Revisiting retail globalization - OECD.org - OECD · 2016-03-29 · Deloitte Research – Revisiting retail globalization 13 Revisiting retail ... whatever economic doldrums retailers

13Deloitte Research – Revisiting retail globalization

Revisiting retail globalization

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 of recession, and when the big emerging markets are showing signs of signifi cant slowdown and fi nancial risk, now does not seem the best time to discuss retail globalization.

Yet, whatever economic doldrums retailers fi nd 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 of revenue and profi ts 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 undertaking a 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 challenges mentioned earlier, some retailers have actually been successful in doing this.

What have global retailers done right? Choose a strategy — and then executeIt is not suffi cient 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 scientifi c 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 advantageIf there is no rule for choosing a strategy, then what is a retailer to do? The answer is to fi gure 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 fi nancial resources might be suffi cient. In a more sophisticated 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 effi cient supply chain that enables low pricing.


Learn much about local tastes and customsThe 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 diffi cult under the best of circumstances. Hence, using a mix of local 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 fi nds 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 talentThe 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, they don’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 good workers 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 offi ce and the subsidiary so that fi nancial processes can be tightly aligned.

Develop a hybrid cultureGlobal retailers face a confl ict 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 diffi culties 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 South America 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 fi nd 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 mistakesIt 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 done this. 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 scaleOften, 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 profi table enterprise will only come about with suffi cient economies of scale. Thus, opening a handful of stores here and there will not suffi ce. Yet many retailers have tried this. There are a number of retailers that have opened small numbers of stores in multiple markets, only to fi nd 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 effi ciency. 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 nicheAlthough 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 retailer entering 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 fi nd 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 suffi ce. 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 technologyTo 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-offi ce functions. They seek to develop standardization through management training sessions that are dictated from the head offi ce. Such retailers also attempt to standardize information technology infrastructure globally.

Deep pocketsIt 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 achieved by 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 outFinally, 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 fi nd suffi cient 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 ineffi cient 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?ArroganceOne 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 fl ashy 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 middle class 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 refl ects 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 suffi cient. It refl ected a failure to learn about the needs and attitudes of the local market.

Interestingly, such stories demonstrate retailers willing 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.

Insuffi cient commitment of time and resourcesSuccessful retail globalization requires time to learn and scale to achieve effi ciency. 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 effi ciency 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 marketSome 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 refl ects the needs of the market and the competitive advantages that a retailer can offer.

Underestimating the local competitionGlobal 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 minefi eld of other emerging markets.

What about the hot markets?ChinaAs 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 infl uence 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 toward domestic 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 affl uent, 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 fi eld for foreigners. Still, they continue to invest on a large scale, refl ecting confi dence about future growth and concern about the possibility of tighter regulations in the future.

IndiaIndia 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 fl ush 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 fi nancial 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 most restrictive 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.

RussiaUnlike 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 fi nancial crisis of late 2008 has taken a signifi cant toll on Russia as of this writing. The global credit crunch and lower energy prices have conspired to create fi nancial 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’ll come 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 fi nancial 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 attractive in the long run.

ElsewhereChina, 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 thoughtsMany 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 fi nd the right formula. Therefore, it is not too risky to offer the prediction that retailing will eventually be a very global industry.


AuthorIra KalishDirector, Global Economics and Consumer BusinessDeloitte ResearchTel: +1 213 688 4765E-mail: [email protected]

US Retail Industry LeaderStacy JaniakTel: +1 612 397 4235E-mail: [email protected]

Global Retail Industry Co-LeadersVicky EngTel: +1 203 905 2621E-mail: [email protected]

Richard Lloyd-OwenTel: +44 20 7007 2953E-mail: [email protected]


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Revisiting retail globalization - OECD.org - OECD · 2016-03-29 · Deloitte Research – Revisiting retail globalization 13 Revisiting retail ... whatever economic doldrums retailers

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