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The Globalization of Trade in Retail Services

Prof Neil Wrigley

University of Southampton

Prof Michelle Lowe

University of Surrey

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Aims and Context

Study commissioned by OECD to inform expert meeting on distribution services

Aims are to:

Explain how & why retail sector internationalised over the past two decades and characteristics of process

Highlight current and potential future trends in the internationalisation of the sector

Consider how trade, investment & regulatory policy have shaped the international activities of retailers

Assess importance of e-commerce in international retailing and any potential restrictions on its development

Assess policy areas and measures which might be included in the retail part of a services trade restrictiveness index (STRI)

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Study written from perspective of academic social scientists

who have contributed to research and scholarship on the

retail sector and multinational retailers in the global

economy, but who are not trade policy analysts.

An important aim of the study is to ‘add value’ to the OECD

debates from that wider perspective.

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Sector Background

In all OECD economies, distribution sector provides a crucial

and dynamically evolving link between producers and

consumers.

Sector typically offers major contribution to:

economy-wide employment – 13-17%

business activity – 25-30% and GDP 8-17%

Within distribution sector (including both retail and wholesale

trade) majority of these contributions provided by retailing

an industry which over the past three decades has

increasingly been viewed as dynamic and innovative

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During 1980s and 1990s, retailing transformed by three

interrelated forces

1. Remorseless processes of concentration – ultimately

produced some of the largest firms in national economies

– firms which progressively increased their bargaining

power relative to suppliers

2. Emergence of retailers as lead firms in buyer-driven

supply chains – which progressively shifted from ‘supply

push’ to ‘demand pull’ in character

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3. Processes of ‘lean retailing’ - integrated logistics and supply chain management methods which underpinned ‘just-in-time’ demand-pull supply systems allowing substantial reductions in retailer inventory holdings and amount of capital tied up in those holdings

Figure 1:The emergence of ‘lean retailing’ - reductions in retailer inventory holdings in the 1980s/early 1990s by the UK’s leading retailer (Tesco)

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1961 1971 1981 1991 2001

Sto

ck D

ays

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From the mid 1990s onwards, the transformed retail

industries of OECD countries at forefront of these three

interrelated transformations began a period of sustained

engagement with the global economy – essentially as

exporters of retail capital and expertise.

Other OECD countries, whose retail systems remained

essentially ‘traditional’, experienced that engagement in an

importer mode

Late 1990s rapid acceleration of retail FDI, largely by

European and US retailers and primarily into the emerging

markets of Asia, Central/Eastern Europe and Latin America

Emergence of retailing as one of the driving forces of

economic globalization

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The Lead Role of ‘Grocery’ Retailers

Within retail industry food and ‘fast moving consumer goods’

sold through ‘grocery’ outlets provide the largest element of

total sales

In UK retail sales through ‘grocery outlets’ accounted for 48.8%

of total retail sales and 13.1% of total household expend 2005

It was essentially these major grocery/fmcg-retailers who

powered the emergence of retailing as one of the driving forces

of economic globalization in the late 1990s

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Retail Globalization – Characteristics & Driving Forces

Scale and Scope

By 2008 12 retailers derived over $25 billion p.a. from their

international operations – operating on average store networks

in 18 countries

Other studies (Dawson top 100 retailers, Deloitte top 250

retailers) show both international sales and average number of

countries of operation increasing over time

All listings of world’s leading retailers show domination by

grocery retailers – 134 of top 250 in Deloitte 2008 list. Next

largest groups are ‘hardline leisure’ & ‘fashion goods’ retailers

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Driving Forces

Acceleration in retail FDI late 1990s driven by:

longer-term growth opportunities perceived to be offered by emerging economies with previously largely ‘traditional’ retail systems

consolidating, and often increasingly tightly regulated, home markets of these firms

capacity of largest of these firms to leverage their increasing core-market scale and free cash flow for expansionary investment, in order to secure the longer-term higher growth opportunities offered by the emerging markets

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Process facilitated by:

full or partial liberalisation of trade and market access in many of emerging economies

availability of low-cost capital

emulation of the ‘first mover’ benefits seen to have accrued to the early retail internationalisers

emergence/adoption of ICT technologies providing essential management tools assisting control of, and knowledge transfer within, large dispersed operations

exogenous macro-economic derived opportunities – e.g. the attractive investment and market entry possibilities provided by the Asian economic crisis of 1997

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Phases

Table 3: Reardon’s waves of retail transformation in emerging markets

Wave 1st 2nd 3rd 4th

Early 1990s Mid-late 1990s Early 2000s Late 2000s

Countries South America

East Asia (outside

China & Japan).

Parts of South-East

Asia (e.g. Thailand,

Philippines).

Northern-Central

Europe (e.g.

Poland & Baltic

countries).

South Africa

Mexico &

Central America

Much of South-East

Asia (e.g. Indonesia)

South-Central

Europe

South Africa

China

Eastern Europe

Russia

Other parts of

Central

America & S.E.

Asia

India

South Asia (outside India)

Sub-Saharan Africa outside

countries impacted in 2nd

and 3rd waves

Poorer countries in South

East Asia (e.g. Cambodia)

South America (e.g. Bolivia)

‘Modern’

retail market

share

mid 2000s

50-60%

30-50%

1-20%

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Resistance

Academics increasingly argued that Reardon’s image of ‘waves of diffusion’ and related concepts of ‘take-off’ imply too much inevitability of domination of emerging market retailers by multinational retailers

Fail to deal with resistance shown by both leading indigenous retailers, and by informal retail channels

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Continuing extent of this resistance illustrated by market

positions Tesco holds, and the competition it faces, in the

nine emerging economies in which it operates

In 5 of those markets - Tesco close to market leadership

Despite determined efforts and significant/continued capital

expenditure by Tesco, a local retailer retains that leadership

Given that Tesco has invested for market leadership more

systematically than many of its rivals, this demonstrates the

fallacy of any easy or inevitable route to domination of

emerging markets by multinational retailing

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The Challenge of the Regional TNCs

Figure 4: The rise of the regional retail-TNC - Dairy Farm’s expanding operations

in Asia 2001-2009

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Competitive Shake-Out

Recent feature of retail globalization is the drive for market scale and sustainable advantage

Inability to achieve market scale in a country against better placed multinational rivals or leading local chains has resulted in growing numbers of cases of strategic divestment and market exit by retail TNCS

E.g. Wal-Mart and Carrefour divested their Korean stores in 2006 leaving Tesco as only multinational retailer, and Carrefour recently announced its strategic withdrawal from South-East Asia

Alternative to divestment is use of asset swaps to secure market scale e.g. the swap of Tesco and Carrefour retail outlets in Taiwan, Czech Republic and Slovakia in 2005

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Global and Regional Sourcing and Trade

Main debates focused on local sourcing impacts of retail FDI

But important impacts also arise as result of multinational

retailers linking emerging market operations into both global

sourcing networks & embryonic regional sourcing systems

Important issues surround the pattern of import evolution

do retail TNCs act as highly efficient ‘Trojan horses’ for

imported goods, or do they reduce importing over time as

transformation of local supply networks builds supply

capacity/quality standards in host economy, leading

ultimately to stimulation of exports into home markets of

the retail TNCs

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Barriers to Trade Shaping the International Activities

of Retailers

Two broad types of barriers have important effects

1. Institutional, cultural, and organizational barriers

2. Regulatory barriers

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1. Institutional, cultural, and organizational barriers

Of critical importance to the competitiveness of retail TNCs

is their capacity to adapt to the institutional and cultural

characteristics of the international markets they enter

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Retail TNCs with different organizational capabilities and

cultures differ considerably in extent to which they invest in

and/or can achieve locally responsive strategies

They enter markets using different processes of capability,

transfer, modification and creation

Additionally, must overcome challenges relating to:

protection of knowledge

intense and localised regulatory challenge

contested relationships with their suppliers of finance

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Regulatory Barriers

Range considered in academic studies covers spectrum from:

restrictions on inward retail FDI

differential application of competition rules

shareholder equity and minimum capital requirements

application of land/property, zoning & building regulations

permitted formats & minimum ‘serviced population’ levels

format-specific restrictions of store opening hours

environmental, community/business impact requiements

Academic debate has not concentrated on some other

aspects of retail value-added chains - e.g. IPR, commercial

communication/certification rules, payment services rules

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Recent academic debate focused more on extent to which

period of market access liberalisation has been followed by

trend towards re-regulation

Rise of re-regulation, particularly in South-East Asia, has

attracted attention

in particular, concern focused on types of adaptive

responses made by multinational retailers - format

adaptation, pre-emptive ‘development site’ acquisition, etc

and the differential agilities of retail TNCS.

extent to which re-regulatory trends might be a long-term

major constraint

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Globalizing Retail and B2C E-Commerce

E-tailing taken much longer to take root than assumed in late

1990s, but acceptance increasing year on year.

E.g. in UK, e-tailing increased to almost 7% of total retail

spend in 2010 – 62% of adult population shopping online

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Vital to understand multichannel model of e-tailing.

E-commerce must not be seen as a separate market

Regulatory challenges relate to:

possibility of minimising exposure of e-tailing revenues to

taxation and other regulations by redefining point of sale

rise of virtual products, the endemic electronic piracy

relating to those products, and complexities of developing

legal retailer-driven download services

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Trends and Research Priorities

Although proportion of international sales continues to rise within world’s largest 250 retailers, increase in the average number of international markets retailers operate in been driven from the early 2000s by the relatively smaller firms in those rankings

Academic opinion increasingly querying whether retail globalization has entered new phase, characterised by:

drive for market scale and sustainable advantage

multi-format/channel adaptation – shift into convenience and hard discount formats

re-regulatory pressures

continuing and stronger than anticipated domestic-retailer resistance

rise of second-tier regional retail-TNCs

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Implications for a Services Trade Restrictiveness Index

OECD Trade Committee Working Party suggests potential measures for inclusion in STRI organized into five categories

restrictions on foreign ownership and other market entry conditions

restrictions on movement of people

other discriminatory measures and international standards

barriers to competition

regulatory transparency & administrative requirements.

Our sector overview suggests international retail services trade has been particularly sensitive to some of the measures in categories 1 & 4

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In category 1:

foreign equity restrictions (& min capital requirements) which

impose controls on multinational retailers taking majority

controlling share ownership positions in major domestic

retailers particularly signif in some regions, & continue to be an

issue in slow process of opening Indian market to retail FDI.

In category 4:

competition policy offers crucial tool host-economy

governments can use to prevent abuses of market power by

retailers (e.g. predatory pricing to drive out smaller retailers,

the imposition of anti-competitive supply-chain practices, etc )

and to maintain competitive markets

however fine line exists between regulations aiming to ensure

competitive markets and to mitigate adverse impacts on

communities & environment, and trade restricting measures

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Clear that multinational retailers have been subject to

regulations (competition, property, planning, building)

designed or interpreted so that they differentially impact the

operating costs of multinational retailers, partic if operating

larger formats

Limited academic debate which exists centred on these

issues – also some on differential enforcements of labour

laws and differential rules favouring informal economy

But little on commercial-communication and certification

rules, product labelling and liability rules, etc.

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In Conclusion

As Nordas (2008) noted the retail sector to an unprecedented level has come

‘under increased scrutiny under the implementation of international trade and investment agreements’

Trade economists and trade policy analysts who previously largely ignored the sector have recognised the growing role of retailers as intermediaries in international trade

But also essential to add the perspectives of other disciplines who have contributed to research on multinational retailing and the global economy and to inject those into OECD’s work on services, trade, restrictiveness