|
|
What retailers can learn from Wal-Mart's international expansion by David Liang
Superior Inputs When retailers expand overseas, one of the most crucial issues to resolve is how to get the right products from suppliers at the right price and at the right time. In the U.S., established retailers have powerful leverage over suppliers that they can use to obtain products at the lowest costs. And because Wal-Mart is such a large customer of so many suppliers, it can demand and receive the best prices. This ability is what accounts for Wal-Mart s higher profit margins and its ability to pass along value to customers in the form of low prices. But in overseas markets, in which a new retailer s presence is still relatively miniscule, it is a different story. Overseas suppliers may know of Wal-Mart, but they may not have a record of doing business with the company. As a result, a recent arrival usually does not start with significant leverage power over suppliers.
Wal-Mart also faces a similar challenge in Germany, where its 94 stores give it between two percent and four percent of the local market. Recently, a Mercer Consulting retail specialist noted that Wal-Mart must increase its share of the German retail market to at least ten percent before it can exert power over local suppliers. And until it does, Wal-Mart may find it difficult to compete with German retailers for superior inputs.
Superior Operation For retailers in general, and for Wal-Mart in particular, building and maintaining an efficient operation is another source of low costs, and hence competitive advantage. Operation here is defined as the logistical distribution network that facilitates goods flow from manufacturers to retail customers. The company s logistics and inventory control systems, which Wal-Mart built to service far-flung stores from its rural Arkansas base, have long been the envy of the retail industry, and of plenty of other industries. A new entrant can either buy an existing distribution network or build one from scratch. When entering a developed country, it is generally easier to buy than to build. First, local players in a developed country usually have efficient logistical networks and sophisticated operations. Second, a new entrant can use an acquisition to avoid dealing with heavy regulations that commonly exist in developed markets, which often hinder a new entrant s efforts to build from scratch. And so in entering Western European countries, such as the U.K. and Germany, Wal-Mart acquired local players but with different results. In the U.K., Wal-Mart s 1999 acquisition of ASDA proved successful. It was immediately profitable and made Wal-Mart the third largest mass merchandiser in the U.K., with 258 stores. The deal worked for two reasons. First, ASDA, like Wal-Mart, had an efficient distribution network strategy. Second, before the acquisition, ASDA followed pricing and promotional strategies that were similar to those of Wal-Mart. The ASDA acquisition was so successful that Wal-Mart was reluctant to implement new changes. In fact, according to BusinessWeek, Wal-Mart learned a few lessons from ASDA in food merchandising and staff incentive programs.
In Germany, however, Wal-Mart s acquisitions of Wertkauf (1998) and Interspar (1999) were less successful because Wal-Mart had to integrate two companies with different logistical distribution schemes. According to the Financial Times, local suppliers initially were so confused with the combined networks that in the first few years of operation, Wal-Mart stores in Germany suffered many stock-outs. Needless to say, integration issues play crucial roles in determining the success of an acquisition. When entering a developing country, by contrast, it is generally better to build from scratch for two reasons. First, local players in developing countries usually do not have efficient distribution networks. This means a new entrant has to create a new distribution network to meet its needs. Second, regulations in developing markets are usually not as restrictive as those in developed countries. In China, however, Wal-Mart built its logistical distribution network from scratch because most Chinese retailers are either owned by, or affiliated with, the government, and their distribution networks are mostly inefficient. In addition, Chinese geographic and demographic patterns resemble those of the United States, which makes it possible to replicate the scale of U.S. operations. In a recent interview with Newsweek, Wal-Mart International CEO John Menzer said that Wal-Mart s Chinese operations had the potential to grow from 25 stores today to 3,000 by 2028. There s a third alternative for entering markets. Instead of an outright buy or build strategy, a new entrant can also choose a local joint venture partner. This choice is particularly desirable if a new entrant has little international experience, little local market expertise, or wants to limit its risk exposure. The drawback is that the new entrant may have to compromise on fundamental issues ranging from store name to merchandising mix. In 1991, Wal-Mart picked Mexico as the first international market to enter. It chose the Mexican discount supermarket chain Cifra as its joint-venture partner, and Cifra s local market expertise greatly compensated for Wal-Mart s lack of international experience. More than a decade later, Wal-Mart s 595-store joint-venture operation in Mexico is profitable. The company is now even starting to use the Wal-Mart name in its newly opened store units rather than the local Aurrera, Bodega, and Suburbia store names.
Superior Offering
Superior product offering is a critical element of retailers success. Wal-Mart is distinguished by its ability to offer thousands of products including brand names at low prices. But because a new retailer who expands into new overseas markets often lacks superior inputs, operation or both, the new entrant may often lack superior product offering. As a result, the value proposition may differ across geography. In the U.S., Wal-Mart can offer the greatest value relative to all its competitors because of its dominant position over suppliers. In Argentina and Brazil however, Wal-Mart s product offerings are generally priced higher than those of Carrefour. That means Wal-Mart has to differentiate itself from the competition in South America based on other factors. Of course, a retailer can only provide superior product offerings if it has an intimate knowledge of its customers desires and needs. Frequently, however, global retailers fail to conduct the due diligence necessary to gain such knowledge. As a result, new retailers often carry product offerings that do not meet local tastes. According to an article in The New York Times, when Wal-Mart first opened its doors in Argentina in 1995, its stores carried the 110-volt appliances commonly found in the U.S. even though the local voltage standard in Argentina is 220-volt. Wal-Mart s first stores also carried merchandise favored by U.S. consumers, but that did not appeal to local Argentine tastes. After a period of trials and errors, as Wal-Mart began to imitate local competitors product offering, its sales in Argentina and Brazil improved.
Superior Brand The final ingredient of a successful international retailer is the brand. Branding creates special relationships between products and customers. It adds special meanings to products beyond their functionality. Coca-Cola means refreshing drinks; Sony signifies high-quality consumer electronics; Gap stands for comfortable casual clothing; and Wal-Mart means value shopping and everyday low price (EDLP). For any company, whether it s a service provider like UPS, or Coke, or McDonald s, it s the ultimate achievement to have your brand recognized on a global basis. Creating a global retail brand, however, can be challenging because retailers generally don t have a tangible product to represent what the brand is all about the way that a Sony VCR represents high quality consumer electronics for the Sony brand. To create branding relationships with customers, a retailer is highly dependent on the overall shopping experience, which is influenced by factors such as pricing, merchandise mix, store atmosphere, and customer service friendliness. The more crowded a segment is, the harder it is for a new entrant to uniquely position its brand. According to The Economist, 30 percent of the German retail industry is dominated by local deep discounters; and a price cut by one retailer is quickly matched by competitors. In this competitive environment, Wal-Mart s everyday low price message did not revolutionize the industry the way it did in the U.S. and the U.K. It is difficult for Wal-Mart to differentiate itself and to uniquely position its brand in Germany as a value and everyday low price brand. Wal-Mart faces a similar challenge in Argentina and Brazil, where the company has five direct competitors with more-entrenched brands. By contrast, in the U.S. market, Wal-Mart only faces one or two direct competitors. In such crowded markets as Germany, Argentina, and Brazil, a new entrant like Wal-Mart has to find alternative ways to uniquely position its brand.
Another aspect of branding that retailers must consider when expanding overseas is whether to use the original American name or adopt a local name. In most cases, the first option seems to be the most popular among retailers because it allows for building global brand awareness. The second option, however, may resonate well with local consumers and may somewhat alleviate anti-Americanism that exists in many foreign countries. Either way, there is no clear-cut evidence that one choice affects profitability more than the other. There is no noticeable difference in results whether a new entrant uses its original American name or a new local name in a new overseas market. But one thing is clear: the new entrant must build its brand in that new market. For when all else is equal (pricing, product offering, shopping atmosphere, customer service), the store brand is the only thing that differentiates a new entrant from competitors.
Superior Access Finally, a retailer s survival is highly dependent on its access strategy. With the exception of upscale retailers, most retailers wish to expand to as many store locations as possible because widespread store locations make it easier for customers to reach its stores and create a feeling of familiarity. In addition to familiarity, having numerous stores in a particular country increases economies of scale. It spreads retailers fixed costs across a larger base and enhances the retailers leverage power over suppliers. In overseas markets like China, Wal-Mart builds not only large supercenters, but also smaller neighborhood markets to take advantage of high consumer traffics in urban centers. Exporting to the five key sources of competitive advantage is a must for a retailer wishing to enter a foreign market. While missing one or some of these elements does not mean a new retailer cannot reach profitability in new markets, it will prevent the new entrant from achieving its full profitability potential. From Coca-Cola to Starbucks, from McDonald s to Polo, many U.S. companies have excelled in taking successful domestic brands and operating systems, and exporting them overseas. Wal-Mart, which has had such tremendous success in the domestic market, has faced some obstacles in its international efforts. But as it learns from mistakes and from its encounters with different retailing and business cultures, the retailing giant based in rural Arkansas will surely continue to expand its presence throughout the globe. David Liang is a second-year MBA student at NYU Stern. This article was written under the supervision of Marco Protano, visiting associate professor of marketing and John Czepiel, professor of marketing at NYU Stern.
|
