Global Expansion: Retailers look to emerging marketsfor growth, opportunities
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 (see chart, left).
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.”
Focus on the Future
The retail workforce is typically young, inherently social and incredibly smart. Optimizing the power of these employees will require retailers to develop social, “gamified” platforms that enable associates to connect with each other, their work, rich information/content and real-time inventory information. The vision: People, inventory and work are all accessible via a social networking platform. Work is performed collaboratively, and with an array of available resources.
Imagine if work and customer interactions could be truly balanced — both served better — via a social platform that enables workers to enroll in work, but also respond dynamically to customers with the support of an extended network of experienced associates supporting them. Work is not mandated, at the expense of the customer, and the employee has access to electronic information and tips from other associates, potentially thousands of miles away, to complete work more effectively and efficiently.
Enabling the Retail Workforce: The reality of a retail store environment challenges some current task management systems to be truly effective. There is only so much work that can be prescheduled given employee multitasking. After all, the first priority of any retail associate is to serve the customer well, and store resource constraints limit a store’s ability to assign tasks to a fixed number of dedicated resources. But when applications, including workforce and task management, real-time inventory management and customer support tools, are connected via a mobile and social platform, the modern worker is more engaged and motivated to get work done, help customers and support each other. This drives more operations efficiencies, workforce satisfaction and customer loyalty.
Incenting High Levels of Participation: Humans are relentlessly achievement-oriented, and they genuinely want to succeed. So a well-structured platform would exploit classic motivations, including one’s sense of identity, status, mastery and achievement. Outcomes need to be quantifiable. Major milestones and markers need to be in place akin to game reward systems. Think of the popular social game Farmville, which offers incentives to perform tasks and to return daily. This social platform would use games like iconography to make work seem more like play — to render the intangible tangible.
The platform encourages users to participate by contributing content that supports getting the work done more efficiently. This system works much better than any employee suggestion box ever did, because the employee is rewarded by direct response from other “players” and the virtual, yet still very real rewards earned for being a contributor. Perhaps, the virtual rewards result in a physical reward or recognition for high levels of achievement. Like deal-of-the-day shopping capabilities, certain tasks could require higher “merit” levels, but also warrant higher reward levels, creating demand for accomplishing prerequisite tasks and motivation to stay engaged.
Engaged and well-informed employees are more loyal. If you think about it, shopping is social and your best employees are social — a social platform for getting work done just makes sense. Integral, however, is the ability to contribute to and gain visibility to rich content like planograms; advertisements; special orders; inventory reservations; customer intelligence; real-time, enterprise-wide inventory; guided selling; and mobile POS.
Another new feature would be a customer click-to-call associate feature, where the customer can find and receive help from an associate via an in-store or smartphone-based application that leverages location intelligence. This is not just a task-management system — this is a mobile social retail operations platform for the future.
Leslie Hand is research director of IDC Retail Insights, which provides fact-based research and analysis for IDC’s supply chain, sourcing and product life cycle management strategies. She also provides thought leadership on sustainability, RFID and lean operations strategies.
Timberland’s Lighting Upgrade
Sustainability is fundamental to The Timberland Co., which has committed to reducing its environmental footprint by cutting emissions from its facilities and stores by 50%. The company has identified lighting, which accounts for a significant portion of its total energy use, as a prime source for energy reduction. In 2009, it replaced incandescent and halogen track and flood lighting in many of its stores with LED technology.
“We had been tracking LED technology for a while, and though it was still emerging, we felt we were ready to make the conversion to LEDs based on their progress at that time,” said Al Buell, store planning and construction project manager, Timberland, Stratham, N.H.
Always on the lookout for more efficient technologies, Timberland recently upgraded its lighting again, installing new high-performance LED lamps from Solais Lighting in track and flood applications.
“Timberland executives were committed to using LEDs based on energy efficiency, but they were not getting the desired light output they needed from their first-generation LED lamps,” explained Ryan Hunt, national account sales manager, Standard Electric Supply, Wilmington, Mass., Timberland’s electrical distributor of record. “They wanted an LED lamp that would really draw out the colors in their stores and make their merchandise pop.”
According to Hunt, the aesthetics that Timberland was looking for — along with a much higher lumen output — could be achieved with Solais’ LR38 and LR30 Long-Neck LED lamps. The LEDs have a lumen output of 850 to 1,000, a high color rendering index, strong center-beam candlepower and a lifespan rated at 50,000 hours.
In addition to delivering high performance and superior light quality, the 18 to 21 watts of energy the products consume will enable the retailer to enjoy a 58% to 64% reduction in energy consumption and costs (relative to Timberland’s original 50-watt halogen technology).
Timberland oversaw the installation of 100 to 200 Solais LEDs in each of the four newly constructed stores that it opened between March and June 2011. The retailer also retrofitted a few existing stores with the lamps.
“We love how easy they are to install,” Timberland’s Buell said. “You just screw them right into the existing incandescent or halogen sockets; there’s no fixture change needed.”
According to Buell, green products and practices are always at the forefront of Timberland’s operating decisions.
“As we gain experience and progress with store expansion, we strive to incorporate more environmentally friendly materials in our construction, and energy is always something we consider,” he said. “The efficiency offered by LEDs is great, but we’ve been especially impressed with the Solais lamps, which we feel duplicate the industry’s best-in-class metal halide offering in terms of their light output and color quality, but at a fraction of the energy consumption.”
Buell has identified the Solais LEDs as Timberland’s “go-to” lamps for all new construction and as replacements for the stores’ older lighting technology as it fails. “The color and brightness of the Solais lamps are excellent,” he added. “The store lighting is now exactly where I want it to be.”