Monday, April 18, 2005

The Ups and Downs of International Expansion in the Retail Industry

Many retailers both in the United States and abroad are faced with the challenge of higher expected growth than can be absorbed by their respective domestic markets. In order to address shareholder expectations, these retailers take to expanding internationally. Building on domestic success, retailers often try to export their established strategies. A number of recent articles and news stories highlight the high rewards and potential failures of such an approach, raising an important question: Is it possible for a successful retailer to simply transport its strategy across international borders, substantially unchanged? The short answer, of course, is no, but a closer look at the successes and failures of the world’s largest retailers sheds some light on what it takes to effect profitable overseas expansion.
Wal-Mart, the largest retailer in the world, has experienced mixed results in its attempts to pursue growth outside the U.S. While the company has been successful in Mexico, Canada and Great Britain, Wal-Mart’s forays into Japan and Germany have been troubling, to say the least. Tempting as it may be to attribute these failures to latent WWII resentments, the truth is that Wal-Mart has not been very systematic about adapting its strategy to new environments, and has thus been at the mercy of cultural forces, both benign and malign, in all of its overseas endeavors.
Wal-Mart’s German experience highlights the need for a clear understanding of a new market prior to entry. Wal-Mart acquired Wertkauf, a successful chain in Germany, but also acquired a weaker rival, Interspar, which did not have a positive brand image. The German market abounded with complications that Wal-Mart was unused to confronting, such as price controls and restrictions on the size of its stores. The company exacerbated this problem by placing non-German-speaking Americans in charge of German operations, which not only led to culture clashes but prevented the decision makers from truly understanding the market in which they operated (though they belatedly installed a native German as director). Furthermore, Wal-Mart neglected to consider the established position of its competitors, most notably the discount chain Aldi. Aldi, entrenched in the German market with 4,000 locations, a loyal customer base and a reputation as the low-price leader, has prevented Wal-Mart from establishing the kind of brand image and supply chain that have driven its spectacular growth in the United States. This failure to perform even rudimentary market research and industry analysis has Wal-Mart playing “catch-up” amongst the Hamburgers and Frankfurters.
In light of the unsystematic mindset that is exposed in examining Wal-Mart’s German “strategy”, it’s not preposterous to suggest that the company’s success stories (such as Mexico and Britain) have arisen due to luck as much as anything else. Compare this to the British supermarket chain Tesco, which has approached international expansion with a more studied, analytical approach. Tesco’s CEO, Sir Terry Leahy, explained his company’s strategy for overseas expansion to a Wall Street Journal reporter: “We actually chose countries, originally, where the retail industry was not that well developed -- former communist countries that didn't have sophisticated retail businesses and what used to be called the Asian tigers. We chose those markets because we felt there would be rapid growth in retailing and there was not already a very strong incumbent retailer. And so that's proven to be where we could go and become No. 1 or No. 2 quite rapidly.” While this approach has not been universally successful (Taiwan, for example, has proven to be a tremendous challenge), it demonstrates a willingness to carefully consider the dynamics of the industry in each new market Tesco enters, and try to focus resources where they’re most likely to bear fruit.
Moreover, Tesco has emphasized decentralized decision-making in overseas operations, acknowledging (in Leahy’s words) that “retailing still is essentially a local business.” By allowing local management much greater flexibility and authority than is typical in its domestic operations, Tesco has avoided many of the embarrassing and counter-productive gaffes that have stymied Wal-Mart in Germany. Though this approach has led to a great number of successes, Tesco is learning that global competition (in the form of French retail giant Carrefour and, of course, Wal-Mart) can sometimes trump their systematic approach. While some markets have opened up to Tesco’s dominance easily, Carrefour and others have presented major challenges in places like Taiwan and the Czech Republic, causing Tesco to contemplate a global market with little low-hanging fruit remaining to be plucked.
As the massive potential markets in India and China become ever more enticing, how can a successful retailer build on its success and organizational competencies when expanding overseas? The key, in a word, is research. A great deal of time, money and effort must be invested by ambitious retailers to understand the needs and tastes of the local population, and to determine where a particular company’s current strategy may need to be “tweaked” to fit the unfamiliar landscape. There are some indications that Wal-Mart has learned this lesson, as it takes it time to research and understand the consumers it hopes to one day serve in the Indian market. The continued application of this approach will be crucial to Wal-Mart’s success, not only in new markets, but in those overseas markets such as China where competition promises to intensify, and perhaps eventually erode the initial achievements that arose more from good fortune, (in Chinese, fú), than from design.


Deirdre Campbell, Chuck Lyman and Jim McCabe

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