The Graceful Exit
Rationalizing the International Retail Footprint
Date June, 2017
Featured in the Journal of Corporate Renewal
Leading retailers have long focused on internationalizing their businesses as a means of growth and diversification. In fact, two-thirds of the world’s foremost retailers have operations outside their home markets. However, broadening the geographic footprint and replicating success in multiple markets can sometimes prove more difficult than anticipated at the outset, particularly in today’s evolving retail environment.
Many retailers are reassessing expansion strategies and even paring back their international operations, with some deciding to exit countries that were previously thought to represent key growth opportunities. Over the past five years, the authors have witnessed more than 65 reported country exits, primarily within Europe and Asia, though North America and Australia experienced notable withdrawals as well. This activity has been particularly pronounced within the do it yourself (DIY), fashion and department store, and food retail segments.
Three key macro factors typically drive retail portfolio rationalization throughout the world: strategic and operational shortfalls, industrywide secular change, and changes in consumer consumption habits. It is important for retailers of all sizes to understand these drivers, as well as the strategic and functional considerations for managing the process of right-sizing their global footprints. Only then can companies employ smart, sensible approaches to optimizing their international operations in a way that minimizes the impact on the brand and ultimately leads to long-term success.
Strategic, Operational Shortfalls
A common strategic error is to accelerate overseas expansion when the core domestic business faces significant challenges. Ideally, before a retailer can even begin to entertain international expansion, its home market must be sustainable, strong, and trading optimally—otherwise the international business will quickly become a distraction to core operations. Unfortunately, many companies don’t take the time to appropriately assess home market activity before expanding.
Other common shortcomings include failing to do enough market research; over- or underestimating the need for products, services, and in-country/regional infrastructure; failing to completely understand local consumers and country dynamics; and attempting to apply domestic values to foreign markets.
In Australia, the home improvement chain Masters made catastrophic decisions around the speed of its expansion plans, especially in light of going head-to-head with category killer and market leader Bunnings. In a few short years it expanded to a chain of 62 warehouse-size sheds, purchasing inventory to support an even larger estate. Eventually economics took over; two years after Masters opened its first Australian store, the company’s losses rose from AU$119 million ($89.5 million) to AU$157 million ($118 million). Accumulated losses eventually topped AU$3 billion ($2.3 billion)
Marks & Spencer, a leading department store and food retailer in the U.K., recently announced a major reduction of its international owned store footprint with plans to close stores in 10 international markets, exiting some altogether, at a total cost of 150 million to 200 million British pounds ($186 million to $248 million). These changes have come after several years of declining home market share in the core clothing segment.
However, the company has announced that it will instead “continue to develop” its international presence via franchise partnerships and currently has more than 250 such stores in 34 markets. As discussed later, this demonstrates that a reassessment of the approach to overseas expansion does not necessarily mean a reduction in presence, but could be a refinement utilizing other mechanisms for accessing international growth.
Even highly successful global retailers such as H&M, which continues to grow its physical store base aggressively in many markets, has announced it will hone its store footprint in certain locations as part of the normal course optimization of its operations.
Taken together, these cases all demonstrate that a firm’s ability to stay in touch with local markets and maintain nimble international operations can make or break international success.
Industrywide Secular Change
A second factor contributing to country exits over the past several years has been the evolution of shopping trends, specifically the undeniable impact of online retail. E-commerce now accounts for nearly 20 percent of nonfood retail sales in many Western countries, such as the U.K. and the U.S. Year-over-year online spending has grown 8.4 percent at its fastest rate for 16 months. For example, in 2016, online fashion retailers Asos and Zalando experienced year-over-year online e-commerce growth rates of 36 percent and 27 percent, respectively. In fact, the exclusively online retail segment grew substantially over the course of the 2016 holiday season, skyrocketing 31 percent in the U.K. and 54 percent across the rest of Europe.
Retailers all over the world—including large, iconic department stores in the U.S.—have been forced to curtail operations or close altogether in the face of digital competition and online-only retailers. Not surprisingly, fashion and department store exits accounted for roughly one-third of reported country exit activity over the past five years. Although this trend seems to have affected the U.S. most acutely, it is spreading to other developed markets quite quickly, including Australia, where retail is still heavily bricks and mortar.
This shift from bricks and mortar to online can in large part be attributed to the millennial generation, a cohort composed of consumers who increasingly rely on all things digital. Millennials, or those born after 1980 up until the turn of the century, are projected to be the largest age group in the next five years, according to reports from both Business Insider and Goldman Sachs. This generation consistently spends more than three hours per day online—double the amount of time that older consumers are engaged with digital devices. In fact, a recent study by eMarketer found that millennials consider a mobile-friendly site or app as the most important feature for retailers.
Hence, it is safe to say that millennials, who are inherently digital natives, will continue to dictate the market and ultimately cement this transition from physical storefront to online shopping cart. There is no greater example of this sea change in shopping patterns than in the fashion industry, where retailers are contending with the rise of affordable fast fashion, newer concepts, and immediate availability, a confluence of factors that is representative of the shift in consumer demands and the growing harshness of the retail landscape.
For international retailers, this dynamic simultaneously creates an opportunity to access a global customer base via a compelling online offering supported by strong logistics and a challenge to assess optimal physical footprint needs in current and future markets—and to realign that footprint to the new reality where necessary.
Changing Consumer Consumption Habits
In addition, consumers in general are steadily changing retail habits and patterns, buying goods more frequently instead of purchasing items in bulk. In other words, customers are now shopping on a daily or weekly basis instead of stocking up on necessities for months at a time—reversing a trend that began in the 1990s.
What this means is that hypermarkets and food retailers are becoming increasingly vulnerable. As a result, more than 20 reported food retail country exits occurred over the last five years. Global big box stores like Wal-Mart and warehouse clubs are experiencing threats from hyperlocal convenience stores and specialty formats, which begs the question: Is smaller—and local—better?
For example, in the U.K. market in recent years, German discount retailers Aldi and Lidl, utilizing the midsized or convenience format demanded by customers, have gained significant market share from the once dominant “Big Four” of Tesco, Morrisons, Sainsbury, and Asda (owned by Wal-Mart). The Big Four have responded by shifting away from large store formats to opening more convenience stores. Tesco, in particular, confronting multiple issues in its core home market, has also exited multiple geographies, including the U.S., where it sold Fresh & Easy in 2013. Wal-Mart, too, has responded to the declining market share of its once successful U.K. operations by announcing several management changes.
Another change worth noting is the movement from DIY to buy it yourself (BIY). Many European countries now find themselves dramatically over-stored in the face of this change in consumer behavior, especially since this change in preference is compounded by an aging population that is now more inclined to hire professionals for a project as opposed to using their own two hands to create, build, or install. The DIY segment witnessed 10 reported country exits in the past five years, and more may be on the way as the segment finds equilibrium in store count and evolves formats.
Recently Australian DIY chain Bunnings, owned by Wesfarmers, acquired the U.K. DIY retailer Homebase from Home Retail Group. Bunnings is in the process of converting these into more “heavyside” DIY chains suitable for trade with direct consumers. The company has now initiated a review of its store portfolio to optimize it in light of this strategic shift.
Managing Through Change
There are a number of strategic decisions and considerations retailers should keep in mind when the best path forward to ensure future success is to undertake a full or partial country exit.
The first of these key actions is assembling the right team. With the right team and the right approach, a graceful (and less painful) country exit is possible. But the sheer complexity of such an undertaking requires specialists and strategic partners to help plan and structure an exit, as well as expert support in sensitive areas, such as labor, tax, and law.
A team can help a retailer determine whether a wholesale exit or slow withdrawal is in the best interest of the company, though the former is often more desirable than the latter—particularly since a lower store count reduces the economies of scale advantage and ultimately translates into costlier operations.
Exit planning must always take into account the long-term strategic objectives of the business to protect the future of the brand and its valuable customer relationships, both in-country and outside. This underscores the importance of working in partnership with experts who understand and support those goals throughout the process, especially since there is always the prospect of re-entry at a later date.
It is also important to take time to think through and implement effective transition plans for loyal customers to maximize the possibility of continued business via less expensive and more scalable channels (i.e., e-commerce). Sales and store closing events are also great opportunities to support customer transitions, attract new customers, and unlock liquidity. The right partner can help a retailer realize and capitalize on these possibilities.
Then there are the functional considerations of the business: maximizing hard assets by negotiating the flow of on-order and supplemental inventory needed to sustain the sale; selling down to the piece, including fixtures, fittings, and equipment; and managing liabilities and obligations, particularly staffing issues, which are often the most sensitive and time-consuming elements of a transition. Involving partners who can plan and support employment matters properly, especially given jurisdictional differences across countries, can greatly facilitate a successful outcome of what is often a challenging period for employees. Likewise, expert help in lease mitigation and tax and legal issues can make a significant difference.
Many retail operators that go it alone do not realize the opportunities they have missed. Take the counter example of Dutch department store Vroom & Dreesmann (V&D). The company was placed into administration and abruptly laid off all staff and closed its doors in late 2015. The court subsequently installed an asset recovery team that reopened the stores and liquidated all inventory and fixtures, fittings, and equipment in the stores, distribution center, and corporate office. When approached strategically, the estate was able to recover on all the existing hard assets, in addition to selling through 38 containers of on-order inventory.
The Future of Retail Internationally
Retail is in the midst of a great reinvention. This new frontier will usher in a more rapid cycle of change, one that will require great flexibility and adaptability for survival.
The healthiest of retailers continue to succeed because they have prepared for and responded sensibly to change. By consistently assessing operations and developing contingency plans for retaining customers, these are the companies that have successfully reinvented themselves for the future. And in the process, they have redefined the retail business model.
So what exactly is the best approach? There are multiple ways to succeed, of course, provided that a retailer has a strategy for maintaining a minimally expensive presence in the marketplace.
One approach to consider is the “assetless brand company,” a model that relies heavily on licensing and brand strategy, with minimal physical operations. British clothing company Ben Sherman is an excellent illustration. After a sustained period of operating losses, this 54-year-old company recently shuttered all of its stores, disposing of the bulk of its hard assets in the process. It is now transitioning to a licensing model, with licensees managing all of its international stores. This will enable the iconic British brand to survive into the future without the encumbrance of an unsustainable store portfolio.
Another concept to consider is the franchise model, which holds great potential at minimal expense. Franchising delegates the most challenging aspect of internationalization that many companies face—understanding regional consumers—to local operators that are more in touch with customer wants and needs. As discussed earlier, this is precisely the model that U.K. department store Marks & Spencer is utilizing to maintain its market presence as it reduces its overseas owned store footprint.
Even after retrenchment, adaptive and healthy retailers continue to develop new strategies for managing their stores. For example, Kingfisher, Europe’s leading home improvement retailer, made the difficult choice to scale back its B&Q concept in 2015. By doing so, however, the company was able to expand its Screwfix concept, Europe’s largest and most successful multichannel supplier of trade tools, accessories, and hardware products.
As retail continues to evolve, it is incredibly important for companies to find the right fit when determining their future market presence. And the strategy must fit the brand and the business objectives. Many luxury brands, for example, often struggle with franchising due to their extreme interest in controlling their own brand. Similarly, operators that don’t sell their own products have little incentive to retain an online presence because the same brands are available elsewhere. But firms that produce their own products may find rich opportunities in establishing a presence via e-commerce, in-store concessions, or franchise structures.
Whether an outright exit, transition to franchised or even licensed operations, or a shift to exclusively online sales, eliminating the drain on valuable resources allows companies to reinvest in more fruitful initiatives. Finding the right partner to help identify the best course of action, provide support through execution, and help manage the transition, whatever it may be, is a critical component to developing the right approach for future success.