international retailing

INTERNATIONAL RETAILING

Dr. Sumeet Gupta, BE, MBA, PhD, (National Univ. of Singapore)

CARREFOUR

FRANCE BASED RETAILER

METRO

GERMANY BASED RETAILER

TESCO

UK BASED RETAILER

WAL-MART STORES INC

US BASED RETAILER

SEIYU

JAPAN BASED RETAILER

BEST PRICE

INDIA BASED RETAILER

OBJECTIVES

• International marketing• Marketing analysis and foreign market entry

strategies• International retail environment• Selection of retail market• Methods of international retailing• Role of IT in international retailing

WAL-MART STORES INC

DOMINATING GLOBAL RETAILING

OUTLINE

• The Humble Beginnings• Expansion and Growth Strategy• International Expansion– Mexico– Europe– Asia

• Problems and Issues• Lessons Learned

THE HUMBLE BEGINNINGS

Founded by Sam Walton 1962

Walton’s Initial Learning

The First Store

The First Store

Where was the store

located and why?

• Volume and Inventory-turn velocity define competitive advantage in the discount retail business

• Concept works in small towns–With population that were

scratching a subsistence level of living

– Few employment alternatives–Walmart could provide jobs at

decent wages

The Concept

What was their Basic Strategy?

• Steady jobs at decent wage required to staff the store

• Small Operations in Rural Areas with minimal competition in retail thus allowing flexibility in pricing merchandise

• Low local real estate costs• Stores were decidedly

austere in appearance Low Operating Costs

What were the

Challenges?

• Walmart developed its own large warehouses to fulfill its needs

• Developed large logistics operations, complete with a fleet of truck and a private satellite system as well

Thus costs were kept low

Capitalizing on Challenges

What were the

Challenges?

EXPANSION AND GROWTH

• Cheerful greeting by the senior citizens of the company

• Fully Stocked shelves with a wide range of products

• No backroom inventory• Employee bonuses linked to

departmental level performance• Prices set as low as possible and

variable from store to store reflecting the prevailing competition

• Very limited advertisements (bare-bones approach) featuring their own associates as models

Operating Philosophy and Culture

• Flat organizational structure• Frugality (Economy class travel, Stay at

Budget motel on a sharing basis, not hiring taxis as far as possible, minimalist décor at the warehouse)– Visitors had to pay for a cup of coffee even at

headquarters– Customer centric dictum (10-feet rule)

• Development opportunities to associates– Promotions from within– Equal opportunity for being promoted into

management ranks and moved to headquarters– Job enrichment and job rotation as a means of

developing HR– 360 degree feedback and performance appraisal

system

Operating Philosophy and Culture

• Centrally managed from its offices at Bentonville

• Group of buyers who negotiated discounts directly with manufacturers

• Negotiations carried out in a small windowless office

• Buyers were tough negotiators and demanded a wide array of price and service concessions– Walmart was the largest single revenue generator

for Hollywood (35% of all pet food sold in US, 24% of all toothpaste, largest volume of groceries, DVDs, CDs, toys, gunsm etc.)

– Its purchase volumes were very-very high and the supplier became rich quickly by supplying to them

– Suppliers needed Wal Mart more than Wal Mart needed them

Supplier Management

• National Brand Strategy–Well known brands at

relatively lower prices thus demonstrating superior value to its customers

– Brands self-advertised and hence Wal Mart could reduce its advertising budget• Wal-Mart could price Mattel Toys

22% below Toys R Us

Supplier Management

• Private labeling Strategy– Began with Ol’ Roy Dog Food– Its brands competed with

National brand–Manufacturers started

manufacturing store brands for leading retailers

Supplier Management

Supplier Management

• Supplier’s Credentials– Very stringent requirements in terms of

product quality, shipping, stocking, and in-store displays

– Transactions to be conducted through Retail Link, a proprietary EDI (IS that allowed the electronic tracking of purchase orders, invoices, payments and inventories)

– RFID required imposed on its suppliers that would enable enhanced capabilities in tracking sales of individual items within its stores, a potential gold mine of inventory and customer preference data

Supplier Management

• Tangible payoffs to suppliers in terms of inventory monitoring and management– Jack Welch, the former CEO of

General Electric, once observed that he learned more about the customers who bought GE light bulbs from Wal-Mart’s supplier reports than he did from his own marketing department. After all, the relationship between the manufacturer and the end user was no longer a direct one. It increasingly went through Wal-Mart.

Supplier Management

• Suppliers could not raise their prices– Walmart continued to compensate at old

rates– Billed its suppliers for missed or delayed

deliveries– Paid suppliers when their items was

scanned upon sale to a customer• E.g., Rubbermaid – Newell merger

– Supplier score card to keep track of the performance metrics of its suppliers

– Suppliers were required to uphold quite stringent standards of employment and fair labor practices at all their manufacturing worldwide (Wal-Mart Code of standards being displayed at suppliers facilities)

Supplier Management

• Passive submission• Active engagement in maximizing one’s own

piece of Wal-mart Pie (Shelf capture approach)• Newell-Rubbermaid offered a wide variety of

largely non-seasonal, low technology, high-volume essentials that were relatively low priced. – Positioned itself as a very responsive, highly

flexible supplier– It became the benchmark for supplier

performance

• Rayovac began with offering 20% lower prices than Duracell and Energizer– It gained a heavy market share (>80%) in its high

margin products– Wal-Mart accounted for 26% of Rayovac revenue

in a relationship

Supplier’s Strategies

• Private satellite network that worked in conjunction with the EDI system and a point-of-sales system

• Own logistics through a central hub-and-spoke system of warehouses and distribution centers.

• Little inventory storage in these centers and active practice of cross-docking

• Mandatory usage of Retail link system to keep logistics planner in Bentonville informed about the availability of cargo for shipping to warehouses, thus enabling backhauling.

Use of Technology

Different Stores for Different Folks

INTERNATIONAL EXPANSION

• Market potential based on economic and political risk, growth potential, and availability of real estate for development.

• Saturated Markets: Acquisition strategy

• Easy availability of Land: Organic Growth

• Unknown territories: Joint Venture

Evaluation Criteria

Wal-Mart’s Mode of Entry

• Joint Venture with Cifra and later on increase its equity to 62%

• Bodega Aurrera stores targeted at lowest income strata

• Superama stores targeted at middle and high income customers

• 26% of all international revenues• Leveraged location specific advantages in

Mexico to grow a supplier base at relatively low cost and augment needs in other parts of the world (300 suppliers exported to its US based stores)

• Copied the template to Brazil (Todo Dia) and Puerto Rico

• Opportunistic product expansion (money transfer service from Mexico to US)

Mexico

• Victim of price war due to its close rival Carrefour

• Price Comparison flyers distributed in Wal-Mart parking lots

• Carrefour was a leader in South American market and has strong merchandising experience as compared to Wal-Mart

Brazil and Argentina

• In Germany through acquisition of Wertkauf (a German retailer that had fallen on bad times in 1997)

• Acquisition of Interspar• Imported its own management team to covert

the acquired stores into Wal-Mart stores• Wal-Mart rural culture did not blend well with

German sensibilities• Language difference, distinctive market

preferences, Prohibitive German laws• Competition with Metro A.G., which was a

formidable competitor and very good at merchandising

• Failure to actually implement their everyday low price strategy

Europe-Germany

• Oligopolistic Market structure (Key Players: Metro-19.7, Rewe-13.6, Edeka/AVA-12.7, Aldi-10.1, Tengelmann-7.6)

• Ultra-low profitability in the industry (0.8% of sales)

• Family owned retailers (Principle of doing business is not maximization of shareholder value)

• Zoning regulations imposing sever restrictions on the construction of large-scale stores

• Euro Conversion caused confusion and Aldi was able to exploit its reputation for great value (high quality products at very low prices)

• Price and value more important than service and quality

• Retail legislation– 80-84 hours/week store opening hours, Saturday and

Sunday closed– One cannot be a loss leaderWalMart-Failure in Germany

• Flawed entry by acquisition strategy– 21 Wertkauf stores (1997)– 74 Spar hypermarkets at

exceptionally high cost Euro560 million (1998 )

– Organic growth was not possible

WalMart-Failure in Germany

• Management by hubris and clash of cultures approach to labor relations– Not able to understand or adapt to the specific

conditions of doing business in Germany– CEOs (e.g., Rob Tiarks) were US citizens who

were unwilling to learn German– Ignorance with regard to the manifold

complexities and the legal and institutional framework of the German retail market

– Executives looking for switching to other retailers because of Wal-Mart’s frugal approach

– Union had strong influence in Europe and therefore staff-cuts and firing was difficult (Strong labor protection regulations)

– Wage-bargaining was refused with labor union in Germany

WalMart-Failure in Germany

• Balatant failure to deliver its legendary “we sell for less-always”, “EDLP”, “Excellent services” value proposition– Aldi was undisputed cost and price leader

in Germany. Wal-Mart could not systematically undercut Aldi and the other hard discounters

– Its assortment was not even substantially cheaper than the traditional retailers

– 10 feet rule or the concept of greeters did not meet with enthusiasm in Germany

– German customers are accustomed to self-service formats and additional staff only adds to labor costs

– Restrictive shopping hour regulations

WalMart-Failure in Germany

• Bad publicity due to repeated infringement of some important German laws– German anti-trust legislations ban all

undertaking with superior market power from selling a range of goods below costs price without any objective justification

– All corporations must disclose their basic financial information including a balance sheet and an annual Profit and loss statement

– Obligatory deposit regulation requires retailers to provide a deposit-refund system for certain types of plastic and metal beverage containers or to refrain from selling any product bottled or canned in containers

WalMart-Failure in Germany

• UK (Acquisition of Asda which worked the Wal-Mart way at 6.7billion pound in 1999)

• Local Managers were given leeway

• ASDA was already a successful venture

• Strategies from ASDA were imported to reform German venture and import fashion clothing into US to compete with Target (Up-market retailer in US)

Europe-UK

• Korea: Acquisition of Makro (High real estate cost lead Wal-Mart to design stores encompassing 6-8 stories)– Exercise its option to increase its

holdings to become a majority partner

– Chains owned by the Korean Chaebols had better supplier links and long-term relationships (works on the principle of GuanXi)

• Japan: Joint venture with Seiyu

Asia-Korea and Japan

• Could roll out many of its strategies successfully

• Local purchases of 95% of its products

• Leveraged its Chinese supply network to export products worth $12 – 20 billion to its US operations

• Moved to Beijing and later into rural heartland of the country

• Promising but difficult markets

Asia-China

LESSONS LEARNED

OBJECTIVES

• International marketing• Marketing analysis and foreign market entry

strategies• International retail environment• Selection of retail market• Methods of international retailing• Role of IT in international retailing

Wal-Mart in India. Will it Succeed?