December 30, 2009

Harvard, Insead & Nielsen talk global retailing

Professor Marcel Corstjens, INSEAD (photo: Mark Mackenzie)
Insead Professor Marcel Corstjens wanted to know why retailers internationalise and why they fail or succeed in foreign countries (photo: Mark Mackenzie)
An invitation from Marcel Corstjens to a transatlantic videoconference on the globalisation of retailing is a challenging proposition. Corstjens (60) is Unilever Chaired Professor of Marketing at INSEAD, the famous international business school in Fontainebleau, France.

Corstjens (60) is Unilever Chaired Professor of Marketing at INSEAD. Among his best-known publications is the retail classic "Storewars: The Battle for Mindspace and Shelf Space", co-written with his wife Judy, on strategies in the consumer goods industry.

Corstjens' intellectual sparring partner on the other side of the pond was Rajiv Lal, the Stanley Roth Senior Professor of Retailing at Harvard Business School, where he supervises the retailing curriculum. Among other things, Professor Lal is a recognised expert on India.

The teleconference was ably flanked by Jean Jacques (JJ) Vandenheede, senior retail industry analyst for ACNielsen Europe.

The participants wish it to be made clear that all statements were made within the scope of an informal talk and therefore do not represent official INSEAD, Harvard or Nielsen positions.

"Retailers are no longer planting flags in ever more countries" 

Gentlemen, why do retailers expand abroad? Is it because their home markets have become too small for them as was the case with Ahold and Delhaize Group in the Netherlands viz. Belgium?

Marcel Corstjens: This wouldn’t seem to apply to Colruyt in Belgium. Colruyt has virtually no sales outside Belgium, is successful and yet still believes that it has plenty of growth opportunities in the country.

Jean Jacques Vandenheede, Nielsen (photo: Thomas Fedra)
Jean Jacques Vandenheede, Nielsen (photo: Thomas Fedra)
Jean Jacques Vandenheede: I think it has more to do with a moment of opportunity. Delhaize Group decided to acquire Food Lion in the U.S. at a time when they had just sold some hypermarkets in Belgium and the dollar rate was very low. At the time it simply made sense to invest it in a country where they saw opportunities.

Can a retailer get good short-term returns from going international or is it a purely long-term game? How low-hanging are the fruits from international expansion for retailers?
Vandenheede: In my opinion you need a long-term perspective of ten to 15 years in order to get a return on your investment. You need very deep pockets, and there are no shortcuts. You also need a certain scale.

Rajiv Lal: Sales growth can be short-term, but profits are long-term.

Many retailers have financed much of their national expansion by using the negative working capital from their suppliers’ payment terms. Why can’t this also be used to expand cheaply abroad?
Corstjens: Even if you take a very successful retailer like Tesco in the UK, when they started, for instance, in Poland, obviously, they were very small, so they weren't such a great client for local suppliers.

Also Polish customers didn't know Tesco and therefore its private label offer, which earns the company so much money on its UK home market, took time to gain credibility with local consumers.

What you said in your first point may be the case as regards local suppliers, but surely this will not also apply to international brand manufacturers?
Corstjens: True, but that’s not the real point. Local suppliers will still make up the greater part of Tesco’s international business.

Vandenheede: A retailer usually has to invest heavily in marketing when entering a new country in order to make local consumers familiar with a new name.

Even when a big international retailer starts up in a new country, generally they will only have a few stores, so customers will have to drive a long way to shop with them rather than at their usual local store.

So you have to reward your customers by giving them added-value one way or another, whether that means offering low prices, heavy promotions or high marketing costs.

Corstjens: Obviously non-food is different, and you can play a multinational game from the start because the products are virtually the same everywhere. You can negotiate with Philips, Sony, Toshiba etc. world-wide, but food is obviously much more local.

So internationalisation needs deep pockets and a long-term perspective?
Vandenheede: I think that this is very much the reason why there has been a kind of reversal in international expansion philosophy over the last few years. If you go back ten years, it was very much about planting flags in ever more countries. Instead retailers are picking their battles very carefully and selecting markets rather than trying to be in 22 countries at once.

Corstjens: On the other hand, you have a company like Tengelmann who certainly spent nearly 30 years financing A&P in North America only to fail miserably. They did have a long-term perspective, but still lost a lot of money and now have only a minority stake in the operation.

Could it have been that top management at Tengelmann acted too autocratically?
INSEAD-Professor Marcel Corstjens (photo: Markt Mackenzie)
Professor Marcel Corstjens, INSEAD (photo: Markt Mackenzie)
Corstjens: Not necessarily. There have been many examples where autocratic management behaviour seems to have been one of the reasons for success. If you look, for example, at Tesco, which is generally considered to be successful internationally, they have a strong leader in Terry Leahy and he calls the shots.

If you have a benevolent and competent dictator, who knows exactly what he wants, then things get done. Walmart founder Sam Walton was like that; the owner of Mercadona is like that; and Colruyt is like that.

Rajiv Lal, Harvard professor (photo: Harvard University)
Professor Rajiv Lal, Harvard (photo: Harvard University)
Lal: If you have an efficiency-based value proposition rather than a value proposition based on local market needs, then central autocracy has its merits over a format which has to evolve and modify itself to local conditions.

Obviously, it should also be clear what is to be done from head office and back office as well as what should be done locally. Walmart has learned from its former difficulties abroad and struck a clear balance between the two.

How should retailers manage their international operations? If they run every country independently, they’ll forgo profitable synergies; but if they focus on synergies, they’ll lack local adjustment.
Vandenheede: I think that, when one talks about centralization, one is really talking about the centralization of a number of principles. You cannot centralize execution, and I know of no retailer who acts internationally where execution is centralized.

They centralize principles, basic ideas around the format, but execution always tends to be, even in non-food, very local. That is where real retail skill lies. It’s when you are able to do this well, that you see it working well.

What exactly do you mean by execution?
By execution I principally mean what categories one carries or not. It’s also about the size of the store and how that store is sub-divided. It is a number of those fundamental principles which are important. Even if you go to an Ikea store, where you feel familiar with the set-up anywhere throughout the world, there will be strong differences in terms of execution.

Corstjens: I don’t quite agree. At Ikea each country manager actually has a list of options which he or she cannot go outside. They can only choose from among a fairly limited listed of options.

Let me rephrase, the last question. How can the retailer profit from group synergies yet at the same time nurture local interface with the shopper?
Vandenheede: This is the oldest question in retailing. After so many years, we are still asking this question, and the reason why we are still asking this question is because there is no clear answer. This is because there are examples of strongly centralised and strongly local retailers, both of whom are successful.

You see very highly-integrated centralized cost-driven systems which work, as with Aldi, but also ones such as ICA of Sweden, which is run by independent store owners who have a lot of individuality and who bring a lot of local differentiation.

This makes centralization more difficult, but they gain through individuality and benefit through execution and local connection with each community. In this respect, almost every retailer on the planet has gone from one organizational extreme to the other and they have sometimes passed each other a few times on the way.

If you look at Auchan’s Mulliez family, they are in many different businesses and their number one principle is no synergies, yet they seem to be successful?
Vandenheede: This is much more a matter of opinion than a matter of science. Mulliez will tell you that what he loses in efficiency on the one hand, he gains on the other. At the end of the day, however, the only way is to try out an existing model and measure any modifications.

Lal: The prerequisite for implementing change is good management, and that is not always available. If you look at Ahold and Delhaize, who were ultimately successful in the States, they both bought companies with good management. This was one of the main factors for their buying those companies.

They could have had all the ingredients for success, but without good management they would not have bought the company. Without good management, there is no-one to make good decisions as to where to bundle synergies and what to leave alone.

Corstjens: Auchan keeps each retail concept as virgin territory. I have been told that Auchan and its specialist chain subsidiary Décathlon don't even buy bicycles together for their stores. The fact that they are successful in what they do still doesn’t necessarily mean that they could not be much more so, if they applied and capitalised on the synergies within the group.

Who has been really good at internationalising their concept apart from the obvious examples of Carrefour, Tesco, Metro C&C, Aldi and Lidl?
Vandenheede: I don’t think it’s right to reduce this to individual companies. I think it’s more a question of exportable retail formats. For instance, the hypermarket concept as a big entity offering everything under one roof is a very marketable proposition to countries which are not very mature in terms of store formats and assortments.

There is no country to date where the hypermarket has not worked as a starting catalyser.

Hypermarkets, hard discount, C&C — what is the key to a successful international format?
Vandenheede: The fundamental element is that you have to give shoppers a reason to change their behaviour. You have to give them enough goodies so that they have a reason for changing their shopping habits.

What type of goodies do you mean?
Vandenheede: Well, if you take a hypermarket entering a threshold economy, for example, it is usually starting on a market dominated by traditional, non-self-service retailing. Therefore it offers an element of choice and price, and these two goodies are flanked by convenience, where you have everything under one roof.

These goodies combined seem to be enough to make a part of the consumer base to modify its shopping behaviour. That logic also worked in the US because that is exactly what Walmart did. It brought existing products found in other stores, but it offered more of them and at a cheaper price.

So the hypermarket is a particularly successful international retail format?
Vandenheede: The hypermarket format, unlike a hard discount store, also has the advantage that you can operate just one single outlet successfully without needing 100 stores to be profitable.

Auchan has proven this. It has shown that with only two, three or four stores in one country you can gain sufficient scale. Look at what Auchan is doing today in Moscow, they don’t need 300 stores.

They might have 300 eventually, but they can still be profitable with only a few. So there you have the advantage of big guns. If you export a hard discount model, then, obviously, that is much harder. It is virtually impossible to operate just one hard discount store and still be successful because you won’t have economies of scale or enough goodies to change consumer behaviour.

What role does convenience play in international expansion? Can convenience-oriented formats internationalise successfully?
Vandenheede: Today, if you go to China or to south-east Asia, the mini-markets are the fastest-growing format and not the hypermarkets. They are so successful because they are growing like mushrooms. They are what we would have called superettes in the old days.

They are small self-service stores, but they are independently run, supplied via a wholesale model, and you can build them by the hundred every year.
Vandenheede: In Indonesia there are now over 10,000 mini-markets. Local chains Alfamart and Indomaret alone added over 1,000 such stores during 2008.It's not just a trend in Indonesia. In Malaysia, for instance, the convenience store operator 99 Speedmart has opened 46 outlets since June 2008 and now has 122 stores in total.

Lal: Tremendous competition also comes from the mini-market-type local stores (kiranas) in India. In the 1960s, supermarkets were advanced by the government and failed, simply because they were government-controlled. Staff service was bad; merchandise was in the shop for a very long time; inventory wasn’t replenished etc.

The kiranas buy from the fresh market at 4 a.m., deliver it to your home, help you with the financing and are highly inventive. Their employment costs are low because they are often family businesses etc. So they are very difficult to compete against.

On top of that, they are supremely “convenient”, you can call someone from your home and ask for four eggs and in 15 minutes a child delivers them to you.

So that’s the kind of service all modern retail formats are up against. In every locality and in every place where there are high-rise apartments you will have one or two such stores. So the question is: How do you succeed against that type of competition, if you want to introduce a new self-service concept?

Are there then no instances of successful local retailers offering modern self-service formats?
Lal: You also have stores such as “Big Bazaar”, which have become quite big in India now because they provide a pleasant shopping environment. Similarly, there is a chain store called “HyperCity” which is highly successful and which runs up-market stores similar to Waitrose in the UK.

However, these are only concepts for the big cities such as Madras, Delhi or Bombay etc. These formats are for the ten-million-plus cities in India and there they will succeed. But, if you go beyond the big cities in India, you are faced with the kiranas.

Vandenheede: Success in threshold economies essentially depends on understanding how local people eat and how they buy their food. In India you buy today what you are going to eat and therefore cook today. This also has an element of cash-management to it because, if I buy every day, I spread my food expenditure more equally over the week.

If I go to a supermarket or a hypermarket, I have to put up a lot of cash up front; I also need to have space to store things and I need to have a fridge. So, even if you go to Japan, it is a market where people shop every single day, and that’s still the model today. It all has to do with local habits in terms of how I cook and how I preserve food.

So modern retail formats don’t bring any goodies to the table in India?
Vandenheede: Probably one of the most appreciated goodies in Asia is hygiene. Some people have greater trust in modern stores in terms of product hygiene than in traditional formats. But it remains to be seen, if there are enough people who can afford to pay for this trust. Some people might, but is it for everybody?

When you talk of hygiene, presumably you are referring primarily to fresh produce?
Vandenheede: Obviously. As a purely personal guess, I am quite sure that the next Sam Walton in terms of fresh is going to come out of Asia. There is someone somewhere in Asia who is going to redefine how fresh produce is sourced and delivered.

The essential questions are: What makes the Asian consumer have such a strong trust in his local supplier, and how can this be replicated? I don’t see anybody in our western world working intensively on this and really trying to come up with something. I am sure that, if you want to be successful with a modern store in threshold countries, this is the direction in which to go.

Somebody one day is going to come up with a model in fresh produce, and probably they will do it so well that we shall import it to Europe and the US.

Lal: This would be particularly important for India where 40 per cent of fresh produce is wasted between the time it is procured from the farmers and the time it arrives on the market place due to the lack of cold chain etc.

In India the farmers suffer both ways. When there is a glut, prices are low, and, when there is scarcity, the traders take all the money because the farmer goes to the market with his produce and can’t wait until it is physically sold because he has to go back to the fields and work.

The trader will always make the farmer wait in order to get the best prices.

Has no-one tried to help with this to date?
Local retailer "Reliance" is trying to set up a whole system in order to make market forces work more efficiently and to improve economics and increase rewards to the farmer.

So the company has decided to source directly from the farmer and bring produce directly to the market place in order to improve the rapidity of purchasing as well as reducing the amount of waste. Reliance also aims to provide farmers with information on what to sow and grow and in what quantities. Sadly, however, the implementation of this concept is lagging in a serious way.

Instead of expanding abroad, retailers can diversify into new businesses. But, while some fmcg manufacturers have been very successful at leveraging their brand equity, many retailers, with the exception of Tesco, many seem reluctant to do so. Why?
Corstjens: I remain puzzled by this. If, for instance, you take Boots, which, in my opinion, is a great retailer, they failed miserably when they tried to diversify, and I still don’t understand why. About four to five years ago, they started setting up doctor’s surgeries, dentists, botox clinics, health care clinics etc. Intuitively it seemed to make sense, but it still didn’t work, so they stopped.

Others are beginning to try. For instance, the UK consumer entertainment electronics retailer HMV is trying to get into cinemas and set up events with rock bands etc.

But why hasn’t this been done more to date? Why expand abroad when you can grow on your home market by extending brand equity?
Vandenheede: I know a lot of companies where marketing is at the heart of what they do, but I have never found this to be the case with a retailer. Retailers seem to regard marketing as a mere side-show.

Do you think retailers are foregoing opportunities, or do you think they just can’t do it?
Vandenheede: There are enough examples which prove that it can be done. Auchan, for example, has expanded successfully into restaurants. Tesco is attempting it in personal finances.

Corstjens: There are a lot of people who would appreciate having the option of choice for extra services. Some would love to pay, for example, Boots for extra health services.

Why is it that retailers still think that their key asset is real estate and not their loyal shoppers? Retailers should start asking themselves what they can do with their shoppers rather than what they can do with their brick & mortar stores.

Lal: I think that, in many cases, it is quicker to expand abroad than to expand laterally on one’s own market into new franchises. Take, for example, Tesco in the UK. The key to its diversification beyond food is trust, but can you name one other retailer in the world which has an equity on trust today?

Corstjens: Aldi in Germany? Walmart in the US?

Vandenheede: Or take ICA in Sweden, Migros in Switzerland, Mercadona in Spain or BIM in Turkey. There are also a number of countries where retailers are taking over the post office. This is because post offices are too expensive to run separately, so increasingly they are being placed in stores where the real estate already exists.

Also stores have longer opening hours. I have seen models working where the whole operation is printed on the same till receipt.

So should retailers be more creative in going beyond their traditional competency of moving goods from warehouse to check-out?
Vandenheede: This lack of initiative is not just a retail problem. I have worked with brand manufacturers who admit that their organisation is not ready to accept significant change. However, when they do, I find it significant that they usually set up an entirely separate business unit to handle the new product.

The logic behind this is that a small different business will devote 99 per cent of its attention to the new product and make it the core business. Whereas big entities that move trucks, ship cargoes etc. find it very hard to start devoting their attention to little things.

Perhaps one of the first attempts by retailers to extend their business model was their move into home shopping. However, with the notable exceptions of Tesco and Ocado, generally they don't seem to have been very successful at e-commerce. Comments?
Corstjens: I think it is about finding the right business model to do this profitably. If this becomes possible, retailers are going to have to ask themselves what they intend to do with all their real estate. Retailers would gain great benefits from focusing more on their shoppers as their key asset rather than on their real estate.

Vandenheede: At the end of the 1990's, everyone was jumping on the e-commerce model, but how many have actually ever made money with it?

Perhaps one of the reasons why retailers have conspicuously failed to leverage their brand equity is because they are worried about increasing both the complexity and risk profile of their businesses?
Vandenheede: This is where things become quite tricky. When you look at the processes of innovation, they often represent a disruptive model. It is certainly very hard to create a disruptive model out of an existing business model.

There are only a very few who have succeeded in this. This creates opportunities for newcomers in the way that Walmart and Carrefour were once newcomers. I think that these transformations happen, but one of the key characteristics to the evolution of retail models is that they take a very long time.

Surely, in the age of the internet everything is moving very much faster than in the past?
Vandenheede: When, for example, did the hypermarket reach maturity in Europe? Obviously this depends on the country, but it took around 40 years since the creation of the concept in 1962. It didn’t stop growing in Europe till 2002.

Look at India, for example, where the government has frozen foreign retail investment because it is worried that millions and millions of small shops will disappear if it allows big modern store operators to enter the country. It could take up to 50 years before a significant amount of the kiranas have disappeared for good.

This may sound exaggerated, but it is very much the type of time span these things take. I admit that life is moving faster and we are living in a modern world.

Life cycles may not take another 40 years, and cycles will become shorter over time, but still clicks are not going to totally replace mortar in only three years’ time. Such replacement cycles are still going to take ten, 15 or even 20 years.

So a number of people are going to have to take a gamble. Think of the guys who invented the hypermarket, there are still people who remember when it was a gamble. At the time, it was a survival strategy for Carrefour because their supermarkets were failing.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Im Elfenbeinturm' by international editor Mike Dawson on page 27 of
Lebensmittel Zeitung, no. 47, 20.11.2009

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