Trade, of course, has been global for millennia, so it seemed hardly unusual for retailers in the US, and in Europe to begin sourcing from distant countries in Asia where certain items were more readily available or significantly cheaper. Imports have also been encouraged as a political and developmental vehicle to aid friendly countries.

So, on the sourcing-end, large retailers have been comfortably operating beyond international borders for several decades even while the stores-end of their business was entirely domestic.

For most large modern retailers however, after the post-Second World War economic boom their core markets have grown relatively slowly (and rather predictably). While the sheer size of the US market kept American retailers busy domestically, planning and legal restrictions in terms of store size, locations, market share etc. limited manoeuvrability for retailers in Europe.

Among the current major retailers, the early retail explorer, Carrefour set out into neighbouring Spain in 1973 and then into distant Brazil in 1975. Soon after, Dutch retailer Ahold landed in the USA in 1977.

However, it took the opening up of East European economies in the 1990s to really prime the pump for growth of international retail. Suddenly, many more millions of consumers became available to European retailers close to their existing markets – both geographically and culturally – and western European retailers jumped at the opportunity.

At the same time, China seemed to have become steadily more open over the previous decade and in the early-1990s India looked accessible again. Some of the Latin American markets were also steaming up.

And, obviously, the prospect of 3-4 billion new consumers in emerging or developing markets was clearly not going to be ignored. In 2001, post dot-com, another inspiring idea hit the business world that was desperately looking for hope – the golden BRICs – the four countries focussed upon by Goldman Sachs as the biggest economies of the future: Brazil, Russia, India and China.

As incomes grew in these “developing” or “emerging markets”, the hypothesis was that consumer would want products and services similar to those in the more developed markets, creating the opportunity for retailers to cross borders. In the last 15 years or so, retail internationalization (and gradually “globalization”) has become an increasingly acceptable theme – in conceptual thinking, in retail boardrooms, in white papers, and finally in trade and mainstream media. The world has witnessed a network of retail subsidiaries, joint-ventures, franchise and other relationships spreading across continents.

Certainly, through the 1990s and 2000s, growing tele-connectivity, fashion, portable TV programming concepts, movies and print media seemed to give the impression that consumers around the world are becoming more similar, and can be reached by common formats and brands. Led by the FMCG companies on the one hand and fashion brands on the other, insights, concepts, products, formats, advertising campaigns are routinely extended across countries. (Unilever’s TV commercial for Close-Up in West Asia is a great example of this – an Anglo-Dutch company’s international brand of toothpaste, Indian models in Thailand, an Arabic voiceover and a Hindi song (“Paas Aao” – “Come Closer”) by Sona Mohapatra – surely you don’t get more global than that?)

But wait! Is the picture really as clear as that?

In 2006 Wal-Mart pulled the plug on its €2 billion German business that was a combination of German chains that it had acquired. In Russia it still has only a development presence since 2005, though it is reported to be looking at opening 10-15 stores in the following three years. According to Newsweek, Wal-Mart’s 13 year old Chinese business – even after an acquisition that is still to be approved – will have fewer stores than it would have opened in the US just in 2009. In the past it has struggled in Japan and Brazil.

In June 2009, Carrefour opened its first 86,000 sq. ft. hypermarket in Moscow, and a second one soon after that. In September, the company affirmed that the BRIC markets were its highest priority for international growth. However, in October it announced that it was pulling out of Russia. Within 4 months of the first store, Russia has gone from a market with “outstanding long term potential” to being a market to exit. In previous years the company has moved out of Japan, South Korea and Mexico. The Economist reports that significant Carrefour’s shareholders are forcing it to look at selling its Chinese business as well – obviously a move that would be politically very sensitive in China. The same shareholders are also reported to be urging a sale of its Latin American business. For now, the official statement from the company maintains an ongoing interest in all these markets.

Ikea has decided to freeze further investments in Russia, and has decided not to enter India until the Indian government allows 100 per cent foreign ownership of retail operations. It entered China in 1998, and has only 7 stores so far.

Even as Carrefour and Ikea announce plans to pull out of Russia, Russian retailers have pulled out from Ukraine, while Metro is cautious in its outlook about that country. French retailer Auchan has opened three stores in Ukraine since 2007, while the German retailer Rewe has opened all of nine since 2000.

Could the juggernaut of global retail be slowing, stopping or even – shock! – reversing? Are the BRICs and emerging markets falling out of favour?

Before we jump to conclusions, as they say in the television world: please don’t adjust your sets. As the French author Karr wrote: “plus ça change, plus c’est la même chose” (the more things change, the more they are the same).

It is a fact that, no matter how international or global a company becomes, when it gets to the business of retail, it needs to be intensely local. While elements of the business – concepts, products, people, money – can travel across borders, it is extremely difficult to take across an intact retail mix and expect to address a significant portion of the population in the new country. And given how important scale is to mass retailers, lack of localization would be a significant hurdle.

A company sourcing products from a developing country can fully expect his suppliers to adapt to his practices and customs. On the other hand, the same company entering that country as a retailer needs to do exactly that – adapt to the customers – rather than expecting them to fall in line because the “best practice” manual dictates certain processes or because central merchandising found some deals that were great for the home market which are totally irrelevant in the new market.

However, there are encouraging signs that retailers looking to grow internationally understand this more and more. Tesco, for one, has been following a localized approach in Thailand and South Korea, while Carrefour, Ikea, Wal-Mart have all steadily modified their approach in China and other markets. Wal-Mart’s cautious steps in India, including the stores opened by its joint-venture partner Bharti, are a complete contrast to the aggressive “plans” that were being reported in the press 2006-onwards. Recently Wal-Mart’s international chief C. Douglas McMillon was quoted by BusinessWeek as saying “we know you can’t run the world from one place”.

For the larger international retailers this means that, the benefits from international scale would be limited by the amount of localization that they carry out in their operations. For smaller and local competitors that are based in an emerging market this means a fighting chance to remain in business and even remain market leaders.

Lastly, as far as all the dark clouds gathered over international retailing and all the retreats being announced – stay tuned – this weather will change, too.

By Vishal Krishna

BusinessWorld

10 October 2009

Indian shopping hotspots are sporting more and more golden arches these days. If McDonald’s is expanding like never before, not far away is KFC (Kentucky Fried Chicken), though on a lesser scale. Their guests are young, their menus glocalised, their branding established, and their menus are no longer over-priced. After more than a decade in the highly fragmented quick service restaurant (QSR) segment — only 20 per cent of the Rs 10,000-crore segment is organised — McDonald’s and KFC are growing at a nippy 20-25 per cent, despite the slowdown.

“In a recession, we see ourselves as a good substitute for premium dining,” says Amit Jatia, managing director of Hardcastle Restaurants, a joint venture partner of McDonald’s. “We are rapidly expanding because we have tested the supply chain for over 15 years and it has given us the opportunity to scale up.” McDonald’s, which had 20 stores in India till 2002, today has 160. It plans to open 200 more over five years, with an investment of Rs 500 crore. KFC, the smaller player with 52 restaurants, plans to open over 100 more outlets in the next two years.

Though McDonald’s foray into chicken nuggets this year has taken it into KFC territory, the companies give the impression of ignoring each other. “The Indian market is very large for QSRs and our focus is on large portions of white meat, while the competition focuses on different products,” says Unnat Varma, marketing director of Yum Restaurants, which has been developing KFC and Pizza Hut in India. The pricing of its menus makes McDonald’s a quick eatery with the average per person spend at Rs 100. KFC’s spend is higher, at Rs 125-150.

Thanks largely to dishes such as McDonald’s Veg McPuff and Chicken Maharaja, and KFC’s Veg Thali and indigenised Hot and Crispy, not only are the two no longer viewed as outsiders by jingoists, they also have a fast-growing loyal clientele. In 2009, McDonald’s guest count has crossed 30 million; in 1996, when it started, the count was a little more than 200,000. KFC’s annual guest count is expected to rise from 3 million today to 5 million by the end of 2010.

Many Indian retailers have not turned cash positive because they burnt most of their money on building the front-end. But, “McDonald’s and KFC have got an amalgam of things right,” says Harish Bijoor, a Bangalore-based brand and marketing consultant. “While McDonald’s has converted millions of people with its Rs 20 happy price menu, KFC has done it with its large portions as a QSR-plus restaurant.”

Staying Ahead In The Numbers Game

It has taken McDonald’s, which has a global turnover of $22 billion (Rs 1.1 lakh crore), almost 12 years to operationally break even in India (KFC is yet to break even). That in itself is not unusual; Bijoor says cereal maker Kellogg’s took 23 years to break even in Mexico. “The costs incurred on store design and supply chains are huge,” says Jatia. “Now, I am expanding in Chennai and I have to prepare the back-end to service that region, which requires large investments.” Of McDonald’s’ Rs 1,200 crore investments in India so far, Rs 250 crore was for the supply chain alone.

McDonald’s supply chain in is decentralised — a store manager sends a requisition to its logistics partner Radhakrishna Foodland (RKF) though a data management system, who in turn informs Vista Foods, which McDonald’s’ global supplier, OSI Global, bought in partnership with Hardcastle Restaurants. “We source everything for McDonald’s locally and process,” says Bhupinder Singh, Vista’s CEO. Vista, which has invested Rs 30 crore in its processing capacity, works on a 15-day lead time with farmers and meat suppliers in a just-in-time format; RKF picks up the supplies and stores them at its distribution centre before dispatching them to every store individually. A McBurger for Rs 13 is possible only due to this efficient supply chain.

Other than a tie-up with Venky’s for chicken, KFC outsources buns, vegetables and transportation from different vendors. While this explains its slow expansion and gives McDonald’s a clear advantage, KFC’s limited, chicken-based menu does not need the kind of supply chain McDonald’s has struggled to establish. It is also the reason why McDonald’s can envisage expanding faster into the metros as well as the tier-I and tier-II cities, but KFC cannot for now.

More To Come

McDonald’s and KFC are unique because their international competitors (Burger King and Church’s Chicken, respectively) have not come to India yet. Local chains such as Nirula’s are popular in their cities of origin but to compete with these two MNCs, they will have to manage a complex supply chain and open stores quickly, which is unlikely to happen on a large scale.

Moreover, the supply chain costs for international restaurant chain brands are complex and play out on a much larger, national scale. Rents, salaries and power make up the largest overheads, and they cannot be rationalised without affecting quality benchmarks.

“The only way to turn profitable is with a growing customer base and they have achieved this with product consistency,” says Devangshu Dutta of Third Eyesight, a retail consulting firm in Delhi. He says the flywheel concept of engineering applies to food retailing too, where a company could be slow, but by building the right things such as supply chains and prudent store openings, it creates momentum for growth.

Sources say both KFC and McDonald’s spend 5 per cent of their turnover on marketing. They also invest considerably in R&D — select McDonald’s outlets have been experimenting with a breakfast menu for over a year now. But, “We will doubly want to check that there are volumes in a menu before we launch anything,” says Abhijit Upadhye, director, supply chain, McDonald’s. In the quick service food business, no decision is taken in a hurry.

(From BusinessWorld, Issue of October 10, 2009)

• Most people want to fit in rather than stand apart from their peers, so pushing sustainable or responsible fashion will need time – just like the typical fashion cycle, the first thrust needs to be on the innovators and early adopters (both consumers and companies), before the majority of the market picks up the trend.
• We typically talk about the “triple-bottom line” – referring to the benefit to the business (profit), benefit to the environment and benefit to the community. However, I think most sustainability initiatives don’t gain enough traction because there is no bottom-line defined for the “individual”. The questions “how am I impacted?” and “what is in it for me?” need to be answered to really push fashion in the direction of sustainability.
• “There is enough on this Earth for everyone’s need, but not for everyone’s greed”. Fashion, by its very nature, lives on obsolescence, so it is pertinent to ask whether “sustainable fashion” is an oxymoron. However, there is some merit in questioning how extreme this sense of forcing obsolescence has become in the industry over the last few decades as companies have sought ever-growing top-lines. The entire industry ecosystem will need to be overhauled for it to become “sustainable”.
• The cause of sustainability may be helped actually by the fragmentation of demand that is going on around the world. This fragmentation may be our inadvertent saviour. Since fashion is about the peaking and the decline of specific trends, with fragmentation there are lower peaks, less forced trending, less forced obsolescence and potentially less waste.
• There was a mention of the concept of “fast fashion”. There are two aspects to it: one is the more visible rapid-change, low-price retail concept and that would certainly seem to be the antithesis of sustainability. However, there is another side to the fast fashion business model: lean management, efficient product development and reduced waste. The traditional fashion business model and supply chain can’t cope effectively with the fragmented demand and short selling-windows. In the fast fashion supply chain model, with shorter lead times, more time is spent on productive activities and successful products, rather than wasting resources and money in developing designs and flying samples back and forth for products that will get sold at a discount. Such waste would be fatal in the aerospace, automotive and high-tech industries – those industries use tools and processes that have also been available to the fashion industry for the last 4 decades. If fashion companies honestly examine how expensive that waste is, we might start moving towards more sustainable fashion.

Here is a summary of the Sustainable Fashion Forum, and some more pictures from the afternoon.

And here is a previous article on sustainability and corporate responsibility.