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Globalization has inherent pitfalls.

Retailers can tap new growth opportunities by expanding into other countries. But many should be careful or those gains will come at a price, according to a study by KPMG International.

The firm looked at 130 publicly traded retailers with international operations and concluded that for most, being global has had a largely negative effect on their financial performance. Only a handful of the largest retailers benefit from operating stores in different countries.

"Many businesses--not just retailers--are seeking to globalize their operations," says Mark Larson, Americas partner in charge for the retail practice at KPMG LLP. "However, our latest research shows that retailers face unique challenges that can mitigate the positive aspects of expanding outside their domestic markets. Specifically, retailers moving into foreign markets may face earnings volatility, a drain on profitability and a decline in stock market returns."

For the purposes of the study, the 130 international retailers were assigned an Integrative Measure of Globalization (IMG) score ranging from zero (for purely domestic operators) to eight. The IMG ratings were then analyzed against profitability, earnings volatility and stock market returns.

The study showed that the least global group of retailers (those with the lowest IMG scores) had an average net profit margin of 3.48%. That figure falls steadily as companies become more geographically diverse, dropping down as far as 1.2%.

Interestingly, however, net profit margins rebound to a more healthy 2.47% for the most global companies in the study. These are the large retailers that operate in many countries.

"Significant size can help shelter such companies from market erosion as they extract additional savings from their back-office operations and reap economies of scale from their supply chains," Larson says. In addition, the more countries a retailer is in, the less likely it is to be subject to the swings of consumer spending."

The message of the study is not that retailers should avoid international expansion entirely. Rather, it concludes that retailers should simply exploit domestic markets fully before expanding into other countries. And when they do take their operations across national borders retailers need to be careful to select the best regions and countries in which to invest. Those already operating internationally should analyze their financial results carefully to be sure they are reaping the benefits they expected and to ensure that their investors remain confident in the value of global operations.

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Title Annotation:Opinion
Author:Meyer, Scot
Geographic Code:1USA
Date:Oct 6, 2003
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