Post on 07-Apr-2018
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Deloitte Research – Revisiting retail globalization
Revisiting retailglobalization
A Deloitte Research Global Retail Study
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Deloitte Research – Revisiting retail globalization
Revisiting retail globalization
In the year 1298, the Venetian navy was defeated in
battle by the navy of Genoa. One of the Venetian
commanders committed suicide in disgrace. He is long
forgotten. Another surrendered calmly and lived to
write about his experience and much else. His name
was Marco Polo. The importance of Polo was his ability
to observe and learn from experience — the experience
of defeat, and especially the experience of entirely alien
cultures.
This is a lesson of importance to retailers interested
in being global companies. For if we know anything
about this topic, it is that much is to be learned from
failure and much is to be learned from observing the
unfamiliar. Plenty of retailers have failed in globalizing,
and many have succeeded. In the spirit of Marco
Polo, this essay offers some lessons learned from both
experiences.
Why think about this now?
At a time when the global economy faces
unprecedented uncertainty, when U.S. retail sales are
falling, when Europe’s economy is on the verge ofrecession, and when the big emerging markets are
showing signs of significant slowdown and financial
risk, now does not seem the best time to discuss retail
globalization.
Yet, whatever economic doldrums retailers find
themselves in, the reality is that economic growth
will eventually return and surviving retailers will need
to seek new arenas for expanding. Home markets
for developed country retailers are going to be slow
growing, saturated, and prone to excessive regulatory
interference. To achieve rapid growth, successful
retailers will be wise to seek out new territories. What
better time to think about the dawn than when things
are darkest?
Of course, we’ve been down this road before. Indeed,
Deloitte itself wrote about the imminent globalization
of retailing several years ago. And while many
retailers have taken their stores on the road, the
industry remains far less global than many comparable
consumer-oriented businesses. Think about the
leading companies in consumer products, hospitality,
food service, telecommunications, and entertainment.
These industries are far more global than retailing, with
the leading players achieving a much higher share ofrevenue and profits from outside their home markets
than is true of retailing.
What went wrong?
Why have so many retailers failed to go, much less
succeed, outside their home markets? The answer
is that retailing is a uniquely complicated business.
It is the industry that maintains the closest and
most personal relationship with consumers, often
intersecting their lives on a weekly and even daily basis.
Thus, achieving a successful personal relationship is far
more challenging when doing it in an alien culture. In
addition, successful global retailing entails undertakinga wide range of tasks. These include managing
diverse human resources who must engage in
personal interaction with customers, managing foreign
human resources from afar, managing complex and
differing supply chains, managing relationships with
thousands of suppliers and other vendors in multiple
business and regulatory environments, meeting the
requirements of multiple regulatory regimes, and all
the while understanding the changing needs of diverse
consumers. Clearly, this is not easy.
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So why bother?
Retailers go global for a number of reasons. European
retailers are more prone to globalization than
American retailers because they often face restrictions
on development in their home markets. French
hypermarkets come to mind. Due to regulations, they
cannot easily open new stores in their home market.
Consequently, they principally seek growth in other
markets. This is why the lion’s share of global retailers
are based in Europe.
Some retailers invest globally in order to latch on to
fast growing consumer markets, especially when their
home markets are stagnant. Germany and Japan come
to mind. Retailers expand globally in order to leverage
their existing assets: global purchasing relationships, a
global supply chain, a unique product, a unique format,
or a well known brand. Finally some retailers globalize
because foreign markets offer them low hanging
fruit. That is, foreign retailers can bring leading edge
practices to relatively unsophisticated markets. In doing
so, they might blow away the competition (or at least
that is their hope). Indeed, despite the challengesmentioned earlier, some retailers have actually been
successful in doing this.
What have global retailers done right?
Choose a strategy — and then execute
It is not sufficient to decide to enter a promising
market. There must be a strategy and it must make
sense in the context of the market chosen. This is
not a simple task and there is no scientific method for
determining the appropriate strategy. Some pundits
suggest that the strategy must be geared towards the
unique qualities of the market. That is, they say it is
most important to adapt. Others, however, argue that
a retailer must bring to a new market the strengths it
possesses at home. In other words, rather than adapt
the retailer to the market, introduce a new idea to the
market. Yet there are plenty of examples of success
and failure for each strategy. In other words, there
appears to be no good rule of thumb. Still, one rule
does seem to apply. Whatever the strategy, the devil is
in the execution.
Find a competitive advantage
If there is no rule for choosing a strategy, then what
is a retailer to do? The answer is to figure out what
the retailer might bring to the market that would
enable it to beat the competition. This can vary
greatly and depends on the nature of the competitive
environment. In an emerging market that lacks much
modern retailing, simply bringing modern supply chain
management and merchandising as well as large
financial resources might be sufficient. In a moresophisticated market, competitive advantage can come
about by offering a well known global brand, a unique
format, a higher level of customer service, a more
entertaining and informative customer experience, or a
more efficient supply chain that enables low pricing.
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Learn much about local tastes and customs
The best global retailers spend substantial resources
and time in learning about the local market. This
entails understanding supply chains, regulation, sources
of merchandise, and, most importantly, consumer
tastes and habits. The latter is the most challenging.
There are examples of retailers which, even after years
of research, fail to develop the right merchandising.
Understanding an alien culture is enormously difficult
under the best of circumstances. Hence, using a mix oflocal and expatriate managers can help to get it right.
Some of Europe’s largest food retailers, in developing
new markets, have sent teams of managers to other
markets. Often, they spend months and sometimes
years learning about consumer tastes, shopping and
living behavior, cultural attitudes, and sensitivity to
branding and pricing. The end result is a compromise
between using the strengths of their core business
at home and adjusting to differences in the foreign
market. Sometimes it takes a period of tinkering
before a foreign retailer finds the appropriate such
compromise.
It should be noted that European retailers have
engaged in globalization far more than those of the
United States. As such, they have gained greater
experience in adjusting to local cultures. That is
because, in order to achieve scale, Europe’s retailers
must operate outside their home countries. Thus,
even before reaching Asia and Latin America, many of
Europe’s global retailers have invested in neighboring
European countries. In the process, they have learned
valuable lessons about adaptation.
Use mostly local managerial talent
The best global retailers tend to rely on the fewest
number of expatriate managers. The ideal situation
is for most stores to have local managers. There are
several reasons for this. Local managers often possess
connections to the local business community and
government. They usually have a better understanding
of local consumer culture. Finally, they often engender
greater loyalty within the organization than foreigners.
The problem with expatriates is that, although they
understand the company culture and processes, theydon’t necessarily understand the local market very
well — especially when there is a language barrier.
In addition, they may not be able to exert the same
degree of authority on local employees as a local
manager. Finally, expats often are uninterested in
staying in a foreign market for very long as it can
represent a burden on their families. One British
company, operating in Hungary, found that the British
employees in Budapest intentionally failed to learn
Hungarian lest they be asked to stay longer.
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The challenge is to develop local talent in a way that
is consistent with the values, culture, and processes
of the parent company. Moreover, in many emerging
countries such as China, a larger challenge is to retain
well trained talent. The problem in such markets
is that rapid economic growth and massive foreign
investment are conspiring to create huge demand for
skilled managerial labor. Yet, despite increases in the
number of university graduates, supply has not kept up
with demand. Thus, labor costs are rising and goodworkers have multiple choices. Foreign retailers report
that, after spending considerable resources to train
managers, they struggle to retain workers. Often, local
employees, having been trained by a reputable global
retailer, will be sought after by local retailers eager to
develop world class processes. These local companies
offer large increases in compensation in order to poach
global retail talent. Retaining such talent will require
not only good compensation but the promise of long-
term career success. This will be more likely if a global
company is seen as having good prospects in the local
market and a long-term commitment to that market.
One way around a shortage of skilled local managers
is to seek out nationals that have worked for other
global companies or, at the least, have been educated
in the West before returning home. In some cases,
companies have sought local nationals who have
spent entire careers in the West but have an interest
in returning home. On the other hand, some global
retailers choose to locally employ an expatriate CFO
from the parent company. The idea is to provide a
linkage between the home office and the subsidiary so
that financial processes can be tightly aligned.
Develop a hybrid culture
Global retailers face a conflict between maintaining
their own traditional way of doing things and adapting
to the local culture. The solution might be to develop
a hybrid that takes the best of both worlds. In some
cases this has been brought about through joint
venture arrangements between a global and a local
retailer. Of course the history of joint ventures is
littered with the remains of failed attempts to integrate
differing cultures. Still, it can be done if the joint
management is committed and humble.
Utilizing the best of both worlds entails combining
the things the global retailer offers (superior use of
technology, logistics, merchandising, and customer
experience as well as access to a global supply chain)
with the attributes of the local market (business culture,understanding of the local market, and local supplier
relationships).
Develop local relationships
In China, a major European food retailer had trouble
achieving success largely because of a failure to build
strong local supplier relations. In Indonesia, a large
global food retailer ran into difficulties when the local
franchisee company opened a competing store on its
own. The franchisee had acquired knowledge in the
process of working with the foreign retailer which
it then applied to its own start-up chain. Finally, a
global food retailer made countless errors in SouthAmerica when it failed to listen to the cultural advice
of its local partner. Thus, there are three lessons: First,
local relationships are critical. Even if you don’t have a
partner or franchisee, you still need local suppliers and
vendors. Developing such relationships in a favorable
manner requires work. Second, it is important to
find the correct local relationships. Making sure that
interests are properly aligned is important. Finally,
global retailers should listen to their local partners
and suppliers in order to better understand the local
market.
These lessons are particularly apt for food retailers.
As for non-food, such as apparel or home related
goods, local supplier relationships are not necessarily
as important as in the case of food. Yet other kinds
of relationships are still necessary and require effort in
order to make them work.
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Be prepared to make big mistakes
It should be evident to even the most casual
observer that global retailing has a steep learning
curve. Mistakes will be made, sometimes big ones.
The capacity to learn and change is critical, and a
commitment of time is necessary to do that. There
are probably more examples of global retailers making
initial mistakes along the way to success than there are
stories of instant success. Yet acceptance of error is
not something that is part of every company’s DNA —and with good reason. Investors often punish mistakes
in ways that affect executive compensation and even
job security. Thus, it must be acknowledged from the
start that, to a large degree, an investment in global
retailing is a gamble. Moreover, the gambler is willing
to stay at the table for more than one game.
The good thing about making mistakes is that they
provide the information necessary to ultimately get
things right. Unlike true gambling, investing in global
retailing does not yield random results. The trick is to
infuse the organization with the lessons learned from
erring. The most successful global retailers have donethis. They have frequently shifted merchandise mix,
pricing, marketing, store layout, and even overall entry
strategy, in order to adjust to an alien market.
Be prepared to invest on a large scale
Often, retailers dip their toes in the water in order
to get a sense of the market. This is sensible up to a
point. Yet a profitable enterprise will only come about
with sufficient economies of scale. Thus, opening a
handful of stores here and there will not suffice. Yet
many retailers have tried this. There are a number of
retailers that have opened small numbers of stores
in multiple markets, only to find that none of them
yielded a positive return. Nearly all success stories have
entailed being selective about the choice of markets,
and then delivering sizable resources to those markets.
Scale is not only important for operational efficiency.
In addition, it enables a retailer to build a following
among consumers. It also convinces local suppliers and
vendors that the retailer is there to stay. Otherwise,
they are often reluctant to enter into new relationships
lest they offend existing customers.
Be prepared to operate in a niche
Although scale is important, it is not always necessary
to saturate a market, nor is it essential to appeal to a
wide range of consumers. In many locations, existing
local and foreign retailers have already grabbed a
considerable share of the market. For a new retailerentering such a market, it is not helpful to simply
replicate what others have done especially if the
market is relatively saturated. Instead, a new player
might be able to find a niche in which to operate. In
some emerging markets where global hypermarkets
have invested heavily, other food retailers have found
that simply investing in the hypermarket format will
not suffice. Instead, they have sought to connect with
consumers through smaller, niche formats such as small
supermarkets, discount stores, and convenience stores.
In the case of electronics retailers, rather than invest in
a superstore format, a smaller neighborhood format
might be appropriate given competitive and regulatory
constraints.
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Standardize processes and technology
To offset the costs of localization, some successful
retailers focus on standardizing certain aspects of
managing a retail business in order to achieve global
economies of scale. These include basic business
processes such as pricing, sourcing, payroll, loyalty
programs, and other management and back-office
functions. They seek to develop standardization
through management training sessions that are
dictated from the head office. Such retailers alsoattempt to standardize information technology
infrastructure globally.
Deep pockets
It is no surprise that many globalization failures were
experienced by companies with poor performance
in their home markets. They lacked the resources to
persist. Their shareholders often complained about
too much focus on longer term projects while the
core business deteriorated. Examples abound of
companies that invested overseas, performed poorly,
and exited rather than trying new strategies. On the
other hand, the most notable successes were achievedby companies with strong success at home. They
had deep pockets and could afford to fail, learn from
failure, and try again. Of course there are those that,
after lengthy and costly failure, ultimately — and wisely
— gave up.
Know when to get out
Finally, retail globalization will not always work no
matter how hard a company tries. Again, it is a
gamble. At some point, the gambler must exit the
casino and find sufficient cash to get back home.
The same is true for retailers. Some of the best
global retailers have failed to master certain markets.
Consider Japan, for example. This country is littered
with the remains of several leading global retailers that
failed to succeed. The country has a tough regulatory
environment, an unusual and inefficient supply chain
with vendors unwilling to offend newcomers, and
consumer tastes that have puzzled foreigners for
generations. Exiting Japan made sense for these
retailers after a valiant attempt. Such failures should
not discourage other efforts.
What have global retailers done wrong?
Arrogance
One Western retail chain, known for appealing to a
mid-market audience in its home market, built a series
of gold plated palaces in an emerging market. The
stores were large and clean with bright lighting, wide
aisles, neatly stacked merchandise, and flashy design.
They were designed to roll over the local competition.
They never worked. Instead, local retailers, with far
more ordinary stores, appealed to the nascent middleclass in this market with greater success than the
global retailer. The latter was perceived as too upscale
given the relatively immaculate nature of the stores.
Ultimately the company was forced to retreat from
that market after sizable losses. This story has been
repeated more than once in a variety of formats. It
reflects a degree of arrogance on the part of home
country management. They believed that simply
bringing the best of their world to a new world would
be sufficient. It reflected a failure to learn about the
needs and attitudes of the local market.
Interestingly, such stories demonstrate retailerswilling to undertake sizable capital expenditures in
order to develop a new market. Yet the money is
misspent. In the situation noted above, rather than
focus on opulence, more should have been spent on
understanding local consumers and simply meeting
their needs.
Insufficient commitment of time and resources
Successful retail globalization requires time to learn
and scale to achieve efficiency. Some retailers have
entered markets timidly, taking the view that they can
quickly retreat if things don’t work out. For a well
known apparel brand that enters a market through
franchise or licensing, this approach may be correct.
Yet for a large food or specialty retailer, scale matters.
Moreover, the efficiency that comes from scale will take
time to develop as the retailer is introduced to local
consumers. Mistakes and subsequent corrections will
be made. Thus patience is essential.
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No good reason to enter a market
Some retailers have entered new markets assuming that
their success at home will easily translate into success
abroad. They lack recognition of what the market
requires and what they can uniquely offer that market.
If the only reason to enter a market is that it is growing,
then there is no good reason. Again, retailers need a
strategy that reflects the needs of the market and the
competitive advantages that a retailer can offer.
Underestimating the local competition
Global retailers often enter new markets thinking that
they will roll over the local competition, what with their
backward information systems, poor merchandising,
and 1970s style store design. Yet, often the opposite
happens. Often, locals demonstrate the true value of
market knowledge, a local supply chain, and long term
brand equity. Examples abound of unsophisticated
local retailers who gave global retailers a hard time and,
in some cases, chased them back home. A healthy
respect for the success of existing local retailers would
serve global retailers well.
Interestingly, some of the most notable success stories
involve emerging market retailers investing in other
emerging markets. Perhaps companies that are able to
succeed in such challenging places, often competing
against world-class foreigners, are well equipped to
navigate the minefield of other emerging markets.
What about the hot markets?
China
As of this writing, China’s economic growth is slowing
considerably. At the same time, the retail markets of
China’s big coastal cities are already dominated by a
handful of global and local retailers. This raises the
question as to whether China is still a good place for
global retailers to invest. The answer is yes.
First, while the economy is in the doldrums, this is a
temporary phenomenon and should not influence
expectations about long-term future growth.
Moreover, the Chinese government appears to be
doing all the right things to get growth back on
track. Recognizing that the slowdown in the global
economy is hurting China’s exports, the government is
boosting spending in order to pump domestic demand,
especially consumer demand. Moreover, the gradual
appreciation of the currency sets the stage for a shift of
growth away from an export focus and more towarddomestic demand. Thus, in the longer term, consumer
spending growth should be strong.
In addition, as the economy grows, large numbers
of households will shift from poverty to the middle
class, especially in China’s secondary cities and rural
areas. These markets are only now starting to witness
investment in modern retailing. Thus, opportunities
abound in those cities that have not already
experienced large-scale foreign retail investment.
Yet, that is not the end of the story. Even in the big
coastal cities, opportunities exist. First, these cities will
continue to grow, in part due to migration from other
parts of China. Thus, the market will enlarge. Second,
as consumers in these cities become more affluent,
their spending behavior will change. There will be
more spending on discretionary items. This offers the
possibility of more investment by non-food specialty
retailers.
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What about the climate for investment? For now, it
remains good. In 2004, the regulatory environment
for foreign retailers improved when China enacted
commitments made when it entered into the World
Trade Organization (WTO). It has remained favorable
ever since, despite periodic expressions of discontent
by government authorities. The latter are concerned
that too much foreign investment will yield an industry
without strong local retailers.
To deal with this concern, the government has
encouraged consolidation on the part of local retailers
in order to achieve scale and joint ventures with
foreigners in order to learn world-class processes.
Since most of the private sector retailers in China still
maintain some government ownership and control,
these retailers often have favorable access to capital,
property, and suppliers. Thus, it is not an entirely even
playing field for foreigners. Still, they continue to invest
on a large scale, reflecting confidence about future
growth and concern about the possibility of tighter
regulations in the future.
India
India is seen by many global retailers as the next
big thing. Yet unlike China, India is merely at the
beginning of a process that could radically alter its
retail landscape. Foreign investment remains minimal
as does chain retailing in general. More important than
the ambitions of foreign retailers are the plans of some
of India’s giant conglomerates. Often flush with cash,
these family controlled behemoths are eager to take
advantage of the expected boom in consumer spending
in the coming years. The rise of middle class consumers
and the expansion of consumer credit are making
the market attractive. Hence some of India’s largest
companies are rolling out large numbers of stores from
scratch without any past experience in retailing. They
utilize their massive financial resources to obtain the
best talent and build a new organization. In addition,
India’s existing retail chains, modest in size by global
standards, are now planning to expand rapidly and
are opening stores far more rapidly than in the past.
Optimism about retailing abounds in India.
Yet should foreigners be optimistic? The answer is
probably not. India imposes some of the world’s mostrestrictive regulations on foreigners. Quite simply,
foreigners — with modest exceptions — are not
allowed to enter India. Direct foreign investment in
retailing is not permitted unless the retailer sells a single
brand — such as a vertically integrated specialty apparel
retailer. Yet, given India’s low per capita income, the
preponderance of interest in India is coming from the
world’s largest food retailers.
Some global retailers are trying to enter India through
the back door. This entails engaging in wholesaling
(permitted) and doing so in close relationships with
local retailers. This provides the opportunity to learn
the market and, it is hoped, enter the retail end in the
future when regulations change.
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Will the regulations change? When asked, most Indian
retailers and observers of the retail scene believe that
the market will ultimately open. Moreover, the political
situation for reform has improved of late. Still, with
a slowing economy, local retailers, especially smaller
independent retailers (of whom there are literally
millions) will likely raise their voices in vociferous protest
if anything changes. It will not be an easy, or even
peaceful, transition.
Russia
Unlike India, Russia is quite open to foreign investment
in retailing. Until a few years ago, however, there
wasn’t much interest because the country was
perceived to be economically unstable. Yet in recent
years, steady rapid economic growth, the result largely
of high energy prices, has encouraged foreigners to
look at Russia anew especially given that the market
is relatively fragmented with few large local players.
Moreover, those foreign companies that have invested
in Russia have done very well. So it is no surprise that
the pace of retail investment into Russia has picked up.
On the other hand, the global financial crisis of late
2008 has taken a significant toll on Russia as of this
writing. The global credit crunch and lower energy
prices have conspired to create financial market turmoil
in Russia and to threaten the strong growth to which
the country has become accustomed. Thus, it would
not be surprising to see global retailers put Russia on
hold.
The important question, however, is whether they’llcome back. The answer depends on what becomes of
Russia’s economy and business environment. A good
bet is that Russia will see strong economic growth
again — although possibly slower than the rapid rate in
recent years. This forecast is based on the assumption
that energy prices will rise again. In addition, it is
predicated on the observable fact that Russia’s leaders
are eager to deliver financial stability in order to
maintain political support. Thus, they are likely to avoid
policies that undermine a free consumer market (unlike
their policies with respect to energy and resources).
For global retailers, Russia therefore remains attractivein the long run.
Elsewhere
China, India, and Russia are the hottest markets on
the minds of global retailers. Of course there are
other important markets, but few are either as big or
undeveloped. Brazil is big but already has a sizable
contingent of global retailers. In addition, it has not
seen the kind of economic growth that the other
three BRIC countries have experienced. As for other
emerging markets, there has been plenty of investment
into such disparate places as Southeast Asia, Central
Europe, Mexico, Argentina, Turkey, and the Persian
Gulf. Yet none of these markets possess the scale
that China and India offer. Moreover, they have fewer
opportunities given the large number of sophisticated
global and local retailers already in operation. Still,
there are opportunities in these markets for those
willing to seek niche opportunities.
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Finally, there continues to be investment by global
retailers into other developed markets — and more
can be expected as retailers seek to take advantage
of high levels of purchasing power. On the other
hand, developed markets have the disadvantage of
often being saturated by world-class retailers relatively
impervious to foreign competition. Cracking such
markets, especially the United States and Japan, has
proven to be the greatest challenge.
Final thoughts
Many of the examples noted in this report refer to
food retailers. That is because a large share of retailers
that have gone global have been food retailers,
especially European food retailers entering emerging
markets. There was a good reason for this. Europe’s
food retailers have faced regulatory constraints on
home country development. Thus, they had a strong
incentive to go abroad. In addition, emerging markets
were initially seen as having limited purchasing power.Consequently, foreign retailers sought to sell them
necessities rather than discretionary products. Hence,
food retailing went global.
Today, things are rapidly changing. The rise of the
middle class in emerging countries such as China has
fueled much discretionary, even luxury, spending. We
are already witnessing many European, American,
and Japanese non-food retailers operating on a global
scale. Apparel retailers have extended their brands to
new markets. Home related retailers, such as home
improvement or electronics stores, have introduced
emerging markets to the category killer concept.Undoubtedly, there will be more. Indeed it is safe
to say that the next phase of retail globalization will
involve the globalization of non-food retailing. Many
of the success factors for these retailers will be no
different than was the case for the early food-oriented
global retailers.
The best question about retail globalization is
not whether it will happen. After all, it is already
happening. The best question is when and how
retailing will become truly global. There are too many
good reasons to globalize, not the least of which is that
the home markets for Western retailers are slowing and
becoming saturated. The challenge, then, is to find the
right formula. Therefore, it is not too risky to offer the
prediction that retailing will eventually be a very global
industry.
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Author
Ira Kalish
Director, Global Economics and Consumer Business
Deloitte Research
Tel: +1 213 688 4765
E-mail: ikalish@deloitte.com
US Retail Industry Leader
Stacy Janiak
Tel: +1 612 397 4235E-mail: sjaniak@deloitte.com
Global Retail Industry Co-Leaders
Vicky Eng
Tel: +1 203 905 2621
E-mail: veng@deloitte.com
Richard Lloyd-Owen
Tel: +44 20 7007 2953
E-mail: rlloydowen@deloitte.com
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“Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consult-ing, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu, a Swiss Verein (DTT). Eachmember firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries inwhich it operates. DTT helps coordinate the activities of the member firms but does not itself provide services to clients. DTT and the member firms are separateand distinct legal entities, which cannot obligate the other entities. DTT and each DTT member firm are only liable for their own acts or omissions, and not thoseof each other. Each DTT member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may securethe provision of professional services in their territories through subsidiaries, affiliates and/or other entities.
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