Global retail pitfalls
Marcel Corstjens: "Some industries can’t travel across borders as well as others"
The latest holy cow they have attempted to slaughter is the globalisation of retailing.
Admittedly, both men do not claim that there are no retailers who succeed internationally. However, they contend that internationalisation doesn't usually increase sales growth or profit margins for publicly-quoted grocery retailers.
Despite their willingness to back their opinion with econometric analysis, this is a brave statement to make when top retailers such as Metro Group and Carrefour already operate in 30-odd viz. 40-odd countries.
CEOs lauded by analysts
It is braver still when one remembers that Casino, Auchan, Metro Group or Schwarz Group post around 60 per cent of their annual revenues outside their home country.
Corstjens's and Lal's iconoclastic ideas probably also won't make them too many friends in the retail world. After all, most CEOs seem to enjoy travelling to exotic places and being lauded by analysts and the media for doing so.
Admittedly, most people are aware of the country risks international retailing involves. In emerging markets these can include natural catastrophes, state bureaucracy and corruption, mafia-type organisations, or simply double-digit wage hikes and high personnel fluctuation.
In western markets, established competition, restricted planning permission, high wage costs, and ingrained local consumer habits can all spoil a cross-border retailer's fun.
Yet, the politically-correct consensus in retail management seems to be that internationalisation was, is, and always will be a very lucrative game to play.
Interestingly, very few of the global retailers we confronted with the ideas first expounded by Corstjens and Lal in the Harvard Business Review (April 2012 edition: "Retail Doesn't Cross Borders: Here's Why And What to Do About It") wanted to take up the intellectual challenge.
Where the bang on the buck?
Only Metro Group pointed to the 18.8 per cent ROCE its worldwide Cash & Carry operations achieved last year. An otherwise taciturn Walmart stressed how the net sales growth of its international division exceeds that of its home market in the US.
As even most PLCs don't breakdown investment and profits on a country-by-country basis, it is very hard for the journalist to act as honest broker between global retail giants and the groves of academe.
Thus, the debate is set to continue between the many who love blue water and foreign adventure and the few who dare to ask whether it might not be better sometimes simply to stay at home.
It is only fair to conclude that both university professors do articulate in their research conditions for grocery retailers to be successful internationally.
However, these are notably more cautious in tenor than the irrational exuberance that can all too easily lead retail globalisation into becoming a costly exercise in mere flag-planting.
Professor Corstjens and Professor Lal, there are many examples of corporations from Boeing to Apple, Disney or Unilever who have succeeded in going global. Why are you so sceptical when it comes to grocery retailers?
Some industries clearly can’t travel across borders as well as others. With a few exceptions, the benefits of globalisation have accrued less to retailers.
Our research (we carried out a battery of econometric analyses to identify the effect of internationalization on sales growth and profit margins) shows that on average, the extent of internationalisation does not have a statistically significant effect on their revenue growth rates or profit margins.
Instead, home market revenue growth rate remains the major profit margin driver.
The sales of the world’s ten largest retailers tripled from 2000 to 2011, but their global sales more than quintupled. Isn’t the globalisation of food retailing a reality?
Firstly, global food sales quintupled from a very low base. No grocery retailer today operates in all five of the world’s largest retail markets, i.e., the US, Germany, Japan, the UK and France.
Walmart, the number 1, doesn’t operate in Continental Europe; Carrefour, the number 2, doesn’t operate in the US, Germany, Japan or the UK.
Tesco, the number 3, has no business in Germany, France or Japan and only has a minor presence in the US. Kroger nor Target, the number two and number three US retailers, have made any significant overseas investment yet.
Furthermore, every retailer has tasted failure abroad. Carrefour has failed in its attempts to enter the US, Japan, Austria, the Czech Republic, Germany, Norway, Portugal, Slovenia and the UK, and has recently admitted that it makes a loss in Greece.
Tesco has withdrawn from Japan, Taiwan and France and makes a relatively big loss on only a small presence in the US. Walmart had to pull out of Germany and South Korea. Metro Group has not been successful in the UK or Denmark.
But the fact remains that Carrefour operates in 38 countries, Walmart in 15 and Tesco in 13 countries….
At first blush that sounds impressive, but retailer country counts don’t compare favourably with those of their own suppliers. Coca-Cola markets its brand to around 200 countries, P&G to 180 and Danone 120. International retail players are remarkably absent in most countries.
In numerous markets, local retailers, such as Mercadona in Spain, Jerónimo Martins in Portugal, and Coop Italia in Italy, or multinationals whose home base is in the country concerned (Walmart in the USA, Carrefour in France, or Tesco in the UK) occupy dominant positions.
This would suggest to me that standard globalisation strategies haven’t worked in retail like they have worked in many other industries.
Why then have Aldi, Lidl and Metro Cash & Carry been relatively successful internationally?
The German hard discount proposition extends across borders better than other formats because every country in the world has a sizeable segment of price-conscious consumers who are prepared to accept no-frills offerings.
Also, cash & carry retailers like Metro Group can enter foreign countries at a relatively undeveloped stage because they can serve productively the needs of local mom & pop stores.
Why have so many other retailers failed to internationalise successfully?
Internationalisation can divert management attention from what’s happening at home. Past troubles at Walmart in the USA and at Tengelmann in Germany as well as current ones at Carrefour and Tesco in France and the UK clearly illustrate this.
Also, what is critical is ‘local scale’ as opposed to planting flags, and it’s tough for international retailers to enter overseas or foreign markets by acquiring large local players because very few of them want to sell in developed markets.
Organic growth isn’t much of an alternative due to high real estate costs, entrenched competition, and, often, a lack of suitable sites.
All these factors may apply to developed markets, but how about the opportunities in threshold economies?
In emerging markets, few chains have developed large networks of stores. Retailing is usually local in those nations, and the industry is highly fragmented. Also, consumers in developing countries perceive foreign retailers to be premium players.
Food manufacturers such as Mars, Nestlé, Kraft, Danone or Unilever have all succeeded in creating global brands. To what extent are these retail internationalisation failures also due to differences in national consumer tastes?
Grocery retailers offer shelf space, which is essentially a commodity. Unlike food suppliers, who can profitably cater to one consumer segment throughout a country, mass-market retailers must compete for every consumer in the economically diverse catchment area of each store.
They don’t enjoy the luxury of selecting slices of consumers for a whole country so they have to make every store profitable despite the mix of clientele in the surrounding area.
Given all these problems, why do retailers try to globalise at all?
The reasons include a quest for greater economies of scale, a need to diversify risk, a desire to attract fresh talent and create new opportunities for top managers, and a need to overcome regulatory constraints on home markets.
Above all, earnings expectations have forced major multiples to enter overseas markets.
Retailing is a high-fixed-cost, low-margin business so retailers have to operate a large network of stores in each country in order to benefit from economies of scale in purchasing, the supply chain and IT. In fine, they have to expand rapidly if they wish to remain attractive to investors.
But in your opinion, even if they do, this won’t provide investors with the high profit growth they had expected?
Globalisation is likely to contribute to revenues and profits only in the long run. For instance, it took Walmart 15 years to break even in China in 2010. What is so critical is to have a strong homebase in order to finance these prolonged losses internationally.
That is why Walmart has such a massive lead. It is a key reason why Nestlé and Migros, both giants in their respective industries, have such different international pedigrees. In retail you need a large homebase, and this is less the case for brand-owners.
So investment pressure on retailers to globalise is necessarily something bad?
I didn’t say that, but there are some pitfalls. Due to the unrelenting pressure to grow, many globalisation gambits are opportunistic and can jeopardise carefully crafted long-term strategies.
For example, Walmart’s move into the UK in 1999 via the purchase of Asda had not been previously planned. The Americans had intended to invest in their undersized German subsidiary, but quickly stepped in when Asda announced that it planned to merge with Kingfisher.
The move caused internal problems and lead both to the resignation of Walmart’s international boss, Bob Martin, as well as to a complete failure in and withdrawal from Germany.
Why didn’t you include on your list of reasons for going global the advantages of international purchasing?
Especially in ‘food’ the share of central purchases in retailer sales is never as large as expected due to the prevalence of local tastes. On average, more than 70 per cent of sales originate from local producers.
Notwithstanding their claims, most multinational retailers aren’t organised enough to capture gains from global procurement. Even if they are, they run the risk of overloading local assortments with products from global suppliers.
These retailers end up selling the deals they have bought instead of buying what they can sell. Believe it or not, Asda is selling Hershey chocolates and Kisses in the UK.
What must retailers do to succeed in foreign markets?
Firstly, they should explore all options for profitable growth on their home market because it is always the linchpin of globalisation. These can include new retail formats, online offers and customer services.
The stronger a retailer’s market position at home, the better its chances of sustaining overseas investments. In fact, the tremendous hype about globalisation shouldn’t blind retailers to opportunities on their own home markets.
So continued success in the home market is the recipe for international success?
It’s necessary, but not sufficient. Unless international retailers enter developed countries by acquiring a strong local player, they must offer something which shoppers perceive as new, different and valuable.
When Walmart tried to export its discount concept to Germany, it failed miserably because it was like carrying coals to Newcastle.
The mixed response to Tesco’s US venture, Fresh & Easy, provides a more recent illustration. American consumers don’t feel the format is novel enough.
Related articles in German: By Mike Dawson in Lebensmittel Zeitung, no. 43, 26.10.2012