Posts Tagged ‘retail’

#114 Every Day Low Price becomes Best Price … in India

Saturday, July 25th, 2015

BestpriceWhad’ya know? Wal-Mart is not only the company that had failed internationally before – readers of this blog know about the retail giant’s epic blunders in Germany or South Korea – it is also a company that seems to be able to learn from experience after all. Wal-Mart had long eyed the Indian market as it had seemed to offer great opportunities – a very fragmented retail sector and a huge number of current and emerging consumers. It was for that reason that Wal-Mart had entered a partnership with Bharti, and Indian conglomerate a number of years ago. In 2013, however, the marriage of the giants broke apart among allegations of bribery and a legal environment that was very unfavorable for foreign retailers. Rather than to pull out, Wal-Mart has learned its lessons and changed course. In August 2015, Wal-Mart will open its first new Best Price Modern Wholesale store – not a retail store for consumers but a wholesale store for retailers. There are no legal restrictions for foreign companies to operate wholesale stores, and there seem to be other benefits as well – Wal-Mart is being a good corporate citizen by not competing with small, independent retailers. Quite to the contrary, as the Los Angeles Times recently reported, Wal-Mart is actually making the lives of these stores easier by providing them with a one-stop-shop opportunity for all their sourcing needs. Wal-Mart has learned, and it believes that it can open around 50 of the new wholesale stores within the next five years in India. Well done, Wal-Mart!

#106 CostCo Gets it Right in China

Sunday, November 30th, 2014
costcoA few weeks ago, I have written on Hermes’ activities in the Chinese market. Today, I am happy to report that another company seems to join the ranks of those who are smart about their entry into the Chinese market: CostC, the Issaquah, Washington based company. According to recent media reports, CostCo has teamed up with Chinese eCommerce giant Alibaba to sell products through their Tmall website. Why is this smart?
Well, first CostCo is going slow. They are starting with the marketing of a limited range of products from their food and health brand, Kirkland. This is not only low-risk, but it also caters to Chinese consumers’ growing appetite for foreign food products. Consumers can get used to the products and become increasingly familiar before other products and brands are introduced. This should help CostCo to get their product portfolio right for China – something that other retailers have found challenging. Most importantly, CostCo is not investing in physical infrastructure that is expensive to build, costly to maintain, and complex to manage.
Secondly, in a time when even first year business students all over the world know what the word “guanxi” means, entering the market with a will established Chinese partner is a good idea. Chinese consumers trust the Tmall brand and, by association, will trust Costco. Tmall also offers volume and instant traffic so that Costco doesn’t have to invest in promotion the same degree it would have to in order to drive consumers into stores. Not to forget that online retail is growing rapidly in China. In July, China-based consultancy iResearch had raised it’s 2014 growth forecast from previously 32.4 to 45.8 percent – totaling at an expected (and staggering) 450 billion dollars this year.
Down the road, Costco may add a few Chinese stores to its existing 19 stores in Japan, 11 in Korea, and 10 in Taiwan, but for now Costco is observing and learning. This slow and smart way of entering China will provide CostCo with an opportunity to learn about the Chinese market and its consumers without a lot of risk.

#101 Think a hundred times before you “Best Buy” in China

Sunday, March 30th, 2014

best_buy bai si maiYes, this is somewhat old news, but it’s also an ongoing story. In early 2011, several media outlets reported that US electronics retail giant Best Buy was failing in China. In a year when Chinese overall retail sales grew by a monthly average of 18 percent, Best Buy shut down all of its nine mega stores. It would be easy to blame the Chinese consumer for their price sensitivity, their tendency to haggle over discounts, their unwillingness to pay for quality service, and the rapidly rising competition from online retail, but that would be – well, too cheap. Foreign companies entering a new market carry what the international management scholars call the “liability of foreignness” – their task is not to educate consumers and reshape and entire culture, their task is to adapt to local conditions. Or, if their internal environment and business model doesn’t allow them to do so, to simply stay away. Also, local Chinese competitors such as Gome (Electrical Appliances Holding Ltd.) themselves started to introduce fixed prices and to take sales personnel off commission a while ago, thus getting closer to the Western retail model. In Best Buy’s case, the failure might have been a combination of many different things from costs that were too high to mistakes in product portfolio decisions to the building of monumental flagship stores. Maybe Best Buy even overextended itself on a global scale. Almost parallel announcements to withdraw from the UK and from Turkey point to a mismanaged overall global expansion strategy. Anywho, back in 2011, it seemed that another arm of Best Buy’s operations in China, the acquired local, Nanjing-based Five Star chain and its mobile business units would be the solution to the company’s trouble. In fact, Five Star was where Best Buy’s involvement in the Chinese market started altogether in 2006. Two years later, Five Star’s market share had been steadily declining and calls for Best Buy to completely pull out of China grew louder. In late 2013, however, the company’s new CEO, Hubert Joly, renewed Best Buy’s confidence in the Chinese market, citing steady progress the company had been making. In 2014, it remains to be seen if Best Buy’s future will be able to attract more Chinese consumers or if they’ll continue to do what one of the translations of Best Buy’s name in Chinese, 百思买 (Bai Si Mai), could mean: “Think a hundred times before you buy”!

#98 Someone seems to get it right in China

Thursday, November 14th, 2013

H&MIn the past, H&M may not always have met analyst’s expectations, it may have taken some heat over the use of Photoshop in some ads, it has been criticized over unfair labor practices, but from this blog’s angle, the Swedish multinational seems to be doing things right in international markets. Considering high profile retail failures such as The Gap’s in Germany, Fresh & Easy’s in the U.S. or WalMart’s in Korea, H&M has been navigating foreign waters without major blunders so far. One of the markets where H&M is very active and expanding is China – a market in which many foreign entrants fail. While H&M did have some run-ins with authorities in China over product quality – excessive PH levels, weak crack resistance, and lower fiber content than claimed, it has all been very contained and hasn’t hurt them. In September 2013, after a year of rapid growth and expansion, H&M opened it’s 3,000th store globally in China where it currently has 170 stores. While this puts H&M behind Inditex’s Zara’s 400 plus stores in China, H&M has ambitious plans for future expansion in the Middle Kingdom. Analysts say that H&M is filling a mid-range gap between sports apparel and high-end luxury clothes in China. By bringing affordable clothes to the market they are catering to the needs of younger Chinese consumers who want Western style shopping experiences and clothes that provide some degree of status that an established global brand conveys.

#93 Global retail: size doesn’t matter, or does it?

Wednesday, December 12th, 2012

fresh-n-easyYes, the British are leaving the United States – again. After a $1.6 billion investment, British supermarket giant Tesco announced that it may be selling it’s US “Fresh and Easy” chain. Clearly, corporate PR speak for “we are pulling out of the United States altogether”. What has happened to Tesco, which successfully operates more than 6,000 stores worldwide? On the surface, the promises of convenience and tasty, freshly prepared food sounded great, but what US customers experienced was less “Fresh and Easy” and more “Small and Strange”. In the eyes of American consumers, the stores had a limited product range (terrible for a country where the pet food aisles are often better stocked than entire supermarkets in Europe), a selection that was uniform irrespective of the neighborhood of the store (watercress salad in South Los Angeles…), unfamiliar British fare instead of the ubiquitous American brands (Marmite, seriously?), too much packaging (in a country where we want our sandwiches on sourdough, toasted on one side with non-fat mayonnaise and chopped tomato – not sliced – Dijon on the upper half, and Pepper Jack, not Swiss), and – worst of all – it made customers do their own check out!

So, it’s really the old story of standardization versus adaptation and finding the right balance between protecting the efficiencies of a proven business model and adapting it to the environment of the target market. Yes, there is a tremendous amount of change in the supermarket landscape in the US that invites new concepts and experimentation, but you certainly can’t just bomb drop an entirely new concept into a market that is as competitive as, for instance the Southern Californian. You need to get the word out, listen to consumers, and slowly educate them, instead of alienating. But then again, if the entire economics of a business model are built around a standardized approach, then the only choice a company has is simply not to enter a culturally distant market. Or leave, several years and $1.6 billion later. Even if you’re a huge company such as Tesco.

#92 Here we go again: Wal-Mart in India

Sunday, December 9th, 2012

Wal-Mart BhartiThis week, the two houses of the Indian parliament have decided to finally and fully pave the road for foreign direct investment in the country’s retail sector. Long awaited, and heavily disputed, this measure opens the sector to foreign retailers who have been waiting at the doorsteps of one of the largest consumer markets in the world. Until recently, only partial ownership has been allowed which didn’t prevent some retailers from tipping their toes into this foreign land. As important as the passing of the legislation has been, it shouldn’t distract from the fact that there are many other barriers to overcome than just the formal barrier of the law. As, I’m certain, US retail giant WalMart, which entered the Indian market in 2007 under a joint venture with the Bharti Group, can confirm. Originally, foreign companies including Wal-Mart’s joint venture were only allowed to operate wholesale stores. Based on recent changes in the law retail stores came within reach, and Wal-Mart announced that it would expand over the next few months. Now, in India’s bureaucratic culture, expansion can be cumbersome. Often, because of the burgeoning bureaucracy and the overlapping of federal, state and local laws, fifty or sixty different permits may be required before the opening of a store is approved. The suspicion is that the expansion train was going too slow, so that some Wal-Mart employees started to grease the tracks. An Indian government agency called Directorate of Enforcement therefore has been investigating Wal-Mart on suspicions of such corruption. Even before that, Wal-Mart had already suspended a number of employees, potentially including its CFO in India based on investigations related to the US Foreign Corrupt Practices Act. The fact that Wal-Mart started similar probes in Mexico, Brazil, China and India shows that blaming entire countries or cultures for corruption may only tell one side of the story. It always takes one to take the bribe, and one to pay the bribe. Implicitly or explicitly, employees must have felt a certain pressure to speed up the process, to please their bosses, or to bring results so that they can get the raise and the promotion. This case also shows that entering mature or developed foreign markets is difficult enough, but when it comes to emerging markets or developing countries, the differences in local practices can often create severe difficulties even for the best companies and the most skilled employees. Strategies that fit Western, industrialized nations, don’t necessarily fit emerging markets, and therefore need to be adapted carefully.

#90 Another one bites the dust (not quite yet)

Wednesday, September 26th, 2012

B&Q Chinese

Not too long before US-based DIY giant Home Depot announced it’s almost complete withdrawal from China, similar news emerged about Europe’s largest home improvement retailer, Kingfisher PLC. Kingfisher, founded in 1969, which owns the B&Q and Castorama brands, operates close to 1,000 stores in eight countries including Britain, Ireland, France, Poland, Spain, Turkey, Russia and China. Kingfisher has been struggling in most countries, but it’s China troubles seem to be of a different magnitude. Ever since it first entered China in 1999, it has been uphill for Kingfisher in the Middle Kingdom. When losses hit more than $ 80 million, B&Q decided to cut the number of stores by 22 in 2009. Realizing that the “big box concept” is not very appealing to the Chinese market, it also downsized operations for its remaining 40 stores. As has become apparent in the recent Home Depot case, B&Q may be struggling with exactly the same difficulties – the fact that for cultural and economic reasons, the entire DIY concept is too foreign to most Chinese consumers. And for those who like the idea of tiling their own bathrooms and flooring their own living rooms, there is a plethora of local alternatives in a highly fragmented market. After all, brand is not as important in the DIY segment as it is in more visible FMCG categories. All in all, another case of the difficulties associated with the internationalization of retail businesses.

#89 Home Depot Packs Bags, Leaves China

Monday, September 17th, 2012

home depotLate last week, US-based home improvement giant Home Depot announced that it would take a $ 160 million after-tax charge and close seven of its big-box home improvement stores. Home Depot entered China with high hopes in 2006 when it acquired 12 stores across China. Over the years it had reduced the number of stores to the seven it is now closing. Home Depot, which of course also sources heavily from China, does have plans to keep two speciality stores in the city of Tianjin and also to be active in online retail, but for now the dreams of making it big in a market of more than a billion consumers are over. While it is true that many retailers in China are currently struggling as slow economic growth is curbing consumer spending, the roots of Home Depot’s failure may be somewhere else.

The first reason may be that China is not so much a Do-it-Yourself (DIY) culture, but more of a HIDBO (Have-it-done-by-others) culture. Cheap labor is abundant, but even more importantly for a culture that values status and prestige, tiling your own bathroom or painting your own window frames is not necessarily a desired activity for the masses. You may ask why it then is that IKEA is hugely successful in China – a company that also makes you assemble your own furniture. The answer leads us to the second reason behind Home Depot’s failure. Chinese are looking for guidance in acquiring Western lifestyles. IKEA provides this guidance by showing their customers how to decorate their homes in a Western fashion. The fact that you have to assemble your own furniture is a little more appealing when you know what the final product is supposed to look like. Besides, there’s always someone to assemble your IKEA furniture for you. Home Depot, however, leaves consumers largely alone and guessing about the final look and feel. Also, most Chinese live in small apartments and don’t have the room to keep tools or work on DIY projects. And ultimately, Home Depot is selling commodities – nails, screws and paints aren’t necessarily the same cultural icons like IKEA, McDonalds or KFC that so many Chinese middle class families are looking for. There may also be a third reason. Generally, as has also been featured in this blog, retail somehow doesn’t travel easily across international borders. But that’s for another time.

#83 The Race is On

Monday, November 28th, 2011

walmartThe race is on. India just announced that it will allow foreign majority ownership in its retail industry. This paves the way for global retailers such as Wal-Mart, Tesco, Carrefour, or Metro. And it’ll be a brutal race, too. One might think that a retail market that is estimated at around $ 400 bio this year and is expected to double within the next four to five years will have enough room for all players. However, with the retail industry being largely devoid of any significant national players, this will be all about first-mover advantage. Maybe it’ll even turn out okay for the second in the race, as sometimes it needs a trailblazer to deal with all the nitty gritty groundwork before someone else reaps the benefits from the efforts of others. But nos. 3 and 4 will certainly find entry a lot more difficult. Wal-Mart which already has a joint-venture with Indian conglomerate Bharti will definitely be a serious contender for the top spot in the race – if they manage to learn from some of the mistakes they have made in other markets such as Germany or Korea. As attractive as the Indian retail market is, it is certainly also a market that will have lots of surprises and difficulties for foreign retailers – from differences in consumer behavior to challenges in dealing with Indian employees.

#73 Vuvuzelas for Bentonville

Thursday, October 7th, 2010

vuvuzelaWal-Mart has made a multi-billion Dollar offer to acquire South African retailer Massmart Holdings. As someone who’s been following Wal-Mart’s failures around the globe, I can’t help but to think, why? And, more importantly, how? Well, what is the attraction of the African market to a company that employs about 2 million people around the globe (and, by the way, intends to add another 800,000 over the next few years), a company whose imports from China are close to US$ 30 billion which (very) roughly equates the total imports from China for whole countries such as the UK, Singapore, or Australia. So, why bother to spread the tentacles to one of the poorest regions in the world, a region that is plagued by a low level of economic activity and a high level of instability?

Well, let’s start with the fundamentals. Unlike the shares of one of its most important US domestic competitors, Target, Wal-Mart’s shares have flat-lined for about a decade. Internationally, Carrefour has outperformed Wal-Mart in many markets including China and South America. Let alone Wal-Mart’s many failures ranging from Germany to Korea to Brazil. Wal-Mart needs to satisfy the appetite of financial markets that is just too difficult to do organically. High profile acquisitions are the way towards quick revenue growth, even if it’s at the expense of the returns on investment. Acquiring a company with reach to a potential customer base of 1 billion is just too good of an opportunity to let pass for Wal-Mart. Looks like Wal-Mart simply can’t afford not to enter Africa. That’s why Wal-Mart is willing to make this one of the most expensive acquisitions it ever made (at about 13 times Massmart’s EBITDA).

So what will be the challenges ahead? First of all, converting 1 billion potential customers into actually paying customers will be a challenge. Purchasing power isn’t quite there yet for the entire African continent, and even if it were, it is difficult to imagine that consumers across Africa will uniformly embrace the Wal-Mart way. Certainly, Massmart’s presence in Botswana, Ghana, Malawi, Mozambique, Namibia, Zambia will help, but educating consumers has previously proven difficult in Germany or Korea. So why would it be easier in African nations? Further, Wal-Mart thrives on it’s tightly managed supply-chain and well-oiled logistics. How fast it will be able to replicate that in Africa is highly questionable. Localizing its offerings has been an insurmountable task for Wal-Mart in Korea, and forced the retail giant to pack up and leave again.

And what about Massmart, the target of Wal-Mart’s acquisition? Like Wal-Mart, Massmart operates low-cost, high-volume outlets in general retailing. That’s the good news. The bad news, again, is a question mark concerning Wal-Mart’s integration capabilities. In previous acquisitions, Wal-Mart didn’t do the best of jobs in managing the post-merger, cultural integration. In Germany, for instance, employee relations had gone sour quickly, ultimately leading to Wal-Mart’s departure.