×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Business at Oxford | Making the move to emerging markets

Business at Oxford | Making the move to emerging markets
Comment E-mail Print Share
First Published: Mon, Aug 20 2007. 01 00 AM IST

Alan Giles is an associate fellow at the Said Business School, University of Oxford, UK, and chairman of Fat Face, the UK-based lifestyle clothing retailer
Alan Giles is an associate fellow at the Said Business School, University of Oxford, UK, and chairman of Fat Face, the UK-based lifestyle clothing retailer
Updated: Mon, Aug 20 2007. 01 00 AM IST
Alan Giles is an associate fellow at the Said Business School, University of Oxford, UK, and chairman of Fat Face, the UK-based lifestyle clothing retailer
British fashion retailer Ted Baker will shortly launch its first store in China, capping two years of whirlwind expansion that has seen the chain open in Indonesia, Singapore, Thailand, Hong Kong, Malaysia and Taiwan. That’s an ambitious programme for a company with a market capitalization of less than £250 million (about Rs2,055 crore), but it’s a typical example of the urgency with which European and American retailers are staking their claim on consumers in emerging markets.
Until the last few decades, retailing remained a largely domestic industry. A few early retail pioneers, such as American variety chain Woolworth and Dutch clothing chain C&A, had opened outside their home country in the first half of the 20th century. But most successful retailers in developed economies focused on building their home markets.
In the last 20 years, this inward focus started to weaken. Firstly, those with a relatively small home market started to venture into adjoining territories. For example, by 1990, Swiss retailer Migros had 530 stores accounting for more than 16% of all retail sales in its home market. To generate further growth, it opened supermarkets in Austria and France and took other formats such as DIY chain OBI and stationer Office World further afield. Dutch grocer Ahold focused on the world’s largest market; acquiring the first of several US supermarket chains in 1977. Among the most striking examples of successful multinational retailers are Swedish chains Ikea (furniture) and H&M (clothing), where more than 80% of sales come from outside their home market. Both these retailers ventured overseas at an early point in their history. Secondly, a handful of very successful mega-businesses (Wal-Mart, Tesco, Carrefour), which benefit from great scale and expertise, moved intoboth adjoining and developing markets.
Now, international retailing is one of the hottest industry trends. Since 2001, at least 50 retail firms have entered more than 90 new markets. The early focus on food retailing has been followed by a surge of overseas investment from home improvement, clothing and speciality retailers. There is a process of trial and error here; the statistics mask a recent underlying failure rate which has led to nearly 20 market withdrawals in each of the last two years. Tesco learned from earlier failures to strengthen its internationalization processes. Some, such as Japan’s Uniqlo in the UK, have invested, divested and then reinvested in the same market. Others have retreated from overseas ventures in the face of difficult trading in their domestic markets. Some markets, such as Germany, have proved challenging for virtually all entrants.
So why are retailers adding to their risk profile by expanding globally? The principal “push” factor is impending saturation in their home market, with its consequent impact on growth and profitability. There are a myriad “pull” factors. Most of the markets being entered have a large, fast-growing and young population, and a perceived lower competitive intensity. The E7 emerging markets (China, India, Russia, Brazil, Mexico, Indonesia and Turkey) are expected to be anything between 25% and 75% larger than the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) by 2050. The compelling opportunity in the E7 countries is the rate of urbanization and suburbanization, coupled with the emergence of a relatively affluent “middle class” and a comparatively low penetration of “organized retail”— independently-owned businesses still dominate retail distribution.
To succeed, Western retailers need an appropriate regulatory framework; the relaxation of protectionist policies (shop opening hours, unduly onerous zoning constraints and constraints on foreign direct investment) and the introduction of controls to raise standards in areas such as food safety and employment practices. They need access to expertise, either in the form of joint venture partners or franchisees, and/or experienced and capable local management and employees. For specialist retailers, good real estate opportunities are necessary, while others have invested in creating modern retail centres to attract the newly affluent. And of course all retailers need investment to facilitate a modern supply chain, where good local sourcing and/or the freedom to import are complemented by robust infrastructure.
Where are the winners and losers in this seemingly irreversible trend? Local entrepreneurs and their employees will benefit—from partnering the new entrants, supplying goods, services and real estate to them, or simply setting up Western-style concepts with the aim of ultimately selling out to a multinational.
Conversely, many local independent retailers will suffer, although those who are expert and committed might be able to differentiate themselves enough to prosper. And not all the foreign entrants will succeed. The conviction to sustain start-up losses and occasional setbacks, and the willingness to adapt to local consumer and competitive conditions, are crucial. Interestingly, success doesn’t always follow entry into countries seemingly similar to the home market. In the so-called “psychic distance paradox”, there are many examples of Canadian retailers who have failed in the US, and US retailers who have failed in Britain. Whether you are entering an obviously different environment, or an apparently similar one, it pays to be open-minded—the contrast between Tesco’s foray into Eastern Europe and its strategy for opening in the US later this year demonstrates that it has learnt to be adaptable.
Above all, consumers will gain; competition will transform standards and choice, and prices should tumble, albeit many will regret the gradual erosion of local character and identity. With a sensitive regulatory touch, the creation of a vibrant, modern retail sector can catalyse an acceleration of economic growth and prosperity for all.
Send your comments to businessatoxford@livemint.com
Comment E-mail Print Share
First Published: Mon, Aug 20 2007. 01 00 AM IST