Transformation of retail activity has led to the growth of large and one-shop retailers?
Retail activity has transformed over its existence, to be dominated by retailers providing multiple products to customers within a single touch point. The transformation has been significant in developed economies like the US and Europe, with the emergence of large retailers encouraged by high acceptance levels and an ability to utilize economies of scale.
? Who have now extended beyond the domestic market and have emerged as “global retailers”
Buoyed by their success in the domestic markets, retailers have attempted to increase their revenues by extending into international markets. Retailers like Wal-mart, with a presence in 14 countries, and Carrefour, with a presence in 30 countries, forayed initially into neighboring countries with similar culture and consumer preferences to aid in the replication of their business models. Subsequently, expansion followed the opportunity present in other foreign countries.
Wal-mart, for instance, forayed initially in the neighbouring South American markets of Mexico and Brazil in its first wave of global expansion and then, extended into the markets of Japan, UK and Korea. Carrefour?s expansion has followed similar lines, expanding within Europe and then into Brazil and other South American countries.
While international operations have contributed to growth of the international retailers?
Growth of operations in international markets has helped retailers to increase their overall revenue growth. For example, in case of Carrefour, the 5-year CAGR (compounded annual growth rate) for domestic revenues was 6% as compared to 12% for its international markets.
This trend can be attributed to the fact that these retailers have been able to expand their international operations at a faster pace, and also the fact that international markets have a lower revenue base as compared to the home market.
? Success in the form of revenue contribution has followed only a few
For a global retailer, a good measure of success is the share of revenues from international operations as compared to the overall operations. However, for most international retailers, international operations account for less than one-third of their revenues. For example, in case of Wal-mart, international operations contribute to only 25% of the total revenues and in case of Costco (Costco Wholesale Corporation), it is only 21%. Carrefour and Metro are the two top retailers, where this share of revenue exceeds 50%.
Further, certain retailers have also recorded a decline in the revenue share from international operations. For example, in case of Dutch supermarkets major Ahold, the share of revenues from international operations has decreased from 85% in 2000 to 60% in 2007.
This is on account of the dominance of local retailers in their home markets?
Although the top 10 retailers have gone global, local retailers continue to dominate in their home countries with high revenue, profitability and market share. Except for UK, the top 10 global retailers have not been able to gain significant market share in a non origin country. In developed markets such as the US, Japan and France, the top 10 global retailers have a mere share of less than 3% as compared to 20-45% share of the five leading local retailers.
? Indicating that retail continues to be a local play with strategic advantages enjoyed by the local retailers as compared to their global counterparts
The success of the local retailers is driven by the following factors which give them a competitive advantage:
In-depth and detailed understanding of the local culture and market preferences: Local retailers have an in-depth and first-and understanding of the local market conditions and customer preferences. This enables them to quickly adapt to the changing market requirements and customer demands. This translates into a well managed merchandising activity, which keeps a control on the stock levels and is in line with the customer purchase patterns.
Utilization of local talent: Effective employment and utilisation of local employees is a key for retailers. Local personnel, both at the store and management level prove beneficial with their understanding of the market and their relations with the business community and government. Local retailers use this very successfully which enables them to gauge local customer culture effectively.
Managing complex relations and supply chains: Local retailers are at an advantage as compared to international retailers in managing complex and differing supply chains. The local retailer is well equipped to deal with the multifarious dynamics of a domestic market, such as suppliers and vendors in multiple businesses. Local retailers are better placed as a result of their knowledge of local market conditions, because of which they are able to negotiate more effectively with suppliers as compared to foreign retailers, who may not have access to a sufficiently large pool of suppliers.
While market opportunity drives the business case for growth, there is much more needed while considering expansion/ entry in an international market. Effective local delivery incorporating local customer tastes and preferences with a complete understanding and strong relationships with suppliers and other players in the supply chain is the key to growth in an international market.
?The writer is partner and industry leader, retail and consumer products practice, Ernst & Young