Crossing Borders

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Retailers that think outside the box and outside their country have the biggest potential for growth.

If anyone has any doubt as to the future development of retailing, they need do no more than consider the recent history, and current disposition, of Wal-Mart. The U.S. giant has a total of 6,447 outlets worldwide, of which 2,639 are located outside of the U.S. Wal-Mart serves 138 million customers weekly in 16 countries, generating sales of U.S. $15.174 billion in the third quarter last year, and reaping a profit of U.S. $797 million for the same quarter. This is impressive for a company that didn't start to expand outside of its domicile until 1991 with the opening of a Sam's Club near Mexico City.

But it is by no means the most impressive story of international diversification. As of December 31, 2005, French retailing giant Carrefour had a total of 7,030 stores worldwide, of which just 179 were located in its home territory. Carrefour is still implementing a strategy, announced in September 2004, of divesting itself of what a spokesperson describes as "non-strategic or underperforming activities." This has spurred a spate of sales and acquisitions as the group reorganizes its overseas presence. These deals include the announcement in February 2005 of the acquisition of 12 Polish hypermarkets from Dutch group Ahold, followed in March 2005 by the announcement of a strategic partnership with Aeon Japan in which Carrefour sold eight hypermarkets to its Japanese partner and the use of the Carrefour brand in Japan, as well as the right to sell Carrefour private-label products in Japan.

In September 2005, Carrefour announced a further deal with British retailer Tesco, under which Carrefour acquired Tesco's six hypermarkets and two development projects in Taiwan for 132 million euros (U.S. $157 million), and Tesco simultaneously acquired from Carrefour its 11 hypermarkets in the Czech Republic and four hypermarkets in Slovakia for a price tag of 189.4 million euros (U.S. $226 million). Tesco was a latecomer to overseas expansion, but already has 647 stores overseas, slightly more than a third of the 1,820 with which it dominates the UK retail sector.

Adam Cross, senior lecturer, International Business School at the UK's Leeds University, dubs such companies "market seekers." He says there are two types of market forces that can turn a company into a market seeker: the "push" factors and the "pull" factors. Push factors are defined by Cross as "forces at play in the retailer's home market that create pressure for it to consider overseas markets." Such factors, he continues, "can include a sense that the retailer has reached the saturation point in its domestic market; a downturn in the local economy; or even improvements in efficiency, which create staff surplus."

"Pull forces," explains Cross, "are factors operating outside the domestic market that act to attract a retail chain into considering expansion into that market. The most obvious recent example is China, which, until recently was a closed market, but has been open to non-national companies since China's accession to the WTO in 2001."

One of the companies taking advantage of that opening up of China is UK retailer Tesco. International corporate facility manager Greg Sage reveals, "Prior to opening up in China, we had people living with families on the ground in the country for three years studying how and what these households bought, how they shopped, and what their spending patterns were." Stresses Sage, "It is absolutely vital to understand the customers and their needs before entering any new market."

Dr. Elke Pioch, senior lecturer at the UK's Manchester University, agrees, but, she argues, there are other matters to be considered. "You must understand the national culture of the country you are proposing to enter," insists Pioch. "You also must understand organizational culture because the staff is the primary interface between your business and its customers, and this has implications for transposing a particular organizational culture into another market that needs to be carefully managed."

Other factors that Pioch believes need to be carefully researched include "relevant local legislation such as labor laws, planning and zoning regulations, and regulations affecting opening hours." It is also important, she believes, "to arrive at a proper understanding of the balance that is intended between locally sourced lines and globally sourced lines, especially in food." For example, she says, multiple purchase deals such as "buy two, get one free" won't work in Japan because the majority of Japanese homes lack storage space, and in many transitional economies, they won't work in food because there is a lack of domestic refrigeration.

Another obvious issue that needs to be resolved is how to enter the chosen country. There are three possible routes: joint venture (including franchising), acquisition, and organic growth. Leeds University's Cross sees several advantages to some form of joint venture, or acquisition, including quick access to local markets; local expertise and knowledge; and possible acquisition of assets such as finance, plant, technology, and distribution networks. Additionally, the new venture likely will be seen as a local company and, therefore, will not attract the interest of competition authorities, and possibly will benefit from goodwill. It is even possible, as McDonald's has done in Moscow, to form a joint venture with the local government, which will bring further advantages. While acknowledging that organic growth has some advantages, such as the ability to choose your locations in relation to population centers and infrastructure nodes, Cross points out that it does have marked disadvantages, as well. These include capital cost; possible concern by local regulatory authorities; and concerted action by existing players, who will view a newcomer in a different light than a takeover of existing competition.

Despite these drawbacks to organic growth as a chosen route, Tesco's Sage predicts that "in the immediate to medium term, the future will focus much more closely on organic growth in the markets in which we do have a presence rather than on further acquisitions."

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