ventures with

foreigners in order to learn world-class processes.

Since most of the private sector retailers in China still

maintain some government ownership and control,

these retailers often have favorable access to capital,

property, and suppliers. Thus, it is not an entirely even

playing field for foreigners. Still, they continue to invest

on a large scale, reflecting confidence about future

growth and concern about the possibility of tighter

regulations in the future.

India

India is seen by many global retailers as the next

big thing. Yet unlike China, India is merely at the

beginning of a process that could radically alter its

retail landscape. Foreign investment remains minimal

as does chain retailing in general. More important than

the ambitions of foreign retailers are the plans of some

of India’s giant conglomerates. Often flush with cash,

these family controlled behemoths are eager to take

advantage of the expected boom in consumer spending

in the coming years. The rise of middle class consumers

and the expansion of consumer credit are making

the market attractive. Hence some of India’s largest

companies are rolling out large numbers of stores from

scratch without any past experience in retailing. They

utilize their massive financial resources to obtain the

best talent and build a new organization. In addition,

India’s existing retail chains, modest in size by global

standards, are now planning to expand rapidly and

are opening stores far more rapidly than in the past.

Optimism about retailing abounds in India.

Yet should foreigners be optimistic? The answer is

probably not. India imposes some of the world’s mostrestrictive regulations on foreigners. Quite simply,

foreigners — with modest exceptions — are not

allowed to enter India. Direct foreign investment in

retailing is not permitted unless the retailer sells a single

brand — such as a vertically integrated specialty apparel

retailer. Yet, given India’s low per capita income, the

preponderance of interest in India is coming from the

world’s largest food retailers.

Some global retailers are trying to enter India through

the back door. This entails engaging in wholesaling

(permitted) and doing so in close relationships with

local retailers. This provides the opportunity to learn

the market and, it is hoped, enter the retail end in the

future when regulations change.




Will the regulations change? When asked, most Indian

retailers and observers of the retail scene believe that

the market will ultimately open. Moreover, the political

situation for reform has improved of late. Still, with

a slowing economy, local retailers, especially smaller

independent retailers (of whom there are literally

millions) will likely raise their voices in vociferous protest

if anything changes. It will not be an easy, or even

peaceful, transition.

Russia

Unlike India, Russia is quite open to foreign investment

in retailing. Until a few years ago, however, there

wasn’t much interest because the country was

perceived to be economically unstable. Yet in recent

years, steady rapid economic growth, the result largely

of high energy prices, has encouraged foreigners to

look at Russia anew especially given that the market

is relatively fragmented with few large local players.

Moreover, those foreign companies that have invested

in Russia have done very well. So it is no surprise that

the pace of retail investment into Russia has picked up.

On the other hand, the global financial crisis of late

2008 has taken a significant toll on Russia as of this

writing. The global credit crunch and lower energy

prices have conspired to create financial market turmoil

in Russia and to threaten the strong growth to which

the country has become accustomed. Thus, it would

not be surprising to see global retailers put Russia on

hold.

The important question, however, is whether they’llcome back. The answer depends on what becomes of

Russia’s economy and business environment. A good

bet is that Russia will see strong economic growth

again — although possibly slower than the rapid rate in

recent years. This forecast is based on the assumption

that energy prices will rise again. In addition, it is

predicated on the observable fact that Russia’s leaders

are eager to deliver financial stability in order to

maintain political support. Thus, they are likely to avoid

policies that undermine a free consumer market (unlike

their policies with respect to energy and resources).

For global retailers, Russia therefore remains attractivein the long run.

Elsewhere

China, India, and Russia are the hottest markets on

the minds of global retailers. Of course there are

other important markets, but few are either as big or

undeveloped. Brazil is big but already has a sizable

contingent of global retailers. In addition, it has not

seen the kind of economic growth that the other

three BRIC countries have experienced. As for other

emerging markets, there has been plenty of investment

into such disparate places as Southeast Asia, Central

Europe, Mexico, Argentina, Turkey, and the Persian

Gulf. Yet none of these markets possess the scale

that China and India offer. Moreover, they have fewer

opportunities given the large number of sophisticated

global and local retailers already in operation. Still,

there are opportunities in these markets for those

willing to seek niche opportunities.




Finally, there continues to be investment by global

retailers into other developed markets — and more

can be expected as retailers seek to take advantage

of high levels of purchasing power. On the other

hand, developed markets have the disadvantage of

often being saturated by world-class retailers relatively

impervious to foreign competition. Cracking such

markets, especially the United States and Japan, has

proven to be the greatest challenge.

Final thoughts

Many of the examples noted in this report refer to

food retailers. That is because a large share of retailers

that have gone global have been food retailers,

especially European food retailers entering emerging

markets. There was a good reason for this. Europe’s

food retailers have faced regulatory constraints on

home country development. Thus, they had a strong

incentive to go abroad. In addition, emerging markets

were initially seen as having limited purchasing power.Consequently, foreign retailers sought to sell them

necessities rather than discretionary products. Hence,

food retailing went global.

Today, things are rapidly changing. The rise of the

middle class in emerging countries such as China has

fueled much discretionary, even luxury, spending. We

are already witnessing many European, American,

and Japanese non-food retailers operating on a global

scale. Apparel retailers have extended their brands to

new markets. Home related retailers, such as home

improvement or electronics stores, have introduced

emerging markets to the category killer concept.Undoubtedly, there will be more. Indeed it is safe

to say that the next phase of retail globalization will

involve the globalization of non-food retailing. Many

of the success factors for these retailers will be no

different than was the case for the early food-oriented

global retailers.

The best question about retail globalization is

not whether it will happen. After all, it is already

happening. The best question is when and how

retailing will become truly global. There are too many

good reasons to globalize, not the least of which is that

the home markets for Western retailers are slowing and

becoming saturated. The challenge, then, is to find the

right formula. Therefore, it is not too risky to offer the

prediction that retailing will eventually be a very global

industry.




Author

Ira Kalish

Director, Global Economics and Consumer Business

Deloitte Research

Tel: +1 213 688 4765

E-mail: [email protected]

US Retail Industry Leader

Stacy Janiak

Tel: +1 612 397 4235E-mail: [email protected]

Global Retail Industry Co-Leaders

Vicky Eng

Tel: +1 203 905 2621


Richard Lloyd-Owen

Tel: +44 20 7007 2953





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