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Global Powers of Retailing Geographical Analysis

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For purposes of geographical analysis, companies are assigned to a region based on their headquarters location, which may not always coincide with where they derive the majority of their sales. Although many companies derive sales from outside their region, 100 percent of each company’s sales are accounted for within that company’s region. Europe, U.S. shares of Top 250 fall Composite sales growth for the European retailers outpaced the Top 250 retailers as a whole in 2010. Nevertheless, for the second year in a row, the number of European companies among the Top 250 declined, from 92 in 2009 to 88 in 2010. That is partly due to the exchange rate effects of a weaker euro relative to the U.S. dollar in 2010; it is also the result of several significant divestments by European retailers, which resulted in fewer European companies meeting the 2010 sales threshold for inclusion in the Top 250. Among the “Big 3” European economies, sales growth and profitability of the German companies lagged their counterparts in France and the U.K. Since 2007, the Asia/Pacific region has gained as a share of the Top 250. In 2010, as in prior years, however, the region’s statistical gains are mostly the result of the growing strength of the Japanese yen against the U.S. dollar, allowing more Japanese retailers to move into the Top 250. Composite sales growth among the Japanese companies was a sluggish 1.5 percent in 2010, far below the region’s overall 4.7 percent growth rate and, by far, the lowest of all regions and countries analyzed. Excluding Japan, composite sales for the 15 other Asia/Pacific retailers grew a robust 10.3 percent, and this group’s 4.6 percent composite net profit margin was more than double that of the Japanese retailers.

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Below-average composite retail sales growth for the North American retailers led to a decline in the region’s share of Top 250 companies and sales in 2010. This was especially true for U.S retailers, as consumer pessimism returned amid continued high unemployment and growing fears of a double-dip recession. The region’s profitability was strong, however: With a composite net profit margin of 4.1 percent, North American retailers outperformed the Top 250 as a whole. Productivity, as measured by return on assets and asset turnover, was also well above average.

Strong growth and profitability continued in the Latin America and Africa/Middle East regions. Latin American retailers, in particular, outperformed their counterparts around the globe. Seven of the 10 Top 250 Latin American retailers posted double-digit sales increases, resulting in a composite regional growth rate of 18 percent, and the region’s composite net profit margin of 4.7 percent led the industry. Top 250 retailers based in Africa and the Middle East also enjoyed robust growth in 2010, and they generated the highest compound annual growth rate over the 2005-2010 period of all regions.

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France, Germany most globally active; Japan least active
The level of globalization among the Global Powers of Retailing, as measured by foreign operations as a share of total Top 250 retail sales, rebounded to 23.4 percent in 2010 from 22.2 percent in 2009.

European retailers remain, by far, the most globally active. They have reduced their dependence on their home markets, where sales have stagnated in recent years, and made expansion into more attractive foreign markets a priority growth strategy. Nearly 40 percent of their 2010 sales were generated by operations outside their home countries. For Top 250 retailers based in France and Germany, foreign operations generated more than 40 percent of overall sales. This high level of globalization accounts for the significantly larger average size of the French and German retailers.

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Among all Top 250 retailers, 40 percent were single-country operators in 2010. By contrast, less than 20 percent of European Top 250 retailers operated exclusively within their national borders. All 13 French companies operated internationally, most expanding well beyond their home country as evidenced by an average 30.1 countries with retail operations. As a group, the European retailers averaged 14.8 countries, the most of any region. Their large and expanding global presence is being driven, in part, by a growing number of franchised and licensed stores being opened around the world by top European fashion and luxury goods retailers.

With a vast domestic market to serve, North American retailers remain the largest, with an average size in excess of $19 billion. In 2010, more than half of the region’s Top 250 retailers continued to operate only within their domestic borders; nine of the 10 Canadian companies did business only in Canada. Just 14.3 percent of Top 250 North American retail sales came from foreign operations in 2010. Still, this was an increase of 1 percentage point from the prior year. This trend is expected to continue, especially as more U.S. retailers move into Canada or Mexico.

Within the Asia/Pacific region, Japanese retailers remained quite insular: they do business in an average of only 2.6 countries, with just 6.7 percent of sales coming from foreign operations. More than two-thirds were single-country operators in 2010. Excluding Japan from the analysis, the other Asia/Pacific retailers were much larger, averaging $14.2 billion in 2010 retail sales, and much more likely to operate internationally. This group operated in an average 4.9 countries and derived 16.6 percent of combined retail sales from foreign operations. Only one-third had yet to expand beyond their home country.

All eight of the Top 250 retailers based in Africa or the Middle East operated outside their home country in 2010, doing business in an average of 9.8 countries, but 85 percent of their combined sales still came from domestic operations.

Five of the 10 Latin American companies in the Top 250 operated only within their domestic borders in 2010. While this region had the smallest global presence, operating in just 2.1 countries, on average, foreign operations accounted for nearly 20 percent of total sales. This is largely due to rapid expansion within South America by two multi-format Chilean retailers: Cencosud and Falabella.

Top 250 raise exposure in foreign markets
To get a better picture of the geographic distribution and global expansion of the Top 250, companies also were assigned to one of 12 sub-regions based on their headquarters location, and their retail activity in each sub-region was tracked.

Following a slowdown in international expansion in 2009, the world’s largest retailers raised their exposure in foreign markets in 2010. Sixty percent (149) of the Top 250 retailers operated in more than one country in fiscal 2010, and nearly 80 percent of them (118 of 149) operated in more than one sub-region.

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Forty retailers began operations in a new country in 2010, with a combined total of 88 new market entries involving 57 countries located in 11 of the 12 sub-regions. It should be noted that these numbers reflect new “bricks-and-mortar” retail activity only.

Nearly half the time, in 43 of the 88 international market entries recorded, the new country was located in Europe, primarily in Western Europe (20 times—particularly in southern Europe and Scandinavia) and in Central Europe (18 times—mostly countries on the Balkan Peninsula or in the Baltic region). A disproportionate share of new market activity also took place in the Middle East (14 times—primarily Turkey, the UAE and Syria) and in Africa (10 times—especially Egypt and other countries in northern Africa).

Four methods of market entry were tracked for this analysis: organic growth, franchising/licensing, joint ventures and acquisitions. The predominant method employed in 2010 was franchising, licensing or some other form of partnership, which was used for almost half (43 of 88) of the new international market entries recorded. About one-third of new market activity involved organic growth (27 times). Acquisition activity heated up in 2010, with 15 of the 88 new market entries resulting from Top 250 companies acquiring an existing retailer. Joint ventures were established as the market entry method on only three occasions.

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Retailers that entered Western European countries in 2010 did so mostly through organic growth (nine of 20 times). In Central Europe, the predominant market entry method was franchising/licensing (eight of 18 times). For expansion into Middle Eastern (10 of 14) and African (seven of 10) countries, the primary mode of market entry also was franchising/licensing.

These data indicate that in smaller or culturally different markets, retailers are more likely to enter with a partner—at least initially. In some countries, retail businesses cannot be foreign-owned. Compared with a wholly owned venture, combining capabilities and resources with a local franchise or joint venture partner can substantially reduce risk and time to market given the cultural, political, economic, legal, regulatory and labor considerations of doing business in a foreign market.

As a result, owned expansion is sometimes used as the second phase of a company’s market entry strategy. Once a retailer has had time to prove the concept in the new market and gain market knowledge, it may prefer to consolidate its interests and operate the business independently. This provides more control, greater flexibility and the ability to ensure a global image in the eyes of its customers around the world.