Ross MBA: International Retail Expansion Study

Strategic Analysis of International
Expansion of Retailers

By
Nanda Kishore Rajanala

Stephen M. Ross School of Business
University of Michigan

A research paper submitted in fulfillment of the requirements for 2
credits, GRADUATE INDEPENDENT RESEARCH PROJECT, WINTER 2006
Professor Jie Zhang, Faculty Supervisor

i

TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................. iii
TABLE OF FIGURES ................................................................................................................. iv
ABSTRACT.................................................................................................................................... v
HISTORY OF INTERNATIONAL RETAILING...................................................................... 1
Retail Innovations in the USA .......................................................................................... 3
GLOBALIZATION OF RETAILING ......................................................................................... 5
Carrefour .................................................................................................................................. 5
Key differentiators for Carrefour’s success............................................................. 6
International Strategy..................................................................................................... 7
AMERICAS............................................................................................................................ 8
ASIA ....................................................................................................................................... 9
EUROPE................................................................................................................................. 9
SUPPLIER – BUYER RELATIONSHIP................................................................................. 11
Buyer Power.......................................................................................................................... 11
What Retailers demand .................................................................................................... 12
WAL-MART ................................................................................................................................. 14
Quick Facts ............................................................................................................................ 14
International Expansion ................................................................................................... 15
Mexico & Canada............................................................................................................. 15
Latin America ................................................................................................................... 15
United Kingdom ............................................................................................................... 16
Germany............................................................................................................................. 17
China.................................................................................................................................... 18
The Japanese challenge ............................................................................................... 19
The Road Ahead… ............................................................................................................... 20
INDIA........................................................................................................................................... 22
Un-caging the Tiger ........................................................................................................... 22
The Five Forces of Indian Retailing.............................................................................. 23
Consumers......................................................................................................................... 23
Economy & Political System ....................................................................................... 27
Competition....................................................................................................................... 28
Logistics, Operations & Services............................................................................... 29
Infrastructure ................................................................................................................... 31
India Retail Model .............................................................................................................. 32
Description of the model.............................................................................................. 33
Functioning of the model ............................................................................................. 34
Summary of the model................................................................................................. 45
APPENDIX A ................................................................................................................................. I
APPENDIX B .............................................................................................................................. III
APPENDIX C ...............................................................................................................................V

iii

TABLE OF FIGURES

Figure 1: 2005 Global Retail Development Index (Emerging markets) .............. 2
Figure 2: Top 250 Retailers, By Sales .............................................................................. 3
Figure 3: Carrefour - Breakdown of consolidated net sales by geographic area
......................................................................................................................................................... 5
Figure 4: Carrefour Store Layouts ..................................................................................... 8
Figure 5: Wal-Mart Financial Highlights......................................................................... 14
Figure 6: Wal-Mart International Operations............................................................... 15
Figure 7: “Wal-Mart Germany: A problem of size”.................................................... 17
Figure 8: Wal-Mart in 2005 ................................................................................................ 20
Figure 9: Five forces of Indian Retailing........................................................................ 23
Figure 10: Indian Consumer Market ............................................................................... 24
Figure 11: Market Share across Retail Categories in India.................................... 24
Figure 12: Indian push-cart vegetable vendor ........................................................... 25
Figure 13: Growth of Retail Categories in India ......................................................... 26
Figure 14: India Retail Model............................................................................................. 33
Figure 15: Category shares among CCA outlets ........................................................ 42
Figure 16: Map of Asia............................................................................................................V
Figure 17: Map of India........................................................................................................ VI

iv

“A Strategic Analysis of International
Expansion of Retailers”

ABSTRACT
This study project aims to explore the history of retail expansions by the world’s two
major retailers. It analyzes the expansion of global retailer Carrefour and takes the
special case of Wal-Mart Stores.

The study delves into the details of how Wal-Mart worked towards its overseas
expansions in Europe, Latin America and Asia. This section will include a study of
their current domestic and international plans.

Of particular emphasis would be an analysis of the retail market in India, and the
promises they hold for a giant mass merchandise retailer like Wal-Mart. The study
will also explore specific strategies for this emerging market that a retailer could look
into.

The proposed strategic initiatives will be based on the analysis of forces such as
supplier relationships, merchandise operations, market environment, consumer
characteristics and competition. In understanding the huge technological advances in
retail operations in the U.S, the feasibility and ease of implementation of these
techniques in the world markets will be studied very briefly. A few examples are
demand forecasting and pricing software, RFID, data collection methods for
customized shopping experience and challenges of applying these technologies in an
emerging market like India.

Retailing trends in India- A section of this study as mentioned earlier, will focus
primarily on what prevents or supports the plans of foreign retailers in making their
presence felt in the country with the biggest promise for growth. As retailers in the
U.S. strive hard to distinguish themselves from their competitors by working on
brand image, partnering with local retailers and establishing a brand name overseas
would be some of the challenges that will be analyzed. As India slowly moves
towards the organized retail sector, a lot of political and operational challenges
undermine the utilization of the same basic strategies that U.S. retailers have so
successfully mastered over the past 50 years.

Finally, a simple model for business growth of U.S. retailers in India will be devised.
The research project will rely on materials from past projects, retail news articles,
retailing websites and research papers.

The conclusion of the research study will be an attempt to integrate the various
analyses made and provide a study material that can help people interested in
international retailing, identify the methods and inherent reasons behind retailer’s
international expansion programs.

v

HISTORY OF INTERNATIONAL RETAILING

The history of international retailing can date back to several hundred years, when
retail merchants traded with different countries in selling their products and bringing
necessary goods for their local consumers. Fast forwarding it to the 19th century, we
see the rise of organized retailing in the developed world and their expansion into
international markets in the middle of the 20th century.

The internationalization of retailing is ‘the transfer of retail management technology
or the establishment of international trading relationships, which bring to a retail
organization a level of international integration which establishes the retailer within
the international environment’.1 Alexander (1997) proposed six distinct stages that
identify the history of retail internationalization:

Genesis (1880-1945): characterized by the limited expansion of US and European
specialty, department and luxury stores across major cities in order to tap expatriate
and cosmopolitan markets.

Emergence 1 (1945-1960): characterized by the transfer of US retail formats and
techniques (e.g. the supermarket) into the markets of Western Europe and Japan.

Emergence 2 (1960-1974): characterized by the overseas investment of major
Western European retailers, both in other Western European markets, and in the
USA. This was a sustained period of internationalization, driven by cash-rich
European retailers reaching the limits of their national markets at a time when
regulatory barriers to international activity were starting to fall.

Crises (1974-1983): a period of truncated international activity due to the
economic shocks of the mid-to-late 1970s.

Renaissance (1983-1989): characterized by a resurgence of investment activity in
Europe and the US by leading Western European retailers, and also significant
investments by Japanese retailers in Western Europe and the US.

Regionalization (1989-2000): after a period of recession in the early 1990s, a
period characterized by ‘regionalized’ expansion by US and European retailers,
shaped in part by the European Single Market and NAFTA, and the opening up of
new markets in Eastern Europe and East Asia.

According to AT Kearney’s 2005 Global Retail Development Index, India and China
are among the top 5 emerging markets in the world. This analysis is based on
extensive studies that looked into factors such as political risk, economic risk, access
to capital markets and financial institutions, market attractiveness, market saturation
and time pressure.2

Moreover, Eastern European countries like Russia and Ukraine are also growing as
potential markets for entry of retailers. Nearly 55% of countries in this region are

1
Alexander, N. International retailing (Oxford: Blackwell, 1997), 37
2
A.T. Kearney Inc., “The 2005 Global Retail Development Index – Emerging Market Priorities for Global
retailers”

1

worth considering, up from 45% in 2004. In Asia, 30% of the emerging markets
show a promise for foreign retailers. The study also predicts that timing is a key
differentiation factor for most retailers. This could explain the reason behind several
retailers leaving a market due to poor performance. In 2003, China and Russia were
highly attractive markets for retailers, but in 2005, they have been overtaken by
India and Ukraine.3 According to the study, this transition of market attractiveness
keeps shifting (based on a country’s GRDI ranking) as and when emerging markets
grow and previously hot markets reach saturation.

Figure 1: 2005 Global Retail Development Index (Emerging markets)

2005 Country Region Country Market Market Time Score
rank risk attractiveness saturation pressure

Weight 25% 25% 30% 20%

1 India Asia 62 34 91 80 100
2 Russia Eastern 52 58 71 92 99
Europe
3 Ukraine Eastern 46 34 82 90 87
Europe
4 China Asia 68 40 53 90 83

0=high 0=low 0=saturated 0=no time
risk attractiveness 100=not pressure
100=low 100=high saturated 100=
risk attractiveness urgency to
enter

Source: AT Kearney Inc.

There are about 270 countries with 6.5 billion people and a $55 trillion GWP (Gross
World Product) 4in the world. In 2004, The GDP of the United States was $11.75
trillion, about 20% of the world economy. The population of the United States is 295
million, only about 5% of the world population. 5In 2003, the global retail sales
reached $8trillion and are still growing. This includes the sales of both US and foreign
retailers operating in different parts of the world. These figures show the potential
markets that US retailers can explore and why it’s beneficial for them to expand by
going international.

Currently, the top 250 retailers in the world serve 135 countries. With emerging
markets in Latin America, China and India showing a steady growth rate and a rising
consumer demand, retailers are required to quickly realize the potential for immense
growth.

3
AT Kearney Inc., “The 2005 Global Retail Development Index” – derived from Figure B and Figure 3
4
GWP – Gross World Product or Purchasing Power Parity: A method of measuring the relative purchasing
power of different countries' currencies over the same types of goods and services. Because goods and
services may cost more in one country than in another, PPP allows us to make more accurate comparisons
of standards of living across countries (Source: http://youthink.worldbank.org/glossary.php)
5
“The World Fact Book,” Central Intelligence Agency,
http://www.cia.gov/cia/publications/factbook/

2

Figure 2: Top 250 Retailers, By Sales

Source: www.stores.org

According to Professor Emeritus James Brian Quinn at Dartmouth College, “The world
we live in was not in the economics books when I was in the university. They talked
about land, labor, and capital in those days. Now, intellect is the driver of all growth
in the world. In fact, intellect, service, and growth create value,”6

Retail Innovations in the USA

Retail innovations have pioneered the growth of the retail industry by bringing
revolutionary changes to retailing formats and consumer behaviors, each step
transforming a nation of people and shaping the growth of the economy.

In 1879, F. W. Woolworth pioneered the five-and-dime store, that specialized in
selling everyday items at bargain prices by using high-volume, low markup strategy.
Woolworth also led to the demise of behind the counter stores and started direct
purchasing from manufacturers. The last Woolworth store was closed in 1998 after it
was unable to compete with the mass-merchandise discount stores on either price or
choice of items.

J.C. Penney led the retail revolution in 1902 by offering consumers high-quality
merchandise coupled with practices like standardized pricing and money-back
guarantees. Penney changed the way American consumers perceived retailers by
embracing the golden rule, “Do unto others as you would have others do unto you”

In 1948, the first E.J. Korvette’s discount store was opened as a “membership store
“to avoid the radar of the Robinson-Patman act. 7 The concept of membership stores
soon developed into the building of giant membership stores like Costco and Wal-
Mart’s Sams Club.

6
Margaret Hart, “Value-Creating Growth: Goals, Strategies, Foundations,” The Conference Board
Inc.
7
The Robinson-Patman Act of 1936, or Anti-Price Discrimination Act, outlawed the anticompetitive
practice of producers allowing chain stores to purchase goods at lower prices than other retailers. The Act
provided for criminal penalties, but contained a specific exemption for "cooperative associations (Source:
http://en.wikipedia.org/wiki/Robinson-Patman_Act)

3

The concept of convenience stores was started by 7-Eleven in 1927 at the Southland
Ice Company in Dallas, Texas. By selling basic grocery items when regular stores
were closed after-hours or on Sundays, the retailer was able to offer consumers, the
comfort of purchasing necessary items. 7-Eleven, or in other words, 7am to 11pm
seven days a week was a revolutionary idea at the time.

Inspired by the concept of hypermarkets in Europe, Wal-Mart opened its first
supercenter following a growing demand by consumers for a one-stop shopping
experience. The first supercenter was opened in 1988 in Washington, Mo. Since then,
the retailer has expanded into the grocery business and relatively every retail space
imaginable. Other retailers like Target and K-mart have also followed up with their
own supercenters.

These innovations have led to the massive expansion of the retailing industry in the
United States. Most of these retailers are now equipped with innovative and efficient
processes, paving way for their expansion into foreign markets. 8

8
“Retail Innovation: Ten Opportunities for 2010,” Retail Forward,
http://www.retailforward.com/special/innovation2010.pdf

4

GLOBALIZATION OF RETAILING9

Academic studies over the years have come up with various theories on what drives
the global expansion of retailers. Some theories propose that global retailers are
successful internationally if they are the first-movers in the market on a potentially
large operating scale, using no local partners or acquired assets and offering a store
format that is new to the country but is familiar to the retail firm. The study by
Gielens and Dekimpe (2001) provides answers to two questions: (a) on what basis
should retailers choose the market of entry for their international operations? (b)
How can retailers succeed in an international market?

A study by Harvard Business School professors David Bell, Rajiv Lal and Walter
Salmon, delves into these very questions by focusing on three top global retailers,
Carrefour, Wal-Mart and Ahold. This study used data collected from multiple sources
including field interviews conducted by the professors in Latin America. My analysis
focuses on their research about Carrefour, the global French retailer.

Carrefour10
Carrefour is the leading European retailer and second largest in the world after Wal-
Mart. It operates hypermarkets, supermarkets, convenience and other businesses
and hard discount stores in 32 countries across Europe, Latin America and Asia. With
a compounded annual growth rate of 24% since 1996, its sales including taxes were
90.681 billion euros in 2004 despite the fact that Carrefour has no stores in the US,
and UK.

Figure 3: Carrefour - Breakdown of consolidated net sales by geographic area

Source: Carrefour SA Annual Report 2004

Carrefour opened its first store (7000 sq ft) in the basement of the Fournier
department store in Annecy, France, in 1957. Soon thereafter, in 1963, Carrefour
opened its first hypermarket outside Paris in Sainte-Geneviève-des-Bois. The store
was unique in its size (27000 sq ft and provided parking for 450 cars) where
consumers could meet all their shopping needs under one roof. The store format was

9
David E. Bell, Rajiv Lal and Walter J. Salmon (John Quelch and Rohit Deshpande, eds.),
Globalization of Retailing in the Global Market: Developing a Strategy to Manage Across Borders, Harvard
Business School, 2004
10
Source: “Carrefour SA Annual Report,” Thomson Research, 2004

5

largely self service and covered a range of products from grocery to auto, clothing,
sporting goods, jewelry, home products and home furnishings. The French
consumers, who were largely fed until then by several mom & pop stores, welcomed
Carrefour’s novel idea. Between 1965 and 1971, sales growth exceeded 50% per
year with non-food items accounting for more than 40% of sales.

Key differentiators for Carrefour’s success

Hypermarket Stores: The hypermarket stores averaging 108,000 sq ft, are usually
located outside towns in commercial areas where land is cheap, and are easily
accessible by highways. The company also had a simple construction for its facilities.
This allowed it to invest about one-third less on a square meter of selling space than
a traditional supermarket.

Price: The success of the hypermarket concept could also be attributed to
convenience and price. Any product that a consumer can think of is conveniently
available at a single store. Carrefour always maintained a sharp focus on its pricing.
The pricing was based on surveys of competitive prices on the most important items
across all stores within a five minute drive of a Carrefour store. They were then set
to match or be less than the competitor prices. Carrefour’s prices averaged 5-10%
under those of retailers in the traditional outlets.

Local Suppliers & Private label brands: As competition grew, Carrefour
differentiated itself by purchasing from local suppliers and selling private labels.
Carrefour does not disclose sales figures for its private label products but it has a
total of 2500 private label products. Carrefour is creating a new organization,
Direction de la Marque, to manage its retail brands. The organization will work to
improve its private label brands and differentiate it from other manufacturer’s
brands. With the autonomous functioning of its hypermarkets, supermarkets,
neighborhood Cash and Carry and discount store operations, this move is part of a
larger plan to reinforce the central role of the private label. Carrefour is also
increasing its investments in private label. In France, the retailer is introducing about
700 new package products by the end of 2006. 11

Purchasing locally was a key strategy as it pleased the local authorities and met the
needs of the local consumers. Some of these very strategies were carried over to its
international markets to reap rich benefits. By purchasing in local markets, Carrefour
was also able to position itself as a leader in fresh food produce. Carrefour also
offered private labels at a price that was often 15 to 30 percent lower than the
national brands.

Decentralized Organization Structure: Carrefour had a decentralized organization
structure that allowed its various divisions to focus on local needs in a market. The
home office in Paris dealt with long term strategy and policy, financial and technical
matters and any advice as and when was needed. The home office was also
responsible for planning capital expenditures of the company and determining new
store locations. The individual store managers were responsible for store profits and
had the freedom to conduct sales and margin forecasts. They also determined the

11
“Latest news from supermarkets,” Private Label Istanbul 2006,
http://www.privatelabelistanbul.com/pleng/privatelabelhakkinda_haberler_haber6.html

6

overall store strategy before it was sent to the headquarters. Comparisons were also
made with other stores and departments in the region to benefit from best practices.

Almost all promotions were from within the organization with a strong emphasis on
on-the-job training. With this level of decentralization, support services like IT and
logistics were treated as vendors. For example, In 2005 Carrefour chose a leading
retail software vendor, Aldata, for deploying Aldata Gold software internationally.
This structure was a direct opposite to Wal-Mart’s centralized structure that banked
heavily on its in-house IT systems and state of the art logistics.

International Strategy
While Carrefour made big in-roads in France, it also stomped out a large number of
mom & pop stores out of business. Between 1961 and 1971, 80000 out of 203000
stores disappeared. These store owners used their political clout to seek government
intervention to slow the growth of Carrefour’s hypermarkets. Eventually, The French
National Assembly intervened and taxed retailers to pay for the pension of small
mom and pop stores. Added to this were zoning laws that restricted the space for
building hypermarkets.

With limitations for rapid growth in the French market, Carrefour started its first
international expansion by moving into Belgium in 1969. Carrefour soon expanded
into Spain and also introduced the hypermarket concept in Latin America in 1975.
However, Carrefour took a cautious approach towards building new stores. From
1975-1985, Carrefour opened only 10 stores using capital available from operating
stores. Once successful in a market, it started to build stores rapidly since 1985.
During the late 1980s, the Brazilian economy experienced severe inflationary
pressures and the local Carrefour management responded to this challenge
producing great financial results for the company. In Latin America, Carrefour
adopted the concept of “self-funding” and provided starting capital for only one store
and a half. It then opened its second store only after it was able to generate enough
funds from the operations of the first store. Carrefour has multiple store formats in
each region (hypermarket, supermarket, hard discount) and the size of the store
format is tailored to the needs of each country it entered. Carrefour was able to
negotiate discounts with its vendors which were then transferred as price cuts to its
customers.

The store manager as always had P&L responsibility, taking advantage of the
decentralized organization structure. Department heads purchased centrally only
when the benefit of central purchasing outweighed the benefit of local purchasing.
Hence product mix and assortment could vary by store and suppliers had to sell
products at the local level to ensure distribution in a country. Carrefour’s
headquarters in Paris negotiated with only 15-20 vendors worldwide and it served as
a central supplier of services such as accounting, legal, IT etc.

In 1989, Carrefour was also the first international retailer to make its entry into Asia.
Currently, it’s present in 7 Asian countries. In 1999, it merged with local French rival
Promode to expand it business further in France. However, the merger with Promode
posed a challenge to Carrefour. It was an alliance between highly decentralized
operations in the hypermarket division with centralized operations in the
supermarket division at Promode. But, it also provided economies of scale in
operations by preventing Carrefour from looking for new space in the French market.

7

But, along with continued expansion, Carrefour also exited from countries in which it
performed poorly. It made unsuccessful forays into Chile, Czech Republic and
Slovakia, Hong Kong, Japan, Mexico, United Kingdom and the USA. In the USA,
Carrefour had hypermarkets in Philadelphia and New Jersey for about five years.
Both stores closed in 1993. In the UK, Carrefour had three hypermarkets until the
1980s. These stores were sold later and Carrefour exited the market due to stiff
competition.12

In terms of international expansion, Carrefour seems to have traded off the benefits
of size, in terms of buying power, distribution and logistics costs and marketing
costs, for getting the format right in each country it entered. In certain Asian
countries, although Carrefour was the first international retailer to enter, it still had
to go through Joint ventures due to government regulations. However, it seeks to
have a majority ownership in these ventures to take control of the day-to-day
management of the stores.

Figure 4: Carrefour Store Layouts

Source: IGD Retail Analysis (igd.com)

Thus Carrefour’s mode of entry remains to be green-field except when constrained
by local market regulations. Carrefour caters to local market needs with a strong
emphasis on prices. For example, in Taiwan, 70% of the products in stores are
Taiwanese, 20% Asian and the remaining 10% come from America or Europe.
Overall, Carrefour has had a strategy that makes it the first international retailer to
enter a market and it seems to prefer and succeed in developing markets over
developed markets.

The following is a snapshot of some of the highlights of Carrefour’s expansion in
several markets worldwide. This gives an idea of the variety of country specific
strategic initiatives that Carrefour implements in each market.13

AMERICAS

Argentina: Carrefour is Argentina's largest retailer with more than 400 stores
including Carrefour hypermarkets, Norte Supermarkets, and Dia hard discounters.
It acquired Norte in 2001 and completed the operational integration of the company.
Its expansion plans for 2005 hinge on Argentina's ability to "tackle the black market
and wrap up the country's mammoth debt restructuring."

12
Source: “Carrefour,” Wikipedia, http://en.wikipedia.org/wiki/Carrefour
13
This Country Analysis snapshot is from multiple news sources: Business Week, One Source Global
Business Browser database and online newspapers worldwide.

8

Mexico: Carrefour badly lagged Wal-Mart in Mexico and had only 29 stores. In 2004,
Carrefour sold its Mexico operations to Chedraui as part of a program announced by
the group to divest non strategic or underperforming activities.

Brazil: Carrefour opened its first hypermarket in Brazil in 1975 and is currently
number two in the country. Competition among retailers in Brazil, a nation of 184
million with some of the highest interest rates in the world, is heating up as they
offer customers financing for their purchases. Carrefour had 390 stores at the end of
2004 and spent money investing in a lot of new hypermarket stores. Wal-Mart is its
biggest foreign competitor in this nation.

ASIA

China: Carrefour has been active in China since 1995, but its store opening plans
have had to be put on hold while it restructured its business to include a local
partner – a rule imposed on all foreign businesses moving into China. Carrefour sales
rose by 25% to 17.4bn Yuan ($2.2bn; £1.3bn) in 2005, making it China's ninth-
biggest retailer by sales. However, Chinese retailers still dominate the local retail
market. Carrefour increased the number of its stores in China to 78. China is the fifth
largest market for Carrefour.

Korea: When Carrefour became the first global supermarket chain to enter Korea in
1996, it put local discount stores on high alert. But the chain failed to localize its
business sufficiently to meet Korean customers’ tastes by stacking products up to the
ceiling warehouse-style and organizing stores the same way it does in France. In
2006, Carrefour Korea, the No. 3 discounter in South Korea, decided to sell up to 10
of its 32 outlets nationwide. This may be purchased by rival Lotte Mart. However, the
company's plan include an increase in the number of stores in the Seoul metropolitan
area from the current five to 12 by 2008 and investing 400 billion won this year for
expansion and remodeling plans.

Malaysia: Carrefour started its Malaysia operations in 1994. Its operations are 30
percent owned by Malaysia's Syarikat Pesaka Antah. Carrefour Malaysia, plans to
invest up to RM200 million for two additional stores and hopes to get better sales
riding on its promotional activities involving a price cut of up to 5% on some of its
“customer-sensitive” products. Carrefour Malaysia is also planning to invest up to
200m rat in two new hypermarkets in the Klang Valley, to raise its network to 10
stores from eight currently. It currently has six hypermarkets in the Klang Valley,
one in Penang and another in Johor. Malaysia has restricted the entry and expansion
of hypermarkets in the country in recent years to protect smaller local businesses,
forcing foreign retailers to devise new strategies to enable them to expand.

EUROPE

Turkey: Carrefour Turkey is currently the number two food retailer in Turkey with
2004 net sales of E702 million. It currently operates 12 hypermarkets, seven
supermarkets and 255 hard discount stores in Turkey. It is on a strong acquisition
drive of local retailers in the market.

9

Spain: Carrefour has had to work hard to make its Spanish operations work, given
the tough legislative framework there and the mechanics of integrating the Pryca
business acquired in 1999 with its existing Continente unit. The necessity of creating
a single IT system for the merged Pryca/Continente business allowed Carrefour to
upgrade its operations, with a likely reduction in IT costs of 25-30 percent. An added
benefit from this merger that contributed to Carrefour's success in Spain was the
sharing of services – such as central purchasing and pricing negotiations. Carrefour
had 30 Spanish distribution centers in 1999 but is on target to reduce this to 11 by
2006 – which should allow it to reduce logistics costs as a percentage of sales. In
2005, Carrefour divested Puntocash in Spain to Miquel Alimentacio Grup.
In 2006, Carrefour Spain acquired 4 hypermarkets and 2 petrol stations from
Caprabo.

Poland: Carrefour has been active in Poland since 1997, and operates about 15
hypermarkets and 67 supermarkets there, with one store the company claims is the
largest shopping center in central Europe, located in central Warsaw. In 2004, with
the purchase of 13 Hypernova hypermarkets from Ahold, Carrefour became Poland's
second-largest hypermarket retailer. Carrefour is considering opening 1,000 square
meters stores in smaller towns. This format will be more suited to the Polish market
where the population is spread out more in rural towns. Poland has a low population
density, with only four per cent of the population living in the capital city. Hence,
small towns are a big opportunity. The retailer's future development in the country
will no longer involve takeovers of shopping malls or individual stores, despite the
fact that it acquired 12 hypermarkets from Ahold early in 2005.

10

SUPPLIER – BUYER RELATIONSHIP

In the context of Global Retailing, no analysis of the retail industry can be complete
without considering its relationship with two main elements of the value chain-
consumers and suppliers. In this section, I briefly analyze the latter element and its
relationship with retailers in the wake of intense global expansion of both retailers
and suppliers.

Buyer Power14
When organized retailing began in the early 1900’s, the consumers became the king.
They were offered a wide array of choices and competition ensured that they always
got the better of price and variety. However, a retailer’s relationship with his
suppliers has been evolving over the years. Initially, suppliers had the power to
dictate terms to the retailer. They decided the products that need to be sold, the
displays and the products that need to be replaced in a store. Price negotiations
always helped the supplier reap benefits from selling a product to a retailer.

However, things changed with the quick rise in discount stores like Wal-Mart.
Retailers were rapidly able to generate consumer demand through their stores and
increased loyalty through price savings, efficient logistics and better marketing. This
eventually led to a retailer dictate terms to the suppliers in order to sell their
products in the stores. Nowadays, major retailers like Wal-Mart get huge price
discounts from suppliers that enable them to implement EDLP (Every Day Low
Prices).

With the opening of world markets, manufacturing companies were the first to go
international by initially sourcing raw materials and then producing them to
eventually selling their final products. These manufacturing companies offered
customized choices to consumers and negotiated better deals with retailers.
Especially in developing economies, suppliers had a better chance of earning
profitability in highly unorganized retail markets. Hence, they were able to
understand the dynamics of foreign competition much before the major retailers did.

But with the global expansion of retailers from the early seventies, the buyer power
came to the forte again and suppliers are faced with some of the similar challenges
that they faced earlier in domestic markets. A typical scenario is where a consumer
products company is faced with the task of satisfying his customer, the retailer. A
retailer with international operations could complain that he is paying different prices
for the same products in the markets he operates in. The retailer may even demand
that he receive a consistent price or deal for all his stores failing which he would go
to the lower priced competition.

This is a circumstance where retailers have understood the strategies of suppliers in
different global markets and hence want to take the same decision making
advantages, which made them powerful in the domestic market. However, such a
deal with a retailer would require a supplier to go through a region-wise financial
analysis and price data understanding that would only complicate than make things
easy for him. Moreover, a change in this direction would be a global decision that can
be made only by the CEO.
14
Mark Carr, Arlene Hostrop and Daniel O'Connor, “The New Era of Global Retailing,” The Journal of
Business Strategy (Boston: May/Jun 1998.Vol.19, Issue. 3; pg. 11, 5 pgs), Copyright Faulkner &
Gray, Inc. May/Jun 1998

11

Faced with increasingly saturated home markets, leading retailers such as Wal-Mart
and Carrefour are looking abroad for future growth. The growth in business through
these large global retailers is creating downward pressure on pricing and upward
pressure on costs in areas such as working capital, supply chain enhancements, and
support resources such as IT. But as retailers began to exert pressure, many
suppliers were finding their regional operations as ill designed to deal with it. This
inconsistency has largely in part been due to the way in which manufacturing
companies expanded internationally.

Most manufacturers began their international operations in a decentralized manner.
The regional offices had considerable leeway in developing channel strategies and
tactics. This structure also enabled manufacturers to better deal with local
competition and consumer choice. But this regionalized structure has now become a
liability with the growing clout of global retailers. This independent decision making
has led to inconsistencies in pricing structures, brand positioning, and logistics
capabilities across markets.

However, in order to survive in a world where global retailers are ever expanding,
the buyer relationship needs to be strengthened and this required significant but
slow changes to the strategic, operational, system and organizational structures of
these manufacturers.

The expansion of global retailers has been a tough challenge for manufacturers.
Their growth has made manufacturers see an increasing dependency on the selling
power of retailers to customers. One consumer packaged goods company with
operations in more than 50 countries found that 10% of its global business was with
Wal-Mart, with another 25% of its business spread among a handful of other global
retailers. Many manufacturers, especially in Europe where retailing is well
established, have found a greater percentage of their business dependent on a
handful of retailers.

Carrefour has entered into global supply contracts in certain categories and so are
other retailers. Also, several European retailers joined global buying groups such as
Carrefour Marchandises International (CMI, created in 1995) to leverage best
practices and realize economies of scale. Carrefour is also considering creating
similar groups in Latin America and Asia.

What Retailers demand15

Price concession: When dealing with manufacturers, either in the domestic or
international market, retailers negotiate a lot of favorable terms. Retailers like Wal-
Mart have well established systems that help them see through price differences and
promotional activities across markets.
Operational cost savings: With increasing costs of global operations comes tough
cost saving measures. Global retailers generally force manufacturers to accept tough
payment terms, in turn raising the costs of doing business for a manufacturer in the

15
Mark Carr, Arlene Hostrop and Daniel O'Connor, “The New Era of Global Retailing,” The Journal of
Business Strategy (Boston: May/Jun 1998.Vol.19, Issue. 3; pg. 11, 5 pgs), Copyright Faulkner &
Gray, Inc. May/Jun 1998

12

same market as the retailer. This gain in Accounts Payable period helps retailers
divert funds to much needed measures such as NSO (New Store Openings).
Supply chain efficiency: Wal-Mart’s IT enabled sophisticated supply chain systems
has led to manufacturers improve theirs in turn. To keep up with the fast pace of
Wal-Mart’s operations, several manufacturers have adopted expensive and efficient
means to achieve lean operations. This has sometimes led to suppliers outsourcing
their operations to manage rising demands and high costs of labor and material.

Overall, the biggest challenge for a retailer or a manufacturer lies in efficiently
coordinating each of these activities to realize true economies of scale and healthy
profit margins.

13

WAL-MART
Quick Facts
Wal-Mart is the world’s largest retailer with sales of $312.4 Billion as of January 31,
2006. It employs 1.6 million people worldwide operating from more than 6200
facilities spread across the globe. On an average, 138 million customers visit Wal-
Mart each week.

The first Wal-Mart was opened by Sam Walton in 1962 in Rogers, Arkansas. In 1970,
the first distribution center was opened in Bentonville, AK to check the COGS growth.
In 1983, Sam Walton introduced Sam’s Club warehouse after observing the concept
of Sol Price’s Price Club. Wal-Mart also has the largest network of suppliers spread
across the globe. Contrary to popular belief, Wal-Mart buys merchandise and
services from 61000 suppliers in the US.

In 1992, Wal-Mart went international in Mexico, which was followed by its entry into
Canada with the acquisition of 122 Woolco stores. Since then, the retailer has never
looked back. International sales represented $56.3 Billion in 2005, nearly 20% of the
total revenues. Wal-Mart made a series of joint ventures and acquisitions in Asia and
Latin America to fight with rival Carrefour.

In 1996, Wal-Mart entered China and in 1998, entered Korea through Joint Venture
agreements. In 1998, Wal-Mart forayed into Germany and faced the toughest
competition from rival hard-discounters like Aldi. In 1999, Wal-Mart acquired 229
stores of the Asda group in the UK. In a span of 10 years, under a consistently
progressive leadership, Wal-Mart made huge inroads in many international markets.
Wal-Mart’s major plan for the future is to enter the most promising retail market in
the world, India.

Figure 5: Wal-Mart Financial Highlights

Source: Wal-Mart Stores, Inc. 2006 Annual Report

14

International Expansion16

Figure 6: Wal-Mart International Operations

Canada
UK
Germany
Japan
South Korea
China
Mexico
Central America

Brazil

Argentina

Not to be reproduced without the author’s permission

Source: Prepared by the author (Primary source:
http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=369)

Mexico & Canada
Wal-Mart made its entry into Mexico by joining hands with the most successful
Mexican retailer CIFRA, with sales of more than $5 Billion in 1997. This was
welcomed by many analysts as the North Atlantic Free Trade Agreement (NAFTA)
looked promising at that time and a lot of consumers with similar demands for US
products existed there. Wal-Mart also transformed the Canadian Woolco stores it
acquired into the Wal-Mart format. Despite initial doubts, the entry into Canada was
a great success story for the retailer.

Latin America
Wal-Mart entered Latin American by establishing its first store in Buenos Aires,
Argentina in 1992. Soon, it opened stores in the interior cities of Argentina. In 1995,
Wal-Mart entered Brazil through a joint venture and subsequent acquisition of Lojas
Americanas. Latin America posed a challenge to Wal-Mart as varied cultural habits
and preferences prevented Wal-Mart from sourcing the same products that it did for
its domestic market and markets in Mexico. Moreover, it had a formidable rival in
foreign retailer Carrefour to confront.

Wal-Mart established both discount stores and Warehouse membership stores in
these markets. Wal-Mart’s poor performance in Argentina led to the overhauling of

16
David E. Bell, Rajiv Lal and Walter J. Salmon (John Quelch and Rohit Deshpande, eds.),
Globalization of Retailing in the Global Market: Developing a Strategy to Manage Across Borders, Harvard
Business School, 2004

15

its top management four times in four years. Such a performance could have been
possible due to a strong desire on the part of Wal-Mart in implementing their much
successful domestic model. Don Bland, president and CEO of Wal-Mart Argentina was
quoted as saying “Following our blueprint too closely wasn’t a good idea”.

Whereas Carrefour with a decentralized model was able to adapt quickly to local
tastes, Wal-Mart initially failed to realize this during its operations in Latin America.
There were many unwanted items stacked in the shelves and Wal-Mart didn’t pay
attention to difference in consumer incomes and spending within the same city. The
store layouts also reflected the US model and didn’t augur well with the local
customers. Wal-Mart strongly relied on its purchasing power and EDLP strategy to
win over the Latin American population, but soon realized that consumers indeed
dictate the strategies of any retailer.

Also, Carrefour posed an unmatched competition in Latin America by competing
head-to-head on prices and using its first entrant advantage as a tool against Wal-
Mart. Especially in Argentina, it was observed that Wal-Mart was not able to spread
the message of its EDLP strategy to the consumers. Another interesting idea is to
understand the mind of the consumer. Latin Americans consider shopping as a social
event unlike consumers in developed countries, who consider it as mostly a chore.
Word-of-mouth campaign is strong with people recommending stores and their
brands to family and friends. Hence EDLP wasn’t a sellable proposition in this
market.

Wal-Mart as always, learned quickly from this experience and came up with a
localized model for a store it opened in La Plata, 50 miles southeast of Buenos Aires,
in 1997. Not only was the floor made of scuff-resistant tile instead of carpet but the
aisles were made wider. Wooden wine shelves with overhanging arbors replaced
metal racks, a change that bolstered wine sales by 20 percent in other stores.
Doughnuts were glazed with dulce de leche, a caramel confection and clothing racks
carried more apparel in medium sizes and less in large sizes. Moreover it was able to
keep an eye on its close competitor, a Carrefour store just down the street.

United Kingdom17
Wal-Mart entered the U.K through the acquisition of Asda. The retailer has faced
intense competition from rival retailer Tesco, which by and large has been very
successful in the country.

Asda is the UK's second largest food retailer and forms the UK interest of Wal-Mart's
International division. The company runs 265 Asda stores, 19 Asda Superstores, a
general merchandise pilot store (Asda Living) and six trial George clothing stores in
the UK. Asda specializes in supermarket retail, selling a range of both food and non-
food products. Its non-food offerings cover apparel, entertainment products,
electrical goods, home ware and toiletries. The stores operate as a traditional
supermarket and also offer services such as insurance, photo processing and an on-
line shopping service. The company also sells its own range of fashion apparel, under
the George label.

17
Source: “Company Spotlight: Asda,” Market Watch: Global Round-up, Sep2005, Vol. 4 Issue 9,
p85-90, 6p

16

Using Wal-Mart's expertise, Asda is rapidly expanding into new specialty areas such
as pharmacies, opticians, jewelries and photo departments. In addition to
supermarket retailing, Asda is also involved in property development through its
subsidiary, Gazeley Properties. The company, through ASDA Financial Services
(AFS), also offers customers insurance schemes (car insurance, home insurance,
travel insurance, life insurance, mortgage life insurance and pet insurance), credit
cards and savings schemes. In addition, the company runs about 150 petrol stations
in the UK.

Asda has been trying hard to impress upon the UK government to remove certain
competition laws that govern planning authorization for large stores (e.g.
supermarkets) in a particular region. Asda has been losing market share to Tesco
and hopes the relaxation of the law will enable it to compete better with its rival. The
problem with the 'first mover advantage' is that, in practice, once a large
supermarket has been built in a particular area, no further planning permission is
given in that area. Because of this, in many locations there is only a single large
Tesco outlet and Asda cannot open a rival store.

However, apart from building new stores, acquisition has been a path that Asda is
taking to compete with Tesco. In 2005, the Office of Fair Trading approved the
purchase by Asda of a dozen Safeway stores in Northern Ireland. Asda aims to open
at least 10-12 new stores per year and hopes to create more than 500,000 square
feet of new retail floor space every year.

Germany18

Figure 7: “Wal-Mart Germany: A problem of size”

Source: Lebensmittel zeitung

18
“Wal-Mart lesson: Smiling service won't win Germans,” The Christian Science Monitor,
http://www.csmonitor.com/2002/1017/p07s01-woeu.html
Andreas KNORR and Andreas ARNDT, “Why did Wal-Mart fail in Germany (so far)?,” University of
Bremen, Department of Economics and Business Studies (FB 7), Institute of World Economics
and Int’l Management (IWIM)

17

Wal-Mart entered Germany in early 1998 by acquiring 21 Wetkauf and 74 Interspar
stores. Wal-Mart faced a major hurdle in Germany when it was unable to understand
the mind of the German consumer and came up with initiatives that fell flat. The
following can be identified as challenges that Wal-Mart faced in Germany:

• Lowest price - Germany is Europe’s most price sensitive market. Consumers
looked for cheapest prices on certain products and were willing to look
elsewhere for that.
• “Everything under one roof” shopping experience – Wal-Mart had so
successfully sold this concept of finding everything a consumer needs in a
single store. However, German consumers did not find this as a value-add.
They were willing to go to other rival retailers for products they didn’t find.
• Customer Service – German shoppers were happy to shop in a store as long
as they got the product they wanted at the price they wanted to pay. Smiling
store clerks and cashiers didn’t add to the glitter of a great shopping
experience.
• The Aldi challenge – Aldi is the most successful retailer in Germany and
operates small hard discount stores in comparison with Wal-Mart. German
consumers love Aldi for its cheapest price offer on groceries and other
essential products. Aldi also offers little in service and no bagging for items.
However, consumers from the poorest to the richest preferred to shop at its
stores. There is a huge challenge to Wal-Mart in luring Germans to their
bigger stores.
• Real estate laws – Wal-Mart is limited in building gigantic Sam’s Club type
warehouse stores in Germany due to planning restrictions. Still Wal-Mart has
come up with around 80 supercenters so far.
• Strict work hours – Germany has a legal maximum of 80 hours/week of store
opening hours. This is among the shortest in Europe. Stores are not allowed
to be open during holidays or on a Sunday. This restricted Wal-Mart which
found the low working hours affecting its sales.
• Fair trade and Anti-trust laws – Germany has some strict pricing policies in
place. This prevented certain pricing strategies as they were deemed illegal
although the same were perfectly legal in the US and the UK. In 2003, Wal-
Mart was slapped with a ruling from the German High Court accusing the
retailer of predatory pricing. The selling of goods below the cost is not allowed
according to anti-trust laws as it is believed to impact small businesses.

China19
Wal-Mart entered China in 1996 and opened its first store in Hsang-Chuin city. This
location was preferred as the local government provided tax incentives to the retailer
and the city was closer to Hong Kong. Wal-Mart entered the Southern part of China
and slowly gained a foothold before moving to the larger cities.

Wal-Mart is focused on gaining a greater market share of China’s $240 billion retail
market. It currently operates more than 43 stores through joint ventures in China.
The company is teaming up with the Hong Kong based CITIC Pacific to open many
stores over the next five years. CITIC Pacific and Wal-Mart are likely to invest heavily
on opening stores in central China as well as the eastern cities of Shanghai and

19
Source: “Company Spotlight: Wal-Mart,” MarketWatch: Food, Feb2006, Vol. 5 Issue 2, p19-25,
7p

18

Nanjing to tap into the liberalizing market. Wal-Mart will hold a 65% stake in the
partnership.

China is an attractive market thanks to its huge population and consumers' growing
levels of disposable income. In addition, certain parts of China are especially
appealing as the government has established zones that encourage inward
investment. The Chinese market has looked all the more attractive following the
opening of the market to foreign retailers. A regulation requiring foreign companies
to have local partners was lifted recently. Wal-Mart hasn’t taken advantage of this
yet but could probably make changes in this direction. A possible reason why Wal-
Mart has chosen to stick with local partners may be the vast information about local
consumers and the market that the partners have. This will serve as a big
competitive advantage for the retailer that has realized the importance of this factor
during its experience in Latin America.20

This will also enable Wal-Mart to bridge cultural gaps and meet the needs of Chinese
customers, which will be vital to its success in this market. In China and most Asian
countries for that matter, food is bought more frequently and in smaller quantities.
Hence stores need to be aware of this trend when they stock their grocery items.
Wal-Mart’s low price image also helps in this case as Chinese consumers are highly
price-conscious despite the emergence of a fast growing but limited in number and
affluent middle class.

The Japanese challenge

Carrefour entered the Asian market when it opened its first hypermarket in Taiwan,
in 1989. In 2000, Carrefour entered Japan, and set up around 8 hypermarkets.
However, unable to sell its mass merchandise, low price strategy to the Japanese
consumers, Carrefour eventually pulled out of Japan in 2005, after four straight
years of losses.

Likewise, Wal-Mart has been facing a downward spiral since its entry into Japan.
Appeasing a demanding consumer base that believes “low prices mean low quality”,
Wal-Mart has struggled all along in selling its EDLP concept to the Japanese, since it
started the Japan operation through Seiyu. Seiyu, Japan’s fourth largest supermarket
chain store was founded in 1963. In May 2002, Wal-Mart acquired a 6.1% stake in
the company to kick-start its international operations in Japan. Wal-Mart chose Seiyu
also because the stores were mostly located close to train stations; one of the most
commonly used means of transportation. In May 2005, Wal-Mart became the largest
shareholder in this Japanese supermarket, when it acquired 42.4% after a series of
capital infusions.21

What went wrong?22
• Japanese consumers believe that low costs goods are associated with lower
quality of the products. Foreign retailers like Wal-Mart and Carrefour have
been unsuccessful in transforming this attitude of the consumers.

20
Source: “Wal-Mart: China in its hands,” Market Watch: Food (Sep2005, Vol. 4 Issue 9, p19-20,
2p)
21
“International operations webpage,” Wal-Mart stores website, www.walmartstores.com
22
“Japan isn’t buying the Wal-Mart idea” and “Wal-Mart’s waiting game in
Japan,”Businessweek.com

19

• As a matter of fact, Wal-Mart has not been able to successfully implement its
EDLP strategy. It is yet to penetrate the close-knit supplier network in Japan
and purchase in bulk, a method that squeezes suppliers to provide low priced
goods to Wal-Mart, making them more efficient, leaner and faster in return.
• Japanese consumers are more used to high-cost departmental stores and
mom and pop stores. Purchasing items in bulk and storing them is not
feasible as most Japanese homes in the big cities are smaller. Consumers
usually prefer to use public transportation and vehicle parking is restricted.
Hence they prefer to make frequent purchases in lesser quantities.
• Seiyu has not been able to reduce costs in its supply chain. Especially in
supermarkets, Japanese buy a lot of fresh produce, which are supplied by
small, family-run businesses whose farms and fisheries offer better deals for
smaller orders.
• A lot of customization also needs to be done to cater to consumers in the
different islands of Japan, who have different demands for a particular
commodity. This causes logistical inefficiencies and complications.
• The Japanese economy is rebounding after a 10 year long slump and
consumer shopping attitudes need time to change.

This brief analysis of the international retailing scene in Japan speaks volumes about
what retailers need to look into when they enter relatively unknown and much more
challenging grounds like India. The promise of growth is no concession for making an
entry that could turn faulty!

The Road Ahead…

Figure 8: Wal-Mart in 2005

Structural changes Marketing Initiatives

155-165 new stores 33% stake in Central New fully integrated Aggressive pricing
in international American Retail media campaign with campaign for the
markets. Net Holding Company – celebrities- “Home for Fall holiday season-
increase of 285-325 dominance in Central The holidays” taking on the
new stores and clubs America competition
in US & abroad

Greater control over Major acquisitions in Launch of Project Launch of Metro 7-
Seiyu in Japan – 53% Brazil of Sonae and Décor- collection of Distinct line of
major interest making Bompreco color coordinated fashion apparel for
Seiyu a Wal-Mart Home Decoration women
subsidiary products

Active Public Experimental super Introduction of office Wal-Mart’s “Save
Relations (PR) centers opened in products catalog in More Smile More” Ad
campaign to fight Texas and Colorado Sam’s Club campaign -
growing criticism, emphasizing value
launch of addition to customer
walmartfacts.com

Source: Prepared by the author

20

As can be seen in the above figure, Wal-Mart made some major changes to the very
way it conducted its daily business. Riding high on state of the art logistics and
support systems, Wal-Mart had a grand plan to integrate its systems worldwide to
gain unimaginable advantage over its rivals. Wal-Mart still continues to spend about
2% of its annual sales on Information Technology. A highlight of their restructuring
however has been a never before seen emphasis on marketing initiatives.

In 2005, Wal-Mart started a major revamp of its organizational policies following
years of union backed anti Wal-Mart campaigns. Realizing that such continued
measures would undermine the image of the retailer in the public eye and facing
opposition from certain foreign and local governments in establishing their base,
Wal-Mart laid special emphasis on improving its public image.

In the domestic market, retailers like Target projected their strength as an upscale
discount retailer and were making healthy profits. Target’s customer base had an
average household income of $60,000 whereas Wal-Mart’s average was around
$45,000. Also, since 2004, Wal-Mart’s same store sale at 2.4% was less compared to
Target’s average growth of 5.1%. Wal-Mart sought to reverse this trend by targeting
more affluent customers with slick merchandise. They also improved store design
and display, making their aisles wider and their sales floors tidier.

These measures, while helping Wal-Mart regain its strong foothold in the domestic
market, also sought to improve the retailer’s image in the world. In India, Wal-Mart
faces strong opposition from socialist political parties that view the retailer as
exploitative and a contributor of job losses for local businesses. Wal-Mart has aimed
to mitigate this notion by projecting the economic growth and the jobs it has created
in places where it entered. According to Wal-Mart’s latest mouthpiece,
walmartfacts.com, the retailer saves working families about $2300 per year.

Currently, Wal-Mart is not only trying to grow in the domestic market but also
making a conscious effort to improve its public image. During the Hurricane Katrina
disaster, Wal-Mart was praised for its foresight and swift action in reaching out to the
needy. It spent $20 million in cash donations, gave 1500 truckloads of free
merchandise, food for 100,000 meals and a job promise for every one of its
displaced workers. The work that Wal-Mart had done was unprecedented and often
surpassed the relief measures of the government. 23

Such socially progressive initiatives will help a long way in making Wal-Mart
acceptable to the public eye in a country like India. As India plays the waiting game
in allowing foreign retailers into the country, Wal-Mart is already preparing itself to
begin its retail operations from the very next moment!

23
Michael Barbaro and Justin Gillis, “Wal-Mart at Forefront of Hurricane Relief,” Washington Post,
September 2005, http://www.washingtonpost.com/wp-
dyn/content/article/2005/09/05/AR2005090501598.html

21

INDIA
Un-caging the Tiger24

India was a land of opportunities for global traders since several centuries in the
past. Merchants from Europe traveled several thousand miles of land and sea in
order to trade for Indian goods. But unlike in the US and Europe, the retail scene in
India has never seen major changes. Retail is India’s largest services sector and
accounts for over 10 percent of the country’s GDP and around 15% of the
employment. Although the country has one of the highest consumer base in the
world, the retail industry as such is still highly fragmented. According to Mike Duke,
Wal-Mart’s vice chairman and head of international operations, “India is becoming a
consumer economy”.

Compounding this trend was the slow economic progress the country made until the
1990’s, when a pro-reform government at the center opened the door for
multinationals to easily set foot in the country. This measure was followed in tandem
by the US government’s measure to welcome foreign talent into its much needed
Information technology services. This saw a sudden surge in Indian talent moving to
foreign shores and Indian IT firms pumping in money into the country by going
global. However, the retail industry in India remains elusive to foreign retailers.
Having realized the potential of allowing Foreign Direct Investment (FDI) in several
industrial sectors, India has started the process of opening the Indian retail space.
Its much prosperous neighbor, China, has been a true example of how reforms can
change a state and India is learning fast.

India is experiencing explosive growth in the economy and projections by a panel of
Indian economists predict that the GDP growth rate of 7% will continue into 2010.
“The average Indian consumer today is richer, younger and more aspiring in his/her
needs than ever before,” consultancy KPMG wrote in a report for the Federation of
Indian Chambers of Commerce and Industry (FICCI), which is actively pushing for
India to relax rules on Foreign Direct Investment. More recently, in a step made in
the right direction, the Indian government allowed single-brand foreign retailers to
enter the country by having a 51% stake in its operations.

I have organized the various factors that can challenge a foreign retailer in setting its
business in Indian shores, in the below flow circle. I have identified five major drivers
of retail business in India and shall explain them in detail.

24
Source: Multiple news sources including- “One Brand, no waiting in India,” Business Week,
http://www.businessweek.com/investor/content/feb2006/pi2006022_1223_pi015.htm

22

The Five Forces of Indian Retailing

Figure 9: Five forces of Indian Retailing

Infrastructure

Consumers

Logistics,
Operations
& Services

Economy
& Political
System
Competition


Source: Prepared by the author

Consumers25
Most retailers will agree that understanding the mind of the consumer is probably the
biggest piece in the retail puzzle. Many retailers spend enormous amount of money
in trying to understand the behavior and purchasing trends of the consumer and
position their merchandise accordingly. Also, consumers differ across countries and
there is no guarantee that a profitable format in one region will work in the other.
Global retailers such as Wal-Mart learnt it the harder way when they entered Latin
America and Germany in the 90’s. Indian consumers are no different, and are much
more demanding and varied in their preferences than their comparable Asian
counterparts. Hence, I’ve considered the Indian consumer as the first part of the
retail circle.

India has a highly versatile population with a mix of rural and urban inhabitants. The
urban population constitutes 27.78% of the total population. Only 7 out of a total of
35 States and Union territories have an urban population over 40%. This indicates
the level of penetration that a retailer needs to achieve if he plans to enter the
Indian market. However, the growth of organized retailing in India depends on the
extent of rapid urbanization that takes place. A study by the US census on the

25
Sources: “Census India 2001,” Census of India, www.censusindia.net; “Gate Way to
Government of India,” India Image, http://indiaimage.nic.in/languages.htm; “Ethnologue
report for India,” Ethnologue, Languages of the World, www.ethnologue.com; Sections on language
and culture of India in www.wikipedia.org; “State of Global Retailing – Looking for Growth in
Emerging Markets -Focus on India,” National Retail Federation, NRF website resources

23

population division in the world shows the increase in India’s urban population
reaching to become the 2nd highest in the world over the next ten years.

Figure 10: Indian Consumer Market

Source: Indian Urban Retail – Opportunities and challenges (FICCI.com)

The Indian consumer is also highly challenging in terms of language and culture.
There are 22 officially recognized languages in India out of a total of around 415
languages. The state boundaries of the country have been divided based on linguistic
differences. India has 6 major religions and is one of the most secular, diverse
democracies in the World. Indian culture poses a huge challenge for retailers as it is
highly inconsistent and varies in a myriad ways from one place to the other. This
strong difference in cultural values is reflected in the purchasing behavior of
consumers especially when it comes to grocery food items. Grocery food is by far the
largest market in India with a total share of 76% of the total Indian retail market but
with only a 1% penetration rate by organized retailing. Major foreign retailers cannot
ignore this large pie, but mastering it is highly challenging.

Figure 11: Market Share across Retail Categories in India

Source: Indian Urban Retail – Opportunities and challenges (www.FICCI.com)

24

These challenges were faced when giant CPG companies like P&G entered the Indian
market. They faced heavy competition from local family owned companies that were
able to make and market products very specific to the local communities. However,
slick marketing tactics including heavy spending in advertising has helped them pile
up a greater market share in categories such as oral care, hair care and feminine
care.

Indians are also similar to other Asian consumers in their purchasing behavior.
Consumers rarely stock items and purchase frequently for grocery items. They
believe in purchasing fresh food produce and usually end up buying vegetables and
meat from local grocers. Hence, it is highly imperative that food items be readily
available in terms of convenience and time. This could probably explain why most
vegetables and fruits are purchased from push cart vendors or small food markets
that are opened very close to residential places.

Figure 12: Indian push-cart vegetable vendor

Source: A retail study tour of China and India (www.retailforward.com)

India is also the largest consumer of vegetables. Indian vegetarians are primarily
lacto-vegetarians and make up 70% of the World’s vegetarians. They also constitute
20-30% of the Indian population. Most Indian food is produced organically and lack
of proper storage and safe transportation, combined with a hot and humid weather,
makes it easily perishable. Hence Indian consumers are used to purchasing food
items on mostly a daily basis.

On the other hand, home products offer an easy opportunity for foreign retailers to
explore. India has a growing middle class and fairly young population. India has the
highest proportion of younger population (<25 years) in the world at 53%. With a
fairly consistent growth in the purchasing power of people, there has been a huge
surge in shopping malls and hypermarkets to cater to their demand. However, this
demand is still restricted to the urban middle class and does not permeate to the
rural or urban lower income groups. This fairly large group is appreciating the
benefits of an organized retail growth where shopping centers and supermarkets are

25

selling cleaner, fresher, well packed and often cheaper products than a local shop
keeper. Some of the fastest growing categories of retail India are food and groceries
at about 33% and books/music at about 26%.

Figure 13: Growth of Retail Categories in India

Source: Indian Urban Retail – Opportunities and challenges (FICCI.com)

Overall, this can be seen as an increased demand for a better shopping experience
by consumers. An interesting aspect about Indian consumers is that they are both
price and quality sensitive. Unlike Japanese consumers who believe quality comes
with price, Indian consumers are more open to the idea of receiving quality products
at lower prices. Indian consumers are also used to the luxury of home delivery
services, a rarity in the west. Heavy traffic crowds and lack of proper commuting
facilities has led to most consumers ordering home items and getting them delivered
to their door step. Starting from the morning milk that is delivered in packs by milk
vendors to every household, home product is usually purchased on a monthly basis
and delivered by stores on the same day.

Customer service also runs high in the highly crowded Indian supermarkets where
faster turnaround in the cash and delivery sections is highly appreciated. Indian
consumers also are highly fascinated with deep custom discounts and free sops.
Moreover, Indian consumers are prone to sales promotions like in many other Asian
and Latin American countries. They like the idea of individual service and appreciate
specialized customer loyalty rewards. Indian consumers are also influenced by the
Price cut proxy effect of brand choice decision mechanism. Most promotional
activities are assumed to be price discounts and are readily grabbed by the
consumers. 26

Although this may indicate that a concept like EDLP would not possibly work very
well, a well marketed EDLP campaign can in fact have a lasting effect on change in
Indian consumer behavior. A retailer like Wal-Mart would need to first start with a
conservative approach to EDLP before making it the retailer’s flagship concept in the
Indian market. Indian consumers also run on tight budgets and most households
usually plan their purchase of goods. Hence, impulse buying is rare although growing
affluence among the middle class has seen an increase in this behavior too. This can
turn to be a boon for retailers who are efficient in using pricing techniques based on
customer demand.

26
Prof. Jie Zhang, Assistant Professor of Marketing, “An Integrated Model of Alternative Mechanisms
of Display and Feature Advertising on Brand Choice”, Working Paper Series, Department of
Marketing, Stephen M. Ross School of Business

26

Added to all this is the fact that Indian consumers are going through one of the
biggest social change in history. The role of the housewife is changing and so are the
purchasing decisions that drive retail shopping. Several studies by various groups
indicate that there has never been such a scenario in the Indian retail industry where
the consumers want more and more.

Economy & Political System27
India is currently going through a major economic boom with a GDP growth rate of
over 7%. Coupled with this is the pro-reform attitude of successive governments
over the past 10 years. According to a report in McKinsey Quarterly, India will
become the third largest economy in the World by 2050 with a projected GDP of
$27.8 trillion. India’s foreign exchange reserves will shortly cross $130 Billion and
the FDI in 2004 reached $9.9 Billion. Thanks to successive governments over the
past 5 years, although India still lags way behind China in attracting FDI
investments, it is soon poised to replace the US as the hotspot for FDI. India is the
world’s largest retail network with 12 million outlets and a total retail market size of
$180 Billion.

The current share of organized retail is only 2% but the organized retail sector is
growing at 28% per annum. This is a welcome sign for foreign retailers who have so
far only entered through franchise agreements. India has proved to be a difficult
market for most foreign retailers due to reasons that defy economic predictions of
growth and prosperity. Most foreign retailers have been able to make very few
inroads in India as compared to Asian giant, China. However, entering a country like
India may not be as easy as it looks.

The Indian retail industry lacks an industry status because of its highly fragmented
status. Also, the country has stringent labor laws governing hours of work and
minimum wage payments. Moreover, multiple licenses and clearances are required,
sometimes making it a very cumbersome and frustrating process for getting things
done.

India has a multi-party parliamentarian form of government. This means that there
are multiple political parties both at the national and regional level fighting for power
in each state and at the national level. With more than a hundred political parties
influencing state and national level politics, coalition has been the only solutions for
power since many years. However, this structure has created the greatest
impediment to progressive reforms for the country. To gain the approval of every
party in the coalition has almost prevented any fruitful reforms from happening in
time. These delays are further worsened by a weak and often corrupt bureaucracy.
This is further complicated by the rampant corruption across all classes of the
population and high levels of illiteracy among the voter population. Transparency
International has ranked India 88 out of 158 countries in the corruption perception
index. Literacy rate is only 60% and there is very poor confidence in the judicial
system. These factors are of utmost importance for foreign retailers as they help

27
Sources: “State of Global Retailing – Looking for Growth in Emerging Markets -Focus on
India,” National Retail Federation, NRF website resources; “Corruption Perception Index,”
Transparency International, www.transparency.org; “The World Fact Book,” Central Intelligence
Agency, http://www.cia.gov/cia/publications/factbook/

27

them look beyond economic prosperity to understand the drivers of daily life in India
and get closer to understanding the mind of the Indian consumer.

Competition28
India has one of the most unimaginable forms of retailing in the world. It has got all
retailing formats working in parallel from the street hawkers, push cart vendors to
the supermarkets and giant hypermarkets. There are a total of around 13 million
traditional mom & pop stores in India. These are mostly family owned and enjoy
patronage from the local consumers because of the close community ties they
maintain with them. Most of these small store vendors occupy rectangular one room
structures and indulge in behind-the-counter sales of items. These stores crop up in
every space possible and add the convenience factor of Indian shoppers who tend to
purchase items as and when they need.

The food and grocery section is the most complex with bazaars, weekend markets,
push cart vendors, basket vendors, morning markets and supermarkets fighting for
every inch of retail space possible. Foreign retailers or any organized retailer for that
matter will find it a daunting task to cut this chain in the food link to establish his
presence. A strong middle class is aiding this process but it will certainly not be
enough, given that Indian consumers are very price sensitive when it comes to
purchasing the more frequent food items. Integrating the food chain from the farm
to the retail store helps remove the outside link but this is challenging as India’s food
chain is fragmented. India’s farm produce pass through six or seven intermediaries
and around 40% of produce is spoilt along the way. Organized retailers hence need
to play the convenience and freshness factors to a very great extent coupled with
prices that either beat or match its unorganized competitors.

For foreign retailers things just don’t stop here. The organized retail is slowly
growing into the other hotbeds like apparel, books and music and household items.
Several players in the Indian market have sprung up in urban areas and currently
there is a huge mall mania in the country. Retail presence in India is divided into
value retailing and lifestyle retailing.

The value retailing consists of hypermarket and supermarket stores like Big Bazaar
and Food Bazaar. The lifestyle category consists primarily of apparel stores like
Pantaloon and Lifestyle. Foreign retailers may find it easy to break the tough
challenge these retailers will pose but unless it is not wary of their business
strategies, their own personal strategies may backfire. Retailers like Wal-Mart, which
believes in observing and learning from competitors may find this a very fruitful
exercise. As foreign retailers wait for government rules to ease up their entry, this
has been a golden chance for local retailers to expand their formats of organized
retailing. Big industrialists like Reliance are also looking into the possibility of
entering the promising retail market very soon.

Several big retailers and small business houses have a significant influence in
political circles. Many have been persistent with the fact that they need time to taste

28
Sources: Sangita Joshi, “The issue of retail formats,” The Hindu Business Line,
http://www.thehindubusinessline.com/catalyst/2004/10/28/stories/2004102800180200.ht
m; “Wal-Mart takes its China lessons to India,” www.reuters.com ; “QPAC-Indian Retail
Industry-July-Sept 2005,” 2005, Cygnus Business Consulting & Research

28

success in the organized retail industry before the big foreign players with massive
capital can jump in. This will weigh heavily when it comes to opening of FDI in the
retail space. The key however is for a foreign retailer to assess both the economic
and political risks of taking up domestic retailers before making any major advance.

Logistics, Operations & Services29
India’s biggest challenges don’t stop with just consumers and competition. I consider
Logistics, Operations, Services and the next section – Infrastructure, as other major
challenges that foreign retailers can face. Both are interrelated as a poor
infrastructure limits smooth operations and produces logistical inefficiencies.

In India, retail operations is a different ball game altogether. First, building huge
distribution centers, one of the biggest contributors to logistical efficiency, is very
difficult. Apart from difficulties in acquiring land for setting up such huge operations,
it is also not possible to take advantage of trucks as lack of proper and wide roads
prevents plying of big trucks and fast movement of goods. Wal-Mart or Carrefour
would require anywhere from 100,000 square feet to 200,000 square feet to set
their stores. Even if they come up with smaller store formats, distribution centers will
be a problem.

There is a huge shortage of quality urban space for retailers in all the big cities of
India. This forces foreign retailers to look for tier 2 cities and towns. However, this is
not certainly something retailers would like to do when setting shop initially. Most of
the 30-40 million square feet of retail space that is coming up in cities like New Delhi
and Mumbai are in suburban or satellite areas. Although the growth of the middle
class will encourage such an expansion, purchasing consumers are not growing
uniformly across regions and face problems such as transportation to reach to far
flung places.

Retailers themselves face shipping issues in cities where traffic is growing and roads
are shrinking in space. India’s highways are being developed at a much rapid pace
over the past few years, but this will hardly allow huge trucks to ply easily. Standard
international norms mandate road space to be 20-30% of the total area of the city.
However, most Indian cities have hardly 10% of road space with certain high-growth
cities like Hyderabad having only 6% in 2001. This leads to traffic snarls that
paralyze the operational efficiencies of retailers too.

Supply Chain bottlenecks are another apparent impediment to the growth of
organized retail. There are many segments such as apparel and food that are
reserved for Small Scale Industries (SSI) distribution. This limits the extent of
growth that other players could potentially have. There are restrictions on the
purchase and movement of food grains and there is hardly any cold chain
infrastructure in the country. This leads to long chains where intermediaries play a
rather unnecessary role in the supply chain.

India also had a complex taxation system and sales tax is mostly avoided by small
store vendors leading to a differential treatment for organized retailers. This has
recently come to an end with the introduction of VAT. Although, VAT is

29
Sources: “State of Global Retailing – Looking for Growth in Emerging Markets -Focus on
India,” National Retail Federation, NRF website resources; “No road space for traffic in city,” Times
of India, http://www1.timesofindia.indiatimes.com/cms.dll/articleshow?art_id=1373052022

29

advantageous, it is difficult to administer and will take time to permeate well into the
entire country. It has been observed that mostly traders have been the biggest
evaders of sales tax and VAT will certainly reverse this trend. However, multi-point
Octroi levied by different states adds to the burden of taxes that affect the bottom
line of retailers.

Manpower is a challenge for organized retailers. With the rampant growth of
unorganized retail that is usually run by merchants with limited personal income, the
perception of retailing is different in the minds of most Indians. Most of the highly
educated class in India don’t consider retailing as a career choice and is often looked
down upon as a low wage chore. Training is also limited and only with the advent of
shopping malls and hypermarkets has the skills of the personnel enhanced. These
prevent many foreign retailers from tapping a good talent pool for their operations.

Manufacturers may not be easy to deal with in India. Barring a few global players
like P&G and Unilever that have connections with foreign retailers, most
manufacturers are again local family owned businesses and deal with a lot of
intermediaries. Many of these manufacturers pass on intermediary margins to
retailers that eventually reduce profits for the retailers and eventually, the final
consumer.

Store operations also will require major changes and global retailers would require
their expertise in understanding local markets and tastes to adapt the floor space
accordingly. Indian consumers are getting used to the self-service mode of
operations but still prefer sales agents to help them out with things. Many organized
retail chains employ a lot of service personnel to cater to the needs of consumers.
Security is also a concern in most malls and most retailers spend efforts in
employing outside security services to prevent thefts. In India, certain retailers like
Pantaloon and Madura Garments have done pilots of RFID systems and plan to
implement it across their supply chains. These technological advances are indeed
changing the face of retailing in the country.

Customer service is highly inconsistent in the Indian retail industry. Most of the
organized retailers are trying to imbibe best practices in customer service and trying
to train its personnel towards better maintaining customer relationships. This is
however not true with the unorganized retail sector and hence can be a promising
differentiator for foreign retailers who have tested some of the best customer
relationship practices. Retailers need to be aware of this when hiring store personnel
and should take care to initiate proper training sessions. Customers themselves can
prove to be challenging at times, and there certainly needs to be strict measures for
certain services such as returns and refunds. Retailers gain largely from customer
service measures in India unlike in Germany, where consumers are not worried
about service as long as they get items for the cheapest price.

India has also been the IT hub for the world with the largest growth in the services
industry coming from it. It is also a major contributor to the growth in the country’s
GDP. However, India’s IT systems and services have not really benefited Indian
businesses as much as they have impacted businesses in the west. Mostly, this has
been due to the reluctance of Indian businesses in recognizing a huge capital
expenditure in IT as a profit making exercise. However, retailers such as Shoppers
Stop are realizing the potential of IT based systems and are working towards utilizing
them. Foreign retailer like Wal-Mart can dominate the field with their existing IT

30

management systems, if they can percolate it across the supply chain and work
around the logistical challenges, especially by tapping into the IT talent pool in India.

Infrastructure30
According to a recent statement made by Mr. Robert O. Blake, the Charge d’Affaires
of the US Embassy in Chennai, India – “India cannot be a world economic power
without world-class infrastructure. It's as simple as that. There are many factors that
have led to the inadequacy of infrastructure in India. One of them is the lack of a
long-term debt market. In the United States, we have credit markets where
borrowers can find financing for 30 years or longer for development projects. India
does not yet have such a market.”

Infrastructure is one factor that is plaguing the entire Indian economy as a whole
and few governments have confronted it successfully. Hence, I consider this to be
the single most important factor in the retail forces that I have designed. Another
significant reason for the poor infrastructure has been the real estate.

The Indian property market is extremely fragmented due to zoning laws that are
based on pre-world war British notion of how cities should be like. This could get
dirty for some businesses when a simple transformation of existing land to a retail
store would require so much of time and bureaucratic hold-ups that they take the
easy path of bribing officials. But, the irony is that the legal system can suddenly
spring up and enforce the zoning laws that throw existing “illegal” establishments out
of gear. A recent ruling by the Delhi High court to demolish illegal establishments led
to the bulldozing of two shopping malls as they built stores on a zone marked for
“villagers”. This has by and large been one of the biggest enemies confronting the
prosperity of the country. The revenue and technical capabilities are highly limited
for corruption-affected municipalities, that town planners impose strict limits on the
floor space index31. Most Asian cities have a floor space index of 5-15, but in India it
is around 1.6. These floor area restrictions push people away from the city center.

Another issue paralyzing the real estate market in India is age-old rent control laws
that are pro-tenant and allow them to pay rates that were set 60 years before. An
interesting dimension to this is from the political angle. Even though the central
government repealed the law and advised state governments to follow suit, certain
states like Maharashtra still follow the old laws. In a study by McKinsey about 5
years ago, the consulting firm warned that India was losing 1.3 percentage points of
economic growth because of distortions in the land market. However, little has been
done to mitigate these issues in a “land of opportunity – minus the land”.

India suffers from lack of faster urbanization. Also, there is the problem of land
grabbing by anti-social elements, rampant in several big cities. These not only limit
the available of quality space but also force many retailers to enter into unnecessary
nexus to obtain prime retail space and fight the competition. Traffic snarls and lack
of parking space also impact retail store sales as this discourages consumers from

30
Sources: Andy Mukherjee, “Commentary- India is a land of opportunity – minus the land,”
International Herald Tribune, March 16, 2006; US Consulate Chennai, India,
http://chennai.usconsulate.gov/prind050428a.html; “ Indian government opens retail sector
to foreign corporations,” World Socialist Web Site,
http://www.wsws.org/articles/2006/feb2006/indi-f22.shtml
31 Floor Space Index: Building’s total floor area divided by the size of the land occupied. This helps
determine the building’s height.

31

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