Summary
We live in a time where businesses can rapidly expand globally and digitalization is more prevalent than ever. This is especially true for the retail sector. In a recent study, my coauthors (Vasilis Theoharakis, Chengguang Li, and Palitha Konara) and I explored the interaction between international expansion and digitalization in the retail sector, with a focus on the differences between grocery and non-grocery subsectors. While internationalization opens up new markets and digital channels enhance global reach, we examined how these factors influence retailer performance. We collected data and applied econometric analysis to the world’s leading retailers. Our findings show that initial international expansion is costly due to unfamiliarity with foreign markets, but performance improves with experience. Grocery retailers face greater challenges due to the need for local market integration, whereas non-grocery retailers benefit more from internationalization, with digitalization amplifying these effects.
Internationalization and Digitalization: Two Much-Needed Corporate Strategies
In today's increasingly connected world, retailers are constantly seeking ways to expand their reach and improve their performance. Two critical strategies that have emerged as game-changers in the retail industry are internationalization—the expansion of retail operations beyond domestic borders—and digitalization, which leverages online channels to enhance customer engagement and streamline operations. Understanding how these two strategies interact, particularly across different types of retail sectors like grocery and non-grocery, is essential for businesses looking to thrive in a competitive global market. Recent evidence confirms that, despite the continuous growth of global e-commerce revenue each year, not all retail segments are experiencing the same level of growth (see Figure 1 below).
In this study we drew data from Edge by Ascential, a leading retail database, and supplemented it with firm-level data from the OSIRIS database. Our study focuses on 234 international retailers over a 20-year period (1997–2017). Advanced applied econometrics techniques were used to test our conjectures.
The Opportunities and Challenges of Global Expansion
Our study’s first assumption is that a non-linear relationship between internationalization and performance exists, where performance initially drops at low levels of internationalization but improves at higher levels. Indeed, internationalization is a tempting prospect for retailers. By entering foreign markets, businesses can tap into new customer bases, achieve economies of scale, and spread risks across diverse geographical areas. However, the path to global success is not without challenges. The initial phases of international expansion often involve significant costs and difficulties, a concept known as the "liability of foreignness." This term refers to the additional hurdles that foreign firms face when operating in unfamiliar markets, such as understanding local consumer preferences, navigating regulatory environments, and building relationships with local suppliers and partners. Interestingly, the relationship between internationalization and retail performance follows a U-shaped curve (see Figure 2 below). In the early stages, the costs of adapting to foreign markets can outweigh the benefits, leading to a dip in performance. However, as retailers gain experience, build stronger networks, and achieve greater market power, their performance improves, eventually surpassing initial levels. This U-shaped curve highlights the importance of persistence and learning in the process of global expansion.
Grocery vs. Non-Grocery Retailers: Different Paths, Different Challenges
Next, we suggested that the U-shaped relationship between internationalization and performance is steeper for non-grocery retailers than for grocery retailers. Grocery retailers, like supermarkets, face significant challenges due to the need for local market adaptation, given varying food habits, logistics, and regulations across countries. This deep local market embeddedness makes their international expansion slower and less profitable. In contrast, non-grocery retailers, such as fashion and electronics stores, often pursue a standardized global approach. While this requires significant upfront investment, it allows for rapid scaling and potentially higher rewards. Consequently,
while non-grocery retailers follow the expected U-curve, grocery retailers experience a flatter curve, and their performance may even decline with increased internationalization, forming an inverted U-shape (see Figure 3 below).
Digitalization: A Strategic Imperative for Retail Success
Next, we argued that higher digitalization would steepen the U-shaped curve. The interplay between internationalization and digitalization presents both opportunities and challenges for retailers. For non-grocery retailers, the combination of these strategies can lead to significant performance gains, provided they can navigate the initial costs of brand building and market entry. Digital channels offer a powerful tool to enhance their global reach and scale their operations efficiently.
For grocery retailers, the path to international success may be more complex. The need for deep local market understanding and the challenges of managing a digital presence in the grocery sector mean that the benefits of internationalization may be slower to materialize. However, with careful planning and a focus on adapting to local conditions, grocery retailers can still achieve significant gains from international expansion.
In conclusion, the relationship between internationalization and retail performance is shaped by the unique characteristics of different retail sectors and the extent to which digitalization is integrated into the business model. Retailers that understand and strategically navigate these factors will be better positioned to succeed in the increasingly global and digital retail landscape. As the world continues to evolve, the ability to balance global expansion with digital innovation will be a key determinant of retail success. The findings indicate that lower levels of digitalization make retailers suffer from a flatter curve while those with higher levels of digitalization experience substantial improvement in their performance as they further internationalize.
How Going Global Digitally Rewards Some Retailers More Than Others
Previously we showed that that higher digitalization steepens the U-shaped curve. However, the impact of digitalization on internationalization is not uniform across all retail sectors. Non-grocery retailers, who typically operate in less complex supply chains, can more easily integrate digital channels into their operations. This allows them to scale their international presence more effectively, enhancing the benefits of internationalization. For example, fashion retailers can use e-commerce platforms to sell their products globally, bypassing many of the logistical challenges associated with physical store expansion.
In contrast, grocery retailers may face more difficulties in digitalizing their operations, particularly when it comes to managing online sales of perishable goods and meeting local regulatory requirements. While digitalization can still provide benefits, such as improving supply chain efficiency and enhancing customer engagement, these advantages may not be as pronounced as they are for non-grocery retailers. Consequently, the U-shaped curve in the internationalization-performance relationship is flatter for grocery retailers, reflecting the more gradual benefits of digitalization in this sector (see Figure 5 below).
Key takeaways
Not all decisions regarding international expansion and digitalization have been successful. Some retailers, like Walmart, have significantly broadened their international reach and digital presence, leading to overall solid company performance. According to our data, Walmart is among the top-performing retailers in terms of expanding internationally and digitally, achieving an average 12 percent return on assets (ROA) over the 21-year period we examined. Walmart has consistently expanded its presence globally, operating in nearly 20 countries. While there have been documented instances of Walmart exiting important markets (for example, the exit from Germany in 2006), the retailer has successfully captured significant market share in many of the markets in which it operates. Additionally, Walmart has effectively integrated its international expansion with increased investments in digitalization and the utilization of digital platforms. An illustrative example of this strategy is the 2018 acquisition by Walmart of a majority stake in Flipkart, one of the leading e-commerce companies in the Indian market, providing access to a vast customer base. It is evident that Walmart has embraced digitalization as part of its international business strategy.
Deciding whether and how much to expand into foreign markets is crucial for retailers. Our study shows that retailers face more costs and fewer benefits in the early stages of international expansion due to unfamiliarity with foreign markets, lack of local connections, and potential discrimination. However, as they establish a presence, the benefits, like increased market power and efficiency, outweigh these initial challenges. Non-grocery retailers face more initial losses but later see greater gains compared to grocery retailers. Additionally, while digitalization may add costs early on, it ultimately boosts performance, especially for non-grocery retailers.
References
Batsakis, G., Theoharakis, V., Li, C., & Konara, P. (2023). Internationalization and digitalization: Their differing role on grocer and non-grocer retailer performance. Journal of Retailing, 99(3), 400-419.