Retail Global Expansion: Determining your method of market entryDocument Transcript
Retail Global ExpansionDetermining your method ofmarket entryAs the global economy continues to stumble, retailers The trade-off between speed and controlare struggling to achieve growth domestically. While There are three primary market-entry methods: franchising,there are pockets of opportunity, many retail sectors joint venture, and owned expansion (see Figure 1).in the United States are saturated and not expected to Figure 1. Market-entry methodsgrow much, if at all. Growth may be heavily dependenton winning share from competitors, typically a taxing Method of Definition Illustrative modelseffort. Consequently, many retailers are looking beyond entrytheir borders for potential growth. Foreign markets offerattractive growth rates fueled by burgeoning middle Franchising An agreement • Area developmentclasses, lower competitive intensity, and greater pricing to allow a • Master franchiseflexibility. Additionally, a global presence may help retailers partner to • Individual franchiselessen their risk exposure to an economic downturn in any operate stores • Hub and spokeone market. under the retailer’s brandSome of the biggest historical barriers to entering Joint venture A shared • Joint ventureforeign markets have eroded. Many foreign governments ownership • Franchise agreementhave opened their countries to outside investment. agreement with through a joint ventureTechnological advances have revolutionized consumers’ a partnerand companies’ ability to communicate and share Owned A company- • Acquisitioninformation. Similarly, enhancements in infrastructure owned and • Multichannelaround the world have made producing and transporting funded (e-commerce)goods considerably more feasible. expansion • Brand statement store • Shop-in-shopHowever, entering new countries is not as simple as • Pop-up-shopsigning a lease and opening the doors. Market entryrequires careful consideration of external risks and internalparameters in order to understand market dynamics,requisite competencies, and financial implications. There isno “one size fits all” model. Based on these considerations,retailers should select a method of entry that balances twocritical but often conflicting interests: speed and control.
Each of these methods presents trade-offs between Parameters for selecting a method of entry speed and control. To contrast the relative differences, we The relative importance of external and internal parameters developed The Control Continuum. As Figure 2 illustrates, influences the level of control and pace of expansion international expansion typically entails an inverse retailers want to achieve (see Figure 3). To develop an relationship between speed and control — the faster a effective international expansion strategy, retailers should company wants to expand, the less control the company prioritize these parameters. The choices will reflect relative can exercise, and conversely, the more control they want preferences for speed or control. Similarly, the trade-offs to retain, the slower expansion is likely to proceed. At among parameters are likely to shape retailers’ decisions one end of the spectrum, franchising typically enables about method(s) of entry and the types of markets to the fastest expansion, but often with less control. At the enter. For example, a capital-constrained retailer who is other extreme, owned expansion typically allows retailers intent on rapid expansion is likely to pursue a method to retain the most control, but usually at the slowest pace. of entry with less control rather than organic growth. In the middle of the continuum, franchising may offer Conversely, a retailer with a valuable, iconic brand will likely the most significant flexibility, and joint venture permits a place greater emphasis on maintaining strong controls blended agreement. rather than achieving aggressive growth targets. Figure 2. The Control Continuum Taken individually, each parameter may suggest multiple potential methods of entry. However, taken in aggregate, Control Speed the parameters will likely lead retailers to a preferred Franchising answer. Joint venture Owned expansion While The Control Continuum depicts the trade-offs between speed and control for each method of entry, deciding which model to employ, when, and where, requires an assessment and prioritization of specific external and internal considerations.Figure 3. Method of entry parameters Parameters Effect on level of control and pace of expansion Level of investment Financial position and access to capital will affect retailer’s choices. The more material the investment, the more control the retailer usually wants to retain. Time to payback Expected return on invested capital, investment time horizon, and anticipated valuation multiples influence the pace of expansion and level of control retailers want to exercise (particularly relevant in owned versus nonowned decision). Brand image and customer Retailers with a strong brand image and/or unique customer experience requirements tend to exercise higher level of experience controls. Risk level Typically the amount of control (and thereby exposure) a retailer retains is inversely correlated to the risk of the market (the greater the market risk, the less exposure the retailer wants to bear). Product freshness Retailers for whom product freshness is a key component of their value proposition tend to favor greater levels of control. Higher control allows them to closely monitor products freshness and effectively manage the product life cycle. Local laws and regulations Level of control exercised by a foreign retailer may be dictated by local laws and regulations. Business model complexity Retail concepts that are fairly formulaic generally require less oversight and, therefore, can rollout more quickly. Conversely, retailers with a highly technical concept may exert greater supervision. Internal capabilities Available competencies, resources, and infrastructure within the organization will play a critical role in determining the level of control the retailer can take on. This parameter is particularly important in joint ventures and franchising as the retailer assesses what they can bring to a collaboration. Partner capabilities Some markets necessitate or warrant bringing in a partner. In those cases, the competencies, resources, and infrastructure of the partner will shape the level of control the retailer wants to retain. 2
Selecting a method of entry different countries, maintains strong controls over their Different retailers use different methods of entry to enter brand, assortment, and pricing. Conversely, some retailers new markets. Though a small minority of retailers employs craft franchising agreements to designate many of these one method of entry, in all markets, many retailers employ responsibilities to the franchisee. Franchising contracts can multiple methods of entry, varying them by market. For even vary by market and partner. example, Zara has company-owned stores in Spain, China, and Russia, joint ventures in Mexico, India, and Australia, Franchising is also an appealing method of entry as and franchised stores in the United Arab Emirates, it allows the retailer to moderate capital investments. Columbia, and Indonesia. In some countries, retailers do Typically, the franchisee partner may be responsible for not have much of a choice as local laws dictate permissible providing some, if not most, of the money required to forms for foreign direct investment. Figure 4 presents an build and expand the business. illustrative sample of retailers and their selected method(s) of entry by region. The flexibility of franchising agreements allows retailers to reach acceptable trade-offs on specific considerationsFigure 4. Method of entry by retailer such as level of investment, market risk, and local laws. As Retailer Asia Middle East/ Western Eastern Americas a result, retailers can enter markets that otherwise might Africa Europe Europe have been inaccessible. Mango • Company- • Franchise • Company- • Company- • Company- owned owned owned owned The primary challenge for retailers is determining the • Franchise • Franchise • Franchise • Franchise amount of control to retain over each area of the business. • Joint • JV Retailers essentially need to categorize all responsibilities venture (JV) into three groups: 1. Responsibilities retailers must own; 2. Responsibilities the franchisee partner must own; and Marks & • Company- • Franchise • Company- • Franchise • n/a 3. Responsibilities that one party or the other will own Spencer owned owned • JV depending on the partner and the market. • Franchise • JV 1. esponsibilities the retailer has to own (internal R Nike • Company- • Franchise • Company- • Company- • Company- assessment). Retailers should first look internally to assess owned owned owned owned the competencies, knowledge, and experience they • Franchise must own in order to remain distinctive. These attributes Zara • Company- • Franchise • Company- • Company- • Company- often undergird their value proposition and competitive owned owned owned owned differentiation. For example, Zara retains strong controls • Franchise • Franchise • Franchise • Franchise over product development and merchandising, which allows them to quickly respond to consumer demand. Franchising Likewise, brand-conscious companies such as Nike, tend The ability to customize franchising agreements is to maintain control over almost all aspects of marketing what makes this type of entry attractive. It is also what and advertising. Decisions about where to preserve makes them so challenging. As depicted on The Control control are comparatively easy at a strategic level, but Continuum (Figure 2) franchising offers more flexibility more difficult at an operational level. For example, on to customize the level of control and pace of expansion. a strategic level, a retailer may want to assert strong Franchising agreements can be written to ensure very controls over merchandising, but what exactly does that high levels of control. Spanish fast-fashion retailer Mango, mean for specific responsibilities such as markdowns, who has over 1,000 franchised stores in about 100 competitive shops, and inventory ownership? The internal assessment is a vital, if arduous, process to determine precisely where to draw the line.The ability to customize 2. esponsibilities the franchisee partner has to own Rfranchising agreements is what (external assessment). The success or failure of a franchising agreement rides on the selection of amakes them so attractive. It is also franchise partner. In many ways, picking a franchisee partner is like choosing a spouse: get it right and years ofwhat makes them so challenging. marital bliss will likely follow. Get it wrong, and divorce lawyers will be carving up the relationship. Fortunately 3
for many retailers, there has been an onrush of attractive 3. esponsibilities that will vary by partner and market R partners with the proliferation of sophisticated franchisee (external assessment). After identifying the central businesses. responsibilities of the retailer and the franchisee, respectively, there will likely be other areas where the Historically, franchising was only palatable to quick- locus of responsibility will vary depending on factors service restaurants. The traditional franchising model was such as the competencies of the franchisee partner and built on two foundational requirements which aligned the dynamics of the market. For example, a retailer may well with quick serve restaurants: an easy-to-replicate designate field oversight as a flexible responsibility. In business model and an owner/operator franchisee safe, mature, and saturated markets like Western Europe, partner. As other retailers pursued opportunities in the retailer may rely on employee company-owned foreign markets, a new, more knowledgeable breed resources to provide field oversight. Conversely, in less of franchisee partners emerged. These modern stable and more remote locations, such as Indonesia, the franchisee partners are generally large, well-capitalized retailer may push the franchisee partner to provide most organizations, possessing deep local market knowledge, of the field oversight responsibilities. with business models predicated on franchising multiple brands in a given market. While the ability to customize franchising agreements makes it an appealing method of entry for many retailers, These highly developed and experienced franchisee it is most applicable to retailers with branded or exclusive partners can add considerable value. These franchisees products and/or services. For example, many vertically typically offer operational capabilities and infrastructure integrated apparel retailers have used franchising as means that can be leveraged to deliver functional services more for international expansion. On the other hand, franchising efficiently and effectively than a stand-alone retailer in commoditized sectors such as consumer electronics could. Figure 5 below summarizes some common and books has been more limited. Franchising may be responsibilities franchisee partners own and the value unsuitable for retailers that want to expand operations they typically provide. in heavily regulated industries such as grocery and drug stores. Figure 5. Typical franchisee responsibilities and value Franchising requires a specific set of management Common franchisee Description capabilities. Running a franchising business is very different competencies and from running a retail business. A franchising business value requires greater account management to fortify and maintain strong working relationships with franchisee Capital Contribute capital specifically partners. From an operational perspective, traditional funding new store openings and roles and responsibilities are only partially applicable. For paying up-front and/or ongoing example, a buyer in a retailer’s franchising group may not fees be in charge of selecting product, but rather serves as a Real estate Own and/or have access to coordinator to facilitate orders from the franchisees. preferred real estate sites Infrastructure Have existing supply chain and Joint venture information technology systems Joint ventures are a less common method of entry. Field and store Have experience running and Conceptually, retailers and partners can be drawn to joint operations overseeing stores ventures as they effectively align both parties’ financial interest and risk. Joint ventures also offer higher levels of Local market Understand local consumers, control than franchising and a single, typically mature, local knowledge competitors, rules, and regulations partner. While joint ventures are fairly rare in the global context,Running a franchising business is they are more frequently used in markets with legal restrictions such as India. As the Indian governmentvery different from running a retail vacillates on opening their retail market to foreign direct investment, current laws limit ownership opportunities forbusiness. many retail formats. Presently, multibrand retailers that sell more than one brand of products are barred from India. 4
Single-brand retailers are allowed 51 percent ownership Another important parameter — the power of the retailer’s through a foreign direct investment. Consequently, joint brand — plays a significant role in shaping which method ventures are the preferred (and/or only) method to enter of entry they use. Retailers with iconic brands favor one of the world’s fastest growing markets. For example, methods of entry that provide for the most significant Marks & Spencer entered India through a joint venture control. The long-term risk of damaging the brand, in an with an Indian retail ownership group. increasingly transparent global marketplace, overrides the short-term need for growth. It is a lesson some pioneers However, many retailers avoid joint ventures as they can be of global retail expansion learned through experience. troublesome to manage and administrate, especially in the For example, one luxury apparel manufacturer used lower fluid and fast-paced retail environment. Joint ventures may control methods of entry to penetrate selected foreign encounter bureaucratic decision making, which can limit markets. However, this company decided to buyout many management’s ability to rapidly and efficiently respond to of its partners and assert full ownership (and control) over market demands. Similarly, joint ventures can encounter its retail presence in these foreign markets. board-level issues such as unclear governance procedures, processes, and accountabilities. Partners can start to While organic owned expansion typically yields measured disagree over which party is bringing value to the entity. growth, acquisitions may allow retailers to more rapidly achieve a sizable presence. Acquisition is a particularly Owned expansion attractive means of expansion for retail models, such Historically, owned expansion has been a favored method as mass merchants, that require scale in order to drive of entry for retailers. Owned expansion offers the a higher operational efficiencies. For example, Target bought leases degree of control. The speed of expansion tends to be from a Canadian mass merchant as a way of establishing more measured for organic growth. an immediate presence in the country. Applying the parameters for selecting a method of entry From a market perspective, retailers tend to pursue to owned expansion shows which types of retailers are owned expansion as a means to enter markets that are best suited to use it. One particularly relevant parameter is geographically proximate to their current operations and the complexity of a retailer’s business model. For example, have similar consumer and competitive dynamics. Many major electronics retailers who sell technical products and American retailers select Canada for their first foray into services need a well-educated sales staff. The importance international expansion. Owned expansion into nearby of attracting, training, and retaining the right store markets with familiar dynamics requires fewer investments associates drives big box electronics retailers to retain a in and changes to the organization and infrastructure and, higher level of control over store operations. Additionally, therefore, has great appeal. the major electronics model requires a sizeable up-front investment to fund each new store opening, a strong In contrast, entering markets that are far removed from relationship with a consolidated supply base, and a flexible existing operations and/or have different dynamics pricing model to maintain product freshness. The relative can require expensive investments in resources and importance of these parameters makes owned expansion infrastructure, thereby decreasing the attractiveness of an effective method of entry. owned stores. The retailer may need to extend existing core competencies in customer-facing functions into these new markets. For example, merchants may need to understand local consumer preferences, competitive intensity, market trends, and price elasticity. Retailers willOwned expansion is appealing to also have to develop the necessary knowledge base to manage effectively other critical customer-facing elementsretailers with a complex business such as evaluating real estate site selection, hiring and managing local store labor, and customizing marketingmodel, an iconic brand, adequate messages.access to capital, and an appetite for Owned expansion presents additional implications, beyond investment in and modifications to customer-facingmeasured growth. functions. Usually entry with company-owned stores is likely to require adding capabilities and costs in back-office functions such as finance and human resources. Retailers 5