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    ravel t ips forretailersLuciano Ca to ni , Nora For isdal Larss en, Jame s Naylor ,and Andrea Zo cch i

    Three s t ra teg ies can he lp re ta ile rs expa nd abro ad. The t r ick i s to choo sethe o ne tha t bes t s u it s your pa r t icula r am bi tions a nd your s ta r t ing po in t.

    R e ta i l ing was once a stay-at-home sector. A few retailers, such asBenetton and IKEA, seemed to travel well, taking their distinctivebrands far and wide. But most were content to grow at home. Universallyappealing pro duct assortm ents are difficult to create, and far-flung, people-intensive retail operations are tricky to run. In consequence, the industry hasremained more local and less concentrated than almost any other (Exhibit 1,on the next page).Since the mid-1990s, however, retailers have come under intense pressurefrom their shareholders to grow farther and faster, expressed in high shareprices (Exhibit 2, on the next spread). That development prompted severalretail groups to accelerate their overseas growth (Exhibit 3, on the nextspread). Most of them were grocery and general-merchandise chains, includ-ing Carrefour (based in Erance) and Wal-Mart (the United States), and cloth-ing chains, such as H & M (Sweden) and Z ara (Spain).'

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    12 8 THE McKlNSEY QUARTERLY 2002 NUMBER 3

    No single model is best. Each offers different trade-offs among the pace ofgrowth it can deliver, the complexity of the organ ization it entails, and therate at which it can realize synergies. The different models also require dif-ferent skills. Retailers moving abroad should choose the model that best suitstheir particular growth ambitionsand be sure they have the right skills topursue it well.

    ReplicatorsLong-standing international retailers such as Benetton, as well as morerecent examples, such as the clothing retailer Z ara and the US coffee special-ist Starbucks, are replicators. Typically, such retailers develop a simple formatand business system, identify the markets where they will thrive, and thenexport them almost unchanged. This well-tried strategy still offers a rela-tively simple and fast route to expansion abroad and makes it easy to achieveeconom ies of scale. But the growth of replicators can flag wh en their origi-

    nal format runs out of_ steam unless they find

    ways to revive the crea-~ tivity of the early days.

    E X H I B I T 1R e t a i l i s f r a g m e n t e d a n d l o c a l

    Market share of 50 largestcompanies, 2000 , percent Average number of countrres ofoperation for 10 largest companies, 2000Petrofeum

    Automotive

    Pharmaceut ical 'Electronics

    Retail

    96 Pharm aceutical '

    9269

    PetroleumAutomotiveElectronics

    13573

    4433

    20 Retail I 10

    ' M a n u f a c t u r e o f p r e s c r ip t i o n a n d o v e r - H i e - c o u n t e r d r u g s .S o u r c e : E u r o m o n i to r ; G l o b a l V a n t a g e ; I M S H e a l t ti : O n e S o j r c e ; M c K i n s e y a n a l y s i s

    Most replicators startout as small and crea-tive owner-managedbusinesses whosefounders develop a newoperational system (asdid McDonald's) orassortment (IKEA), fre-quently involving a newstore format and oftenby chance. If the inno-

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    TRA V E L T I P S FO R RE TA I L E RS 12

    E X H I B I T 2High expectationsPercent ot equity value implicit In share price, March 2002

    CurrenI pe r fo rmance ' ^ [ ^ | Fu tu re g

    CarrefourPinault-Printemps-RedouteSource: Thomson Financial; McKinsey ana lysis

    E X H I B I T 3Retaiiers go globalNumber ot new countr ies entered

    1981-85 1986-90 1991-95 19%-2001~

    prod uct range also means that repli-cators can easily reap economiesof scale, especially in sourcing andmanufacturing. By applying the samebusiness system in successive newmarkets, replicators learn how bestto explain brand standards to front-line workers and suppliers and howto ensure their compliance. And therewards that replicators offer thesenew franchises have, in some cases,inspired tremendous growth.Given the simple format and organi-zation of the replicators, they cancapture synergies easily and expandquickly overseas. Standardization,however, also makes these organiza-tions difficult to sustain; it can behard to motivate frontline staff whenfollowing a preset formula becomesdull. Replicators can maintain conti-nuity in stores if their managers areadept at training new staff quickly,but the standardization of the repli-cators' approach may repel goodtrainers.Replicators can accommodate localvariations in consumer demand bytweaking their formats only within the bounds imposed by their standardsystems. McDonald's, for example, offers a McRye burger in Finland, curry

    AholdCarretourKingfisher

    MetroTesco

    Wal-Mar tH&M

    1102

    100

    1

    ]

    - 101

    1412

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    130 THE McK lNSE Y QUARTERLY 2002 NUMBER 3

    To grow in new markets, replicators can form small teams of corporate-levelentrepren eurs to acquire or develop for replication new retail formats quiteseparate from the original business. But this approach can be tou gh , sincecreative thinking is a skill different froin the disciplined adherence to stan-dard procedures that characterizes rhe replicators' operational success.Nonetheless, several replicators are managing. McDonald's, for example,has acquired several stand-alone ventures, including Donatos Pizza andBoston Market restaurants in the United States and a strategic stake in Preta Manger, a chain of sandwich shops in the United Kingdom.

    Performance managersCompanies such as Ahold and Kingfisherthe performance managersexpand internationally by acquiring a portfolio of existing retail businessesand developing them as almost completely d istinct en tities. Already accom-plished retailers, these companies have refined their skills in corporatefinance and postmerger management so that they can identify and negotiategood deals. They also excel at managing their assets' performance: settingtargets, using precise metrics to monitor progress, and, when assets slip offtrack,, responding quickly. Such companies have largely decentralized struc-tures and run acquired businesses by using local management teams (oftenthose that had previously run the acquisitions) and giving them considerableoperational authority.When the price of acquisitions is right, such factors can make performancemanagers the fastest-growing category of international retailers. Althoughother models also rely on acquisitions to grow,^ they must be altered to fitinto an existing business systema time-consuming and expensive job.In principle, the assets of performance managers can function separately.But these companies do realize some synergies among their disparate assets:

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    TRAV EL T IPS FOR RETA ILERS 13

    Some performance managers may trade off size against simplicity. Under-standing which assets to sell then becomes as important as knowing whichto buy. Kingfisher, for example, is now concentrating on the high-growthdo-it-yourself and electrical-equipment businesses, having exited the slower-growing pharmacy and general-merchandise sectors.Alternatively, a performance manager can try to capture synergies by identi-fying them across all of its assets and then appointing a range of managersfrom around the group to realize them as fast as possible. By such means.Ahold, for instance, has expanded from the Netherlands into 27 other coun-tries in 25 years (see sidebar, "Ahold's knowledge management," on the nextpage). But the more performance managers create behind-the-scenes syner-gies, the more such companies look like rcinventors.

    ReinventorsCarrefour, Tesco, and otber reinventors typically "own" one or more storeconcep ts hyperm arkets, for example which they adapt to the needs ofeach local market, meanwhile building on standardized behind-the-scenes orback-end processes and systems. Since reinventors create a largely new offerto suit the taste of each new overseas market, in theory there are fewlimits on their growth, and they have been particularly successfulin capturing share in developing markets. Yet understandingnew markets, adapting formats to fit them, and linking the for-mats to a standardized back end takes skill and time .When reinventors decide to enter a new market, their local mar-keting teams must first find out exactly what the market's consumerswant across the board. (In contrast, replicators need only confirm localdemand for their format, and performance managers buy existing enter-prises.) While local store managers adapt layouts and ranges to cater to localconsumer preferences, higher-level managers try to exploit international scale

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    132 THE McK INSEY QUARTERLY 2002 NUMBER 3

    out what consumers want and adapting formats accordingly is tough andtime -consum ing. One successful retailer, for instatice, sends a small pre-launch team of expatriates into new target markets a full two years beforeopening a store. In order to study local preferences and to decide how thecompany's value proposition and store format should be adapted.Grafting a variety of store formats onto standard back-end processes pre-sents additional management challenges. Reinventors, for example, must findthe right balance between central and iocal control for all back-end func-tions, and that balance may differ for each version of their retail concept. Tocontrol operations in different markets and to make practical comparisonsamo ng them , cetitral managers need standard operational-performance mea-

    Ahold's knowledge management"Ahold Networking" is a tool for sharing knowl-edge to improve the performance of the busi-ness. Some 8.000 people in the Ahold group aredireotly oonnected to the network, which com -prises 15 knowledge areas, such as categorymanagement, logistics and distribution, storeoperations, and IT. Each knowledge area includesdifferent network grou ps 150 in all. Within thebuying and merchand ising knowledge area, forexample, are network groups that cover flowers,meat, delicatessen, and bakery products; theiogistics and distribution area inciudes networkgroups on transportation and distribution-centeroperations.

    the world, though the flower varieties might differin different markets.

    Network group champions constantly improve thedefinitions of best practice. During the two weeksfollowing any acquisition, for example, all of thenetwork group champions seek out their counter-parts in the acqu ired business to discuss keyperformance indicators and best practices . Ifthe acquired company has better practices thanAhold, the new standard is transferred to the restof the group through Ahoid Networking, and viceversa. Marked improvements in performance canresult. Giant Food, of Landover, IVlaryland, forinstance, improved its be fore-tax profit margin

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    TRAV EL TIPS FOR RET AILER S 133

    sures that cut across these dissimilarities and capture the common processesthat bind the organization. Last, reinventors need a business culture thatrewards concentration on the job at hand and flexibility based on fast learn-ing. Such a culture helps them to develop, adap t, or abso rb new versions ofthe same basic retail concept quickly and thus to grow rapidly. But culturesthat really combine focus and flexibilityGE's, for exampleare rare.

    Reinventors can overcome these challenges. They can harmonize product andservice ranges as much as possible so that back-end synergies aren't squan-dered on duplication or unnecessary variation and scale benefits in purchas-ing and m arketing are more easily realized. They can develop performancemetrics that monitor the management activities that really create value acrossthe business. And they can align their systems for managing talent to rewardthe highly mobile, flexible middle managers who understand their standardcore processes and can apply market intelligence to meet local consumerneeds.'' Even with these skills, reinventors may not grow as fast as youngreplicators or performance managers but should be able to grow more inthe long term.

    Once a retailer understands the available strategies for expanding abroad andthe specific challenges each presents, it can choose the one that best suits itsambitions, its skills, and the business from which it is starting. Of the threestrategies, reinvention seems likely to attract ambitious companies that canaccept a slower initial growth rate. Both replicators and performance man-agers may grow faster at first, but the challenge for replicators is to maintaintheir early growth rates once standardization starts to create problems, whilethe growth of performance managers may eventually be constrained by ashortage of companies to buy. Reinventors face no logical lirnit to profitablegrowth if they can manage the tension between local tailoring and exploitingeconomies of scale. In such a fragmented industry, however, retailers that can

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