Globe Trotting

November 1, 2007
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GLOBAL RETAILING
Globe Trotting

By Denise Leathers

Some of the best opportunities for growth exist outside the borders of retailers’ home countries. Cashing in on them, however, requires a country-by-country approach.

Thanks to advances in transportation and communication, the world is becoming a much smaller place, creating new opportunities for both consumers and retailers. On the consumer side, notes a report in the July issue of New York-based Nielsen’s Consumer Insights, population growth has slowed and many developed markets are aging, but a burgeoning middle class in less-developed nations combined with dramatic population shifts between markets is creating increased demand for a wider variety of goods.
At the same time, however, retailers under intense pressure to grow income year after year are being forced to look beyond their own borders for new growth opportunities. Although the practice still is more common among chains based in countries considerably smaller and with fewer opportunities for expansion than the United States, seven of the top 10 retailers worldwide say sales outside their country of origin represent a growing portion of their overall business. For many, sales in foreign countries are even higher — sometimes significantly — than domestic sales. For example, Brussels-based Delhaize Group, which owns Food Lion, Hannaford Bros. and Sweetbay Supermarkets here in the states, does 77 percent of its business outside Belgium.
There’s No Place Like Home
Among U.S. retailers, however, sales in foreign markets still represent a small percentage of total revenue. Leading the way is Bentonville, Ark.-based Wal-Mart Stores Inc., one of only two U.S. chains with more than a handful of stores outside the country (Issaquah, Wash.-based Costco Wholesale is the other). Currently operating in 13 foreign nations, Wal-Mart’s non-U.S. stores account for about 22 percent of its total sales.
Why aren’t more stateside retailers following suit? According to industry insiders, many U.S. chains simply haven’t yet reached the point where they need to look outside the country for new markets.
“There are still so many opportunities for U.S. retailers in their home markets,” explains London-based Jonathan Banks, business insights director for ACNielsen, a division of the Nielsen Co., New York. “It makes sense for them to maximize opportunities in their own country first.”
The World’s Top Consumer-Goods Retailers
Global Rank (revenue)
Company
5-year *CAGR Country of Origin Global Footprint
(# of countries)
1Wal-Mart12%U.S.14
2Carrefour3%France31
3Metro5%Germany30
4Tesco13%U.K.14
5Kroger4%U.S.1
6Target7%U.S.1
7Costco10%U.S.7
8 Schwarz (Lidl)13%Germany22
*Compound Annual Growth Rate
Source: The Nielsen Co., New York

So, for example, while chains in France, whose population is just a fifth of that in the United States, ran out of opportunities for domestic expansion years ago, stateside retailers such as The Kroger Co. and Target Corp. — ranked fifth and sixth, respectively, on the list of top consumer-packaged-goods (CPG) retailers worldwide — still have plenty of new markets to conquer at home. But they’re not the only ones eyeing up underserved markets in the United States.
United Kingdom-based Tesco — already in 13 other countries — will open its first American stores in Southern California this month. And by the end of next February, it’s expected to have opened at least 50 locations, including stores in San Diego, Phoenix and Las Vegas. But don’t expect to see them operating under the Tesco banner. Before launching in the United States, explains Banks, Tesco executives put “serious time and effort” into understanding the wants and needs of stateside consumers. Instead of plunking a U.K.-style Tesco into the middle of Los Angeles, the company developed an Americanized version that gives U.S. consumers what they desire most in a supermarket. The store’s name says it all: Fresh & Easy.
Will one of the first foreign retailers to open new stores in the United States (vs. taking over an existing chain) be a success? Banks thinks so. “What Tesco does better than anyone else is not only finding out exactly what their shoppers want, but giving it to them as well.” It may seem like a no-brainer, but a surprising number of retailers expanding into new countries have failed to take the needs of the consumers they hope to serve — which are sometimes very different from the needs of consumers at home — into proper consideration.
One Size Does Not Fit All
Up until about the year 2000, explains Banks, many expansion-minded retailers simply “planted flags” in foreign countries, mistakenly believing that being first would give them an edge over those that may come later. Forget customizing their stores, their assortments or their approach to the new market. “Consumers are consumers,” they thought. Big mistake.
“You can’t be arrogant in your approach to foreign markets...every one is different,” Banks says, adding that many of those early flag-planters have since left the countries they first landed in.
“[The] most successful [retailers] know that there is no ‘global’ consumer waiting for a ‘global’ product,” writes Jane Perrin, senior vice president and managing director of ACNielsen Global Services, in a recent online treatise on the challenges of globalization. “The world is comprised of local markets with different cultures, languages and tastes. What consumers eat or drink — or clean with, or put on their faces at night — differs from market to market. And when, where and how they shop differs as well.”
She adds that, “Successful globalization begins with the recognition that a global strategy is really only a collection of local strategies built around a common core. It is a strategy based on managing local diversity, while leveraging global strengths.”
The Role of Private Label
One of those strengths, of course, is a retailer’s private label program. Unfortunately, many chains overestimate the value of store brands in new markets. “If you go into a new country and fill the shelves with your private label products without first building support for the line, without building any brand equity, it won’t work,” Banks says — even if the brand is very successful at home. “Brand equity isn’t free or easy,” Banks explains. And it doesn’t carry over from market to market (hence Tesco’s decision to abandon its hugely popular — at least in the United Kingdom — Tesco label in favor of a new brand for U.S. stores). “You have to start over in each country,” he continues. “And it can take years.”
But that doesn’t mean retailers shouldn’t try. In countries where private label is well-developed, Banks says, store brands act as a “subliminal differentiator.” In other words, consumers don’t think it influences their store choice, but it does. As a result, “It can be a useful weapon in your kit bag to attract shoppers.” However, it’s got to be done right. “If a shopper goes into your store and buys a national brand that performs badly, it’s a poor reflection on the brand, not the store,” Banks explains. “But if the same thing happens with a private label, it hurts the store’s reputation,” which can be particularly damaging to a foreign retailer trying to increase market share in a new country.
The best approach to building a private label program abroad is to take it “category by category, region by region, country by country,” Banks says. Just like in the United States, private label penetration can vary dramatically from category to category, depending, in part, on the strength of national brands in that segment, which can fluctuate wildly from country to country. Moreover, consumers in certain nations, especially those where a small number of retailers control the bulk of the marketplace, are simply more familiar with and accepting of store brands in general. But in countries like the Ukraine, where the number-one retailer has maybe a 3 percent share, private labels are likely to face a more uphill battle, at least in the beginning.
“Private label is a great way to leverage economies of scale,” Banks concludes. “But it’s got to be done carefully, and with a great deal of sensitivity.”
Global Retailing Hot Spots
More than 100 experts from around the globe gathered in New York and London earlier this summer at a Nielsen-sponsored forum to discuss opportunities for retailer expansion worldwide. Here’s what they had to say about some of the world’s hottest markets:
Asia Pacific
A vast area that stretches from New Zealand and Australia to Japan and China, the Asia Pacific region includes a wide range of cultures, lifestyles and consumers, some of which hold more opportunities for Western retailers than others. The big prize, of course, is China, where the population of just one city equals that of all of Great Britain. But retailers that attempt to scale the Great Wall are encountering very strong local retailers that, so far, are doing a better job than the newcomers when it comes to creating an enjoyable shopping experience, thanks to their superior knowledge of the consumer. Still, demand for CPGs from China’s emerging middle class is so strong that retailers able to adapt are likely to reap the rewards in the end.
Northern and Southeastern Europe
Many markets are either very small or very large but almost always underdeveloped. Because of its size, Russia represents one of the best opportunities, but its population is scattered over 11 time zones, so markets are very fragmented outside large cities. But retailers that can break through the barriers to competition and find a way to work with local governments are likely to get a good reception from consumers with growing spending power but few options. The key to success, however, is customizing individual stores the different tastes, lifestyles and incomes of different Russian consumers.
Europe
The surprising success of hard discounters such as Aldi and Lisl, which currently own as much as 18 percent of the European marketplace — even more in Germany and Austria — has made it imperative for all but the most upscale, specialty retailers to keep prices low. In an effort to differentiate themselves, however, many have begun to emphasize quality and value as well — two attributes European shoppers say are most important to them. However, foreign retailers looking to make their mark in Europe should avoid a pan-European strategy. Even the European Union, though it shares a common currency, is made up of 27 countries with 27 different cultures, languages, traditions, etc.
North America
The population in the United States and Canada continues to gray as baby boomers reach retirement age. With no children at home to take care of, many of these empty-nesters are lavishing attention on their pets instead, evidenced by the growth of the pet care market vs. the children’s toy market in recent years. The two countries also are becoming more ethnically diverse, especially younger households and those with a higher percentage of children. Large, dominant retailers are readying themselves for an onslaught of new competitors from Europe.
Source: Nielsen Consumer Insight, July 2007

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