International Expansion and Retail: Top Retailers Go Global
By Katie Davies, Senior Advisor
For American and European retailers in a still-struggling economy, the imperative to grow can be as hard to fulfill as it is hard to ignore. Cash-strapped shoppers are still not opening their wallets, as evidenced by the drop in U.S. retail sales last year. At the same time, living standards the world over have been rising for years. Parts of the world that once served mainly as sources of labor and raw materials in the global economy now offer attractive domestic markets with strong demand for the goods produced by American, English, and European retailers.
In this environment, more and more retailers of all shapes and sizes are going abroad to sustain their growth. And it’s a wide-open playing field. In addition to the usual suspects, retailers are finding niches in all sorts of surprising places, like Mongolia and Georgia. But adapting to local tastes and local regulatory regimes can be daunting.
Fortunately, the world’s biggest retailers have been expanding globally for years with notable success. The world’s four largest retailers — Walmart, France’s Carrefour, the UK’s Tesco, and Germany’s Metro — are expected to grow their foreign operations at several times the rate of their domestic market growth in coming years.
The big boys have also had their fair share of failure along the way. Walmart and Carrefour have both shuttered their Russian stores. Ikea also famously withdrew from Russia after finding itself unable to function in the country’s notorious culture of corruption. Both Tesco and Metro have had to retreat from countries, too. To reduce the risk of such setbacks, target the right market and enter it in the way that makes the most sense for your business.
How Do We Enter the Market?
There’s more than one way to gain a foothold in overseas retail markets. The method you choose will depend on your business model, the characteristics of the market you’re entering, and the laws of host governments.
If you’re looking to capture foreign market share quickly, and your business model can be replicated easily by franchisees on the ground, then you may opt to license franchises. This option reduces your capital expenditures and relinquishes a big chunk of operational control to local partners. Some clothing retailers begin with even smaller commitments, They will supply their product(s) to existing retailers in foreign markets to better understand demand before opening any storefronts.
For retailers with complex business models or tightly managed brands, full ownership of overseas operations is often the best choice. In exchange for more control and a greater share of the profit, this option will require you to commit greater resources, accept a longer timeline, and if it doesn’t work out, having to deal with the entity close down compliance requirements should not be underestimated.
Sometimes, local laws will prevent you from fully owning your operations in certain jurisdictions. In India, for example, most retailers are required to enter into a joint venture with an Indian partner, with a maximum stake of 51 percent. Foreign retailers who do qualify to fully own their operations in India must still adhere to complex sourcing and branding requirements. Walmart, for one, is the subject of an ongoing criminal investigation in the country over allegations that it circumvented the country’s restrictions on foreign direct investment in supermarkets.
Many other jurisdictions place various other limitations and requirements on foreign retailers — and foreign businesses in general. When determining where and how to enter foreign markets, you should fully understand the regulatory limits of potential target countries and account for them in your strategy.
For more on Walmart in India check out our blog post: Wal-Mart’s Setback Shows Why the Indian Market Remains Hard to Reach