2001 saw a lot of talk about retail globalisation but not a great deal of action. What are the factors driving global retailing, and which groups will emerge as international heavyweights? The Institute of Grocery Distribution's Steve Webb offers his insight.

At the start of the 21st century the world appears to be at a significant watershed. The century could converge towards a more unified global approach in a number of areas, including culture, politics and commerce. People from Berlin to Buenos Aires and from San Francisco to Shanghai could experience the same music and films, and purchase the same food from the same retail organisations. Alternatively people may reform into smaller communities and reject a global approach.

The future of global retailing will depend on the outcome of this process. If consumers are happy to accept globalisation, then there is clearly an opportunity for retailers to develop global strategies.

But just what does global retailing mean?

The topic has received much coverage over the last five years. But does it exist? If it does, why, and what barriers might there be, now or in the future? An extreme definition of global retailing could be taken to mean the retailing activities of the entire globe. However, if this were the case then clearly there would be no global retailers in operation today.

It could also be considered that global retailers are those that have a global strategy in place, designed to have operations covering much of the global retail market (defined by market size as opposed to population). Global retailing is therefore defined as much by the spirit of being global as the physical number of stores and countries where operations exist.

1990s - The Advent of Global Retailing

Although a select few retailers (notably the French operators) were internationally active in the 1970s and 1980s, activity significantly increased during the 1990s when global retailing as opposed to international expansion was firmly placed on the grocery industry agenda.

 
Source: IGD Research

NB The chart does not show the total number of individual countries in which retailers operate due to duplication, for example, Tesco, Metro and Wal-Mart all operate in the UK.

However, despite the progress made, the retail industry can still be considered a relative laggard in its global progress when compared to other major industries. The following chart provides an indication of the level of global coverage for the leading operators within a number of industries.

Number of Countries of Operation for Global Companies. =======================================================
Company  Number of Countries
 of Operation
=======================================================
Energy:
Mobil  200+
Royal Dutch Shell  154
Banking:
Citigroup  100+
HSBC  81 IT:
Siemens  190+
IBM  165

Consumer products:
Unilever (operations)  88
Procter & Gamble (operations)  86
Automotive:
General Motors  90
Fiat  85
 Grocery retailing:
Carrefour  26
Ahold  23
Metro  22
======================================================
Source: IGD Research

Although grocery retailers have come a long way, the leading operators still have a relatively limited global presence in comparison to other global operators and considerable progress needs to be made before retailing can be viewed as a global business. Operators in the retail industry have slowly expanded the view of their own geographically based market to encompass an increasingly larger region and have grown through both organic means and consolidation.

Although relatively unfocused at first, the leading players have slowly developed a more coherent and ultimately globally focused strategy. As with the early stages of many new processes the path towards further development is rarely smooth. 2001 can best be described as a relatively quiet year in global retailing, and in future may be looked back upon as the calm before the storm.

It is likely that the first major phase of global retailing has concluded with the major moves of Carrefour/Promodès and Wal-Mart/Asda. However, retailers are now digesting and planning for the next major phase. Many of the leading candidates have tested their strategies for further global growth, and it is just a matter of when, not if, the next wave of activity will occur.

But why is global retailing occurring?

There are a number of specific driving forces that can be categorised as either push factors or pull factors. Additionally a number of enablers have helped global retailing to develop by simplifying the process of globalisation for retailers.

The major push factors are primarily a result of the domestic market conditions experienced by many retailers in developed economies. The increasingly limited potential in the domestic market has been the catalyst to push retailers both to look abroad and to explore opportunities provided by diversifying into new business areas.

The first push factor is the current planning restrictions in many developed markets, particularly those in Western Europe. These markets have introduced increased levels of planning restrictions over the last thirty years, which were tightened much earlier on the European continent than in the UK. This led to continental retailers pursuing an international expansion programme earlier than many UK retailers.

The rationale for these restrictions has included economic, social and environmental reasons. However, the effect has been the same, namely retailers searching for growth outside the confines of the domestic market. One major market that stands out as having a relative lack of planning restrictions despite a large and relatively competitive environment is that of the US. As a result, the hypermarket (Supercenter) format continues to expand at an amazing rate, principally led by Wal-Mart.

The second push factor is that of home market dominance. Once a retailer has established a dominant home market position, it becomes increasingly difficult to achieve further significant increases in turnover. Domestic market dominance not only pushes retailers to look for international expansion, it is seen as a requisite before being able to successfully expand abroad. The reasons include allowing retailers to build from a solid foundation; having a dependable source of cash flow; and being able to divert management time to other activities.

The third push factor is the reduced growth in food spending. In many developed markets there is a slowing down in the growth of food retail spend, primarily as a result of food retail's decreasing share of the 'consumer wallet'; lower inflation (or even deflation) in food retail; and slower population growth (or even decline).

The last push factor can best be described as the fear factor and can be seen to work in two ways. Firstly, it works proactively where retailers need to be first in new markets for fear of missing out on the best locations and acquisition opportunities which would give them an advantage over competitors.

Secondly, the fear factor works reactively. In order to remain competitive retailers react to situations from a fear of what may occur if they do not. For example the proposed acquisition of Asda by Kingfisher in 1999 forced Wal-Mart to react and make a larger (winning) bid. This itself led to a number of reactions, for example the Carrefour and Promodès merger. It is likely that as the stakes get higher so the fear of being left behind will also grow - especially amongst the smaller to middle-sized retailers who may feel pressurised into acting "before it's too late".

The various benefits of global retailing increasingly exert a strong pull. The first of these pull factors, to date seen by retailers as one of the major benefits, is the importance of scale.

Retailing is a scale business and with increasing size the ability to achieve improved economies of scale also increases. This provides retailers with a cost advantage that can be used either to invest in price, and thus provide a clear competitive advantage, or to improve the level of profits in order to satisfy shareholder expectations. Economies of scale can be achieved in a number of areas within a retail business, and include the cost of goods for re-sale; the cost of goods not for re-sale; the cost of services; development costs; and management resources.

The largest scale retailers have sufficient buying power to negotiate lower cost prices. However, at this stage the ability to leverage global scale across the entire product range is limited. Some product areas lend themselves more readily to global purchasing, such as non-food and ambient products. However, local brands and perishables still need to be sourced locally and so provide a limit on the advantages of scale. In these instances local scale is arguably more important than global scale. Over time as more suppliers become organised to service global customers, global scale will become increasingly important.

The second pull factor is the size of the prize. The attraction of the global market is that it offers significantly more potential in comparison to any single market. Global consumer spending is estimated in excess of $18 trillion, and global retail spending in excess of $7 trillion. Within this total retail spend, the global grocery market is estimated at over $3.6 trillion and the food retail market is estimated at over $2.8 trillion. Therefore, even for a retailer the size of Wal-Mart, which operates in one of the world's largest markets, the additional potential represented by the global market is considerable. Indeed, Wal-Mart's total global retail turnover represents just 5% of the estimated global grocery market.

In addition, long term global potential is still increasing in a large number of emerging and undeveloped markets. In China alone Wal-Mart and Carrefour believe they can double in size over time. In India and Africa there are huge populations yet without a significant level of organised retail. Over time, albeit a long period in some instances, the potential for food retail will be extensively greater than the current global market.

The third and last pull factor can best be described as the virtuous circle, pulling many retailers into pursuing a global strategy. The benefits of transferring best practice and increased trading levels are realised in greater cash flow and enhanced profitability. This in turn leads to further improvements in market value and the ability to make acquisitions.

Virtuous Circle of Globalisation

 
Source: IGD Research

The push and pull factors described would not necessarily be enough to facilitate the development of global retailing on their own. A number of key enablers have increasingly facilitated this, and continue to do so. Some of the enablers are macro issues external to the retail industry, and some are being internally led by retailers. All have simplified the operating environment to allow retailers to operate on a global basis.

The first enabler is that of conforming cultures. Although there are undoubtedly significant variances in cultures across the globe, there has been a slow trend towards conforming cultures. The advance of modern communication processes has speeded this up, particularly the advent of radio, TV, film, satellite and the Internet. Before the start of the 20th century a global event was unheard of, whereas today it is almost commonplace, whether it be sporting, political, economic or otherwise.

As a result of these conforming milestones, there is a trend for consumer tastes and retail concepts to become increasingly similar, particularly in developed markets. As other markets develop it is likely that they will also experience this trend, although in some markets this may not occur for a considerable period of time, for example, parts of Africa, the Middle East and Far East Asia.

The second enabler has been the reduction in trade barriers in the form of both tariff and non-tariff barriers. These have been in steady decline since the formation of a number of agreements and trade areas, including the General Agreement on Tariffs and Trade (GATT), the World Trade Organisation (WTO) and common trade areas such as the EU, NAFTA, and ASEAN. These have all contributed to an increasing level of global trade and commerce, and have therefore enabled the advent of global retailing.

The last major enabler is that of technology. The developments achieved during the 20th century, particularly in the last fifty years of that period have enabled retailers to expand across international borders. The satellite age has transformed communication capability, and retailers can now operate on a global basis with relative ease.

A number of retailers have been at the forefront of exploiting the increased capability that technology provides for global retailing. For example Wal-Mart's superior systems that allow individual store sales tracking on a global basis, and Tesco's expertise in remote shopping, which provided the ability to expand internationally via a joint venture agreement with Safeway Inc. in the US.

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The push and pull factors together with the enablers indicate that global retailing will continue to evolve. However, there are a number of barriers, either actual or potential, to its future progress. Despite the simplification of the process of globalisation, these barriers are threatening to make it more complex for retailers.

These factors can be grouped into those that will impact on the internal development of any given retailer, as well as the external factors which will impact on the majority of, if not all, global retailers. There are five key external barriers that may impede the progress of global retailing, and the first is planning regulations.

Although planning regulations in developed markets have acted as a push factor towards retailers becoming international, they also have the potential to become a significant barrier to further global growth. Although strong planning regulations only currently exist in a handful of markets, there are indications that emerging markets are also concerned over the relative freedom of global retailers to build new stores. For example, Poland has already seen a degree of restrictions introduced, and more are expected over time.

The second barrier is that of competition authorities. Currently, the main regulatory concern for large retailers is that of national competition authorities, particularly in developed markets. However, there is still relative freedom to continue to grow on a regional and global basis. This situation may not continue indefinitely, with various regional authorities, notably those in the European Union, having increasing levels of power.

The veto in 2001 by the EU of the proposed GE Honeywell merger could well be a milestone in the development of a more global approach in regulating competition. In particular the level of market power held by any one company is increasingly likely to be examined at levels other than just national market share. This has clear implications for businesses looking to establish increased global scale.

The third barrier is that of cultural issues. Although conforming cultures are seen as an enabler, it is important for retailers not to assume that each new market will be the same. 'Think global act local' may be a cliché but is nevertheless still true, with a wide range of cultures existing in many markets. If retailers are not sensitive in tailoring their offers to local idiosyncrasies they may end up failing.

Although increased experience of international retailing will help, it must be remembered that many of the leading global retailers operate in less than twenty markets, with only a few operating in more than that number. Therefore, there are still a significant number of markets, cultures and consumer differences that global retailers have yet to become aware of.

The fourth barrier is termed big business backlash. Although retail may not be alone in feeling the effects of this issue, there is a continued risk that many consumers will begin to view big business in the same distrusting way they view governments - i.e. as being untrustworthy, manipulative, greedy and power hungry. Such a view could manifest itself in various ways, ranging from direct action against retailers through to a general dislike of shopping at those retailers identified.

This would clearly have serious implications for large global retailers, particularly those with single brand fascias. Companies with an obvious point of contact, such as a retail store, may represent more of a target for consumers' anger and distrust, or even for reduced demand from those stores. Retailers who operate a number of different fascias may be more successful in avoiding such activity.

The last external barrier is in the form of the local market response, which should not be underestimated. Morrisons in the UK and Matahari in Indonesia are just two examples of where local competitors can survive and succeed against their global peers. In addition it may be that groups of local competitors will either join together or form various alliances with other smaller retailers. This may provide benefits to rival larger retailers, for example in purchasing power.

There are also two major internal barriers to the future progress of global retailing. The first of these is the diseconomies or inefficient use of scale, usually arising as the business organisation becomes too complex to operate efficiently. The disadvantages of being a large organisation include increased bureaucracy, lower degree of staff motivation, poorer levels of customer service and increasing lack of consistency throughout the portfolio. Retailers will need to be careful to ensure that these disadvantages do not begin to outweigh the advantages.

The second internal barrier is the negative spiral of globalisation. Although the virtuous circle acts as a pull to globalisation, potentially globalisation can act as a negative spiral for a retailer. Retailers that create unprofitable and unsustainable positions in new markets are at risk of draining their domestic performance and destroying shareholder value.

Negative Spiral of Globalisation

Source: IGD Research

The retailers that fall into a negative spiral will do so for a number of reasons, including: over-stretching of resources such as financial and management resources; neglect of the home market; poor market research, specifically of new markets; a poor market entry strategy; a poor market expansion strategy and external market forces.

For those retailers that fall into a negative spiral it can prove difficult to get out. One recent example is Marks & Spencer, which has had to withdraw from many of its international markets in order to turn around its domestic fortunes. It has taken the best part of three years for a new strategy to be put in place and improved results to start to show through.

In summary, we are still at the dawn of global retailing. A set of push and pull factors together with simplifying enablers has led retailers to pursue this global path. However, the future of this path is unlikely to be smooth, with progress being made in bursts of activity. Indeed there are a number of barriers, which threaten to make the global process more complex and progress more difficult.

What is A Global Retailer?

IGD believes that being a global retailer is more than just about turnover size. For example is Kroger twice as global as Auchan purely because its turnover is twice the size? Kroger is only present in one market, albeit the world's largest, whereas Auchan is present in fourteen markets.

There is no easy way to define a global retailer, and strictly speaking none of the current grocery retailers can be considered as being truly global since they are not present in all of the countries of the world. However, there are now a number of retailers who are global in their outlook, and therefore increasingly fulfil the essence of what it means to be considered as global. IGD's Global Retail Index uses the following factors in measuring how global a retailer is.

Hard Factors                       Soft Factors              
=============================================================
Size of turnover           Clarity of global strategy
Number of countries of operation   Level of global 'culture'
within an organisation
Percentage of foreign sales    Level of global learning
and sharing
Presence in key regions*
Level of home market dominance
=============================================================
*Europe, NAFTA, Asia
 

Who Are the Leading Global Retailers?

IGD has created a Global Retail Index based on the factors it considers are necessary to be global. The following highlights the leading twelve retailers on the index with the previous years ranking shown in brackets. Also shown is the relative turnover rankings, with Wal-Mart ranked number one and so on. The top three retailers in the index are considered to be the 'global' retailers, while the remaining nine are still considered as 'international' retailers.

  IGD Global Retail Index - 2002
===================================
Index       Turnover
Rank   Retailer    Rank

===================================
1  (1)   Carrefour   2
2  (2)   Ahold    5
3  (3)   Wal-Mart   1
4  (4)   Metro    4
5  (6)   Tesco    10
6  (5)   Ito-Yokado   8
7  (7)   Delhaize   21
8  (8)   Casino    20
9  (9)   Auchan         17
10(10)   Aldi    13
11(11)   Tengelmann   16
12(12)   Costco    11
==================================
Source: IGD Research
This information comes from
IGD's report Global Retailing 2002.

By Steve Webb, Senior Retail and Economic Analyst, IGD

IGD's third annual Global Retailing Conference will take place on Wednesday 15th May in London. The event promises to be lively and informative, covering issues such as geographical expansion strategies, global sourcing, global marketing, store format development and the spreading of international best practice. Visit the event website for more details by clicking here.