Retailing and Innovation a Study in Today's Global Retail Market

Advances In Management I VoL 5 (5) May (2012)

Retailing and Innovation: A Study in today's Global Retail MarketShukla YupaP and Gadhavi Dharmesh

V.M. Patel College of Management Studies, Ganpat University, Kherva, Mehsana, North Gujarat (Gujarat) 382711, INDIA

yssOl @ganpatuniversity.ac.in

AbstractIn recent years, the combination of economic

growth and population growth in emerging markets andless developed markets has accelerated the progressionof globalization of retailing and globalization byretailers. The challenges faced by global and globali-zing retailers (retailers who currently have or intend toestablish a market presence in mature markets, emerg-ing markets and less developed markets) can be moredaunting compared to those faced by firms in otherindustries such as automobiles, steel and computers.Retailing innovations that are responsive to thecharacteristics of distinctive national markets andbroader aggregations of markets such as mature,emerging and less developed markets are critical to thesuccess of global and globalizing retailers. Against thisbackdrop, this paper focuses on retailing innovations inthe context of a globalizing retail market.

Keywords: Retailing, Innovation, Emerging markets.Innovation, Globalization.

IntroductionOver the past several decades, modem retailing has

become increasingly global in scope. The term globalizationof retailing encompasses many interrelated developmentssuch as (1) major retailers based on mature marketsestablishing a market presence in countries in different stagesof economic development, (2) the supply chain undergirdingthe operations of retailers becoming increasingly global inscope and (3) the diffusion of retailing innovations in variousparts of the world. By and large, the retail marketenvironment in numerous countries worldwide has beensubject to the influence of globalization forces. The influenceof these globalization forces is evident with regard to variousaspects of retailing such as the' retailing supply chain, productassortment, store format and branding.

Alongside these changes, retailers that operate in aglobal retail market environment are also confronted with thefact that the structure of retail markets in various countriescommensurate with its stage of development. While in mostwestem markets, retailers face challenges typical for maturemarkets, in emerging markets such as the BRIC- (Brazil,Russia, India, China) nations and other country markets withsimilar characteristics growing at and/or are projected to

*Authorfor Correspondence

grow at significantly higher rates, they face a different set ofchallenges. Likewise, less developed markets such as manycountries in Africa exhibit their own distinctive dynamicfrom the standpoint of retailing. While countries and marketsacross the globe show considerable heterogeneity in terms ofthe development stage - and associated structural and supplychain characteristics - one can broadly distinguish betweenthree subgroups of retail markets: (1) mature markets such asin Westem Europe and North America, (2) emerging marketssuch as in Asia, Central and South America and EastemEurope and (3) less developed markets such as in Africa andsome parts of Asia and South America.

Against this backdrop, the study focuses on retailingiimovations in a globalizing retail market environment. Theglobalizing retailing environment comprised of differentiallydeveloped retail markets presents a number of challenges toboth established retailers operating in multiple markets aswell as local incumbents and presents interesting questions toresearchers.^'' For instance, what might be viewed as aretailing innovation by customers in an emerging or lessdeveloped retail market environment may or may not beviewed as such by customers in a mature retail market." Ifthis phenomenon is driven by the diffusion of concepts andideas across markets this is not the major focus of ourapproach. Rather, our focus is on irmovations per se (and noton diffusion of innovations across markets).

Thus, we investigate innovation challenges that arespecific for each of the three different global retail marketsubgroups. Examples of major dimensions of innovations inretailing that we incorporate are: retail formats, branding,assortment, process innovations, customer experience,information technology, new media, handling of payment andorder fulfillment. The following vignettes shed insights intothe above issue and other challenges as well as opportunitiesassociated with studying innovations in retailing in aglobalizing environment.

Retailing innovations in mature markets -challenges and opportunities

In mature markets such as North America, both theinfrastructure for physical distribution of products andconsumer purchasing power are largely in place. More often,the retailing innovation challenge in such markets is toreplace goods, services and experiences that are currentlybeing consumed with innovative new goods, services andexperiences as a path for growth. The rationale being, mostbasic needs of consumers are being more than adequately met

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and hence, retailers need to locus on how they can fulfill thehigher-order needs of consumers^^ ^"^ and thereby grow. Inother words, retailers have to think ahout how they can createsuperior value for consumers through innovations '' . gobeyond satisfying basic needs.

One example of a firm that does quitesuccessfully is Build-A-Bear, a retailing franchi d inthe United Slates. The St. Louis based Comp...];y .. (wscustomers to create their own customized stuffed animals.Since its founding in 1997. the company has grown to $ 468m (2008) in revenue and operates 410 stores in the US and inother countries. Build-A-Bear offers customers an interactive•'make your own stuffed animal" retail-entertainmentexperience. It thus combines customization of the product toindividual consumers' desires with the concept ofentertaintnent and experience. In a market environment inwhieh consumers are flooded with (exchangeable) physicalproducts, the above retailing innovation, by providingcustomers with an entertaining experience while at the sametime enabling them to co-create their own unique productbestows the firm with a competitive differentiationadvantage.

Retailing innovations in emerging markets -challenges and opportunities

A major challenge faced by globalizing retailersbased in mature markets in their attempts to sell to customersin emerging markets (particularly, to potential customersresiding in rural areas) is the absence of a well developed andfunctioning retailing distribution network, mass media,transportation atid storage infrastructure.'"' ' One approach loaddressing these challenges is to increase the number ofdistributors in rural areas by helping people to start their ownsmall store. Project Shakti, launched in 2000 as a partnershipof Hindustan Unilever in India with nongovernmentalorganizations, banks and the Indian government, entailedenlisting women residing in villages to become direct to-consumer sales distributors for Unilever's products such aslaundry detergent, bath soap, toothpaste and shampoo.

The company provides training in areas such asselling and bookkeeping to help rural residents becomemicro-entrepreneurs. After an initial investment in stock,usually through a loan from self-help groups or micro-financebanks facilitated by Hindustan Unilever, most Shaktientrepreneurs tnet a monthly profit of 700-1000 rupees(US$15-22). This, eoupled with the earnings of a spouseworking in the fields, typically doubles the householdincome. By the end of 2007, there were more than 45,000Shakti entrepreneurs covering three million homes in over100,000 villages 111 India.

In other words. Project Shakti has enabled HindustanUnilever to distribute its product offerings to millions ol'customers in rural India. Understandably, this is a retailing

system innovation initiated by a manufacturer rather than aretailer. Nevertheless, it sheds insights into the kinds ofretailing innovations that retailers may have to come up within order to make inroads into rural markets in emerging andless developed markets. The retailing innovation does notentail a business operating from a standalone retail outlet, butfrom the home of a female miero-entrepreiicur. Similarapproaches have been applied by other big manufacturitigcompanies. For example, Procter and Gamble has started towork with so-called "mom and pop" shops to overcome thedistribution challenge in emerging markets by offering theirproducts in small package sizes to fit on crowded shelves andby using a network of local representatives to keep the shopsstocked."

Retailing innovations in less developed markets- challenges and opportunities

In less developed markets, retailing innovationsoften entail being responsive to specific localconditions.^"' *"' ''' For instance, a broad cross-seetion otconsumers in a number of less developed countries in Alricado not have bank accounts due to the combined effect ol theirlow income levels and a sparse network of hank branches andATMs. However, mobile phone service providers have madeconsiderable inroads and ownership oi mobile phones is onthe rise. This environmental condition has provided theimpetus for retailing innovations such as use of mobilephones to facilitate retail transactions. Case in point is M-Pesa (M for mobile, pesa in Swahili means money), a mobile-phone based money transfer service that was developed byVodafone and sponsored by the U'K based Department forInternational Development. M-Pesa enables retail paymentsvia mobile phone in lieu of physical ciu'ieney at participatingretail outlets and even money transfer between individuals.Here again, we have an illustration of a retailing innovationbut initiated by a mobile phone service provider and not atraditional retailer, but nevertheless seems to be having atransformative effect on the retailing landscape.

In general, the relevance of a contingencyperspective for studying innovations in retailing is givenimportance.'' '̂ ' ''" Main foeus is on innovations in retailingfrom the perspective of innovations geared to spécifiemarkets and not merely the adoption of specific aspects ofretailing practice in a country market that originatedelsewhere. For example, a number of retailing processes.technologies, formats etc. that were initially rolled out in aparticular country or a region (a cluster of countries) tend tobe subsequently launched in other countries. In his influentialarticle on the Wheel of Retailing, Hollander' pointed out thatnew types of retailing follow evolutionary paths anddiscussed the possibility of a "nattiral law of retailing" in theevolution of innovatit)ns in retailing. Ahhough toeusedexclusively on retail fonnats, his work was one of the first tosysteniatieally address innovations in retailing.

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(riobal market typesWith regard to the study of issues relating to the

retailing innovations in a globalizing retail marketenvironment, the market eoiitext in whieh the innovationlakes |)laee. must be borne in mind. Retailing is a businessthai entails the firm ititeraeting with the enstomers it serveson an ongoing basis. Customers' attitudes atid behaviors bothnifhienee and are influeneed by the actions of eompetingtetailers iti a marketplaee. Additionally, whether a good,serviee. process, business model or organizational structure iseonsidered as novel also depends on its degree of newness toboth the eotisumers and the firm." In other words, what isseen as an innovation in one region may alteady be aeonmion praetiee in some other parts ol' the world. Withtespeet to context, we broadly distinguish between three typesol markets based on their stage of development - mature,emefging and less developed markets.

Most of the extant literature on retailing and tetailiiigitmovatiotis is in the context of developed or maturetnarkets,'' "*' Geographically, most of North America,Western iiurope and parts of Asia constitute mature markets.However, selected urban districts in emerging tnarkets alst)belong in this group (e.g. cities such as Hong Kong andShatighai atid city states such as Singapore).

limefging markets refer to countries and regionsexperiencing substatitial and rapid economic gtowth andindustrialization that are likely to emerge in the future asmatuie markets.^' Hmerging economies refer to regions ol' theworld experieneing rapid infomiationalization undercondittons of limited or partial industrialization.'" In otherwotds, consumers in these markets are informed about andexposed to goods and serviees from mature markets whilestill cotil'oniiing to cettain traditional habits, attitudes andstrtietutvs. Rapid urbanization is otie of the reasons for theinereased interest amotig retailers based in mature markets inetnergnig markets. The BRIC eountries are widely viewed asthe largest etnerging markets. Other important emergingtnafkets lneluile Mexico. Poland, ,South Africa, South Koreaand Turkey. The total population of these emerging countriesconsiderably exeeeds the population of developed eountries,makitig these regions particularly attractive for maturemarket-based retailers and retailing innovations that ateresponsive to the distinctive eharaeteristies of these markets.

While we exelude least developed eountries (i.e.tegions sufferitig from extreme poverty and lacking politicalas well as social stability) innovations tn retailmg in thecontext ot less developed coimtries, sometimes referred to asthe "'base of the pyramid" country markets have been dealtwith. " These eeonomies are eharaeterized by lowpet-eapitaineome. not being fully industrialized and lackinii asophisticated legal or financial systetns. Whereas in a globalcontext, less developed cotintries tend to be generally vtewed

as base ol the pyramid markets, countries in enierunmmarkets atx also eharacterized by the prvseiice i)i a Ni/cahlebase of the pyramid market segtnent, besides nioie aftliieiitmarket segments.

In an attenifit to highlight the poteiilial (or ieiailiii;iitiiK)\ations in mature, emerging and less (levelo|icti iiiarkci>.Schumpeter" who described drivers of innovations as lol lows

••|. . , | the fundamental impulse that sets and kee(is ihe

capitalist etigine in motion comes I'roni the new conMii ikis '

goods, the tiew methods of pt'oduction c>r t ranspoiiai ion. tlic

new markets, the new forces ol industrial orgaiH/aiioii iliai

ca|iital etiterprise creates." Though ScluimpctL'! tlid iioi

explicitly consider the retailing cotitext, lii\ «jeiicral

proposition that consumer based, industry based and iiiaikei

based contexts affect the suceess ;ind failure ol' in inna i ions

closely eorresponds with the major en\ ironmeiital faciors

examined in this paper. Additionally, eotitingencv tlieorv is

helpful in recognizing environmental charaeterisi ics ¡hat

influence innovations, such as etivironniental s iabi l i t ) .

complexity, diversitv' and hostility"'. Both, classiestudies •' '^, as well as more reeetit studies"'' ' ' pnnideempirical credence for the role of environniental coniexi as i\major driver of organizational tlesign in general andintiovations in partieuiar.

.A r e v i e w of r e l e x a n t l i t e r a t u r e a n d d i s c u s s i o n s w i t hintlustry experts suggest three broad categories ofenvirontiiental factors •• consumer based itidustn haseil aiitllegal and regulatory based intiovations related cluilleiiees amiopportunities to retailers.

Consumer based challenges refer to iiinu\aîH>nchallenges and opportunities related to tlilTcivnces in theeharaeteristies of custotners in the mature, eriiemini! ami lessdeveloped markets. The fact that the success of an innovationis dependent on its ability to address the ctirrent needs ofcustomers better thati existing offerings, or address tlie latentneeds ol customers, highlights the importance ol i inohiimcustomers in developing innovations. Many eompaiiies haverecognized that getting custotners engaged m iiiiiovaiioii

processes is a crucial step.

Itidustry based challenges refei to iniK)\atioiichallenges and opportunities related U) differences in thenature of eonipetition. teehnology and su[ipliers in mature,emerging atid less developed markets. I'he iiidusir}' context,partieularly the intensity of eonipetition m a market andsupply ehain tnanagement. has been identified as a niaiordriver ot suceess versus failutx" in inno\aiioii manage-ment.^^' '"'' Similarly, technological developments are al thevery heart of innovations and have been ideiilified as a majorforce behitid innovations in retailing."'

Legal and regulatory based challenges refer toinnovation ehallenges and opportunities relaied to dilferenees

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in govemance and regulations in the different markets. As .discussed in writings on national innovation systems'^ and thecompetitive advantage of nations^", regulatory constraints andthe stability or volatility of political and legal systemsstrongly affect irmovativeness and R&D performance. Therole of the legal environment has also been recognized bygovernments, particularly those which view irmovativeness asa major objective. For example, in order to learn more aboutmajor conditions for innovation to flourish, the EuropeanUnion conducts an annual review of irmovation performanceof all EU member countries. Based on this review, aScoreboard assessing the innovation performance of all EUmember cotmtries is made. This Scoreboard serves as abenchmark and to identify barriers to innovation in the legalsystems of individual countries.

These envirormiental factors drive retailers' effortsto better serve their customers in different types of marketsthrough innovations and thereby enhance their performance.The importance of branding as a dimension of retailinginnovation encompassing store brands and private labels hasbeen discussed in literature.^* Retailers' strategic decisionssuch as single versus multiple private label brand names, theirpositioning and differentiation within and across marketenvironments is subsumed under branding as a dimension ofinnovations in retailing.^ Notwithstanding some overlap withretail format and branding, specifics of assortment such asvariety, stock ownership and speed of replenishment havealso been identified as potential ways for a retailer todifferentiate itself from competitors^".

Process innovations such as market research andsupply chain management also constitute potential avenuesfor retailers in achieving a competitive advantage. Forexample, new forms of collaboration between manufacturersand retailers in supply chain management such as efficientconsumer response (ECR) and category managementrepresent major innovations in retailing pioneered bycompanies such as Wal-Mart in the US and Metro inEurope^* Furthermore, new forms of market research andmarketing intelligence generation such as UPC scanner databased, customer loyalty program based and customerexperience management based activities'^ representinnovations in retailing. Other important dimensions ofretailing innovation include those in the realm of customerexperience, such as irmovations based on store atmosphere,expertise and knowledge of front-end staff, informationtechnology and new media enabled retailing irmovationsand the handling of payment.

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Finally, retail goods and services have to bedelivered. While consumers in mature markets are faced withproblems such as lack of time, lack of parking space in citiesand ensuring that items purchased over the Internet aredelivered in a timely manner, consumers in less developedcountries often lack any means of transportation. In both

cases, innovations constitute less expensive and/or timelyways of order fulfillment.

Innovation challenges predicated by environ-mental Challenges

The relevance of various retail environment factors(consurner based challenges industry based challenges andlegal/regulatory based challenges) to retailing innovations indifferent types of markets is examined here. Historically,retail firms have irmovated in their home country (typically inmarkets that one might currently characterize as maturemarkets) and then rolled out these innovations in othercountries. Increasingly however, the growth of emergingmarket economies such as India and China has forcedretailers to modify their innovation strategies in order to beresponsive to the unique challenges posed and opportunitiespresented by these markets. In the broader context ofinnovation literature, this has spurred debate and discussionon trickle-down versus trickle-up irmovation (trickle-up or

. reverse innovations refer to successful innovations developedin emerging markets by multinational enterprises beingsubsequently launched in mature markets in which theycompete).40

Mature markets (Consumer based innovationchallenges)

Many of the innovation challenges faced by retailersin mature markets are customer-centric in the sense that theyrequire designing retail processes and products to bettermatch (shifting) customer needs.*' A first cluster of consumerbased challenges in mature markets relates to changingdemographics and life-style driven consumer requirements,such as those of an increasing proportion of elderly citizens inmarkets such as Western Europe and Japan. This trendimplies retailing innovations that are responsive to themobility and shopping needs of this cluster. For example,consumers may wish to have easy access to both health andleisure facilities and perhaps even residential serviceofferings."* Retailers have opportunities for innovations inthese areas by integrating different goods and services andadapting retail processes to meet the needs of older peoplecloser to their homes. With respect to product development,further exploiting heterogeneity in tastes also offersopportunities for irmovation. Full personalization orcustomization of products and retail processes is an extremeexample of leveraging such heterogeneity. For example,online apparel retailers such as Lands' End have successfullynurtured customer loyalty by offering customized clothing

options.^*

A second cluster of consumer based challengesinvolves the touch-point of information technology (IT) andconsumer needs. Mobile and online information technologymake consumers more and more flexible in terms of whereand how they wish to access retailer information and where

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and how to purchase products."'' •** In addition, IT-enabledtailored (e.g. location specific) retail information andofferings are increasingly becoming the norm.'^ Furthermore,IT allows consumers to interact closely with one anotherwhich in turn calls for retailers to monitor consumer-to-consumer communications and respond to the marketintelligence generated. These environmental trends poseimportant innovation challenges to retailers and createpotential opportunities for innovations in terms of: (a)developing IT applications such as real-time listening,cocreation tools'*, (b) supportive online purchaseenvironments'^ and (c) location based information services(e.g., applying RFID teehnology).^^ Additionally, theintegration of multiple channels involving IT and non-ITenabled environments is another area • of innovationopportunity.73

Industry based challenges: Competition between retailers inmature markets tends to be relatively intense. Relatively lowlevels of government protectionism and a strong legal system,high-level market information and a strong physicalinfrastructure often leads to competition between global retailchains in these markets. In addition to the verticalization ofmanufacturers, sourcing of products is also relatively flexiblebecause many suppliers are available. Thus, retailers'innovation opportunities are mainly dependent on their abilityto design flexible supply chains that can effectively respondto changes in competitive market conditions (e.g. Zara) or todevelop new non-imitable products.^' Retailers in maturemarkets also increasingly extend into the direction of newnon-traditional services such as healthcare "' and financialproducts.^ This challenges them to compete in new marketscharacterized by new demands, product-market boundariesand regulations.

Legal/regulatory based challenges: Retailers in maturemarkets face a number of legal and regulation basedchallenges. In particular, it is likely that governments inmature markets will increasingly place demands on theenvironmental sustainability of retail processes and products.For example, the U.S. Environmental Protection Agency setslimits on eadmium in toy jewelry, owing to the metal's healthhazard implications. This has resulted in retailers such asDress Bam Inc. and Claire's Boutiques Inc. recallingnecklaces, earrings and bracelets after finding the productscontained Cadmium. Thus, designing sustainable productsand processes constitutes an opportunity for innovations inretailing. For example, Sainsbury's, a UK retailer, recentlyintroduced electric urban home-shopping delivery vans topromote greener retail operations. In a broader sense, retailersmay also be able to partner with local governments in findingregional solutions to develop innovative ways to promotesustainable local growth in a dynamic and open worldeconomy.^'

Emerging markets Consumer based challengesDespite recent economic advances, the average

consumer in emerging markets tends to be price sensitive ^'.However, the économie growth in emerging markets is alsocreating a growing, relatively wealthy middle class. Thiscreates locally attractive retail markets which has lured majorinternational retailers such as Carrefour and Wal-Mart intothese regions. This effect is strongest in the metropolitanareas with their large population density. Given the greaterpriée sensitivity eoupled with the wide income disparityamong individuals and households in emerging markets,retailers are faced with the challenge of effectively targetingdifferent customer groups (market segments) within thesenational markets.'^

Given this difficult task to simultaneously serveconsumers at the bottom, in the middle and at the top of theincome pyramid, companies might focus on those consumersthat become more affluent and thus move up the incomepyramid. An innovation that retailers have been successfulwith in emerging markets is a tiered pricing structure thatcaters to various market segments. For example, the BeijingXidan Department Store uses a configuration that is tiered inits design structure and caters to consumers of various incomesegments. The premium and more expensive brands arelocated on the higher floors of the store and the lessexpensive brands on the lower floors. Innovations in productsize variations can be more effective in emerging marketsthan in mature markets. Sueh innovations by retailers oftenentail product adaptations commensurate with the relativelylower income, lack of storage facilities and different purchasehabits of customers in these markets. Case in point is productadaptations in response to more frequent purchases, but insmaller quantities by customers in emerging markets (forexample, kirana outlets or small grocery stores in India).

Emerging markets also have grown to be relativelyhigh on technology innovativeness, as a consequence ofskipping one or more generations of technology and theassociated sunk infrastructure costs. In the last decades,erstwhile technology-related barriers have gradually recededwith the growth of globalization and the increasing interest ofmultinational companies. The changing consumer preferencesalso have a great impact on retailers' innovation strategies..Consumer preferences are often affected by changing 'trends'in other (developed) countries.

For instance, in the 1990s, India saw a sudden spurtin 'western' influence on clothing. Consumers were rapidlyshifting their preferences from the traditional attire to more'modem' apparel (such as jeans and t-shirts). Globus, apopular clothing retailer in India, underwent a completetransformation in a very short time in order to adjust to thischange in consumer preferences.

Industry based challenges: A major obstacle that retailfirms face when attempting to enter emerging markets is thecompetition from local players. Overcoming this hurdle can

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take years when the host country brands are supported by thelocal govemment. Additionally, the retailing structure inemerging markets is characterized by a relatively largeunorganized sector and many retailers are of small scale andunregistered. In South America, large retailers face stiffcompetition from the smaller players. Such small retailershave been shown to have greater resilience against the largerretailing chains^^, a phenomenon which threatens theexistence of retail chains in emerging economies because it ismore difficult to gain large market shares in these markets.

The reason for this dominance of smaller retailers istwofold. First, the sheer number of smaller businesses inemerging countries is much larger than the number of retailchains that have a presence in these cotmtries. Second,consumers (in emerging economies) often tend to rely on'local' produce which is stocked in the smaller retail storesrather than in those operated by chains, a phenomenon whichis becoming more and more common'̂ *. As a result, modemretail chains only account for one third of consumer goodssales in China and only one fifth in India.̂ ^ This createsopportunities for retailers in these markets to innovate inoptimal shelf space usage, product assortment and marketingexpenditures to accommodate 'local' produce as well.

The next link in the retail chain is constituted by thesupply and distribution networks. In order to ensureprofitability, firms must have access to a reliable suppliernetwork. In the case of emerging economies, retailers facedwith a number of challenges in establishing reliable suppliernetworks have irmovated in different ways. Some retailershave created their own supplier networks. For example,TOPS, a leading food retailer in Thailand, invested in thedevelopment of an exclusive fresh produce supply chain anddistribution center in order to create a shorter and morestreamlined supply network in the country *.

Legal/regulatory based challenges: Retailing in emergingmarkets is generally more heavily influenced by the hostcountry's govemment than in mature markets. For example,Brazil's substandard growth in the 1980s spurred thegovemment to introduce heavy structural reforms especiallyin the retailing sector. The reforms included tradeliberalization and opening of markets. Henisz and Zelner^*observe the importance of politics and governmentalregulation in emerging economies and prescribe a directpolitical approach to investing in emerging markets. In thecase of India, the trade liberalization reforms of 1991 haveproven to be a boon to large scale retailers. The country hasseen unprecedented growth in the fields of retailing,manufacturing, production and agriculture. In 2006, theGovemment of India opened the retail industry to the worldby allowing up to 51% foreign direct investment (FDI)through the single-brand retail route. Following this change inthe retailing climate, FDI inflows between April 2000 andApril 2010 in single-brand retail trading stood at USD 194.69million, according to the Department of Industrial Policy and

Promotion (DIPP), Govemment of India. These inflows areexpected to drive retail growth in India, primarily from therural markets.

Takada and Jain^^ also found that the legal systemand govemmental issues play a major role in the innovationprocess. Therefore, firms usually develop long termrelationships with host countries in order to negotiate betteragreements regarding land, labor and taxes. A majorchallenge that retailers face when investing in emergingeconomies is changes in policy in the aftermath of changes inthe country's leadership. Retailers have employed a range ofinnovative strategies in the face of legal and regulatorychallenges. Although entering into strategic alliances withdomestic firms is a pervasive practice in the manufacturingsector, it is relatively less pervasive in the retailing context.Since existing FDI regulations in India do not permit foreignretailers with multiple brands, Wal-Mart's joint venture withBharti Enterprises in India is an example of retailers usingirmovative strategies to overcome regulatory challenges. Jointventures as a mode of entry into emerging markets byretailers based in mature markets enables them to leverage thecapabilities of the domestic alliance partner to managerelations with the local govemment as well as to offer productassortments better suited to local market conditions.

Less developed markets (Consumer basedchallenges)

Less developed markets are often characterized bylow domestic production and high inflationary pressure,resulting in lower per capita income. Further, the distributionof wealth in less developed markets tends to be more heavilyskewed towards the extremities than in emerging markets,implying even starker distinctions in income levels' . Someretailers have responded to this environmental condition bycreating product offerings catering specifically to either oneof these segments^. For instance, retailers aim to serve therelatively small affluent segment of the population byoffering premium priced products and/or the relatively largepoorer segment of the population with lower priced productofferings. Also, the banking sector in these markets tends tobe comparatively rudimentary.

Many consumers do not have bank accounts orcredit cards. Therefore, most transactions entail the use ofcurrency. This can have an adverse impact on retailers innumerous ways. First, without a financial system to backthem up, retailers cannot comfortably credit consumertransactions for future sales. Second, the total size of the saleis always limited by the amount of money the consumer iscurrently carrying. Further, both consumers and retailers arepotential victims of frequent burglaries due to the breakdownof law and order. In order to address these consumer basedchallenges, retailers in less developed markets areincreasingly resorting to technological innovations that

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enable cashless transactions, even in the absence of bankaccounts.

Industry based challenges: In less developed markets, thepoor infrastmcture and lack of basic amenities imply thatretail outlets need to be located close to where consumerslive. Therefore, typically many small retailers operate close tothe consumers' homes and as a consequence a large share ofthe competition in retail markets in these areas is relativelyunorganized and diffused. An additional implication of thepoor infrastmcture facilities is that it creates a supply ehainbottleneck. Transport and communication facilities in lessdeveloped markets severely limit the savings in inventorycosts and the effectiveness of sales that retailers operating inmore developed mature markets are able to achieve throughjust-in-time delivery.

Retailers in these markets have innovated bystockpiling inventory through large warehouses that can storerelatively more products than is typically the case in moredeveloped economies. Thus, where innovations in retailsupply chain management in saturated markets have typicallyfocused on keeping stocks as low as possible, in lessdeveloped markets the direction of innovation may bereversed. Retailers for example may choose to extensivelystock inventory to be able to maintain a continuous supply ofproducts at their retail facings.

On the supplier front, retailers often face poor,disjointed distribution networks in less developed markets.Since the number of firms in each stratum is very limited,retailers have little say in dealer preferences and distributoragreements. Retailers in some areas have therefore investedin backward integration, producing a number of the goodsthey sell either themselves or through franchises. Forexample. Fast Retailing Co. from Japan is working withGrameen Bank group in Bangladesh to provide clothes pricedat around $1. To do so, Jhe firm is planning to use locallyprocured materials and local production, as well as tomobilize women receiving small loans from the GrameenBank to build up a sales network. This is another innovationthat is illustrative of differences between mature and lessdeveloped markets.

Innovations in just-in-time retail delivery strategiesand supplier partnerships that have emerged in maturemarkets may not be suitable for the less reliable marketconditions in less developed markets. This has pressuredretailers in these markets to innovate by bringing suppliertasks within their own operations allowing them to create amore stable basis to meet consumer demand. The market-level dynamics in less developed markets provides a contrastrelative to mature and emerging markets. Due to the political,economic, infrastmctural and consumer level complexities inthese environments and reduced possibilities for economiclaw enforcement, producers may form cartels and 'territories'among themselves, giving rise to a self-blocking mono-

polistic system of producers"' ". Additionally, the legalsystems in these markets do not always have stringent anti-tmst laws. Entering these markets entails retailers having tobreak through cartel barriers. New entrants have for exampleresorted to opening retail outlets in the form of large chainsthat are well spread throughout a region of dominance,thereby simultaneously employing all members of acompeting cartel.

Legal/regulatory based challenges: In less developedmarkets characterized by frequent changes in govemments,the political system is generally less conducive to makinginvestments in the infrastructure, public distribution systemsetc. The govemments in some less developed markets haveplaced strong restrictions on intemational trade. Foreignsubsidies to retailers from developed countries and NGOsoffering goods and services in these markets have sometimesenabled them to overcome the barriers of closed markets. Inthese cases, retailers have been able to establish a presence bypassing on these subsidies to the consumers*. For example,producers and retailers of agricultural products such as seedsand fertilizers enjoy both domestic and intemational subsidiesin West Africa. With the lack of basic amenities such as foodand healthcare, the socio-political climate in less developednations significantly weakens the financial system and tradein these regions is largely driven by trust and personalrelationships. Retailers in these markets are, therefore facedwith a paradoxical situation of having to make heavyinvestments in an environment with a high risk of valuedestmction due to policy changes of the mling govemments.

As a result, retailers such as the Oriental Weavers'Company in Egypt have innovated by resorting to personaland dh-ect selling efforts when marketing their products.Personal selling has the advantage of low fixed costs in termsof long term assets such as physical retail outlets, whilesimultaneously, creating a fabric of tmst with consumersthrough faee-to-face transactions. The high cost of humanresources in developed nations limits the degree to whichorganizations in these markets can invest in direct personalselling techniques. Firms in less developed markets haveleveraged on the availability of less expensive human labor totrain and deploy a large direct sales force.

Implications for future researchMature markets: A key eharacteristic of mature retailmarkets is the (over) abundant availability of data regardingcustomers. Depending on eontext and firrn activities, thesedata comprise the gamut of behavior, demographics,attitudes, marketing resource allocation - all at an individuallevel. For example, Wal-Mart handles more than 1 millioncustomer transactions every hour, accumulating data totalingmore than 2.5 petabytes - the equivalent of 167 times thenumber of books in America's Library of Congress.Accordingly, the challenge that most retailers face is not the

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lack of access to specific data but rather the inability totransform available data into decision-relevant informationand insights. Illustrative of a firm's information technologycapabilities as a basis for innovations in retailing processes isNordstrom's seamless hitegration of inventory on specificproducts at the retailer's web warehouse with inventory of thesame products at each of its bricks-and-mortar stores.

Thus, when a consumer shops online for a particularitem and the firm is out of stock at its web warehouse, thesystem checks whether the product is available at any of itsphysical stores. If that is the case, the transaction iscompleted and the product shipped from the store which hasthe product available in stock. Following the successfulintegration of the inventory of various SKUs at individualstores with the inventory of the SKUs at the online store, thefirm's inventory tumover is reported to have touched a five-year high in 2009. As a consequence of such IT enabled,enhanced process capabilities, Nordstrom is reported to haveachieved a significant increase in the percentage of customerswho bought merchandise after searching for anjtem at itsonline store'*.

The implication for retailers is developing new dataanalysis capabilities. Data analytics capabilities drivenanalysis of vast amounts of data have the potential to provideinsights to retailers into opportunities for retailing irmovation.Innovation therefore needs to take place at the organizationallevel as well as at the functional level. At the organizationallevel, buildhig up a strong analytical and customer insightfunction is the keyl At the functional level, firms need toimplement competencies with respect to the relevant datasources such as scanner panel data, multicharmel data, cardprogram data, online data and data from RFID tracking

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Whereas many retailers - even in mature economies- have been focusing on maximizing supply chainefficiencies, competing successfully on strong customerunderstanding has been more of an exception than the norm.Consequently, irmovation in this domain has both exploitativeas well as exploratory characteristics'^ - exploitative in thesense that many of the associated activities build on existingtechnological trajectories and involve improvements inexisting activities and exploratory in the sense that certainactivities use new hitherto non-existing types of data andpotentially might lead to business models that focus ondifferent product-market domains. Examples of new datarefer to many online and social network contexts.

Related research questions are: How can retailerstake advantage of consumer-to-consumer (C2C) communi-cation and observations of their behavior in online socialnetworks (e.g. if they become fans of a company profile onFacebook)? Examples of new business models refer to retailformats that leverage long-tails^ or new Intemet based

formats such as group buying or private sales " . From aresearch perspective, a question that arises is how retailerscan take advantage of the long-tail not only in the onlineenvironment but also in the offline, while recognizing that the'long-tail' effect is uneven across product categories^l

Another area of potential research is reexamining thedirectionality of cross-national lead-lag effects with respectto diffusion of innovation. 'While it is considered to be themle that innovations usually are developed and applied firsthi mature markets and then transferred to emerging and lessdeveloped country markets, some of the most recent andnovel innovations in retailing are being developed andapplied first in either emerging or less developed countrymarkets. A likely driver of this trend is the growing interestamong major retailers in countries with the highest growthrates andyor future growth potential. Interestingly, pre-liminary evidence suggests that successful innovations fromless developed countries (such as M-pesa) are later adopted inmature markets. In other words, traditional views of lead andlag cotmtries in the diffusion of innovations now warrant re-examination in the evolving global retail market environment.In addition, it also calls for new models in intemationaldiffusion and adoption of retailing innovations. Such models,rather than assuming that innovations "cascade down" fromheadquarters in developed countries initially to emergingcotmtry markets and subsequently to less-developed countrymarkets, must allow for bi-directional dispersions ofinnovations'^. Emerging literature on reverse innovationalso points to the need for research along these lines. There isthus also a need for empirical insights into how innovationsin retailing occur and disperse across countries.

Emerging MarketsEmerging markets such as India and China are

characterized by large segments of the population that fallunder different income groups. This presents a challenge aswell as an opportunity for retailers to serve customersspanning multiple layers of the income pyramid. Case inpoint, Prahalad^^, in a seminal article titled, "The InnovationSandbox," identified four criteria that innovations for the baseof the pyramid"'markets must meet in order to be successful(i.e. have a major impact in serving the base of the pyramidmarkets). The iimovation must: (1) result in a good or serviceof world-class quality, (2) achieve a significant pricereduction - at least 90 percent off the cost of a comparablegood or service in the West, (3) be scalable - be able to beproduced, marketed and used in many locales andcircumstances and (4) be affordable to potential customers atthe bottom of the economic pyramid - people with the lowestlevels of income in any given society. While these criteria forinnovations for the base of pyramid markets are pertinent togoods and services, the exemplars on low cost retailinginnovations in the health care services sector in India(Narayana Hmdayalaya Cardiac Care Center, Aravind Eye

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Care and the Jaipur Foot) highlighted by Prahalad*^ areinsightful from the standpoint of avenues for future research.

In an article focused on Aravind Eye Care,draws attention to the hospital's success at substantiallylowering costs in every area of its service through variousproduct and process innovations. For instance, he notes thatwhile it costs hospitals in the United States about $ 1650 toperform a cataract operation, the cost at Aravind Eye Care isabout $10. Among the innovations that have enabled Aravindto achieve such substantial cost reductions is putting two ormore patients in an operating, room at the same time.Although in some countries this may not be permitted,according to the article, Aravind has not experienced anyproblems with infections by doing so. The size of the marketfor affordable health care services in emerging markets andless developed markets points to research focusing oninnovations in the delivery of health care services under thebroader rubric of services retailing (retailing of intangiblesdominant products) as an important avenue for futureresearch.

Another example of a service retailing irmovation inIndia is the HP i-community Mobile Photo Studio Project thatenables female entrepreneurs to leverage HP's high-resolution digital photography and printing services in waysthat are new and impactful in rural areas. By providing on-the-spot processing to rural residents at a modest price, withequipment leased from HP and consumables purchased atmarket rate from HP, many of the entrepreneurs are reportedto have been able to double their monthly family income. In asense, Hindustan Lever's Project Shakti initiative in India andHP's i-community Mobile Photo Studio Project defy theconcept of retailing innovation to the extent that there isneither a physical location nor a web address at whichcustomers transact with the retailer.

Teece'° describes a regime of appropriability as theenvironmental factors excluding firm and market structurerelated factors that govern an innovator's ability to capturethe profits generated by an iimovation. He distinguishesbetween two key dimensions of appropriability - the natureof the technology (product, process, tacit and codified) andthe efficacy of legal mechanisms of protection (patents,copyrights and trade secrets).'" Teece notes that whenimitation is easy, markets do not work well and profits frominnovation may accrue to owners of certain complementaryassets, rather than to developers of the intellectual property.This, as he points out, highlights the need for the irmovatingfirm to establish a prior position in these complementaryassets.

On the one hand, this issue is particularly pertinentin the context of innovations in retailing in light of the lowbarriers to entry into the retailing sector and ease of imitationof a number of retailing innovations (e.g. store format.

product assortment and price points).On the other hand, it isalso conceivable that under certain environmental andorganizational contexts, the innovating firm may be moreinclined to facilitate emulation of its innovation throughimitation by other organizations that are either its directcompetitors or non-competitors. This is likely to be the casewith retailing innovations designed to reach the base of thepyramid markets. Facilitating imitation of an innovationrather than erecting deterrents is likely to be the norm when aretailing irmovation, whether in the goods or services sectorsdesigned to reach the base of the pyramid markets is acooperative venture involving both for-profit and not-for-profit organizations.

These considerations point to the following asresearch questions that merit inquiry: (1) How do (how can)retailers protect their retailing innovations from beingappropriated? (2) How do (how can) pioneers of retailinginnovations in emerging markets and less developed marketsthat are primarily targeted at the base of the pyramid marketsfacilitate diffusion of such innovations for the larger benefitof customers in these markets?

Less developed marketsOne central innovation challenge to retailers in less

developed markets is to design product and supply chainstrategies to service the population groups that differ at a verybasic level in terms of income, accessibility and preferences.Sizeable segments of the population have very low incomesand many of them are hard to reach through the availabledistribution and commimication channels (e.g. those living inlow income - rural areas). Other segments are somewhateasier to reach but still require completely different dedicateddistribution and communication for example through manysmall local stores (e.g. low income - urban populations). Atthe same time there is also a segment of consumers who havea very high income (e.g. the highest income - urbanpopulation) and expectations comparable to the expectationsof consumers in mature markets, who can be targeted withmarketing communications similar to those employed inmature markets and a small number of high-end stores.

Future research to develop a better understanding ofthe different segments can be particularly prornising inproviding guidance for future retailing irmovations. Inparticular such research could address questions such as thefollowing: (1) What are some critical distinguishing andtargetable features of the different segments in less developedmarkets that tie in with clearly different behaviors and needs?(2) How are these behaviors and needs of the differentsegments likely to shift over time as the economy of a lessdeveloped market develops? and (3) What retail strategycomponents can be used to address each of the differentbehaviors and needs?

The insights from answers to these questions can

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also guide the understanding of the competitive retailstmetures in less developed markets where perhaps not allretailers may choose to compete for a share of the market inevery one of the market segments. Thus, an additionalpromising avenue for future research is to analytically andempirically study the competitive implications of widedispersion in respect of price sensitivity and location basedaccessibility in less developed markets. For example, arethere conditions under which the existing large number ofvery small, locationally separated retailers is sustainable, or isconsolidation an inevitable consequence as the economicstmetures of these markets develop?

While research by Ahlert, Blut and Evanschitzky'sheds some light into this question, there is a need for moreanalyses of time-series data from different countries to betterunderstand the dynamics of the retail industry stmcture in lessdeveloped markets. The organizational and environmentalcontingencies under which retailers should tailor differentlybranded chains to reach different population segments versusdevelop one common retail brand to reach all populationsegments (income groups) constitutes an avenue for futureresearch. From a more publie policy-oriented researchperspective, there is a need for research focusing on criticalfactors that facilitate access to the retail process for thepoorest segments of the population. For example, ifsubsidized offers are targeted at the poorest segments in themarket, will this hinder innovation in the market targeted atthese segments and adversely impact retail accessibility in thelong mn?

Such market responses to subsidized retailing couldpotentially also be highly context/country dependent whichfurther point to potential avenues for future research into theprocess of innovation for retailing in less developedcountries. More generally, research questions grounded inmid-range theories that recognize and explicate themoderating effects of organizational and environmentalcontingencies on the relationship between retailinginnovation and performance constitute an avenue for futtireresearch. Illustrative of the relevance of organizational andenvironmental contingencies is the following: retailinginnovations of Type A (multiple store formats versus singlestore format), pursued by retailers of Type B (non domesticretail entrant from mature market versus entrenched domesticretailer), under market stmcture conditions of Type C (maturemarket versus emerging market versus less developedmarket), will lead to performance of Type D (superior versuspoor performance).

ConclusionAs the scope of retailing further expands and more

retail firms globalize, they face new challenges. Innovationsin retailing are an imperative in order to transform thesechallenges into opportunities and successfully compete.

particularly in mature markets and less developed markets.Against this baekdrop, in this paper, we explore (1) consumerbased, (2) industry based and (3) legal/regulatory basedchallenges and opportunities that mature markets, emergingmarkets and less developed markets present to retailers andthe associated innovation challenges.

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(Received 9* Febmary 2012, accepted 16* April 2012)

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copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written

permission. However, users may print, download, or email articles for individual use.