Retail Growth Strategies – Is It About Location Only?

Why is it that a Carrefour has eight locations and LULU has over thirty four? Or why a
company like the Apparel group (franchisees of brands like Nine West, Aldo, Kenneth
Cole, etc.) has aggressively grown to nearly 150 stores over the past ten years? Or a
Starbucks has over 6000 retail locations world-wide whereas Gloria Jeans is operating
just over 200 stores worldwide.

Retail growth is not just about opportunity and access to locations but is an outcome of a
complex interplay of motives, perceptions, and attitudes of the entrepreneur and / or
senior management.

Retailers achieve growth through three means – either by increasing sales from the
already existing stores (organic), or increasing the number of stores (geographic), or
developing new retail brands catering to different consumer needs (diversification). The
choice of retail growth options is a consequence of a number of factors; some internal
and others external to an organization. Presented in figure 1 is a frame work that
identifies issues that ‘influence’ and ‘drive’ retail growth strategy.

Background factors and growth

Consider the contextual variables. Retail brand ownership influences the number of
options available for growth. The owner of a retail brand has the flexibility of exercising
a wide variety of growth options (e.g. growth through concessions, franchising, licensing,
wholesale, and distribution etc.) whereas growth options for a franchisee are usually
limited. It is not unusual for a franchisor (the brand owner) to decide when where, and
how to grow. The nature of the brand, it’s positioning and differentiation (in the eyes of
the customers) also influences growth options. An up-market differentiated luxury brand
(e.g. Louis Vuitton or Mont Blanc) targeting a high-income niche will rarely change its
products / positioning / identity based upon socio-economic and demographic changes, or
across geographies. Luxury retail brands are generically international requiring only
limited adaptation to cater to special tastes of different consumers / markets. Whereas
stores like Metro - Cash and Carry or Carrefour or ALDI or Wal-Mart’ derive their
identity from ‘wholesale prices,’ or ‘low prices’ or ‘narrow range low prices,’ or ‘Every
Day Low Price’ across all products respectively, and growth requires transferring
organizational efficiencies (e.g. of the supply chain) to newer locations with product
range adaptation reflecting local needs.

Drivers of growth

The motivations, perceptions and attitudes of the owner and / or top-management drive
the selection and implementation of growth strategies. The goal of any growth strategy is
to increase long-term profitability and keep risks at an ‘acceptable’ level. The perceived
benefits and risks are shaped by motivations of owner and / or top management and by
their perception of consumer needs. Paris Gallery is an example of an entrepreneur whose
 Figure 1

Antecedentfactors
Background for Drivers of growth Direct influences
growth

Own brand or Attitude, experience, and Can be both internal

franchisee knowledge of owner- (market saturation) or
managers influence external (opportunity
Specialist strategies, direction, speed, and identification)
focused retail concept, strategy of growth
strong brand enables
differentiation Formal and informal
networks of relationships
Less or more market are important in
oriented with target geographic growth
segment at the
premium or middle
segment

Resources and Growth strategies

capabilities

Resources – brand Transfer / replicate

market appeal, access concept with little or
to locations, people limited adaptation
assets
Transfer organizational
Organizational capabilities, reposition
capabilities – supply and re-create concept
chain, marketing,
flexibility of concept,
organizational
adaptability, IT assets,
organization structure

Capabilities have to be
scaled up or
transferred across
geographies

understanding of consumers (convenience of buying all brands in a single location versus

going to different department stores for specific brands (Grand Stores, Salams, and
Jashanmal - the distributors for various brands and competing with each other), drive
(aggressive growth), and risk-taking ability (paying comparatively high rents for mall
space, and working with low retail margins by purchasing from local wholesalers)
transformed the perfume and cosmetic retailing business from department stores to stand-
alone retailing with other major changes in industry structure over the past ten years.

Retailing reduced to its basics is a supply chain management problem – large network of
organizations working in tandem to meet customer needs and ‘moving’ boxes. I have
often heard entrepreneurs use a metric of containers moved per year as indicator of scale.
Wal-Mart measures its supply chain efficiency in terms of cost per case delivered to the
store through the distribution center and number of day’s storage from receipt to supply
in their distribution centers. Underlying the successful realization of a growth dream is
the need to develop a network of responsive network of supply chain relationships. As a
new store starts the scale of operations of the entire supply chain network needs to scale-
up without glitches. Performance indicators of each network member need to be in sync.

Direct influences on growth

Growth strategies are influenced by direct stimuli, internal and external to the firm, those
trigger the growth motive. External stimuli include access to prime real estate
(construction of new malls), government stimulation measures (boost to tourism, opening
the real estate market, liberalization of the business environment, etc.) and the consequent
market opportunities, influence of third-party decisions (either foreign franchisors who
set the growth agenda or understanding, or emulating the successful growth of
competitors). Internal stimuli are like a perception of market saturation and need for
geographic expansion, or unique organizational resources (people, brands, sourcing or
supply chain capabilities) that can be leveraged.

Retail growth strategies are a mix of rational and goal-oriented proactive behavior where
goals are first defined and growth options are derived from research and analysis, and a
more reactive, suck-and-see, more gut feel, less rational and less objective-oriented
behavior. My experience suggests that selection of growth strategies is often a more
intuitive behavior, and it is here that cultural factors exert their influence in setting the
direction of growth, particularly when evaluating growth in new geographies. In the mid-
nineties the Caspian Sea CIS countries were on the radar screen of every businessman in
Dubai as virgin markets (a rational perception), and but quickly fell out favor based upon
the poor experience (difficult political and cultural conditions). The businessmen never
felt at ‘home.’ India was a ‘closed’ country till 2004, but suddenly is the focus of global
growth opportunity. It is not that it has become any easier to do business in India. It is
just as difficult to open a retail store. The business ‘sentiment’ has certainly changed but
the access to human resources who have an intuitive insight into culture and ‘feel at
home’ is also an important factor. The China growth story was led by the Hong Kong and
Taiwanese business persons for whom cultural affinity and ‘returning to the roots’ was an
unstated underlying variable.

Organization resources and capabilities

The antecedent conditions, motivations and direct and indirect influences, affect the
trajectory of growth whereas the organization’s access to resources (e.g. strength of brand
identity, access to locations, human resources, network of supplier relationships, etc.) and
capabilities that add tangible value to consumers (e.g. supply chain efficiencies, IT assets,
organization culture, design capabilities, responsiveness, etc.) influence the choice of the
growth path. Zara, for example, implements its unique business model of ‘rapid
responsiveness’ through company-owned and managed stores, controls nearly all
operation details, and bears the inventory risk. Other brand franchises like Clarks or
Calvin Klein sell to franchisees, transfer the inventory risk, and only define operational
details in general. Clark’s and Calvin Klein have not developed adequate franchisee
management capabilities in-house and depend upon franchisee partners to ‘manage’ the
business outside the home geography. The diversity of growth options like concessions,
franchising, owned stores, licensing, etc. are all influenced by the resources and
capabilities of the parent organization. If the supply chain efficiencies are a critical factor
in the success of a brand, transferring the efficiencies will be integral to exercising the
growth option. Similarly if design is a critical success factor, adapting product to the new
market will be essential to successful growth. This can be exemplified through the
apparent lack of success of Wal-Mart in Germany versus in the UK. Wal-Mart has to an
extent being unable to replicate its success factors in Germany e.g. supply chain
management is an outsourced service in Germany but done in-house by ASDA / Wal-
Mart.

Evaluating and exercising the growth option

Sensitizing the growth issues as above does not imply that entrepreneur or owner-
manager considers all issues before making a growth choice. Entrepreneurs or managers
reduce most of the above issues into simple workable business rules. Starbucks sells a
commodity, easily replicable, and a product for which an average consumer will not do
brand-seeking destination search. And therefore if convenience and accessibility are
critical to consumption then locate the brand everywhere coffee is consumed (both to
access consumers and prevent competition), often four locations in a mall or even across
the road from each other. With the commoditization of other categories (e.g. apparel or
the ‘swatchification’ of the low priced fashion watches etc.), brands searching for
increasing volumes often mimic the Starbucks approach and give consumers accessibility
and convenience by placing stores proximate to each other.

So how does one make the retail growth choice? Retail is a highly fragmented business
where sales from each new location grow rapidly for the first three years and then start to
slow down (the 1000-day rule). Getting double digit growth rates from mature stores in
mature economies (Dubai is an exception) is a challenge and retail growth is basically a
decision about locating a new store in the vicinity of or distant from an existing store. A
new store location is not a straightforward decision. It needs to weigh the positive
primary effects of increasing sales based upon market opportunity, loyalty effect, and
operational synergies against the negative secondary effects of inter-dependency of the
branches in the network and the additional organizational and operating costs as under:

Primary effects
Increasing sales
Pre-emptive strategies to prevent competition
Synergy in marketing and promotional costs associated with economies of scale of advertising
More outlets are found to lead to more loyalty – consumers are forced not to try competition because of
convenience and adding a branch may often leads to increase in sales of all outlets

Secondary effects
Potential cannibalization of sales from existing stores
Costs associated with managing a retail network of branches – people and logistics
Costs associated with financing fit-out and inventory
Balancing the primary and secondary effects is difficult to predict, and retailers prefer to
follow the intuitive suck-and-see approach – open a new location that broadly meets the
criteria of a ‘good’ location and assess the impact of primary and secondary effects. The
sensitivity to the secondary effects, primarily cannibalization of sales from existing
stores, was sensed by retailers in Dubai as the Mall of Emirates opened and the foot
traffic in Diera City Center or Bur Juman was affected. I have also found that retailers are
less sensitive to the logistics and inventory carrying costs of the retail business, and the
secondary effects of these costs on retail growth decisions. So when does a retailer seek
opportunities in new countries? As long as the positive secondary effects of increasing
sales and economies of scale dominate proximate growth options are realized. Once sales
saturation sets in and sales become marginal with pressure on profitability retailers start
to seek opportunities in other geographies.

Conclusion

Barring organic growth retail organizations normally grow by opening new branches and
the choice of where to locate an outlet requires an understanding of three effects – the
expected increase in sales, impact of the new outlet on performance of existing outlets,
and impact of the new outlet on the costs of the entire set of outlets. At a strategic level,
however, choice of retail growth options is a much more complex phenomenon driven by
the motives of the entrepreneur (top management), is based upon defining goals
identified by the entrepreneur’s (top-management) subjective perception of opportunity,
is moderated by an assessment of resources and capabilities that contribute to customer
value and can be leveraged for growth, and is tempered by a the entrepreneur’s (top-
management) risk perception.