Magazine article Marketing

Amanda Aldridge on Retail: Don't Leave Your Home without Due Diligence

Magazine article Marketing

Amanda Aldridge on Retail: Don't Leave Your Home without Due Diligence

Article excerpt

Last week Tesco became the first UK supermarket group to enter China in a deal that could turn the company into the world's biggest grocer.

As soon as retailers begin to operate outside their domestic market, addressing the different consumer cultures they encounter - very different in the case of China - represents an immediate challenge. Their task is to understand the cultural differences that exist between the new market and their home market, and to consider how these may affect business or consumer behaviour.

KPMG decided to investigate the subject in greater depth. It embarked on a research project with Oxford University's retail experts at Templeton College, sponsoring their Retail Value Creation programme. One aspect of the research was to consider the impact of cultural exposure on a company's financial performance.

A mathematical formula was devised to assign companies an international cultural spread (ICS) score, representing the diversity of consumer cultures to which they were exposed. Companies with low scores could be operating in several countries, but were not exposed to marked differences in consumer attitudes. A high score meant that a company had to deal with consumer cultures that showed few, if any, similarities.

The negative correlation between ICS scores and financial performance was noticeable. A link was established between high cultural spread and poor risk-adjusted cash returns, showing that the degree of cultural spread can limit cash-generating abilities. In addition, between 1998 and 2002, the share price of a portfolio of retailers with high cultural spread declined by 5%, while their counterparts with low exposure saw shares rise by 24%.

It is, however, worth pointing out that Tesco and Kingfisher - strongly performing businesses in anyone's book - both featured in our top 10 of high ICS scores. This demonstrates that high cultural stretch represents a management challenge to be overcome, rather than an insurmountable issue.

What is clear is that board members need to pay more attention to this topic and consider the degree of cultural stretch they face. They should take account of these risks when making new entry decisions and assess the adequacy of their recruitment, training and management policies for dealing with cultural differences. …

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