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Lessons of Retail Globalization

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At a time when the global economy faces unprecedented uncertainty, when U.S. retail sales are struggling to recover and Europe’s credit markets are on edge, it might not seem like the best time to discuss retail globalization.

On the other hand, global economic growth is on the mend, with most of it taking place in emerging markets. Consumer spending is increasing rapidly in many of these markets. Meanwhile, home markets for developed country retailers are likely 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.

Why go global?
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 domestic markets. French hypermarkets come to mind. Due to regulations, they cannot easily open new stores in their home market. Consequently, they primarily seek growth elsewhere. 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 -- like Germany and Japan. 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).

Right now, U.S. retailers are expressing increasing interest in going global. That is because they face a relatively slow growing market, a relatively leveraged and now frugal consumer and increasing market saturation. Investing outside the United States is seen as a good way to maintain rapid growth. Moreover, the preponderance of global consumer spending growth is shifting away from the United States and toward big emerging markets.

What are the lessons of global retailing?

Choose a strategy -- then execute it
It is not sufficient 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; there is no scientific method for determining the appropriate strategy. Some pundits suggest that the strategy must be geared toward 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. There are plenty of examples of success and failure for each strategy, so 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 advantage
If there is no rule for choosing a strategy, then what is a retailer to do? The answer is to figure 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 financial resources might be sufficient. 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 efficient supply chain that enables low pricing.

Learn much about local tastes and customs
The best global retailers spend substantial resources and time learning about the local market. This entails understanding supply chains, regulations, sources of merchandise and, most importantly, consumer tastes and habits. The latter is the most challenging. There are examples of retailers that, even after years of research, fail to develop the right merchandising. Understanding an alien culture is enormously difficult under the best of circumstances. 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.

Use mostly local managerial talent
The 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 and they often engender greater loyalty within the organization than do 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.

The challenge is to develop local talent in a way that is consistent with the values, culture and processes of the parent company. In emerging countries like 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. 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. 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, and a long-term commitment to, that market.

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 difficulties when the local franchisee 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.

There are three lessons here: 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 find 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.

Be prepared to make big mistakes
It 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. Therefore, it must be acknowledged from the start that, to a large degree, an investment in global retailing is a gamble. And the gambler must be willing to stay at the table for more than one game.

Be prepared to invest on a large scale
Often, retailers dip their toes in the water in order to get a sense of the market. This is sensible up to a point, but a profitable enterprise will only come about with sufficient economies of scale. Opening a handful of stores here and there will not suffice, although many retailers have tried this. A number of retailers have opened a few stores in multiple markets only to find 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 efficiency -- it also 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.

A new age of retail globalization
Retail industry pundits have been predicting the imminent globalization of the industry for the better part of two decades. Although there has been plenty of globalization, the industry remains far more parochial than others such as consumer products, hospitality, telecommunications and entertainment. The issue has always been that retailing is a uniquely complicated business. It is the industry that maintains the closest and most personal relationship with consumers, often touching their lives on a weekly and even daily basis. And establishing a successful personal relationship is far more challenging in an alien culture.

Yet now may be the time that pundits are right. As success in developed markets becomes more challenging, the emerging world becomes more compelling. In addition, the experience that some global players have gained by operating in emerging markets has taught the industry valuable lessons as to what to do, and what not to do. While it will never be easy, many more companies are now ready to take the plunge. We may be on the precipice of a new age of retail globalization.