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.