Do Retailers Have What It Takes to Expand into Russia, Brazil, India, and China?

Implications: Overseas expansion into mature Western-like countries has been hit and miss for many US retailers.  Despite the potential profits, opening stores in emerging countries like Russia, Brazil, India, and China is even more risky.   Here's why

Analysis: Just a couple of observations about the retail opportunities in emerging markets like Russia, Brazil, India, and China.  First, as hard as it is to establish a retail brand in well developed countries like Canada and the United Kingdom, it’s many times harder to do so in emerging countries like the RBIC group.  There are several reasons. 

First neither selling nor consumer buying patterns are established.  So, if an US retailer could adapt its retail model to one of the RBIC countries today, it’s likely it would have to be significantly changed as the market emerges.  That could mean writing off millions of dollars in both tangible and intangible assets, while investing more to keep up with changes in the market.  So don’t underestimate the long term cost of entering and staying in the market.

Second, don't underestimate the competition either.  A highly fragmented, disparate, retail market may look vulnerable to large western retailers with the advantage of market share and scale.  But small retailers don't necessarily own the customer in emerging countries, large manufacturers and brand distributors do.  While, large US retailers can bring retailing technology and process to the market; those aren't long term barriers to local competition.  Product is what people buy and it’s the right product that keeps them coming back.  That may mean advantages of scale in buying one assortment of products for western markets may not be that much of a competitive advantage in emerging markets.

Third, most US retailing models are highly specialized for western consumers.  Their profitability depends on the efficiency of a highly mobile, decentralized, distribution system, such as malls and shopping centers, supported by abundant access to personal transportation.  Among many other things, this defines the fundamental relationship between the cost of retail space and the cost of generating store traffic.  Public and private sector infrastructure in emerging markets is invariably different which means traditional profit models probably won't work.  Don’t assume RBIC markets will inevitably follow western shopping paradigms.    

Fourth, specialize in a particular country or region.  The time frame for growth, as well as, the cultures of Russia, Brazil, India, and China are completely different.  While everyone may not agree, it’s problematic whether any company can simultaneously enter two of these markets successfully, much less all four at once.   

Last, for retailers that want to expand into Russia, Brazil, India, and China, now is a good time.  Market change and growth in these countries are fluid and robust.  Unfortunately, many of these same retailers are looking inward as the US economy slows.  One characteristic of emerging markets is that they don’t necessarily follow the economic growth patterns of more mature Western economies.  That’s a good thing, but it also means, retailers could find themselves funding increased capital expenditures and inventory investment overseas while US profits decline in a counter cyclical turndown.  

Retailers and investors alike need to anticipate the consequences of entering these markets and adjust their performance expectations to account for the impact of diverging economic cycles on cash flow and profitability.