Retail Global Expansion The journey starts at home

2

In the current economic climate, new expansion targets may suddenly be within reach, which could help position a retailer to rebound more quickly, gain a foothold in a growing market, or capture the coming upturn. Retailers who are able to seize the marketplace opportunities inherent in difficult economic times are investing in global expansion as a path to long-term growth.

U.S. retailers’ early global retail expansion efforts were often unsuccessful. Their efforts were sometimes greeted with skepticism by foreign shoppers. Many early expanders met limited success and ultimately decided to disengage. However, successful retailers have invested time and money into understanding local markets by adapting their strategies and tweaking their product offering and communications to gain share in foreign markets. The process will likely take some time, but global markets will become increasingly crucial as the growth prospects transition from western markets to new, emerging areas. Retailers looking to move into new overseas markets must first fully understand their own goals, capabilities, and resources and how these areas translate in a global marketplace.

With today’s volatile market, it may be difficult for retailers to see the silver lining. However, despite a struggling economy and cautious consumers in the U.S. and abroad, global expansion opportunities do exist for those willing to move now. While there is no “one-size-fits-all” path to expansion, finding one’s way should always start at home.

Find a way to keep growing – any place, any timeIn almost every market, retailers are facing the constant pressure to expand. Wall Street rewards growth and potential. Shareholders have high expectations for retailers to find ways to maintain same store sales growth while continuing to open new locations. To grow in their current markets, retailers are trying to find incremental sales without cannibalizing existing store sales—a challenge, particularly in a difficult economy.

Retailers also face stiff competition from new international players entering their home markets. An increase in competition for a shrinking share of the consumer’s wallet is not a story that sells on Wall Street. Most retailers eventually reach domestic market saturation and eventually begin hearing the siren song of international expansion. Though this expansion is more daunting in today’s economic environment, now is the time to consider positioning for global growth. Doing so may enable retailers to rebound more quickly and profitably as economies recover, placing them in a commanding position in new emerging markets.

For many retailers, there are two key reasons to invest now in a global expansion strategy as opposed to waiting for economic conditions to measurably improve. First, better deals are available now. Some companies are floundering. Certain foreign retail sectors are currently quite weak. These trends create opportunities for acquisition, partnering, or consolidation. This weakness also means that acquiring top talent from companies facing financial woes will be easier, and more prime retail locations are available than at any time in recent memory. Second, expanding now can help put a company ahead of the curve. Expansion planning takes time and retailers need to start now in order to prepare their organization. Conducting background analysis now enables better decision-making later. By properly preparing, retailers can lay the foundation for greater – and ultimately faster – success. Companies can position themselves as early movers rather than as followers competing for market share.

Retail Global Expansion The journey starts at home 3

When retailers make the decision to expand internationally, they typically start by performing customer, market, and product analyses. They explore hot regions, concept alterations and various go-to-market platforms. Even when arming themselves with all of this information, many retailers still have problems when they expand into new markets.

Why? Often, they have over-emphasized external market-facing factors (i.e., population growth, competitive landscape) and under-emphasized the importance of anchoring core elements of the expansion strategy to existing internal capabilities. Retailer expansion strategies can be an execution challenge because the organization does not possess the internal capabilities needed to operate in the new environment. Such key internal capabilities include the logistical infrastructure, the local merchandising talent, strong supplier relationships, and the knowledge of government regulation. Retailers underestimating these crucial internal capabilities can pay a steep price, including expansion delays and/or financial overruns.

Looking inward – the first step in growing outwardRetailers need to be introspective when determining their expansion strategy. Having a clear understanding of corporate global expansion goals and organizational capabilities is critical to success.

Because global expansion takes time and financial resources, retailers should consider starting the process by assessing their capabilities in three important areas. These assessments should be completed before deciding on the expansion market and method of market entry (i.e., franchising, acquisitions, mergers, or internal growth).•Goalassessment–WhatdoIwanttoachievewiththe

global expansion?

•Internalcapabilityassessment–DoIhavethenecessarycapabilities to be successful abroad?

•Resourceassessment–DoIhavethetalenttomanagethe global expansion?

The goal assessment relates to a retailer's objectives concerning global expansion. What does the retailer hope to gain by entering a new market? What are its objectives

from a return-on-investment and timing standpoint? How risk averse is the organization? Assessing and documenting these goals can facilitate internal buy-in and act as the organization’s compass in making decisions and charting a course for expansion.

Assessing internal capabilities can help a retailer understand the gaps that need to be filled in order to compete successfully. One component to consider is whether each function’s capabilities are advanced or lagging behind effective practices in the target markets. Another is whether functional capabilities are easily transferrable to other global locations. In other words, which of these functions truly make the business successful, and can these functions be leveraged or duplicated in new markets?

Often, assessment objectivity is difficult to do internally and requires an outside perspective, as the answers may not always be apparent. For example, a U.S.-based specialty retailer was evaluating expanding into several international markets. This retailer’s cache was associated with its assortment, composed of luxury brands highly coveted in the U.S. Deloitte was engaged to help them in their efforts to conduct an independent evaluation of the markets and the internal capabilities they needed to be successful in those markets. The resulting analysis helped them identify a key capability that had been overlooked. Success in the new markets would not hinge on simply delivering the U.S.-coveted brands, but in securing exclusive licenses for the same or similarly-positioned brands overseas. In order for the retailer to achieve success in the new markets it would need to find the right suppliers for those markets.

Successful global expansion also hinges on execution and possessing the right skills and resources. Determining a retailer's available capital and talent will help it identify the degree of flexibility and/or limitations it may have in developing an executable expansion strategy. For example, an Asian-based retailer recently was evaluating a possible U.S. market entry. The result of its capability assessment was that this retailer didn’t have the capital or resources available to make a substantial impact in the U.S. market. The retailer realized it could not gain the market share necessary to make expansion profitable within its targeted timeframe. This realization avoided a potentially costly mistake.A comprehensive assessment of capabilities will provide

4

decision-makers with a strategic and tactical understanding of the key functions critical to expansion into new markets. Information technology, human resources, store operations, vendor management, pricing, real estate, inventory and warehouse management, marketing, merchandising, fulfillment, customer service and sales, corporate strategy, supply chain, shipping frequency, and scheduling are all functions that should be included in a sound assessment.

Many fast-fashion retailers, for example, have successfully executed against their goals and capabilities to expand rapidly around the world. Much of this success is rooted in their deep understanding of their customer base and their careful selection of locations with similar types of individuals. These fast-fashion retailers have developed internal capabilities such as centralized in-house product development and strong control over suppliers that allow them to quickly respond to the needs of their customers and marketplace changes. This balanced strategy of market selection and internal capability development has effectively helped them deliver rapid global expansion.

Ready… or not? Evaluating your strategyDetermining a retailer's value proposition and undertaking a capabilities assessment may require a company to adjust the lens by which it views its current organization. At the very least it involves a challenging series of steps aimed at highlighting strengths and weaknesses.

The next critical step for many retailers is to evaluate capabilities against global expansion strategies and goals. Let’s walk through a simplified example to illustrate this process.

Figure 1 provides an example of a retailer who has completed an assessment of its goals, functional capabilities, and resources. This retailer is looking for high sales and margin growth, has moderate tolerance for risk, and a moderate-fast timeline for execution. The areas where there are gaps in capabilities are in supply chain, support structure (e.g., legal, regulatory) and expansion experience. However, they have high levels of capital, which could help the retailer overcome shortfalls in certain areas as they evaluate the various market-entry options.

Strategic Assessment

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

High

Fast

Low

Slow

Reward expectation

Risk tolerance

Desired timeline

Marketing/Brand

Merchandising

Supply Chain

Store Operations

Support Structure

Internal Capability Assessment

Resource AssessmentExpansion experience

Available capital

Available resources

Figure 1. Assessing global expansion readiness (Illustrative)

Retail Global Expansion The journey starts at home 5

Strategic Assessment

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

High

Fast

Low

Slow

Reward expectation

Risk tolerance

Desired timeline

Marketing/Brand

Merchandising

Supply Chain

Store Operations

Support Structure

Internal Capability Assessment

Resource AssessmentExpansion experience

Available capital

Available resources

Figure 2. Overlaying market prospects to goals and internal capabilities helps retailers find the right markets for expansion (Illustrative)

Solo Expansion Joint Venture Franchise M&A Retailer

Un-natural selection – determining which path to takeOnce a retailer has assessed its goals and its capabilities to execute a global strategy, the question then becomes where and how to expand. Determination of expansion targets requires understanding the foreign market dynamics. The retailer should consider a target market’s potential based on the company’s internal capabilities and tolerance for risk.

A quick example of this process is in Figure 2. Assessing this retailer’s functional capabilities via the tool below reveals that it ranks high in its ability to market/brand its product(s), and relatively high in its merchandising capabilities – all of which can be leveraged in global expansion.

Conducting the resource assessment reveals that the retailer has relatively strong access to capital to finance expansion. Further analysis indicates that much of

the assessment criteria that the retailer finds highly important are closely aligned with going global through “Solo Expansion” or internal growth (highlighted by black arrows). In practical application, retailer-specific weights are assigned to each of these assessment criteria. "Available Resources," for example, which represents bandwidth of the current employee base, might be given a lower amount of weight by some retailers; first, because being effective at "Marketing/Branding and Merchandising" might be seen as far more complex or important, and, second, because having access to abundant capital would allow rapid acquisition of resources where needed. Following the below logic, the retailer in this example would choose “Solo Expansion” as its most viable global expansion method. One option many retailers are considering for expansion into international markets is a version of “Solo Expansion” or “Joint Venture” that starts with the Internet. This tactic involves using the e-commerce channel to pave the way for brick-and-mortar

6

global expansion by building brand awareness and gaining customer insights. However, as with all expansion options, in order to leverage the Web as a viable sales channel, the appropriate support capabilities (e.g., supply chain, fulfillment, and customer service) must be in place.

The retailer should check to be sure that the chosen expansion method fits with the market it is seeking to enter. Assuming, for the sake of this example, that “Solo Expansion” is a viable option in the expansion market of choice, the final step in the process involves developing a roadmap that leverages the retailer’s strengths and, more importantly, closes the capability gaps.

Developing the roadmap to global expansionA retailer must fully develop a comprehensive market-entry strategy that positions it for sustained growth once the optimal market-entry method has been selected. Every expansion initiative will require developing a unique roadmap. Examples of considerations for a market-entry strategy include:

1) Designing brand development criteria for the new market(s)•Balancingglobalbrandcontinuitywithbranding

opportunities or limitations unique to the local market(s)

2) Entering the market as a manufacturer first to better understand demand prior to expanding as a retailer•Manyprivatelabelretailershaveadoptedmarket-entry

strategies focused on distributing limited assortments through existing retail channels to better understand local market demand. This understanding can be converted into a more successful retail concept.

3) Understanding the regulatory, social, and political environments and their implications on the entry strategy•Commercial,labor,andemploymentlaws•Tradeagreements,tariffs,andtaxlaws•Copyright,trademark,orproprietaryprotection•Currencyexchange,particularlyimportantincountries

with volatile currency fluctuations

Continuing with the earlier example, a critical component of this phase involves closing the gaps where overall strategic criteria, functional capabilities, or resource constraints could become roadblocks.

Retail Global Expansion The journey starts at home 7

Strategic Assessment

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

Low High

High

Fast

Low

Slow

Reward expectation

Risk tolerance

Desired timeline

Marketing/Brand

Merchandising

Supply Chain

Store Operations

Support Structure

Internal Capability Assessment

Resource AssessmentExpansion experience

Available capital

Available resources

Figure 3. Highlighting expectation and capability gaps helps build the roadmap for success (Illustrative)

Solo Expansion Retailer

In the strategic assessment section shown in Figure 3, bridging the gap between how soon stakeholders or the retailer expects to see results and the expected timeline might be as simple as clearly level-setting expectations across all internal and external stakeholders.

Additionally, closing the supply chain capabilities gap might involve partnering or teaming with either an established third-party logistics organization in the desired market or an established retailer until sufficient experience is gained to go solo. Closing the skills gap might involve going out and acquiring the appropriate in-house talent or partnering or teaming with services firms to deliver on short-term goals or help build the competency in-house over the longer term.

Different markets and dynamics will call for different responses in each gap-closing scenario. Of importance is being aware of what the gaps are and having a game plan to close those gaps, or a rationale for why those gaps are not critical.

SummaryWith the global retail environment emerging from a period of considerable weakness, we believe now is the time to be focusing on the many expansion opportunities found in non-U.S. markets. The economic pressures on weaker players are creating desirable acquisition targets and opportunities. Current conditions are also setting the stage for forward-thinking retailers to be better positioned to realize faster, more profitable growth once the markets sufficiently recover.

For a retailer considering international expansion, it is still essential to begin the strategic development process at home. By taking a thorough inventory of the organization’s unique capabilities, resources, and goals, the retailer can create a framework by which market-entry vehicle options can first be evaluated, measured, and prioritized. Following that evaluation, external market factors and over-arching strategic objectives can be introduced to refine the selection process. Importantly, a successful market-entry strategy must be flexible enough to accommodate changing markets, growth in the company’s skill sets, and economic swings.

Global expansion is evolutionary not revolutionary. Retailers can start by adapting their own value proposition and core strengths in the context of the global expansion (i.e., What do we offer and how do we do it better than the competition?). This understanding can help a retailer gain a new focus and provide a stable and more risk-free platform upon which to base market-entry decisions. Global expansion will not happen overnight. It requires a significant time and resource commitment to be successful in the long term.

Retailers that are taking strategic actions now will be in a stronger position to grow. Those retailers that only think about taking action today will likely be challenged by having to play catch-up to the leaders tomorrow.

AuthorThomas F. QuinnPrincipalDeloitte Consulting LLPTel: +1 313 324 1265Email: tquinn@deloitte.com

Stacy JaniakVice Chairman & U.S. Retail LeaderPartnerDeloitte LLPTel: +1 312 486 5391Email: sjaniak@deloitte.com

John SchefflerPartner & U.S. Assurance Leader, RetailDeloitte & Touche LLPTel: +1 415 783 6827Email: jscheffler@deloitte.com

Nancy WertheimPartner & U.S. Tax Leader, RetailDeloitte Tax LLPTel: +1 617 437 2722Email: nwertheim@deloitte.com

John RooneyU.S. Consulting Leader, RetailPrincipalDeloitte Consulting LLPTel: +1 215 446 3600Email: jrooney@deloitte.com

Lawrence HutterPartner, Deloitte UK & Global Consumer Business & Transportation Industry LeaderDeloitte Touche TohmatsuTel: +44 20 7303 8648Email: lhutter@deloitte.com

Visit Deloitte.com

To learn more about our services, visit us online at www.deloitte.com/us/Retail. Here you can access our complimentary Dbriefs webcast series, Deloitte Insights podcast program, innovative and practical industry research, and a lot more about the issues facing retailers from some of the industry’s most experienced minds.

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

About DeloitteAs used in this document, “Deloitte” means Deloitte & Touche LLP, which provides audit, assurance and risk management related services, Deloitte Consulting LLP, which provides strategy, operations, technology, systems, outsourcing and human capital consulting services, Deloitte Tax LLP, which provides tax services, and Deloitte Financial Advisory Services (FAS), which provides financial advisory services. These entities are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Copyright © 2010 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu

Jean-Michel FallySenior ManagerDeloitte Consulting LLPTel: +1 469 417 3191Email: jfally@deloitte.com

For more information about Deloitte’s Retail services, contact: