11/22/2010 1 1 The Globalization of Trade in Retail Services Prof Neil Wrigley University of Southampton Prof Michelle Lowe University of Surrey 2 Aims and Context Study commissioned by OECD to inform expert meeting on distribution services Aims are to: Explain how & why retail sector internationalised over the past two decades and characteristics of process Highlight current and potential future trends in the internationalisation of the sector Consider how trade, investment & regulatory policy have shaped the international activities of retailers Assess importance of e-commerce in international retailing and any potential restrictions on its development Assess policy areas and measures which might be included in the retail part of a services trade restrictiveness index (STRI)
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The Globalization of Trade in Retail Services
Prof Neil Wrigley
University of Southampton
Prof Michelle Lowe
University of Surrey
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Aims and Context
Study commissioned by OECD to inform expert meeting on distribution services
Aims are to:
Explain how & why retail sector internationalised over the past two decades and characteristics of process
Highlight current and potential future trends in the internationalisation of the sector
Consider how trade, investment & regulatory policy have shaped the international activities of retailers
Assess importance of e-commerce in international retailing and any potential restrictions on its development
Assess policy areas and measures which might be included in the retail part of a services trade restrictiveness index (STRI)
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Study written from perspective of academic social scientists
who have contributed to research and scholarship on the
retail sector and multinational retailers in the global
economy, but who are not trade policy analysts.
An important aim of the study is to ‘add value’ to the OECD
debates from that wider perspective.
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Sector Background
In all OECD economies, distribution sector provides a crucial
and dynamically evolving link between producers and
consumers.
Sector typically offers major contribution to:
economy-wide employment – 13-17%
business activity – 25-30% and GDP 8-17%
Within distribution sector (including both retail and wholesale
trade) majority of these contributions provided by retailing
an industry which over the past three decades has
increasingly been viewed as dynamic and innovative
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During 1980s and 1990s, retailing transformed by three
interrelated forces
1. Remorseless processes of concentration – ultimately
produced some of the largest firms in national economies
– firms which progressively increased their bargaining
power relative to suppliers
2. Emergence of retailers as lead firms in buyer-driven
supply chains – which progressively shifted from ‘supply
push’ to ‘demand pull’ in character
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3. Processes of ‘lean retailing’ - integrated logistics and supply chain management methods which underpinned ‘just-in-time’ demand-pull supply systems allowing substantial reductions in retailer inventory holdings and amount of capital tied up in those holdings
Figure 1:The emergence of ‘lean retailing’ - reductions in retailer inventory holdings in the 1980s/early 1990s by the UK’s leading retailer (Tesco)
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1961 1971 1981 1991 2001
Sto
ck D
ays
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From the mid 1990s onwards, the transformed retail
industries of OECD countries at forefront of these three
interrelated transformations began a period of sustained
engagement with the global economy – essentially as
exporters of retail capital and expertise.
Other OECD countries, whose retail systems remained
essentially ‘traditional’, experienced that engagement in an
importer mode
Late 1990s rapid acceleration of retail FDI, largely by
European and US retailers and primarily into the emerging
markets of Asia, Central/Eastern Europe and Latin America
Emergence of retailing as one of the driving forces of
economic globalization
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The Lead Role of ‘Grocery’ Retailers
Within retail industry food and ‘fast moving consumer goods’
sold through ‘grocery’ outlets provide the largest element of
total sales
In UK retail sales through ‘grocery outlets’ accounted for 48.8%
of total retail sales and 13.1% of total household expend 2005
It was essentially these major grocery/fmcg-retailers who
powered the emergence of retailing as one of the driving forces
By 2008 12 retailers derived over $25 billion p.a. from their
international operations – operating on average store networks
in 18 countries
Other studies (Dawson top 100 retailers, Deloitte top 250
retailers) show both international sales and average number of
countries of operation increasing over time
All listings of world’s leading retailers show domination by
grocery retailers – 134 of top 250 in Deloitte 2008 list. Next
largest groups are ‘hardline leisure’ & ‘fashion goods’ retailers
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Driving Forces
Acceleration in retail FDI late 1990s driven by:
longer-term growth opportunities perceived to be offered by emerging economies with previously largely ‘traditional’ retail systems
consolidating, and often increasingly tightly regulated, home markets of these firms
capacity of largest of these firms to leverage their increasing core-market scale and free cash flow for expansionary investment, in order to secure the longer-term higher growth opportunities offered by the emerging markets
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Process facilitated by:
full or partial liberalisation of trade and market access in many of emerging economies
availability of low-cost capital
emulation of the ‘first mover’ benefits seen to have accrued to the early retail internationalisers
emergence/adoption of ICT technologies providing essential management tools assisting control of, and knowledge transfer within, large dispersed operations
exogenous macro-economic derived opportunities – e.g. the attractive investment and market entry possibilities provided by the Asian economic crisis of 1997
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Phases
Table 3: Reardon’s waves of retail transformation in emerging markets
Wave 1st 2nd 3rd 4th
Early 1990s Mid-late 1990s Early 2000s Late 2000s
Countries South America
East Asia (outside
China & Japan).
Parts of South-East
Asia (e.g. Thailand,
Philippines).
Northern-Central
Europe (e.g.
Poland & Baltic
countries).
South Africa
Mexico &
Central America
Much of South-East
Asia (e.g. Indonesia)
South-Central
Europe
South Africa
China
Eastern Europe
Russia
Other parts of
Central
America & S.E.
Asia
India
South Asia (outside India)
Sub-Saharan Africa outside
countries impacted in 2nd
and 3rd waves
Poorer countries in South
East Asia (e.g. Cambodia)
South America (e.g. Bolivia)
‘Modern’
retail market
share
mid 2000s
50-60%
30-50%
1-20%
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Resistance
Academics increasingly argued that Reardon’s image of ‘waves of diffusion’ and related concepts of ‘take-off’ imply too much inevitability of domination of emerging market retailers by multinational retailers
Fail to deal with resistance shown by both leading indigenous retailers, and by informal retail channels
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Continuing extent of this resistance illustrated by market
positions Tesco holds, and the competition it faces, in the
nine emerging economies in which it operates
In 5 of those markets - Tesco close to market leadership
Despite determined efforts and significant/continued capital
expenditure by Tesco, a local retailer retains that leadership
Given that Tesco has invested for market leadership more
systematically than many of its rivals, this demonstrates the
fallacy of any easy or inevitable route to domination of
emerging markets by multinational retailing
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The Challenge of the Regional TNCs
Figure 4: The rise of the regional retail-TNC - Dairy Farm’s expanding operations
in Asia 2001-2009
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Competitive Shake-Out
Recent feature of retail globalization is the drive for market scale and sustainable advantage
Inability to achieve market scale in a country against better placed multinational rivals or leading local chains has resulted in growing numbers of cases of strategic divestment and market exit by retail TNCS
E.g. Wal-Mart and Carrefour divested their Korean stores in 2006 leaving Tesco as only multinational retailer, and Carrefour recently announced its strategic withdrawal from South-East Asia
Alternative to divestment is use of asset swaps to secure market scale e.g. the swap of Tesco and Carrefour retail outlets in Taiwan, Czech Republic and Slovakia in 2005
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Global and Regional Sourcing and Trade
Main debates focused on local sourcing impacts of retail FDI
But important impacts also arise as result of multinational
retailers linking emerging market operations into both global
sourcing networks & embryonic regional sourcing systems
Important issues surround the pattern of import evolution
do retail TNCs act as highly efficient ‘Trojan horses’ for
imported goods, or do they reduce importing over time as
transformation of local supply networks builds supply
capacity/quality standards in host economy, leading
ultimately to stimulation of exports into home markets of
the retail TNCs
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Barriers to Trade Shaping the International Activities
of Retailers
Two broad types of barriers have important effects
1. Institutional, cultural, and organizational barriers
2. Regulatory barriers
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1. Institutional, cultural, and organizational barriers
Of critical importance to the competitiveness of retail TNCs
is their capacity to adapt to the institutional and cultural
characteristics of the international markets they enter
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Retail TNCs with different organizational capabilities and
cultures differ considerably in extent to which they invest in
and/or can achieve locally responsive strategies
They enter markets using different processes of capability,
transfer, modification and creation
Additionally, must overcome challenges relating to:
protection of knowledge
intense and localised regulatory challenge
contested relationships with their suppliers of finance
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Regulatory Barriers
Range considered in academic studies covers spectrum from:
restrictions on inward retail FDI
differential application of competition rules
shareholder equity and minimum capital requirements
application of land/property, zoning & building regulations
extent to which re-regulatory trends might be a long-term
major constraint
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Globalizing Retail and B2C E-Commerce
E-tailing taken much longer to take root than assumed in late
1990s, but acceptance increasing year on year.
E.g. in UK, e-tailing increased to almost 7% of total retail
spend in 2010 – 62% of adult population shopping online
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Vital to understand multichannel model of e-tailing.
E-commerce must not be seen as a separate market
Regulatory challenges relate to:
possibility of minimising exposure of e-tailing revenues to
taxation and other regulations by redefining point of sale
rise of virtual products, the endemic electronic piracy
relating to those products, and complexities of developing
legal retailer-driven download services
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Trends and Research Priorities
Although proportion of international sales continues to rise within world’s largest 250 retailers, increase in the average number of international markets retailers operate in been driven from the early 2000s by the relatively smaller firms in those rankings
Academic opinion increasingly querying whether retail globalization has entered new phase, characterised by:
drive for market scale and sustainable advantage
multi-format/channel adaptation – shift into convenience and hard discount formats
re-regulatory pressures
continuing and stronger than anticipated domestic-retailer resistance
rise of second-tier regional retail-TNCs
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Implications for a Services Trade Restrictiveness Index
OECD Trade Committee Working Party suggests potential measures for inclusion in STRI organized into five categories
restrictions on foreign ownership and other market entry conditions
restrictions on movement of people
other discriminatory measures and international standards
designed or interpreted so that they differentially impact the
operating costs of multinational retailers, partic if operating
larger formats
Limited academic debate which exists centred on these
issues – also some on differential enforcements of labour
laws and differential rules favouring informal economy
But little on commercial-communication and certification
rules, product labelling and liability rules, etc.
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In Conclusion
As Nordas (2008) noted the retail sector to an unprecedented level has come
‘under increased scrutiny under the implementation of international trade and investment agreements’
Trade economists and trade policy analysts who previously largely ignored the sector have recognised the growing role of retailers as intermediaries in international trade
But also essential to add the perspectives of other disciplines who have contributed to research on multinational retailing and the global economy and to inject those into OECD’s work on services, trade, restrictiveness