The Revolution in Retailing: from Market Driven to Market Driving

Singapore Management University Institutional Knowledge at Singapore Management University Research Collection Lee Kong Chian School Of Lee Kong Chian School of Business Business 12-1997 The evolutr ion in retailing: From market driven to market driving Nirmalya KUMAR Singapore Management University, [email protected] DOI: https://doi.org/10.1016/S0024-6301(97)00068-X Follow this and additional works at: https://ink.library.smu.edu.sg/lkcsb_research Part of the Marketing Commons, and the Sales and Merchandising Commons Citation KUMAR, Nirmalya. The er volution in retailing: From market driven to market driving. (1997). Long Range Planning. 30, (6), 830-835. Research Collection Lee Kong Chian School Of Business. Available at: https://ink.library.smu.edu.sg/lkcsb_research/5182 This Journal Article is brought to you for free and open access by the Lee Kong Chian School of Business at Institutional Knowledge at Singapore Management University. It has been accepted for inclusion in Research Collection Lee Kong Chian School Of Business by an authorized administrator of Institutional Knowledge at Singapore Management University. For more information, please email [email protected]. Published in Long Range Planning, Volume 30, Issue 6, December 1997, Page 830-835. http://doi.org/10.1016/S0024-6301(97)00068-X The Revolution in Retailing: from Market Driven to Market Driving Nirmalya Kumar From Fragmentation to Consolidation Retailing was a very fragmented industry in most countries 25 years ago. Through internal growth as well as mergers and acquisitions, an enormous consolidation has taken place in the industry. Over the past year, Metro of Germany has become the second largest retailer in the world after adding Kaufhof, Asko, Deutsche SB-Kauf to their portfolio. The result is that Metro's sales in 1996 were 57.4 billion dollars worldwide, up three-fold, from 18.8 billion dollars in 1990. Besides there have been several cross-border mergers and acquisitions. Royal Ahold of Netherlands has been one of the most active on this front with their acquisitions of Stop and Shop, Bi-Lo, Giant, Tops, Finast, Edwards among others in the USA and most recently Bom Preco, a 50 store grocery chain, in Brazil. These mergers and acquisition are driven by several factors. 1. Strong retailers because of their cash management system of cash sales to customers while buying on credit from suppliers are sitting on heaps of cash. 2. Retailers feel that size brings them bargaining power versus suppliers, and therefore, helps reduce what for many retailers is their biggest expense--COGS or cost of goods sold. 3. There are the more traditional economies of scale. If the same products are available through several retailers, then cost control becomes one of the, if not the, paramount driver of profitability. 4. Many developed countries have strict restrictions on opening large new stores (e.g. Spain, Italy, and adequate size (e.g., Switzerland) leaving mergers Japan), over-stored environments (e.g. France, Ger- and acquisition often the only domestic expansion many), or lack of availability of prime locations of strategy available. ~ Pergamon Long Range Planning, Vol. 30, No. 6, pp. 830 to 835, 1997 PII: S0024-6301(97)00068-x © 1997 Elsevier Science Ltd. All rights reserved Printed in Great Britain that have the potential to be unleashed around the world, the availability of technology to help manage far flung operations, global consumption patterns, and the opening up of new markets with relatively under-developed retail sectors. On the last point, con- sider that in India with a population of almost 1 billion over 95% of retail sales are through independent owner-operated stores or what are referred to in the United States as 'morn and pop' operations. Even in more developed countries or regions, such as Greece, Eastern Europe, Italy, Malaysia, Mexico, and South Korea these independent operations still account for a large percentage of the total retail sales. No wonder, the Wal-Mart's, Carrefour's, and Makro's of the world get misty-eyed when they talk about globalization. The early leaders in global retailing were specialty formats such as IKEA from Sweden, C&A from The Netherlands, Benetton of Italy, Marks and Spencer, and several McDonalds type franchise operations from the USA. These were mostly private label formats and it was not clear whether their primary activity was retailing or manufacturing. Furthermore, the economic model and business system of these retailers was such that they could break even in a country with as few as one or two stores. Now one observes true retailers such as Carrefour, Dairy Farm of Hong Kong, Seven-Eleven convenience stores (part of Ito-Yokado) of Japan, Makro of Netherlands, Toys'R'Us, Virgin and Wal-Mart going overseas with Consolidation has several implications for both their formats carrying manufacturer branded pro- manufacturers and retailers. It makes it much harder ducts. Since the merchandise they offer is often tor the independent retailers to succeed as they just already available, one of the main distinctive com- cannot buy as efficiently or invest enough in tech- petencies they bring is distribution exellence. How- nology to keep their operations competitive. Thus ever, a certain minimum number of stores (6 to 8) despite the efforts of many governments to protect the in a country are necessary before their distribution small, independent retailer, we will continue to see efficiency can be successfully replicated. M&A activity in the industry moving at a hectic pace. Despite the popularity of globalization in retailing, For manufacturers this continuing consolidation in most retailers are still struggling to develop com- points of sale is worrying. As retailers learn how to petencies to succeed in global markets. To what extent integrate their mergers and acquisitions more tightly, should the 'original' format be adapted is a major especially with respect to sourcing, the pressure on issue. Wal-Mart learnt this the hard way when its manufacturers will undoubtedly increase. Many of initial entry into China had the wrong merchandise. the premier manufacturers who were previously On the other hand, Mexican customers were dis- operating as branded bulldozers have now been appointed when they did not find enough imported shocked into talking 'partnerships.' However, part- US merchandise in the Wal-Mart stores. Another nerships often mean very different things to manu- related question is which activities should be cen- facturers and retailers thereby leaving one party tralized and which should be decentralized. rather unsatisfied with the entire experience, usually Currently, retailers believe that activities where sub- t }n~ manufacturer. stantial economies of scale exist such as merchandising systems, information technology and vendor management should be centralized whilst others such as merchandising and distribution should From Local to Global be decentralized. To protect against currency fluc- Perhaps the most dramatic change in retailing has tuations, comply with local sourcing requirements been the increasing globalization of retailers. Several and serve local tastes, most 'big' retail formats prefer factors are driving globalization including: low to rely on local suppliers. However, if 90% of mer- growth in domestic markets, sophisticated formats chandise is locally sourced, as is the case for Wal- Long Range Planning Vol. 30 December 1997 Mart and Carrefour, then these retailers start to lose among the clutter of over-distributed manufacturer some of their global sourcing leverage against the branded products. manufacturers and advantage against local compe- While private labels may look very seductive for tition. Finally, as local partners are often mandated the retailer, mass retailers have to be careful not to or necessary, who to select and what should be the overdo it. For a mass retailer, customer count and role of each partner is a crucial question. Clearly, traffic are crucial issues. Having too many private Carrefour as the late entrant in Mexico ended up with labels can turn off many, especially younger, a relatively weaker local partner because Wal-Mart customers. Despite having in Kenmore and Craftsman already had Cifra, the best Mexican retailer, tied up two of the most respected brands in the market place, in a joint venture. Sears, the US department store, had to move away Most manufacturers are still in the process of from their private label only policy in white goods developing a coherent strategy on how to interact and hardware. Some of Sainsbury's problems and effectively with global retailers. To what extent can recent loss of market leadership to Tesco in United price differences of 40-60% between markets be sus- Kingdom can also be traced to their over-reliance on tained in the face of transshipments by retailers? How private labels which made Sainsbury's customers feel to keep the traditional retailers who still account for that they lacked adequate choice. a large majority of the manufacturer's sales in a par- The experience of MIGROS, the market share leader ticular country satisfied while serving the global in supermarkets in Switzerland, offers two other les- retailer who undercuts established prices to gain sons to retailers for private labels. First, by focusing local market share? How to organize and compensate on their own brands which account for more than a dedicated multinational-multifunctional account 90% of their sales, they have provided their com- management team to serve global retailers? These are petitors with a strategic window to operate in. There all as yet unresolved questions. is little doubt that MIGROS is by far the best retailer in Switzerland and that their competition is, to put it bluntly, inept. Yet the competition has almost 60% market share as they offer manufacturer branded products such as Coca Cola which MIGROS still re- fuses to carry. Second, it is more difficult for mass From Merchants to Retail Brand retailers such as MIGROS who rely on private labels to expand overseas as they have to convince the cus- Managers tomers in the new country to switch both stores and Retailers were once considered true merchants, mak- brands.

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