[SERI COLUMN]Carrefour, Wal-mart and ‘localization’Wal-Mart Stores on May 22 made a surprising announcement: They will leave Korea, after struggling for eight years in the $25 billion discount-store market. The world’s biggest retailer said it agreed to sell its 16 stores to Shinsegae Company, the operator of E-Mart discount stores, for $880 million. The latest sell-off came only three weeks after the French retailer Carrefour’s decision to exit the Korean market in late April. Carrefour, the world’s second-largest retailer, sold its 32 local stores to the homegrown fashion retailer E-Land for $1.85 billion.
The New York Times carried an article on May 23 saying that Korea has been “a graveyard for some of the most competitive global brands.”
Indeed, there are a great number of instances of failures or near-failures of major international brands in Korea. In addition to Wal-Mart and Carrefour, Coca-Cola and McDonald’s also are having a tough time competing against formidable local brands. In technology markets as well, Google is suffering from embarrassing obscurity, while Nokia gave up promoting its cell phones in Korea years ago.
What is going on here? Is Korea’s consumer market so special that foreign consumer-goods giants cannot possibly penetrate it?
It seems many retail analysts here and abroad subscribe to this view. They attribute the recent departures of discount-store operators to their inability to adapt to local particularities, such as Korean housewives’ preference for vaguely upscale ambiance over no-frills warehouse environments selling bulk items.
SERI researcher Jin-Hyuk Kim concurs with the above view. He says that the two retailers made fatal strategic mistakes in this fickle market: First, they erroneously thought Korean consumers would flock to their outlets as long as they offered low prices, just as they did in the United States and Europe, where consumers drive long distances to buy foods and dry goods by the box.
As it turns out, Korean consumers want more than low prices. They prefer instead to shop in a more pleasant atmosphere, preferably a few blocks away from their homes.
The second reason for the “big box” store failures has something to do with the fact that these retailers missed the right timing for expansion here. Launching stores at lucrative locations at an early stage of the market and thereby reaching economies of scale faster than anyone else is the most essential condition for success in the discount-store business. Wal-Mart and Carrefour, according to Mr. Kim, lost their chance to lead the market in Korea by failing to make investment decisions to open new stores quickly enough.
From the above diagnosis, one may get the impression that localization is the way to go.
There are many global retail brands, however, doing extremely well in Korea without even trying local adaptation. Starbucks is one good example. In addition, U.S.-based restaurant chains, led by Bennigan’s and TGI Friday’s, are attracting young affluent clients by serving all-American dishes.
Most likely, their formulas for success are based on positioning themselves in the upscale market.
These chains are strategically located in high-traffic areas amid a multitude of pricey fashion clothiers and accessory shops. They also charge higher prices to reflect their upmarket positioning, typically costing their customers more than $50 for a dinner for two. In return, their customers enjoy attentive service rendered by efficient and eager servers, and feel as if they are in an American city for the couple of hours they linger over a meal.
That means there are other ways for foreign companies, especially those engaged in consumer markets, to succeed in Korea without pretending to be a local company. Actually, nothing looks more awkward than a foreign brand making clumsy attempts to be taken for a local. Instead, it’s much better to proudly announce early on that you are foreign and make the most of this fact.
These companies should be able to offer something that local rivals can’t possibly match. For example, an American retailer can “educate” Korean consumers by holding a Thanksgiving festival in which store visitors can sample American-style holiday meals featuring turkey, cranberry sauce and pumpkin pie.
If you are a German restaurant operator, you can regale customers with free beer, rotisserie chicken and giant pretzels to celebrate Oktoberfest, thereby familiarizing them with famous Bavarian cuisine and all, or at least many, things Deutsch.
Of course, localization is still important in many areas. But I’m just saying that too much of it may be more dangerous for foreign companies doing business in Korea, or any other Asian market for that matter, than being consistent with globally recognized business practices.
It may be that Wal-Mart and Carrefour were unsuccessful in Korea because they stuck to neither localization nor global practices. It would have been different if they defined their strategy more clearly and pursued it more forcefully.
* The writer is managing editor of SERIworld, Samsung Economic Research Institute’s English-language Web site. The views expressed in this column are the author’s and do not represent those of Samsung Economic Research Institute.
by Chung Sang-ho