Global lessons for retailers


Retail dynamics work differently in emerging markets:

All major global retailers have set their eyes on India, a country of a billion plus consumers. Be it Wal-Mart or Tesco, everyone is keen to set shop in India once the government policy on Foreign Direct Investment (FDI) in setting up retail super markets becomes clear. But an emerging market like India is not that easy to crack. And in more ways than one, local retailers like Pantaloon have an edge over their foreign counterparts purely because this is their home turf. What did the Wal-Marts of the World learn in similar emerging markets? Can local retailers deal with the threat of foreign competition? A professor of marketing and director of the Aditya Birla India Centre at London Business School had been tracking all this for a long time now. He is of the opinion which is given as under:

There are five players who have really tried this in a big way in mass retailing. They are Tesco of the UK, Wal-Mart of the US, Carrefour of France, Ahold of the Netherlands and Metro of Germany. But they have learnt that it isn’t easy and the global retailers cannot simply take their format and drop it into another country. They have to customize it according to local tastes. When dealing with mass retailing where customers are shopping, the local basket is very different from the global basket that they are used to in the West.

For example, in China, Wal-Mart has to carry live turtles. They don’t do that anywhere else in the World. If you go to the fresh markets of China, you’ll see that is what people are buying. Fresh foods drive volumes in emerging countries, unlike the US where you can have a format with dry goods.

But fresh food is very local in each country so you have to customize very incredibly and also be highly price competitive at the same time.

The global retail entrants have to ensure the efficiency of their systems. Carrefour has been more profitable then Wal-Mart in China because they haven’t put in place a very expensive IT system that Wal-Mart adopted from Day One. They have also tried to manage the thing more on a store-by-store basis whereas Wal-Mart put in a centralized planning model in place.

Wal-Mart are still learning. Initially they put in a very centralized model. It didn’t work in China because that Market was very different, the stores were very different. Carrefour put in a more local store profitability model where it gave the store manager a lot more control over the store, the pricing, and the store profitability. That worked better. So Wal-Mart realized that they can do less central planning in their stores in China because regional differences are so huge.

The same applies to India as well—the India experience will be quite similar to China. A person on the South will consume a different basket of fresh products opposed to someone in the North. And similarly the East and the West will be different.

In terms of organization structures, Carrefour is more decentralized then Wal-Mart. Tesco is somewhere in the middle—more towards Wal-Mart. Within a country and even across countries, Carrefour gives more power to store managers. Wal-Mart tends to be more systems driven and centrally driven. The flexibility at the local store level in Wal-Mart comes from the central system being able to recognize the differences in different markets rather than local store managers recognizing it.

They faced strong competition from local retailers because they were very price competitive. Global retailers cannot charge a premium over local retailers. On top of that they have to give customers a better experience – without a price penalty.

Take Brazil, which was one of the first emerging markets Wal-Mart went into. They used the USA plan there and it flopped. In a Wal-Mart in the US, a PC can be the first thing you put as a promotional item when you enter the store. They tried the same in the Wal-Mart in Sao Paulo in 1996. In Brazil no one will go to a Wal-Mart to buy a PC. In 1996, it was an everyday shopping item in the US.

Global retailers have now realized that they have to start with food and fresh items and then add the other stuff. Food is what triggers shopping for the middle class consumer in emerging markets. But the value proposition of food is not very compelling. Not necessarily it will get a frequent loyal customer.

In China they looked at the local fresh food market and decided that this is the stuff they needed to stock. And they were stocking all this for the first time. Then add the service, the ambience, cleaner aisles. All of that has to be added on top and without a price penalty.

The global retailers have to communicate upfront that there in no price penalty when they are setting up shop in another country.. The moment they see a store with air-conditioning they think it is high-priced. So the price must be communicated very loudly through ‘shelf talkers’. Customers in emerging markets tend to be very price conscious as opposed to consumers in the developed world. As soon as they see the price of a product in a big store, they immediately know if it is cheaper or not.

There is no point in building an elaborate supply chain initially because it will only add to your cost structure.

Unlike Wal-Mart, in China Carrefour didn’t go into building an elaborate structure before they had the store. Carrefour will take their time. In the first four, five, six stores the first two years or so they will try and get the formula right. After that the rollout will be smooth. They will try different things in different stores to see what works and what doesn’t. The great advantage of a retailer with seven-eight stores is that it is like having seven-eight companies. The retailers have to try out various things and get immediate feedback from the sales and customers.