Much is made of BIG Retail with more than 80% of the retail market in the US; the UK and most of the EU in the hands of major retailers. Now, in many emerging and developing markets the debate on modern International retailers expanding into emerging markets has polarised debate. Some claim that International Retailers are a vital catalyst to serve the needs of increasingly prosperous consumers; others warn that corporate imperatives are not always compatible with local needs. Whichever side of the argument you are on, both tend to agree that BIG Retail knows how to generate profitable business – or does it?
In recent weeks, stories have started to appear about International retailers reporting profits warnings because of a combination of fragile economic conditions in their domestic markets and, difficult trading conditions in emerging and developing markets. Are these the first signs that the major retailers do not have all the answers? First, the background.
Carrefour, Europe’s biggest retailer with more than 9,500 stores in 32 countries, warned analysts that “increasingly challenging” economic conditions across Europe will drag its profits down by more than 15 per cent this year. Over at the UKs biggest Retailer Tesco, new CEO Philip Clarke has started to take tough decisions. After ploughing more than £250 million and eight years into trying to build a viable business in Japan, Tesco admitted defeat and is pulling out. And then, there is Walmart. The world’s biggest retailer by sales has posted eight consecutive quarters of falling sales at US stores open at least a year and there are strong hints that the trend will continue into a ninth quarter. What is happening?
Let’s start with the biggest. Walmart’s international business is going well and, it is rumoured that they will bid for Carrefour’s ailing Brazilian business – though Carrefour insist that the business is not for sale. Walmart’s problem is domestic; with Morgan Stanley forecasting a 1 per cent fall in like-for-like sales year on year and blaming this on a growing price-image problem: “60 per cent of Walmart customers no longer believe that they have the lowest prices.”
With a 40 per cent drop in the value of their shares so far this year, Carrefour is in more serious trouble. This is the same fall as the retailer’s operating profits in its core French market. This means a €249 million half year loss with a warning that things will get worse before they get better. Lars Olofsson, chief executive of Carrefour, said the results were “unsatisfactory” and promised “radical action”. City Analysts were unimpressed. “Yet another profit warning and yet another plan,” said JP Morgan Cazenove.
Tesco has over 5,000 stores worldwide – 2,484 in the UK and 2,750 sores and 65% of total space in International markets. However, with 129 stores in Japan, Tesco did not have scale enough to build a viable business in the tough Japanese market. Boots the chemist and Carrefour made the same conclusion a few years earlier. Cracking the third largest retail market, with total sales of $356bn, proves difficult. The market is fragmented with many strong retail players, often family owned. Crowded urban areas and stretched commuters have built a strong convenience culture and vending machines are everywhere.
Scale in all markets is a major issue and, as Walmart, Carrefour and Tesco push their agenda in India it is worth exploring whether this will be possible. Indian FDI legislation is being relaxed on Retail but, this does not guarantee success. According to research from Roland Berger, almost two thirds of average supply chain costs for UK supermarkets come from the “last mile” – taking goods to stores. Then, there is the all too often ignored cost to the consumer (and the environment) of taking things home. When International MNCs enter emerging markets this cost will escalate. Even moreso if the MNC has low density stores. For example, Tesco and Sainsburys have an advantage in London because of their scale of operations. In Indian metros; Moscow; coastal cities in China and, the huge agglomerations of Brazil and Mexico the same applies. Worse, the start up cost are exacerbated by huge rental costs. Kishore Biyani, Founder of India’s biggest retailer the Future Group makes the point that, despite FDI relaxation, International Retailers will suffer badly from the lack of a property bank in metros and the impossibility of boiler plating their supply chain standards into a stretched network.
International Retailers need to tread carefully AND be bold. Developed world markets are suffering from a reaction to the credit fuelled boom years and, low growth in these markets is starting to push them overseas. Two things are happening here.
First there is the realisation amongst Emerging market based investors (who have piled up $6,400 bn worth of official reserves in “safe assets” – sovereign debt in developed markets) that a marketplace made up of a fragile Euro zone and Americans wrapped up in a political Civil War is no longer a safe bet. This is looking like a comprehensive role reversal with the IMF estimating that by 2016 emerging markets will account for no more than 14 per cent of world debt – down from 17 per cent in 2007 – as the four main reserve currency areas (the US, Japan, UK and Eurozone) account for 81 per cent.
Second, the developed world approach to retail is not the answer in many emerging and developed world markets. The major rush to urbanisation means that International retailers will not be able to build their preferred big store formats. The shift in developed markets to convenience formats and smaller stores will be forced upon them in the majority world and this means – as Asda found with their UK inner city formats – greater attention to geographical clusters of small stores. The ‘last mile’ is not just a concern for retailers it is a real issue for consumers. Fuel costs are impacting shopping decisions and, this is exacerbated by living in appartments with no need for a big shop to be stored in confined space
We are moving into a phase where MNCs have to re-think their strategy and the mobile phone industry offers a sobering comparison. Over the next five years global subscriptions to mobile phones will grow by 30% – from just under 6 bn to 7.8 bn. But revenues over the same period are unlikely to rise by more than 10%. The growth in global connections will be fuelled by Africa, China, India and Indonesia – up from 44% to 51% of global connections by 2016. However, the business model is changing. The mobile internet will shift many subscribers to VoIP calls (voice over internet protocol) and services like Skype. Suddenly, these new services will undermine the Telcos grip. Similarly, developed world business models that target the people with money in the big cities have to get used to the fact that there is a massive market at the bottom of the pyramid. Here, success comes not from using the same products and prices for a global middle class but ADAPTING products at an AFFORDABLE price with margins generated by huge VOLUME. For example, Nokia designing a phone with far fewer features but with multiple address books – so that a village can have one phone.
Maybe the same will be true of International Retail where crowded urban spaces and distribution difficulties will challenge traditional International retail models and demand innovation in format; size and logistical clusters. In traditional legacy based supply chains the various actors operate independently of one another with each step in the end-to-end process moving in a staccato stop / start fashion. This is encouraged by the agents who dominate the flows and withhold information as a means to extract better rents and prices generating collateral value erosion in excessive inventory and waste. There is a real need to explore and understand these flows more closely, to identify basic processes which are lacking in resources and to ensure that investments and changes happen. This is where cooperatives and 3PL operators can combine with traditional actors to transform the system by coordinating the so far uncoordinated. It is this lack of integration which distinguishes the modern and traditional approaches and, these ideas offer practical solutions.
Cooperatives are a case in point. AMUL in India has been referred to several times on this Blog and we raise it again as an illustration of what can happen in highly fragmented markets without reverting to the MNC model. AMUL is located in Gujurat and has built a $1.3 billion branded business by coordinating the milk out put 10.2 m litres of raw milk per day from 2.7 million farmers. AMUL operates dairies, milk collection facilities, truck fleets and food processing plants on their behalf. Cooperatives and other mutual models have merit in many contexts and, with mobile technology aggregation and cash flow need no longer be in the hands of agents. This is the LOCAL spirit that is transforming the beer industry. Over time the big breweries wiped out local beer but then, the consumer became bored with a lack of variety and now micro-breweries are growing fast in the US and the EU. This is the same logic that seems multiple radio stations and the internet generating massive content for regional languages in India and elsewhere. Diversity sells.
Similar innovation can happen with products and packaging design. For example, single use sachets being more useful to consumers living in cramped spaces. Remember, one in seven people on the planet live in slums, favelhas, townships or jhopadpattis and, according to the OECD, by 2020 over two thirds of the global workforce – many of whom will be target customers – will live and work in the informal marketplace.
What happened to Tesco in Japan – a lack of scale to deliver their supply chain advantage – could happen in all such crowded urban spaces. This is NOT a zero sum game in which International Retailers are bad for local business in all emerging and developing markets. There needs to be a recognition that all business models have to adapt in the Majority world as well as an understanding that logistics intensive businesses – like retail – are likely to accelerate sustainable growth in these markets for all sorts of business. For example, there are several examples of companies developing the Cash and Carry model as a means to build business in the modern trade AND support growth in traditional outlets. This means a kirana or a spaza or a mom and pop can use a Cash and Carry as a regional distribution hub; thereby leveraging someone else’s intermediate infrastructure (warehouses and truck fleets) investments. Conversely, the modern trade is not leveraging efficiency so much as the inherent sociability of these crowded areas; a kind of viral marketing.
One size does not fit all in the local markets of the global retail economy and, whilst little or no growth in developed world economies makes these markets attractive, developed world plug and play solutions are highly unlikely to work. The premium is not about expansion into a new market; it is the opportunity to look anew at the business as a whole. MNCs are going to have to learn to learn and not expect to have all the answers.