Attendees at last week’s IGD Global Retail conference were told that the global consumer does not exist and there is no such thing as global retailing. Managing micro-markets is essential, and retailers must learn how best to stretch their reach while creating shareholder value. Some are already beating a retreat – and suppliers must learn how to move with them. Catherine Sleep was among the delegates.
With attendees from 19 countries, last week’s IGD Global Retail conference in London boasted a truly global audience. Yet speakers were almost unanimously united in their belief that there is no such thing as global retail, and that the global consumer does not exist. Micro-markets and local management are paramount and retailers who overstretch will come a cropper. Not surprisingly, the name Ahold cropped up a few times…
IGD chief executive Joanne Denney-Finch kicked off proceedings, outlining the most significant recent moves in global retailing as identified by international suppliers in a new survey. They attributed particular importance to UK market leader Tesco’s acquisition of HIT in Poland; the creation of IRTS by French retailers Casino and Auchan; the alliance of French company Intermarché with Spanish counterpart Eroski; US giant Wal-Mart’s entry into Japan; and Casino’s acquisition of a stake in troubled Dutch retailer Laurus. Had they been asked today, they would doubtless have included the withdrawal of Dutch retailer Ahold from South America and Asia.
Globalisation: a threat or an opportunity?
Denney-Finch gave delegates a glimpse of a new IGD survey that revealed that leading UK and international suppliers saw retail globalisation as a threat rather than an opportunity. On a brighter note, however, 80% of them said that they viewed global retailing as a long-term opportunity – which is perhaps just as well, as IGD does not foresee globalisation going away, despite some prominent market exits.
To reap the benefit of future international consolidation, suppliers are making changes to their businesses. Many are focusing on price transparency and common trade terms, while others are working to combat parallel imports. Internal restructuring to develop global account managers is also near the top of suppliers’ agendas, although many are still concentrating primarily on their home markets.
Does the global consumer exist?
They are doubtless right to focus on domestic markets, as Johanna Waterous, leader of McKinsey’s Consumer Practice reaffirmed her belief that localisation rather than globalisation remains paramount, and conquering your home market must be the first step. Waterous suggested that, since there are a number of indisputably global brands, the global consumer must therefore exist. Starbucks, Yoplait, Gillette, Colgate, Nescafé… brands such as these can be found in supermarkets around the world – but to what extent do their purchasers share common traits?
Waterous struggled to build an identikit of the global consumer – young, mobile, urban, savvy and worried about his or her financial future – but hazarded a guess that there were only twenty to forty million accessible global consumers, who in theory have similar likes and dislikes and respond to global brands in the same way.
Is it worth going after such a nebulous group? It is surely more important to identify trends shaping global consumption and then apply this knowledge to fit the needs of individual markets. Four trends that are evident in almost all developed markets include: value retailing, as retail prices either decline or grow below the rate of inflation, shaping consumers’ perception of value; the growth of single-person households; the proliferation of elderly dependents; and a sustained hankering after convenience. As Waterous added, the convenience sector is growing at three to four times the rate of the supermarket sector as a whole in most developed markets.
However, profound differences remain. The length of the working day, the number of annual vacation days, purchasing power and the importance which different nationalities place on various store attributes remain highly diverse, even in developed markets, and shape consumption patterns accordingly. Retailers and manufacturers must tailor their brands and how they sell them to suit local markets, and find a way to reconcile global sourcing with local products and positioning, and global management with local planning. Day-part pricing and occasion-driven promotions can only be controlled at local level, and international retailers must maintain strong in-country teams to handle this, warned Waterous. Focusing too heavily on a global consumer who may or may not exist – or only in insufficient numbers – could prove costly.
Top tips from Tesco – or was it a threat?
One of the most global retailers in the business is Tesco, and finance director Andrew Higginson was on hand to share the company’s insights. He showed his hand at the outset, insisting on the term ‘international retail’ rather than ‘global retail’, as he believes grocery remains one of the slowest industries to become truly global. He doubts there are as yet any real global economies of scale in food retail as markets remain local, and both capital- and people-intensive. Echoing Waterous’ sentiments, Higginson reminded delegates that Tesco maintains a full head office in each of the ten countries in which it operates.
Tesco is considered to be performing well in all the markets into which it has moved. Higginson stressed that, with the need to give shareholders fast returns, it was imperative that the company choose markets where basic economic conditions were improving and fast organic growth was possible. Avoid markets where the game is all but over as others have seized the opportunity before you, he urged. Highly consolidated markets or those with prohibitive planning laws are not tempting even though such markets often offer a prosperous consumer base.
Stay flexible, Higginson added. At home, Tesco’s Metro format has not been pushed, since the company realised it never generated enough profit to do much more than pay the exorbitant rent demanded by inner city, prime location landlords. Tesco has therefore switched its strategy to open more Express outlets as a result. Further afield, the superstore format so popular in the UK would not have been able to compete against the prices offered by local hypermarkets in Thailand, so Tesco focused on opening hypermarkets there.
Own-label has become a pivotal tool in Tesco’s armoury, allowing the company to control its own destiny more easily, particularly when expanding into new markets. Some 55% of Tesco’s UK sales are now own-label, compared with 30% multinational brands and 15% unbranded products.
The refreshingly frank Higginson had a word of warning for suppliers of strong brands, stressing how important it was that they work hard to build relationships with retailers. He gave an example of how Tesco reacted to a situation in Thailand. Tesco was gaining just 4% gross margin from selling a local washing-up liquid brand, so it launched a rival own-label brand. The new brand is priced 22% cheaper than the local brand and Tesco’s margin is 24%. The message to suppliers was clear: offer us favourable enough terms to prevent us launching rival own label products unless you have GREAT confidence in the supremacy of your brand.
A new way to measure value creation – and 7-11 comes out top
Meanwhile Neil Austin, global head of consumer markets at KPMG International, introduced delegates to a new system for evaluating value creation in the retail sector. In a new KPMG-sponsored study, Oxford University’s Templeton College analysed financial results published by the world’s top 500 quoted retailers to rank them by a classification known as their Value Creation Quotient (VCQ). This is a ratio that measures the return generated on every dollar of capital investment. Using this ratio, Japan’s 7-11 was the highest listed grocer, ahead of Wal-Mart and Monoprix in second and third place respectively.
Austin said that small and medium-sized players tended to dominate the top end of the table. Companies which retained a strong founder influence and focused solely on their domestic markets also performed well. It is perhaps ironic that the stock market nevertheless favours the sheer scale and cash-generating power of the larger international players.
Stock markets prefer low cultural stretch
Despite the prevailing admiration for companies that expand overseas, geographical stretch can have a negative impact on financial performance if managed incorrectly – again the case of Ahold springs to mind. The ‘cultural stretch’ that a company undertakes can also impact a retailer’s performance. The study assessed cultural stretch by looking at the cultural differences between a retailer’s home market and each of the others in which it operates.
This is different to geographical spread in that a retailer could operate in numerous countries that all exhibit similar consumer cultures, for example Carrefour, and so register a low cultural stretch despite being geographically spread. Conversely, a retailer such as Jeronimo Martins can operate in just three countries – Portugal, Brazil and Poland – yet register a high cultural stretch score because of the massive cultural differences between Portugal and Poland. Interestingly, the retailer with the biggest cultural stretch by far was Ahold…
Austin said the new research indicated that retailers which are culturally stretched suffer in terms of stockmarket recognition, suggesting that the pitfalls of cultural stretch should be factored into all decision making.
Emotional involvement is a dangerous thing
David McCarthy, managing director of food retail equity research with Citigroup Smith Barney, told the conference that further retail disposals are inevitable as companies reverse the mistakes of the last few years. Ahold may have been forced to start the ball rolling, but McCarthy sees French giant Carrefour being forced to change strategy before long. He criticised the French group for being overly emotional in its approach to its international operations, quoting a Carrefour source who said to him “We do not want to strangle our own children” when asked about potential divestments.
This perhaps backs up McCarthy’s theory that mergers and acquisitions are all too often based on ego rather than commonsense, and that management boards that remain passionate about their business while acting dispassionately to avoid or quickly reverse poor decisions will be the ones that succeed.
If delegates took away just one message from Thursday’s conference, it should be: Do not gamble with your core, bread-and-butter business. Your home market may look saturated, but have you realised your full potential there? Understand what you are good at, listen to your customers and concentrate on the battles you can win.
At IGD’s conference Professor Roy Larke also told delegates a few home truths about the potential of the Japanese retail sector. just-food.com has already published an article outlining his talk – click here to read it.