Need a new microwave oven and package of detergent? How about light bulbs and shampoo? Sure, you could go to your local grocery, appliance or hardware store, and perhaps a pharmacy. But chances are you’ll be making tracks to a colossus of a shop with a wide selection and low prices – a shop where you can most likely buy all of those items at once, even if you happen to be in, say, China. Welcome to the growing world of global retail, where merchandising behemoths are no longer confined by domestic boundaries. According to the 2003 Global Powers of Retailing report by STORES magazine and Deloitte Touche Tohmatsu, four years ago more than half of the top 200 retailers in the world operated in only one country. That number has since dropped to 44%. Formats vary, but many of the industry’s players operate so-called big-box retailers, such as discount stores, category killers, outlet stores and warehouse clubs, with footprints ranging from 20,000 to 200,000 square feet or more. Topping the global list is the world’s biggest company: Wal-Mart. With operations in 10 countries, it dominates the scene unlike any other player. The Bentonville, Arkansas-based firm went international in 1991 when a Sam’s Club opened near Mexico City. Since then the company’s international division has boasted respectable financial results: Fiscal 2002 sales reached $35.4 billion, a 10.5% increase over the previous year, and operating profit rose to $1.4 billion, an increase of 31.1%. In second place on the list is France’s hypermarket leader Carrefour, with a presence in more than 30 countries. Dutch grocer/food distributor Ahold and U.S.-based Home Depot round out the top four. How good are these companies at reaching beyond their borders, and how successful will they be in the future? Experts from Wharton are cautiously optimistic, noting that retail depends heavily on such disparate factors as consumer whims and the cost of real estate. “
Marshall Fisher, Wharton professor of operations and information management, says companies generally approach international expansion in three ways. “The first is simple: Don’t do it,” he says. “Ito-Yokado, Japan’s largest retailer, fell into ownership of 7-Eleven when the convenience store’s parent, Southland, was in financial trouble. A while ago, I met with the son of the Japanese firm’s founder and asked him about their plans for global expansion. His answer? They didn’t really have any. The essence of retailing is understanding customers in great depth, and they didn’t feel they would have an advantage elsewhere.
“A second method is by acquisition. Some retailers, for instance, have a very structured approach to acquisition. They mostly leave their companies alone except for ensuring that bookkeeping is standard. They then integrate the buying functions. When they have several chains of stores, they can go to suppliers and negotiate lower prices. Last, they integrate operations. They never tamper with the brand name, so customers generally don’t know who owns that store chain. But they do inject all kinds of operational efficiencies, customer service best practices, etc.”
“The third way is simply through organic expansion – just go in and open a store abroad,” notes Fisher.
Wharton marketing professor Stephen Hoch agrees that the approach should be tailored to the situation. “The phrase ‘retail strategy’ is usually an oxymoron, but not for big players like Wal-Mart,” he says. “It’s not really so much about marketing or pricing strategy. Instead, [the company] shrinks costs. It’s easy for them to execute that in the local market.” When they go into a new market, “they don’t try to figure out how price sensitive the consumers are. They just charge prices slightly below market. That builds traffic to their stores.”
In China, for instance, says Hoch, Wal-Mart sees a huge opportunity. “I think they feel the living standards are high enough in the urban areas that it would make sense. They’re betting on China continuing to grow at a fast rate. The U.S.’s per capita GDP may be orders of magnitude higher, but China’s population is obviously much bigger.”
Hoch explains that sometimes buying existing retailers or working through joint ventures is the best strategy because retailers may be unable to ramp up fast enough otherwise. “Companies don’t always feel the need for full-fledged control, so they partner with local firms,” he says. The U.K., for example, has a very different marketplace density than the U.S. and real estate is much more expensive. So a strategy based on acquisitions or joint ventures makes sense, Hoch adds.
The downside of ceding control, however, can be huge: Just recently, Ahold’s CEO and CFO resigned and the company announced it would be restating its earnings in light of a discovery that promotional payments by manufacturers to one of its U.S. subsidiaries were inflated. Several class action lawsuits have been filed against Ahold.
Assembling Your Own Furniture
No matter how a firm enters a new market, there are at least two ways it can play the retail game once it has established itself, says Fisher. “One approach is customer knowledge – to know your buyers inside and out. The other is product concept – doing something unique.”
Fisher cites McDonald’s and Swedish furniture giant IKEA as examples of concept-driven firms. “IKEA isn’t so much about knowing the customer as it is being an expert in product category positioning,” he notes.
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IKEA had an operational strategy and executed it well from country to country,” adds Hoch. “Part of it is that virtually everything is drop-shipped to stores. So there was no reason they couldn’t similarly drop-ship here. Furniture was an industry where, with most retailers, you ordered something and then waited 12 weeks to get it. It’s still mostly a build-to-order type of business. IKEA cut down that time by pushing delivery and assembly onto the customer.”How far a concept-driven enterprise can go is anyone’s guess, notes Fisher. “The question is whether Wal-Mart’s distinctive elements – the everyday low price, the people greeters, etc. – can trump the need for deep customer knowledge in each country. Is their supply chain and cost reduction strategy enough?”
And if, as in Wal-Mart’s case, a U.S. company’s roots are fairly transparent to the customer abroad, how will that affect sales? “There are two things retailers need to do. One is to adapt to the local competitive environment. The second is cultural,” says Hoch. In the current economic and geopolitical climate, it’s hard to say how reactions may change. “U.S. firms benefit from their ‘American-ness’ sometimes. But it’s a double-edged sword. At the same time that ‘American’ is an attraction – it can cause problems, too.”
Edward B. Shils, emeritus professor of entrepreneurial studies at Wharton, agrees that geopolitical and social factors are not static. “Firms can enter any country as long as they are sensitive to cultural differences and how they change over time depending on world affairs. Employing locals to manage the operations there can help, but the companies should be aware of the economic, sociological and cultural milieu in which they are operating.”
Sometimes retailers don’t do well because of stagnant or nonexistent consumer interest. As reported in Home Channel News, Home Depot did not meet expectations in Chile or Argentina, but it has done quite well in Canada. One explanation for this is that Canadian consumers were already exposed to the brand and hands-on culture of their U.S. neighbors to the south.
“Home Depot has had some problems abroad,” notes Hoch. In the U.S., “the do-it-yourself ethic was already quite strong. Home Depot provided a large assortment at good prices in what had been a regional, scattered environment. It put a lot of lumberyards out of business. In other countries, where labor is often cheap, the do-it-yourself mentality was not quite as developed. Home Depot is still struggling, for instance, in Mexico. When there isn’t a lot of disposable income, someone might barely be able to buy six concrete blocks and a bag of cement.”
Carrefour, which was the first international retailer to establish a presence in Asia, has also been successful in many countries but did not fare well in the U.S. “Carrefour didn’t stay on strategy. It wasn’t clear what they were trying to do,” says Hoch.
“Carrefour probably didn’t succeed in the U.S. because people saw the hypermarket as a bit of a European anachronism,” adds Fisher. “In this country, there’s no compelling reason to buy a refrigerator and the food to put in it in the same store.”
The conclusion? While there are no easy answers, the success of some of the big players on the global stage does suggest that it’s not impossible to export a good strategy elsewhere. “Retail is a slippery slope,” Hoch says. “The margins are often not high, so you shave an extra dollar here and there. Most succumb to that temptation. So far, players like Wal-Mart, Costco, and Home Depot are staying the course. They stick close to what they do well.”
