Amid an uneven and slow recovery at home and financial volatility in established European markets, U.S. chain retailers are increasingly looking to emerging global markets to expand operations, increase overall revenues and gain a competitive advantage. The reasons are obvious: Consumer spending is on the rise in many of these areas, boosted by, in some instances for the first time ever, a growing middle class. Equally important, emerging markets present significant opportunities for store growth.
“Many of our retail customers see expansion into emerging markets as a way to get into markets that are not saturated, especially in light of how competitive things have become in emerging markets,” said Michael Griffiths, global industry product director, distribution and retail, Microsoft.
In some instances, new markets are on more solid footing than older, established ones.
“Emerging markets were impacted much less severely by the 2008-2010 recession, and these markets are now proving their sustainable growth,” said Mike Moriarty, partner in the retail practice of A.T. Kearney, and co-author of the Global Retail Development Index (GRDI), an annual study that ranks the top 30 developing countries for retail expansion worldwide. The index ranks the attractiveness of retail expansion in emerging markets based on economic and political risk, the retail market, and the difference between gross domestic product growth and retail growth.
As to where the growth is, during the 10 years of international retail growth tracked by A.T. Kearney, five countries have consistently ranked in the top 10: China, India, Russia, Vietnam and Chile. The growth trajectory of the retail market in these countries has consistently surpassed other developing markets, according to A.T. Kearney.
But while Asia is key to the global economy, South America is emerging as a potential retail powerhouse. Indeed, three of the top five countries in the 2011 A.T. Kearney study were from South America.
Brazil, which is now the world’s eighth-largest economy, led the rankings with an expected GDP growth of 5% over the next few years, a large and mostly urban population, and surging retail sales. Also, the country will host both the 2016 Summer Olympic Games and the 2014 FIFA World Cup. Preparations for the events are expected to generate billions of dollars in new investments.
“South America, especially the southern part, is roaring on all cylinders,” Moriarty said. “The nations are becoming more open and business-friendly, and the consumers are becoming more globalized.”
For some reason, however, most U.S. retailers, Wal-Mart being a notable exception, have ignored South America.
“European retailers are there, and I fear they will be the ones who have the opportunity to take best advantage of the economic benefits that a rising South America offers,” Moriarty said.
The strong showing of Latin America in the 2011 study is a reflection of the faster pace of growth of the economies in the region, as opposed to a sign of falling retail potential in China or India. China recently overtook Japan as the world’s second-largest economy, while India is expected to grow even faster than China in the long run, given its younger population.
“China is a complex market,” Moriarty added, “but one with tremendous opportunities, especially in the Tier 2, 3 and 4 cities.”
Brands thinking of entering China need to be aware that Internet penetration in the vast country is immense.
“The Internet makes shoppers smarter and requires you to sharpen your strategy even more. If you open up a store, make sure the store and brand experience is in sync with what’s on your website,” Moriarty said.
As for India, the time to enter is now, according to the most recent GRDI study, with forecasted annual growth of 8.7% in the GDP through 2016 and increased consumer spending among the factors contributing to the favorable retail climate.
Foreign direct investment regulations continue to require single-brand retailers to enter India through an Indian partner or joint venture. But a committee of secretaries has given a green signal to FDI in multi-brand retail. Although the move requires political approval, it is the first step toward relaxing the regulations.
FRANCHISE VS. DIRECT
While global expansion is increasingly being viewed as a priority, creating a consistent and profitable performance across borders can be a challenge.
Many U.S. retailers, particularly on the apparel side, have opted to pursue global expansion by entering into franchise agreements with international partners. Such arrangements allow retailers to enter a market quicker than they might have on their own. But in the long run, they could constrain a retailer’s success, Moriarty warned.
“The desire to get into a market quickly can cause you to make business decisions you might regret later,” he said. “If you decide to franchise, go in with your eyes open and understand that the distributor is there to serve the market, not grow it. You have to build the market. All too often, brands become disappointed with their global partners because they are not working with the same passion and love of brand and product that the principal has.”
Some retailers that previously sought to grow globally with a partner are now going direct. In May 2011, for example, Coach Inc. announced it was taking back control of its retail business rights on the Chinese mainland, Hong Kong and Macau from its distributor. Last year, Burberry said it had agreed to buy out its franchisees in mainland China. The shifts allow retailers more control over the merchandise and how it is marketed, and also mean profits from the stores will move from simply wholesale earnings to retail.
That is not to say, however, that franchising does not make sense for some retailers. Consider the success of McDonald’s global efforts.
“If you opt for the franchise model, understand clearly that this is your model and why the strategy makes sense,” Moriarty said. “Don’t go into the situation out of weakness.”
Having the right business systems and information technology in place is as crucial to global expansion and success as it is to domestic operations.
“Many companies that expand into other markets fail, not because the concept or products are bad but because they keep introducing new systems and processes [in each market]. There is too much > effort involved, and things become too dysfunctional to succeed,” said Michael Griffiths of Microsoft, whose Microsoft Dynamics AX for Retail (see story, left) is available in 50 countries.
Running multiple systems in multiple countries, or having to localize the system yourself, is hugely inefficient and costly, Griffiths added. It also doesn’t allow for transparency or consistency across the business.
“Global availability of an IT solution is critical to maximizing resources and business processes,” he said. “In fact, the tech platform that a retailer utilizes can actually be a barrier to success if the solution is regional and not globally available.”
The more consistent and standardized a retailer’s IT platforms are, the more it is able to leverage the business efficiencies it has established in base countries and extend them into new markets, according to Griffiths.
“Not having a single platform also makes it hard to make strategic decisions at the global level,” he added.
With a single solution, retailers can feel confident that, as they expand into new markets, they can keep the same platform and training tools, and reap the benefits they have established in base countries, according to Griffiths, and also provide the same customer experience regardless of the country.
“So ultimately, the cost of expanding is dramatically reduced,” he said.
In terms of store design, experts caution that retailers should be sensitive to the local market.
“It’s importance to define the relevance of your brand in a new market,” said Bruce Dybvad, CEO, Interbrand Design Forum. “You need to be in tune with the customer. Everything from the merchandise assortment to the store design needs to be informed by the local competitive circumstances, as well as consumer sensitivities.”
Retailers are also urged to make local connections.
“Consistency across brand touchpoints is important, but a one-size-fits-all approach can be a mistake,” Dybvad said. “We’ve seen retailers miss opportunities by not adapting their brand appropriately to connect with a new market.”