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Luciano Catoni, Nora Forisdal Larssen, James Naylor, and Andrea Zocchi
Three strategies can help retailers expand abroad. The trick is to choose the one that best suits your particular ambitions and your starting point.

etailing was once a stay-at-home sector. A few retailers, such as Benetton and IKEA, seemed to travel well, taking their distinctive brands far and wide. But most were content to grow at home. Universally appealing product assortments are difficult to create, and far-flung, peopleintensive retail operations are tricky to run. In consequence, the industry has remained 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 pressure from their shareholders to grow farther and faster, expressed in high share prices (Exhibit 2, on the next spread). That development prompted several retail groups to accelerate their overseas growth (Exhibit 3, on the next spread). Most of them were grocery and general-merchandise chains, including Carrefour (based in Erance) and Wal-Mart (the United States), and clothing chains, such as H&M (Sweden) and Zara (Spain).' Now, however, shareholders insist that retailers deliver not just instant sales growth from their foreign ventures but also substantial synergies and thus more profits. Yet creating value from dispersed retail operations is still difficult. Eor the past two years, we have examined the way international retailers manage their operations overseas. Successful companies seem to fall into one of three distinct models: replicators, performance managers, or reinventors.^
European companies generaiiy preceded their North American counterparts in going abroad, largely because opportunities to grow at home were exhausted more quickly in Europe's smaller national markets. ^We screened more than 65 international retailers and studied 17 cf them in depth to understand their international organization and to compare the retail sector's overseas development with that of industries whose globalization started earlier.



No single model is best. Each offers different trade-offs among the pace of growth it can deliver, the complexity of the organization it entails, and the rate at which it can realize synergies. The different models also require different skills. Retailers moving abroad should choose the model that best suits their particular growth ambitionsand be sure they have the right skills to pursue it well.

Long-standing international retailers such as Benetton, as well as more recent examples, such as the clothing retailer Zara and the US coffee specialist Starbucks, are replicators. Typically, such retailers develop a simple format and business system, identify the markets where they will thrive, and then export them almost unchanged. This well-tried strategy still offers a relatively simple and fast route to expansion abroad and makes it easy to achieve economies of scale. But the growth of replicators can flag when their original format runs out of EXHIBIT 1 _ steamunless they find ways to revive the creaR e t a i l is f r a g m e n t e d a n d local ~ tivity of the early days.
Market share of 50 largest companies, 2000, percent

Average number of countrres of operation for 10 largest companies, 2000 135

Most replicators start out as small and creaAutomotive 92 Petroleum 73 tive owner-managed businesses whose 69 Automotive 44 Pharmaceutical' founders develop a new Electronics 33 Electronics operational system (as did McDonald's) or Retail I 10 Retail 20 assortment (IKEA), frequently involving a new 'Manufacture of prescription and over-Hie-counter drugs. Source: Euromonitor; Global Vantage; IMS Healtti: OneSojrce; McKinsey analysis store format and often by chance. If the innovations prove popular, management tries to lock the company's fine-tuned procedures into standard training and implementation manuals. Codifying the system allows the business to growfirst at home, where growth is easier, and then overseasfaster than competitors can copy it.
96 Pharmaceutical'

This simple approach gives replicators several advantages in running an international operation. First, such a company can coordinate its home and overseas businesses under one centralized global or regional management structure. From this center, the company controls the activities that support its brand's identity: typically, merchandising, the development of new products, knowledge management, and marketing. Gap's US division, for example, provides all of Gap's product design and marketing services. A standard



product range also means that replicators can easily reap economies of scale, especially in sourcing and manufacturing. By applying the same business system in successive new markets, replicators learn how best to explain brand standards to frontline workers and suppliers and how to ensure their compliance. And the rewards that replicators offer these new franchises have, in some cases, inspired tremendous growth. Given the simple format and organization of the replicators, they can capture synergies easily and expand quickly overseas. Standardization, however, also makes these organizations difficult to sustain; it can be hard to motivate frontline staff when following a preset formula becomes dull. Replicators can maintain continuity in stores if their managers are adept at training new staff quickly, but the standardization of the replicators' approach may repel good trainers.


High expectations
Percent ot equity value implicit In share price, March 2002
CurrenI performance ' ^ [ ^ | Future growth

Carrefour Pinault-PrintempsRedoute
Source: Thomson Financial; McKinsey analysis


Retaiiers go global
Number ot new countries entered

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

Ahold Carretour Kingfisher Metro Tesco Wal-Mart

1 1 0 2 1
0 0

~ 20


-1 0 1


Replicators can accommodate local variations in consumer demand by tweaking their formats only within the bounds imposed by their standard systems. McDonald's, for example, offers a McRye burger in Finland, curry potato pie in Hong Kong, and the kiwiburger (actually based on beef) in New Zealand, but the company's value proposition in every market is lowcost, quality fast fcx>d: hamburgers. Coke, and french fries. Making more substantial changes for local tastes would alter the company's format and operational system and thus lose the advantages of scale and simplicity. A combination of conformity and creativity is needed if replicators are to find new growth opportunities and maintain existing business. More subtle marketing will enable such companies to tweak their value proposition as far as possible to local preferences without damaging their business system and brand image. Evaluation systems that identify and quickly promote the kinds of managers replicators need will help them retain the best.



To grow in new markets, replicators can form small teams of corporate-level entrepreneurs to acquire or develop for replication new retail formats quite separate from the original business. But this approach can be tough, since creative thinking is a skill different froin the disciplined adherence to standard 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 and Boston Market restaurants in the United States and a strategic stake in Pret a Manger, a chain of sandwich shops in the United Kingdom.

Performance managers
Companies such as Ahold and Kingfisherthe performance managers expand internationally by acquiring a portfolio of existing retail businesses and developing them as almost completely distinct entities. Already accomplished retailers, these companies have refined their skills in corporate finance and postmerger management so that they can identify and negotiate good deals. They also excel at managing their assets' performance: setting targets, using precise metrics to monitor progress, and, when assets slip off track,, responding quickly. Such companies have largely decentralized structures and run acquired businesses by using local management teams (often those that had previously run the acquisitions) and giving them considerable operational authority. When the price of acquisitions is right, such factors can make performance managers the fastest-growing category of international retailers. Although other models also rely on acquisitions to grow,^ they must be altered to fit into 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: they may develop shared private-label programs, for instance, or provide managers with their wide range of retail expertise. Nonetheless, such groups could still exploit huge potential synergies, as the capital markets are now urging them to do. The problem is that the bigger they get, the harder it is for them to realize any synergies at all, since their organizational complexity also increases at a faster rate; as their operations grow more widespread, it becomes harder to understand and control markets, brands, and formats. And the more companies join the hunt for existing assets, the scarcer and dearer they become, so the performance managers' overall scope for growth may also be limited by the need to buy them at low prices. Now that so many of the best deals have been done, it may be difficult to keep the acquisition pipeline full.
^Replicators acquire new sites or entire new growth platforms.



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

Carrefour, Tesco, and otber reinventors typically "own" one or more store conceptshypermarkets, for examplewhich they adapt to the needs of each local market, meanwhile building on standardized behind-the-scenes or back-end processes and systems. Since reinventors create a largely new offer to suit the taste of each new overseas market, in theory there are few limits on their growth, and they have been particularly successful in capturing share in developing markets. Yet understanding new markets, adapting formats to fit them, and linking the formats to a standardized back end takes skill and time. When reinventors decide to enter a new market, their local marketing teams must first find out exactly what the market's consumers want across the board. (In contrast, replicators need only confirm local demand for their format, and performance managers buy existing enterprises.) While local store managers adapt layouts and ranges to cater to local consumer preferences, higher-level managers try to exploit international scale advantages in back-end processes. Tesco, for instance, uses the same systems for processes such as inventory management, the approval of properties, and merchandising in all of the markets where it sells food and household goods {see "Taking Tesco global," in the current issue). But its outlets are so closely adapted to local tastes that a consumer familiar with Tesco supermarkets in, say, London who shopped in its Bangkok or Warsaw hypermarkets would have difficulty believing that the same company ran them all. In contrast to companies that follow other models, reinventors may have more latitude to grow, can offer entrepreneurs more exciting opportunities, and can improve operations back home by applying lessons learned overseas. But the price reinventors pay for this style of growth is complexity. Finding



out what consumers want and adapting formats accordingly is tough and time-consuming. One successful retailer, for instatice, sends a small prelaunch team of expatriates into new target markets a full two years before opening a store. In order to study local preferences and to decide how the company's value proposition and store format should be adapted. Grafting a variety of store formats onto standard back-end processes presents additional management challenges. Reinventors, for example, must find the right balance between central and iocal control for all back-end functions, and that balance may differ for each version of their retail concept. To control operations in different markets and to make practical comparisons among them, cetitral managers need standard operational-performance mea-

Ahold's knowledge management

"Ahold Networking" is a tool for sharing knowledge to improve the performance of the business. Some 8.000 people in the Ahold group are direotly oonnected to the network, which comprises 15 knowledge areas, such as category management, logistics and distribution, store operations, and IT. Each knowledge area includes different network groups150 in all. Within the buying and merchandising knowledge area, for example, are network groups that cover flowers, meat, delicatessen, and bakery products; the iogistics and distribution area inciudes network groups on transportation and distribution-center operations. Network group champions constantly improve the definitions of best practice. During the two weeks following any acquisition, for example, all of the network group champions seek out their counterparts in the acquired business to discuss key performance indicators and best practices. If the acquired company has better practices than Ahold, the new standard is transferred to the rest of the group through Ahoid Networking, and vice versa. Marked improvements in performance can result. Giant Food, of Landover, IVlaryland, for instance, improved its before-tax profit margin Each network group has at least one participant from all of the companies Ahold owns or controls, and each defines key performance indicators and best-practice benchmarks to apply to its particular activity around the world. The flower group, for example, may choose the number of popuiar, high-value flowers sold from 8 AM to 1 PM as a key performance indicator and specify the volume that constitutes best practice. This performance metric would then show the relative performance of each flower department around van der Hoeven at the LSA {Libre-Service Actuaiits) conference, "Distributeurs: Quelles strategies gagnantes a I'international?" ("Retailers: What are vi/inning international strategies?"), held in Paris in October 2001, from 3,5 percent to 6 percent between 1998, when it was taken over by Ahold, and 2001, when it increased same-store sales on average by 6 percentone ot the strongest retail growth rates in the United States. Ahold's president and CEO, Ceesvan der Hoeven, thinks that Ahold Networking was responsible.^ the world, though the flower varieties might differ in different markets.



sures that cut across these dissimilarities and capture the common processes that bind the organization. Last, reinventors need a business culture that rewards concentration on the job at hand and flexibility based on fast learning. Such a culture helps them to develop, adapt, or absorb new versions of the same basic retail concept quickly and thus to grow rapidly. But cultures that really combine focus and flexibilityGE's, for exampleare rare. Reinventors can overcome these challenges. They can harmonize product and service ranges as much as possible so that back-end synergies aren't squandered on duplication or unnecessary variation and scale benefits in purchasing and marketing are more easily realized. They can develop performance metrics that monitor the management activities that really create value across the business. And they can align their systems for managing talent to reward the highly mobile, flexible middle managers who understand their standard core processes and can apply market intelligence to meet local consumer needs.'' Even with these skills, reinventors may not grow as fast as young replicators or performance managers but should be able to grow more in the long term.

Once a retailer understands the available strategies for expanding abroad and the specific challenges each presents, it can choose the one that best suits its ambitions, its skills, and the business from which it is starting. Of the three strategies, reinvention seems likely to attract ambitious companies that can accept a slower initial growth rate. Both replicators and performance managers may grow faster at first, but the challenge for replicators is to maintain their early growth rates once standardization starts to create problems, while the growth of performance managers may eventually be constrained by a shortage of companies to buy. Reinventors face no logical lirnit to profitable growth if they can manage the tension between local tailoring and exploiting economies of scale. In such a fragmented industry, however, retailers that can overcome the challenges inherent in any of these overseas growth models should find room to expand for a long while to come.

Replicators, by contrast, have a greater need for disciplined frontline staff, while performance managers require entrepreneurial leaders at the top of their businesses. The authors wish to thank Peter Child and Johanna Waterous for their insights and suppcrt thrcughout the research project on which this article is based. Luciano Catoni is a principal in McKinsey's Rome office; Nora Forisdal Larssen is a principal in the Stockholm office; James Naylor is a consultant in the London otfice; Andrea Zocchi is a principal in the Milan office. Copyright 2002 McKinsey & Company. All rights reserved.