International spread has a largely negative effect on financial performance, affecting all but the most globalised, and generally largest, retailers. Moreover, a listed retailer's stock market performance may also suffer from expansion abroad. Similarly, a negative correlation exists between cultural exposure and a retailer's ability to generate cash - the share prices of retailers with low cultural exposure outperform their high exposure counterparts by 30 per cent.
Elsevier Food International, Vol. 6, Number 4, November 2003
Neil Austin

As soon as retailers begin to operate outside their own domestic market, addressing the different consumer cultures that they encounter represents an immediate challenge. Their task is to properly understand the cultural differences that exist between the new market and their home market and to consider how they may affect business or consumer behaviour.
Culture can be defined as 'the shared attitudes and beliefs of the people of a country or society'¹. It is essentially a set of common attitudes and beliefs which influence behaviour and which exists irrespective of any differences at the individual level. Corporate culture can be defined as 'the set of shared taken-for-granted beliefs that the organisation assumes is the right way to see, think and feel about how it operates'². Individuals actually operate within a framework of national and corporate cultures, affecting their views on what is right and how to do things. Ideas of how to behave, what is considered normal. deep-seated attitudes and values vary from country to country.

In order to analyse the cultural differences between countries, each country's cultural score is based on an aggregate of four different dimensions which represent their consumer culture. These dimensions are:
• Individualism (preference for individualism over a group approach);
• Power distance (the degree of inequality considered normal in a society);
• Relationship-achievement (preference for softer values, such as relationship development, over harder values such as achievement);
• Uncertainty avoidance (preference for structured over unstructured situations).

A retailer operating in two countries will achieve its International Cultural Spread score (ICS) by comparing those two countries' scores. Companies operating in several countries will have to add up the differences in several pairs of locations - the company's home country and each of its secondary locations in turn. If all the countries in question have similar cultures, a retailer may achieve a low cultural spread score despite being geographically spread. However, the opposite may also apply.
For example, the Portuguese retailer Jerónimo Martins ranks as the second most culturally spread retailer, despite the fact that it only operates in three countries. It operates in Brazil, which is an obvious cultural fit for a Portuguese company, but it also operates in Poland. The cultural dissimilarity between Portugal and Poland is immense, thereby explaining the company's high ICS of 118. Carrefour, on the other hand, demonstrates that international presence does not necessarily translate into an equivalent amount of cultural spread. Carrefour operates in over 20 countries, yet because of the cultural similarities of those countries Carrefour only appears at 27th in this study.

Bridging the cultural divide
The negative correlations between high ICS scores and financial performance have ensured that the ICS scores represent more than just an interesting talking point. Analysing the share prices of a bundle of retailers with low cultural spread compared to a bundle with high cultural spread reveals that, between December 1998 and December 2002, the low-spread retailers' share prices rose by 24 per cent while the high-spread group declined by five per cent. Additionally, a link was established between high cultural spread and poorer risk-adjusted cash returns, emphasising how the degree of spread can limit cash generating abilities.
The table of the ten highest ICS scores reveals some interesting results. Demonstrating that high cultural stretch represents a management challenge to be overcome rather than an insurmountable issue, Tesco and Kingfisher appear in the top six, despite both generally being considered as strongly performing businesses. In fact, Kingfisher's high score is primarily due to the cultural differences between France and the UK. In a similar vein, 7-Eleven, which appears in tenth place, suffers primarily because of the vast differences between Japan and the US, particularly in the areas of 'Individualism' and 'Uncertainty avoidance'. However, the contrasting cultures of Australia, Hong Kong, Malaysia, Norway, Mexico and Sweden also playa part.
Mothercare, the leader in this particular table, can claim some degree of mitigation because of its extensive use of franchisees and because only nine per cent of its sales are international. However, the fact remains that operating in 20 different countries, and in several very diverse regions, has created some very large scores on all four aspects of the cultural mix.
In the light of these findings, retailers with international aspirations should actively consider the degree of cultural stretch that they face across their country markets portfolio. Boards should take serious account of the risks inherent in extending cultural spread when making new entry decisions and they should assess the adequacy of their recruitment, training and management policies for dealing with cultural differences.

In March 2003, Oxford University's Templeton College, in conjunction with KPMG International, launched the initial findings of their 'Value Creation among the World's Top 500 Retailers' report, which showed how good each business is at delivering value to its shareholders. Since then, the focus of the project has shifted to the issues that affect that performance, starting with geographical expansion and cultural stretch. No international retailer, they claim, can afford to ignore the findings.

The quest to be a global player
Being classed as a truly global player often appears to be the Holy Grail for businesses of all kinds, including retailers. However, within retail, the barriers preventing businesses from becoming

Portuguese retailer Jerónimo Martins operates hypermarkets (Feira Nova) in its domestic market and the Biedronka discount stores in Poland

recognised globally are many, including the challenge of addressing diverse consumer cultures as discussed above. Not that this prevents businesses attempting to broaden their geographical spread.
International spread, however, does have a largely negative effect on financial performance. Ignoring for the moment the very top echelon of the most globalised retailers, you can see that as companies become more globalised, on the whole, profit margins and risk-adjusted cash returns deteriorate while earnings volatility increases. Within the top echelon of the most globalised, and generally largest, retailers however, performance improves markedly.
While their performance is still inferior to that of purely domestic operators, their size ultimately seems to bring some benefits of scale and corporate learning curves over time. The performance of the purely domestic retailers demonstrates how small and medium-sized retailers should exploit their domestic markets fully before being tempted to expand internationally.
Templeton closely examined those 130 of the top 500 retailers that were actually international players. Each was assigned an Integrative Measure of Globalisation (IMG) score that represents their percentage of international sales, the number of global regions where the retailer is present and the concentration of regional sales.
IMG scores range from zero (purely domestic) to eight. We compare the IMG scores against the three factors of profitability, earnings volatility and stock market returns. (Graph 1)

It turns out that the higher the IMG, the lower the profitability, expressed both as operating and net margins. Exceptions are the most globalised companies as shown in graph 1, which shows five equal quintiles of 26 companies each, ranging from the most globalised firms in Quintile I to the least globalised in Quintile V. The least globalised retailers record the highest average profit margin but profitability declines across Quintiles II, III and IV as international spread increases. Upon reaching Quintile I, however, the trend of 'more global/less profitable' is reversed and profitability returns.
One of the possible explanations of this effect may hinge on size as the most globally spread companies also tend to be the biggest ones, having the business imperative and necessary resources to drive international expansion. Significant size shelters such companies from margin erosion as they extract additional savings from back-office operations and reap economies of scale from their supply chains. Size and spread also reduces country-specific risks; the more countries that a retailer is in, the less likely it is to be subject to local swings in consumer spending, which is a factor of major importance in retail business.
As can be seen in graph 2, a similar trend was revealed when cross-referencing earnings volatility (expressed in this instance as VAREARN - Variance in Earnings) with the IMG scores. The least globalised group of companies recorded the lowest volatility, closely followed by the most globalised group. In between those two quintiles though, the trend exists again that the more international the group, the more volatile the earnings.
In both areas of analysis so far, the most globalised quintile has demonstrated its ability to buck the performance trend. However, this was not the case in the final analysis that looked at international spread versus stock market returns. For the purposes of this, the whole group was split into three - the most globalised (with average international sales of 55 per cent), moderately globalised (average of 25 per cent) and the least globalised (average of 12 per cent). The portfolio returns for these three groups was analysed between December 1996 and August 2002. Starting with an initial investment of US$100, the least globalised group provided the highest return (US$174) over five years, compared to the moderate group at US$128 and the most globalised at only US$119.
This performance may well reflect a level of general unease among investors with retailer internationalisation or quite possibly a direct reflection of concerns about individual retailers' profitability and earnings volatility, as evaluated on a group basis earlier.
The geographical stretch study as a whole does underline the importance of retailers fully exploiting their domestic markets before embarking upon international expansion. When subsequently starting out across borders, greater care would seem to be needed in selecting the best regions and country markets for investments. Retailers already on the international path should analyse their financial performance very carefully if they want to reap the type of financial returns that will improve both their performance and, more importantly, the prospective investors' positive view of this.

The 'stay at home' players
The performance of the domestic, generally smaller, players makes for interesting reading. As already shown above, those businesses that focus solely on their domestic market perform extremely well when compared to some of their sometimes more illustrious counterparts who have moved into overseas markets. This was also demonstrated in the first phase of the

French retailer Carrefour is represented in 32 countries worldwide, but demonstrates that international presence does not necessarily translate into an equivalent amount of cultural spread. Image: M+M PlanetRetail

Templeton/KPMG research that ranked all 500 retailers in terms of their Value Creation Quotient (VCQ) - a mathematical calculation designed to show how good each business is at delivering value to its shareholders.
The theme of the largest retailers' performance being cushioned to some extent by their sheer scale, as evidenced in the geographic spread analysis, also first showed itself in the VCQ league tables. Alongside the VCQ rating, each retailer was given a Realised Economic Value (REV) rating, which illustrates how good the business is at generating cash. Despite stumbling, as a whole, in terms of cash generation, the largest retailers still maintained their relative value positions, thanks to the market openly favouring their huge cash flows. The old tenet of cash being king remains valid with retailers being recognised and rewarded by the market on the basis of cash generation ability. However, size does matter and, despite some of the smaller businesses being amongst the best at generating cash across the 500-strong sample, their share prices are often discounted, in part probably because of the relatively low volume of their cash flow. With consolidation gearing up across the sector, it is unfortunate, but seemingly unavoidable, that many of these smaller retailers will lose their independence during the next ten years. Returning to the topics of culture and geography, what this research does is provide food for thought for every retailer already embarked, or about to embark, upon international expansion. Adding the multivariate cultural dimension to more traditional market entry and management considerations will potentially enable greater success, both operationally and financially.
The importance of exploiting domestic markets before embarking upon international expansion is evident. When subsequently starting out across borders, greater care would seem to be needed in selecting the best regions and country markets for investment. Retailers already on the international path should analyse their financial performance very carefully if they want to reap the type of financial returns which will improve both their performance and, importantly, prospective investors' positive view of it.

Notes
1 Hofstede, 'Cultures and Organisations', 1991
2 Schein, 'Organisational culture and leadership', 1986

Neil Austin is chairman of KPMG Global Consumer Markets.