Faraway fields are rarely greener for retailers
On the back of the news that Musgrave's UK arm is struggling to find its feet, Dan White looks at the many different retailers that have attempted international expansion and finds that they more often fail than succeed in this difficult task
Print15 May 2014
Musgrave Group’s decision to write down the value of its UK assets demonstrates once again the risks all retailers face when they expand outside of their domestic market.
In its recently-published 2013 results Musgrave Group revealed that it had written down the value of its UK assets by €131m. The latest write-downs mean that Musgrave has now written all of the goodwill off its Budgens and Londis operations in the UK.
The write-downs mean that a 2013 profit before exceptional items of €60m was transformed into a loss of over €83m – Musgrave also took a €12.2m charge to cover the cost of integrating the Superquinn chain into SuperValu.
Musgrave is committed to UK
While Musgrave is adamant that it is committed to remaining in the UK market, its experience across the water is uncannily similar to that of many other retail groups who have found that overseas expansion comes with enormous risks attached.
Tesco pulled the plug on its US operation Fresh and Easy in 2013, forcing the UK’s largest retailer to take a £2bn hit. Tesco wasn’t the first UK retailer to learn the hard way that faraway fields aren’t always greener.
Sainsbury’s also came a cropper in the States with Shaws, which it offloaded in 2004 while Marks & Spencer sold Brooks Brothers for just $225m in 2001 – less than one-third of the $750m it had paid for the iconic US clothing retailer in 1988.
But it’s not just the major UK retailers who have found it difficult to make overseas expansion pay. Walmart, the world’s largest retailer, took a $1bn hit when it pulled out of Germany with its tail between its legs in 2006.
So why do even the biggest and best retailers apparently find it so difficult to replicate their success in overseas markets? Why does a formula that is a sure-fire winner in one market fail to find favour in another?
Demands differ in different markets
When Tesco launched its Fresh and Easy chain in the US in 2006 it was determined to avoid the mistakes other UK retailers had made in their attempts to crack the US market. Instead of paying way over the odds for an existing retailer it decided to grow its own and build a new chain from scratch.
Tesco carried out extensive market research in advance of launching its new chain and even operated a "dummy" store in Los Angeles which trialled the Fresh and Easy format. Customer feedback to the "dummy store" was, we were assured, extremely positive. So after such careful preparation what could possibly go wrong?
Just about everything. It quickly became apparent that real-life American consumers weren’t warming to the Fresh and Easy format of relatively small stores stocking mainly fresh produce and ready meals, preferring to do all of their shopping at larger, full-service outlets instead.
What the failure of even the best retailers to crack foreign markets demonstrates is that it is very, very difficult to get overseas expansion right. Customer expectations and demands vary widely between countries. German shoppers demand superb quality no matter what the price, American shoppers expect to have their groceries packed for them at the checkout, British shoppers are particularly keen on own-label.
Some have been successful
Of course not all overseas expansion by retailers ends in tears. Tesco, admittedly at the second time of asking, has been successful in the Irish market. However, some of its other overseas ventures have been more problematic. The group has exited Japan and injected its 145 Chinese stores into a "joint venture", in which it will have a shareholding of just 20%, with a local retailer.
Giant French retailer Carrefour has expanded successfully outside of its home market while Walmart owns Asda in the UK.
And then there is what can only be termed the Aldi and Lidl phenomenon. The German discount retailers have long since outgrown their home market and are now rewriting the rules of the game throughout Europe, including Britain and Ireland. Their combined market share is now up to more than 7% in the UK and over 15% in Ireland.
While it is always difficult to determine cause and effect, it is clear that the rise and rise of the discounters has contributed massively to the problems being experienced by other retailers. With the discounters busily hoovering up market share in many countries, the bar to success for overseas expansion by other retailers has been raised even higher.
Internet retailing to ramp up
Now that the discounters have already shaken up the market in many countries, next up is internet retailing. While grocery retailing is probably less vulnerable to the internet than other categories such as clothing, music or books, there can be very little doubt but that it will ultimately transform the way in which we do our grocery shopping.
The proportion of internet-ordered groceries delivered to customers’ homes will increase sharply and, even when we do go to the shop, we will often have e-mailed or texted our orders in advance. Much of the business of grocery retailing will retreat from the traditional store to large distribution centres where customers’ orders will be processed.
Ironically, given its recent misfortunes in the UK, these developments could ultimately play to Musgrave’s core logistics competence.
Destined to fail?
However, the increased proportion of grocery retailing done online, will not eliminate differences in consumer behaviour and preferences across borders. Indeed it may serve to increase them even further. Some markets will embrace online far more quickly than others, we can expect that consumers in some markets will doggedly insist on still purchasing certain items from stores – regardless of how inconvenient it may be for retailers – while different national regulations governing the sale of items such as alcohol and tobacco will also serve to complicate matters.
That complicated mix of cultural, historical and legal factors that dog any overseas expansion will not disappear in the digital era.
All of which mean that overseas expansion by retailers will remain extremely difficult. While some retailers will successfully expand overseas, most of them will not. Failure will continue to be the most likely outcome in the future as it has been in the past.
Related Articles
XL Ireland introduces new mascot, Briosca the Irish Wolfhound →
The Busker debuts small batch Single Pot Still Whiskey →
I’m with the brand: Aaron Mulligan, brand ambassador for Diplomatico Rum →
Fans 0
Followers