Babson College - The Transfer of Retail Formats into Developing Economies: The Example of China

The format employed by a retailer when entering a new, international market is often the key for to that firm's ability to gain competitive superiority. Failures in this transfer frequently lie in flaws in the format decision.

The retail format embodies the elements defining a retailer's distinctive capabilities, its strategy, and market position. In this research, I examine the bases for choice of the entering format using a database derived from retailers who have recently opened their first stores in the Mainland Chinese market. Contrary to earlier studies, I conclude that much of the entry into this market is undertaken without substantial change to the retailer's format in its home market. The reasons for this finding are surprising and reflect a greater complexity in the decision making process than anticipated.

Earlier studies and anecdotal evidence indicated that retailers might pursue a number of format transfer policies. They may transfer their format totally unchanged while others may introduce extensive revisions. My focus in this research is upon the transfer into developing countries where this choice may be particularly difficult. This focus is also of special interest because a growing number of international retailers are seeking to exploit perceived opportunities located in such countries.

I derive my conclusions from a qualitative study that focuses on the entrance of foreign retailer into China. This comprises a set of extensive, personal interviews with company executives from twenty-seven foreign retailers home based in a variety of countries and operating different retail formats, such as supermarkets, hypermarkets, specialty stores, department stores, wholesale-clubs and shopping centers. Evidence from more than one executive from each retailer was often obtained.

Among this group of retailers, I found format transfers strategies to be more complex than previously described as well as contradictory to prior expectations. First, it had been previously theorized that international retailers would make major format changes in order to adapt to developing country conditions. I found, however, that most transfers involved only limited changes.

Part of the reason for this is that many of retailers opening stores in China are located in neighboring Asian countries. While many well-known, global retailers were also involved, smaller retailers from other Asian countries dominated transfers into China in my sample. The potential for this type of entry has been ignored by a literature that has focused on major, international retailers.

Many of the neighboring transfers I studied involved little or no format change because of similarities across the economies spanned by introduction. Entering retail facilities typically involved a relatively simple, extension of operations into the new sphere. As more data becomes available with respect to international transfers, I would not be surprised to find that this form of transfer, one that I call format extension, to dominate international movements. Better-known, global exchanges involving longer distances and greater differences with the host economy may play a less dramatic role.

Limited changes were also seen where international retailers employed a "portfolio" strategy. Here, I found large, experienced international retailers who operated a number of format versions in different countries. Upon entering a particular host country, they would select an appropriate format from their portfolio. This format would then be transferred largely unchanged into the new market.

Second, I found transfers to be motivated by the global strategy of retailers in unexpected ways. For example, one strategy sought to protect the international retailer's global niche. Here, instead of adaptation as might otherwise be expected, format transfer by these, often luxury, retailers often targeted the same segments they served elsewhere. The choice was driven by the goal of protecting retailers' global brand position against possible lowering of standards in the developing economy. I label this strategy as one of global niche protection.

Where the entering retailer's goal was to achieve competitive superiority over specific local retail retailers, the format involved only a few changes. This occurred only among department store retailers within my sample of firms. Department store strategies are relatively common across both developing and developed economies. Hence, with when introducing a department store to the Chinese market, they faced strong, local retailers operating the same format. The few format changes employed were designed tweak the department store format to achieve competitive superiority over domestic retailers. Hence, the term competitive position oriented for this approach.

Extensive change in format strategy was found only in a limited number of cases. Where the international retailer lacked a commitment to a specific format or strategy, an opportunistic strategy was undertaken that reflected strong adaptation to local conditions. In this instance, it was driven by the goal of exploiting perceived local linkages or specific demand or supply side opportunities.

The format pioneering opportunity strategy also involved extensive format change. However, here, the host country served as a testing ground for a prototype format that the international retailer hoped to be able to exploit later in similar retail environments.

Lastly, more change might be found where the entering retailer perceived current conditions to be inappropriate, especially from the supply perspective, to its home strategy. Here, substantial changes were made initially in the format to be transferred. Later, contingent on the appearance of specified conditions, some retailers planned to change the transferred formats to bring it into greater conformity with what they used at home.

Altogether, these patterns of behavior reflect a more varied and complex set of format change strategies than previously conceived. They reflected a great diversity across the character of the entering retailers in terms of their economic capabilities, the complexity of their existing, international strategies, and their capacity for strategic planning.

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