The Globalization of Trade in Retail Services Prof Neil Wrigley University of Southampton Prof Michelle Lowe University of Surrey 1 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) 2 1
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. 3 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 4 2
Stock Days 11/22/2010 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 5 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) 50 40 30 20 10 0 1961 1971 1981 1991 2001 6 3
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 7 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 8 4
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 9 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 longerterm higher growth opportunities offered by the emerging markets 10 5
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 11 Phases Table 3: Reardon s waves of retail transformation in emerging markets Wave 1st 2nd 3rd 4th Countries Modern retail market share mid 2000s Early 1990s Mid-late 1990s Early 2000s Late 2000s 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 50-60% 30-50% 1-20% 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) 12 6
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 13 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 14 7
The Challenge of the Regional TNCs Figure 4: The rise of the regional retail-tnc - Dairy Farm s expanding operations in Asia 2001-2009 15 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 16 8
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 17 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 18 9
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 19 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 20 10
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 21 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 22 11
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 23 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 24 12
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 25 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 26 13
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 27 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. 28 14
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 29 15