Devangshu Dutta
October 23, 2009
Trade, of course, has been global for millennia, so it seemed hardly unusual for retailers in the US, and in Europe to begin sourcing from distant countries in Asia where certain items were more readily available or significantly cheaper. Imports have also been encouraged as a political and developmental vehicle to aid friendly countries.
So, on the sourcing-end, large retailers have been comfortably operating beyond international borders for several decades even while the stores-end of their business was entirely domestic.
For most large modern retailers however, after the post-Second World War economic boom their core markets have grown relatively slowly (and rather predictably). While the sheer size of the US market kept American retailers busy domestically, planning and legal restrictions in terms of store size, locations, market share etc. limited manoeuvrability for retailers in Europe.
Among the current major retailers, the early retail explorer, Carrefour set out into neighbouring Spain in 1973 and then into distant Brazil in 1975. Soon after, Dutch retailer Ahold landed in the USA in 1977.
However, it took the opening up of East European economies in the 1990s to really prime the pump for growth of international retail. Suddenly, many more millions of consumers became available to European retailers close to their existing markets – both geographically and culturally – and western European retailers jumped at the opportunity.
At the same time, China seemed to have become steadily more open over the previous decade and in the early-1990s India looked accessible again. Some of the Latin American markets were also steaming up.
And, obviously, the prospect of 3-4 billion new consumers in emerging or developing markets was clearly not going to be ignored. In 2001, post dot-com, another inspiring idea hit the business world that was desperately looking for hope – the golden BRICs – the four countries focussed upon by Goldman Sachs as the biggest economies of the future: Brazil, Russia, India and China.
As incomes grew in these “developing” or “emerging markets”, the hypothesis was that consumer would want products and services similar to those in the more developed markets, creating the opportunity for retailers to cross borders. In the last 15 years or so, retail internationalization (and gradually “globalization”) has become an increasingly acceptable theme – in conceptual thinking, in retail boardrooms, in white papers, and finally in trade and mainstream media. The world has witnessed a network of retail subsidiaries, joint-ventures, franchise and other relationships spreading across continents.
Certainly, through the 1990s and 2000s, growing tele-connectivity, fashion, portable TV programming concepts, movies and print media seemed to give the impression that consumers around the world are becoming more similar, and can be reached by common formats and brands. Led by the FMCG companies on the one hand and fashion brands on the other, insights, concepts, products, formats, advertising campaigns are routinely extended across countries. (Unilever’s TV commercial for Close-Up in West Asia is a great example of this – an Anglo-Dutch company’s international brand of toothpaste, Indian models in Thailand, an Arabic voiceover and a Hindi song (“Paas Aao” – “Come Closer”) by Sona Mohapatra – surely you don’t get more global than that?)
But wait! Is the picture really as clear as that?
In 2006 Wal-Mart pulled the plug on its €2 billion German business that was a combination of German chains that it had acquired. In Russia it still has only a development presence since 2005, though it is reported to be looking at opening 10-15 stores in the following three years. According to Newsweek, Wal-Mart’s 13 year old Chinese business – even after an acquisition that is still to be approved – will have fewer stores than it would have opened in the US just in 2009. In the past it has struggled in Japan and Brazil.
In June 2009, Carrefour opened its first 86,000 sq. ft. hypermarket in Moscow, and a second one soon after that. In September, the company affirmed that the BRIC markets were its highest priority for international growth. However, in October it announced that it was pulling out of Russia. Within 4 months of the first store, Russia has gone from a market with “outstanding long term potential” to being a market to exit. In previous years the company has moved out of Japan, South Korea and Mexico. The Economist reports that significant Carrefour’s shareholders are forcing it to look at selling its Chinese business as well – obviously a move that would be politically very sensitive in China. The same shareholders are also reported to be urging a sale of its Latin American business. For now, the official statement from the company maintains an ongoing interest in all these markets.
Ikea has decided to freeze further investments in Russia, and has decided not to enter India until the Indian government allows 100 per cent foreign ownership of retail operations. It entered China in 1998, and has only 7 stores so far.
Even as Carrefour and Ikea announce plans to pull out of Russia, Russian retailers have pulled out from Ukraine, while Metro is cautious in its outlook about that country. French retailer Auchan has opened three stores in Ukraine since 2007, while the German retailer Rewe has opened all of nine since 2000.
Could the juggernaut of global retail be slowing, stopping or even – shock! – reversing? Are the BRICs and emerging markets falling out of favour?
Before we jump to conclusions, as they say in the television world: please don’t adjust your sets. As the French author Karr wrote: “plus ça change, plus c’est la même chose” (the more things change, the more they are the same).
It is a fact that, no matter how international or global a company becomes, when it gets to the business of retail, it needs to be intensely local. While elements of the business – concepts, products, people, money – can travel across borders, it is extremely difficult to take across an intact retail mix and expect to address a significant portion of the population in the new country. And given how important scale is to mass retailers, lack of localization would be a significant hurdle.
A company sourcing products from a developing country can fully expect his suppliers to adapt to his practices and customs. On the other hand, the same company entering that country as a retailer needs to do exactly that – adapt to the customers – rather than expecting them to fall in line because the “best practice” manual dictates certain processes or because central merchandising found some deals that were great for the home market which are totally irrelevant in the new market.
However, there are encouraging signs that retailers looking to grow internationally understand this more and more. Tesco, for one, has been following a localized approach in Thailand and South Korea, while Carrefour, Ikea, Wal-Mart have all steadily modified their approach in China and other markets. Wal-Mart’s cautious steps in India, including the stores opened by its joint-venture partner Bharti, are a complete contrast to the aggressive “plans” that were being reported in the press 2006-onwards. Recently Wal-Mart’s international chief C. Douglas McMillon was quoted by BusinessWeek as saying “we know you can’t run the world from one place”.
For the larger international retailers this means that, the benefits from international scale would be limited by the amount of localization that they carry out in their operations. For smaller and local competitors that are based in an emerging market this means a fighting chance to remain in business and even remain market leaders.
Lastly, as far as all the dark clouds gathered over international retailing and all the retreats being announced – stay tuned – this weather will change, too.
Devangshu Dutta
October 8, 2009
Here is a summary of the Sustainable Fashion Forum, and some more pictures from the afternoon.
And here is a previous article on sustainability and corporate responsibility.
Devangshu Dutta
August 9, 2009
At the end of 2006, in an article about market segmentation, I’d proposed a customer segment called “Cafe Workers” who look at coffee-shops as inexpensive real-estate to work out of. These include professionals, start-up entrepreneurs, small businesspeople and travellers into a city. (Click here to open the PDF file of the article “Slicing the Market“.)
But now, amidst the recession, apparently it is one positioning that some coffee shops don’t want to buy into. The Wall Street Journal reports that there is a backlash from many coffee shops towards customers who enjoy the use of free wi-fi and spend hours occupying tables that should be turning over more. (No More Perks: Coffee Shops Pull the Plug on Laptop Users). Many of the comments on the article are sympathetic towards the cafe owners, calling such customers “moochers”.
While the dismay of cafe owners over customers who abuse the facilities is understandable, could they be doing themselves harm by actively discouraging laptop use? Wi-fi is just one of the sticky aspects of a ‘hanging-around’ culture that the cafes have encouraged in the first place as part of their business model.
By and large, wi-fi enabled cafes around the world are more expensive than the ones which are not. Wi-fi goes along with the more premium positioning, and they should be able to balance the space premium lost on long-term wi-fi users with the grab-and-go customers who are paying higher prices without using the facilities.
That said, in specific cafes or at specific times of day or days of the week when there is a bottleneck, they should be able to limit the length of the IP-lease.
All it takes is a bit of thought and a tiny application of technology, not total disruption of the business model.
Devangshu Dutta
July 16, 2009
The grocery market is loud. From the times when food markets were in streets and town squares, hawkers have cried out their wares, and the freshness or newness of everything made evident to the customers passing by. So, I guess, it is no surprise that today’s FMCG and food market is also tuned to high-decibel promotion.
You don’t need to search too long for the reason – margins are generally thin on these frequent-use products and inventories need to move fast. And what you don’t make a noise about may not be visible to the customer and may remain unsold.
But if that was the whole story, most players should be focussing on one brand, or at most a few brands, and should be using their advertising budgets to maximum effect on these.
Instead we see exactly the reverse phenomenon in the market – more brands, more sub-brands, more varieties of everything. Why? Because newness sells – it creates excitement, anticipation, and in customers with a sense of experimentation it creates the urge to buy.
The old proven method of doing this was the “New Improved” starburst on the pack. The slicker, updated method is to launch a new variety that is apparently different in some way. For instance, if the old supplement helped to strengthen bones, the new line might contain separate “child” and “adult” versions (growth vs. osteoporosis). The old shampoo might have helped to keep hair clean and prevent dandruff – the new one might leave the customer wondering if she should pick the dandruff-fighter that also reduces hair loss, or the variety that makes her hair glossy, or even the one that provides a date for the next weekend! By the time she reaches the end of the shelf, she might have forgotten that her need essentially was to prevent dandruff.
Due to this, the grocery and FMCG product mix is fractal. Each grocery shelf or grocery store is susceptible to fragmentation. Each such fraction is supposed to act as the seed that can allow a new segment in the market or a new use occasion to grow, and provide the FMCG company or the retailer with an avenue for additional business. This phenomenon is particularly visible in a growing consumption environment – consumption feeds proliferation, while proliferation provides further occasions to consume.
However, an unfortunate outcome of this proliferation of brands and SKUs is the heightened noise, in which the brand often loses its unique voice. Also, over time, the brand may be too thinly spread or be undifferentiated from its competitors, and its sales only sustained through ever increasing bouts of expensive advertising – a vicious spiral.
Another issue is the real estate availability and the cost. Chris Anderson wrote about “the long tail” about 5 years ago – the myriad products for which the market is limited, but demand may be sustained over a long period of time through internet sales. However, while the long tail works for e-commerce businesses such as Amazon that carry limited inventory, the physical store runs out of space for micro-segment items very quickly.
All of these factors obviously start hurting visibly when the market turns down, and when marketing investments start being evaluated against the returns. This is when proliferation starts giving way to “rationalization”, reduction of the brand portfolio, narrowing the SKU focus.
We are already seeing signs of this in many of the developed modern retail markets currently, where retailers and their suppliers are closely analyzing which parts of their portfolio they need to sustain, and which they need to drop.
The story in the Indian market is slightly different for a variety of reasons.
First, the market is still growing, and for most FMCG suppliers there are vast expanses of the market are still blank canvases.
Secondly, India has been a branded supplier driven market for a long time, and remains so, by and large. However, the SKU and brand density is nowhere close to what is seen in the West. There is plenty of headroom still for new varieties to be added and new brands to be developed.
But possibly the most important factor is the new modern retailers, who are desperately seeking additional sources of margin. When there is a limit to the traffic that you can divert from traditional mom-and-pop stores, and when you hit the glass ceiling on transaction values per customer, proliferation becomes the game to play. Therefore, these retailers are either busy introducing own labels or encouraging new branded vendors who would offer them higher margins than the more established brands.
Own label is obviously the tricky one. The customer needs to feel comfortable with the switch – in the US, a study showed that consumers would more easily switch to own label merchandise in categories where the “risk” was perceived to be low (such as household goods, rather than children’s products). Also, the best own label gross margins typically come from products that are presented to the consumer as “brands” comparable to national branded products, because the pricing is more on par.
So, on the retailer’s part, this requires sophistication of product development and brand management that may be expensive and may need time to develop. A short-cut could be the acquisition of an existing brand, its entire assets including the organisation, as some retailers have been reportedly looking to do. How well they integrate the brands into their businesses remains to be seen.
In the long term, like their counterparts in more developed markets, these retailers may also come to the point where they wonder whether these owned brands offer them enough return on the expense and the management effort spent on them, or whether they would be better off just buying brands that consumers are already familiar with through multiple channels.
In the short term, however, we can expect proliferation, fragmentation, fractalization in all its forms. We can expect the illusion of plenty of choice to continue driving sales, and more and more products to fulfil needs that even the customer doesn’t know he has.
Devangshu Dutta
June 18, 2009
It has been around 200 years since the birth of Charles Darwin, and about 150 years since the publication of his and Alfred Wallace’s thoughts on evolution by natural selection. In their honour, let us remind ourselves of the basic theory that all of us learn at school. (So I’m a few months late acknowledging it – please bear with me!)
On Evolution: Change Happens
(1) Species differ from each other, but individuals within a species also differ from each other quite a bit.
(2) These differences are due to changes to the basic genetic framework of the organism (mutations) which can get passed on to following generations.
(3) The environment keeps changing physically, climatically and biologically.
(4) In the new (changed) environment some of the mutations survive better than others (“natural selection”).
(5) The effect of these changes over several generation results in the evolution of species, and the rise of new species.
The primary reason I am highlighting this theory is because, to my mind, businesses are like living beings. Businesses are conceived, given birth to, they grow, and most of them die after a few years or a few decades. During their life some businesses get married (merged or acquired), and sometimes they give birth to other businesses.
About 2-3 years ago, the business climate seemed predictable and only looking upwards – the biggest challenges in the food and grocery sector seemed to be whether your ambition was bigger than your competitor’s. Many predictions were made about how the large – more “organised” – businesses would quickly kill the small.
However, with much turmoil in the business environment in the last year or so, it is evident now that it is not just the small companies that are vulnerable. The change in the environment is also giving new growth opportunities to the smaller or younger, previously vulnerable, businesses. While some of the larger businesses have died or are in the process of dying, some of the smaller businesses are mutating even more to survive better in the changed surroundings.
Although small businesses are always looking for growth, the new environment can bring such a surplus of opportunities that, in the helter-skelter growth the learnings are quickly lost and the business may actually go off the tracks.
On Process: Passing On the Genes
The challenge for the smaller businesses now is to pass on their genes down the generations; for the management to ensure that the newer stores and the newer recruits gain from the learning and the adaptations already in the organisation.
At an entrepreneurial stage, the core team handles critical activities and is on call to guide others. The team is knit quite tightly, and located geographically close together. The stores are few and in locations with a similar environment. “Knowledge” is inherent in the way you do things, guided rather than taught.
You may recall my stressing culture and organisational personality, the “people” end, in a previous article. At the early stage of the business, very often, that is all there is. But growth needs replication and predictability.
Biology again gives us a great lesson in how to replicate learnings and functionality: genes (DNA) provide the template for cell functions, and are reproduced almost faithfully from previous generations.
In a business, such replication comes from well-designed processes incorporating the intent, the activities and the desired outcomes. For growth, processes are a must; they are the genetic code of the business. Processes provide the design for how a customer would interact with the store, how the store would interact within itself and with other points in the organisation, and how the organisation would interact with external agencies.
You may ask, “How much process should we depend on, and how prescriptive or restrictive should we make them?” You may also point out that processes start off with very good intention, but with time – and often distance from head office – the processes decay.
And you would be right.
On Decay: Bad or Good
Even in bureaucratic organisations, adjustments are made to fit people or situations, and that causes the process to mutate. Sometimes the change is temporary, at other times the process may change completely and permanently. If changes happen passively and are not channelled the existing process will decay.
I use the word “decay” carefully. While the process change itself may be good at a point (e.g. responding to a customer need), the organisation as a whole may not learn much from it, or the change may affect one part of the organisation and not others. If that happens, the organisation and its systems will become dysfunctional at some point.
For instance, it could be the little leeway that the merchandising head provided to some managers that erupts into an uncontrolled working capital epidemic across the chain. Or a margin adjustment with a vendor at a certain point in time becomes a deadly norm.
So, back to evolution: mutations are a fact of life. Adaptations are happening because of the changes in the environment. Managers need to critically question: does this change meet a current ongoing need or provide an ongoing advantage, and can it apply to the rest of the business? If the answer is no, ask people to read the rule-book (the process manual).
If the answer is yes to both, change the rules, and make sure the new process is implemented quickly and smoothly across the organisation. Then it will be “adaptation” rather than “decay”.
After all, the conclusion that Darwin, Wallace and many others have given us is this: it is not the strongest, the biggest, the fastest, but the most adaptive who survive.
