Travel Tips for Retailers

Three strategies can help retailers expand abroad. The trick is to choose the one that best suits your particular ambitions and your starting point.

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By Luciano Catoni, Nora Fö risdal Larssen, James Naylor, and Andrea Zocchi

Retailing was once a stay-at-home sector. A few retailers, such as Benetton and IKEA, seemed to travel well, taking their distinctive brands far and wide. But most were content to grow at home. Universally appealing product assortments are difficult to create, and far-flung, people-intensive retail operations are tricky to run. In consequence, the industry has remained more local and less concentrated than almost any other (Exhibit 1).

Since the mid-1990s, however, retailers have come under intense pressure from their shareholders to grow farther and faster, expressed in high share prices (Exhibit 2). That development prompted several retail groups to accelerate their overseas growth (Exhibit 3). Most of them were grocery and general-merchandise chains, including Carrefour (based in France) and Wal-Mart (the United States), and clothing chains, such as H&M (Sweden) and Zara (Spain).¹

Now, however, shareholders insist that retailers deliver not just instant sales growth from their foreign ventures but also substantial synergies and thus more profits. Yet creating value from dispersed retail operations is still difficult. For the past two years, we have examined the way international retailers manage their operations overseas. Successful companies seem to fall into one of three distinct models: replicators, performance managers, or reinventors.²

No single model is best. Each offers different trade-offs among the pace of growth it can deliver, the complexity of the organization it entails, and the rate at which it can realize synergies. The different models also require different skills. Retailers moving abroad should choose the model that best suits their particular growth ambitions -- and be sure they have the right skills to pursue it well.

Replicators

Long-standing international retailers such as Benetton, as well as more recent examples, such as the clothing retailer Zara and the US coffee specialist Starbucks, are replicators. Typically, such retailers develop a simple format and business system, identify the markets where they will thrive, and then export them almost unchanged. This well-tried strategy still offers a relatively simple and fast route to expansion abroad and makes it easy to achieve economies of scale. But the growth of replicators can flag when their original format runs out of steam -- unless they find ways to revive the creativity of the early days.

Most replicators start out as small and creative owner-managed businesses whose founders develop a new operational system (as did McDonald's) or assortment (IKEA), frequently involving a new store format and often by chance. If the innovations prove popular, management tries to lock the company's fine-tuned procedures into standard training and implementation manuals. Codifying the system allows the business to grow -- first at home, where growth is easier, and then overseas -- faster than competitors can copy it.

This simple approach gives replicators several advantages in running an international operation. First, such a company can coordinate its home and overseas businesses under one centralized global or regional management structure. From this center, the company controls the activities that support its brand's identity: typically, merchandising, the development of new products, knowledge management, and marketing. Gap's US division, for example, provides all of Gap's product design and marketing services. A standard product range also means that replicators can easily reap economies of scale, especially in sourcing and manufacturing. By applying the same business system in successive new markets, replicators learn how best to explain brand standards to frontline workers and suppliers and how to ensure their compliance. And the rewards that replicators offer these new franchises have, in some cases, inspired tremendous growth.

Given the simple format and organization of the replicators, they can capture synergies easily and expand quickly overseas. Standardization, however, also makes these organizations difficult to sustain: it can be hard to motivate frontline staff when following a preset formula becomes dull. Replicators can maintain continuity in stores if their managers are adept at training new staff quickly, but the standardization of the replicators' approach may repel good trainers.

Replicators can accommodate local variations in consumer demand by tweaking their formats only within the bounds imposed by their standard systems. McDonald's, for example, offers a McRye burger in Finland, curry potato pie in Hong Kong, and the kiwiburger (actually based on beef) in New Zealand, but the company's value proposition in every market is low-cost, quality fast food: hamburgers, Coke, and french fries. Making more substantial changes for local tastes would alter the company's format and operational system and thus lose the advantages of scale and simplicity.

A combination of conformity and creativity is needed if replicators are to find new growth opportunities and maintain existing business. More subtle marketing will enable such companies to tweak their value proposition as far as possible to local preferences without damaging their business system and brand image. Evaluation systems that identify and quickly promote the kinds of managers replicators need will help them retain the best.

To grow in new markets, replicators can form small teams of corporate-level entrepreneurs to acquire or develop for replication new retail formats quite separate from the original business. But this approach can be tough, since creative thinking is a skill different from the disciplined adherence to standard procedures that characterizes the replicators' operational success. Nonetheless, several replicators are managing. McDonald's, for example, has acquired several stand-alone ventures, including Donatos Pizza and Boston Market restaurants in the United States and a strategic stake in Pret a Manger, a chain of sandwich shops in the United Kingdom.

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