European Retailers

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European Retailers’ International Market Selection The Impact of Home Market Conditions, Host Market Characteristics and Psychic Distance Hayley Myers* and Nicholas Alexander** Abstract: The process of retailer internationalization took off dramatically in the late 1980s and has developed steadily ever since. Given the significant investment this growth strategy demands, considerable attention has been paid to understanding the process, not least in terms of international market choice selection. This article reviews some key themes emerging from research in the area of retailers’ international operations and particularly picks up on the issues of home market conditions, host market characteristics and psychic distance.

Researching Retailers’ International Expansion Retailers began to expand internationally to a significant extent in the late 1980s, and the phenomenon has increased ever since. The commitment that retailers have made to non-domestic operations has led to an increased academic interest in the way in which strategic decisions are made. A particular interest has been to understand how and where retailers internationalize, the criteria they use to select new markets, and how they decide to enter them. Given the considerable amount of investment and risk associated with expanding a retail operation internationally, it would be comforting to believe that markets are selected on the basis of rational, well researched and even scientific analysis.1 Yet it has been suggested that, despite retail organisations following a predetermined protocol of decision making, such decisions can very often be, in part at least, the result of non-systematic processes that draw heavily upon senior management’s personal experience and attitude. To a considerable extent, any attempt to quantify potential markets is marred by the researcher’s ability to impose objective criteria on subjective factors such as cultural differences between host and home market. The concept of “psychic distance” is often referred to in international business analysis, but its impact on the process of retail internationalisation still remains somewhat elusive. It is a well established principle of international retail research that, at least initially, retailers tend to favor markets that are culturally and geographically proximate and have a similar or less developed retail structure.2 Such proximate markets are assumed to offer

a low psychic distance and hence it is believed that the risk of entering such markets is lower. While there are many business examples to support this viewpoint—for example, Wal-Mart’s move into Canada can be regarded as a natural extension of its operation in the United States (U.S.)—there are also clear examples of where real life does not support this theory. Tesco, the United Kingdom’s (U.K.) number one retailer, made its initial foray into the international arena in supposedly culturally and geographically proximate Ireland in 1978, but divested its operation in 1986 after eight unsuccessful years in that market. Tesco retreated back to its domestic market. More recently, however, Tesco has rethought its international strategies by primarily focusing on rolling out a hypermarket format across less developed retail structures of Eastern Europe and parts of Asia, and is now held up as a shining example of a retailer which has had the sense and humility to adapt to local market conditions. Stages Approach to Internationalization Tesco’s approach international growth supports the suggestion that retailers follow a ‘stages’ approach to retail internationalization. Research suggests that, while retailers tend to take a cautious approach to developing an international presence by seeking to enter proximate markets, so, too, do they focus over time on ever more distant and diverse marketplaces, as the organization learns not just about international markets themselves but about the process of internationalizing its business.3 More recent research has, however, suggested that, for some retailers, entry into markets with greater psychic distance from home can actually be beneficial,

* Lecturer in Management, Faculty of Management and Law, University of Surrey, Guildford, U.K. ** Professor of International Marketing and Director of the Centre for Research in Marketing, School of Management and Business, University of Wales, Aberystwyth, U.K. 1

Young, S., and Hood, N. “Perspectives on the European Marketing Strategy of U.S. Multinationals,” European Journal of Marketing. Vol. 27 (No. 4), 1976, pp. 11-24. 2 Burt, S. “Temporal Trends in the Internationalization of British Retailing,” International Review of Retail. Vol. 3 (No. 4), 1993, pp. 391-410. 3 Treadgold, A. “Retailing without Frontiers,” Retail and Distribution Management. Vol. 16 (No. 6), 1988, pp. 8-12.

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Features not least because management will devote time and effort to considering how the business model may need to be adapted to the new competitive environment.4 Other studies have suggested that this may be masking the true picture5 and that, for many retailers, the comfort zone of proximate markets remains an attractive proposition, while success in psychically distant markets may be a result of transferring a retail business model that is new to that market and that has associated competitive advantages, rather than a more intense appreciation of local conditions. As Sternquist6 has noted, within the context of current U.S. retailers, international retailers choose markets that are less saturated than their home markets, and ones with less developed retail structures and less competitive intensity than at home. But how may psychic distance be measured? One suggestion is to take language as a proxy measure. A shared language certainly enhances communication and understanding between markets, within companies and between companies if the internationalization process is to be conducted through acquisitions or joint ventures. This approach recognizes the assertion that the motives for retailers to internationalize are not merely the outcome of external influences that push the retailer beyond its home market, due to restrictive conditions at home, for example, or indeed just a response to the opportunities presented by potential host markets; they are also the outcome of the nature and character of the retail organization itself. Influences such as access to capital, attitude to risk and quality of senior management focus on internationalization as a core growth strategy all play a part in shaping if, when and how retailers internationalize. Research conducted by Alexander, Rhodes and Myers7 empirically tested existing theories of international retailing. A database of the non-domestic operations of retailers from 17 Western European markets was analyzed in order to assess patterns of market selection. Specifically, the results of the study suggest that markets with less developed retail structures are favoured as targets for entry. In addition, the scale of the selected market also acts as an important facilitator

or inhibitor to retailer entry, but it is population rather than existing levels of wealth that is the key determinate suggesting, among other things, that European retailers see international operations as a long-term strategy that will grow with a market. It was also found that the most active international retailers were based in large and mature markets. On the one hand, this suggests that internationalization is very often a reaction to market competition and regulation at home. But it also suggests that most retailers that are capable, as well as willing, to follow the high-cost and high-risk strategy of internationalization have emerged from competitive domestic market conditions that have allowed them to become large-scale, sophisticated operators with the know-how and access to capital to follow a growth path. The research also highlighted that similarity of language between host and home market was an important factor shaping flows of international retail activity, and that perceived cultural closeness between markets is a more important influence than geographical proximity. Retail Globalization Requires Greater Sophistication and Risk Tolerance In summary, Western European retailers based in large home markets show a distinct tendency to expand internationally into psychically proximate markets that are less developed than the home market and where language similarities facilitate development. In some senses, this is a concerning phenomenon. While retailers from large markets will inevitably seek neighboring markets that are less competitive and where they have an initial competitive advantage, such an advantage does not last forever. If we are to see the emergence of a global retail marketplace, many retailers will have to overcome their natural risk aversion and address the challenges of competitively and culturally more demanding markets as they move through different stages in their development. This will necessitate developing market selection procedures that avoid unsystematic, personalized appraisals in favor of more sophisticated evaluation methods. Only then will they be able to compete effectively in a truly global marketplace.

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Evans, J., Treadgold, A., and Mavondo, F. “Explaining Export Performance Through Psychic Distance,” International Marketing Review. Vol. 17 (No. 2), 2000, pp. 164-8. 5 Alexander, N., Rhodes, M. and Myers, H. “International Market Selection: Measuring Actions Instead of Intentions,” Journal of Services Marketing (special issue). Vol. 21 (No. 6), 2007, pp. 424-434. 6 Sternquist, B., International Retailing. Fairchild Publications, New York, 1998. 7 Alexander, Rhodes, and Myers, ibid.

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Features

Dr. Hayley Myers is Lecturer in Management, Faculty of Management and Law, University of Surrey, U.K. She has research experience in the area of retailing and consumer behavior from both a commercial and academic perspective. She spent a number of years as Director of Retail Research at Corporate Intelligence Group and then at Mintel International, where she managed a team of analysts and researchers who focused on evaluating the changing nature of the U.K. and European retail and consumer environment. She returned to her academic career in 2003, joining the Retail Research Group within the School of Management at the University of Surrey. Her core research interests focus on international retailing, particularly by European retailers, and her latest research project has recently been published in the United States Journal of Services Marketing. She has also spent a number of years as a member of the Steering Committee and the Data and Information Committee of the International Council of Shopping Centers European Research Group and as a member of the British Council of Shopping Center's Management Team overseeing The Future of Retail Property, a two- year program of research (www.bcsc.org.uk/research/FORP). Contact details: E: [email protected], or call +44 (0) 1483 686373, School of Management, Faculty of Management and Law, University of Surrey, Guildford, Surrey, GU2 7XH, U.K. Nicholas Alexander is Professor of International Marketing and Director of the Centre for Research in Marketing within the School of Management and Business, University of Wales, Aberystwyth. His areas of expertise include international retail marketing and financial-services marketing. His consulting experience for government and industry is primarily in international retail marketing and strategy. He has published books on international retailing as well as other retail subjects. In the U.S., he has recently published in the Journal of Services Marketing and the Journal of International Marketing and, in the U.K., in the European Journal of Marketing and the Journal of Marketing Management. His current research is focused on international retail marketing and brand authenticity.

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