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MULTINATIONALS

When Multinationals Go Abroad

The following are tales of successful entities in the West spreading their wings and going global. Sometimes that axiom of "Go Global, Think Local" is a lot harder than most operators think. - ANDREA ENG

Go East

2007 Feb 26: Back in 2005, Doug Doust was at a crossroads. After a successful career that included stints at A&P Canada and Eaton’s, the vice-president of logistics for Wal-Mart Canada happily could have retired with his wife in Toronto and spent more time at their cottage in Muskoka. Doust could also have worked a few more years at the Wal-Mart Canada office in Mississauga, Ont. It would have made sense for him to stick close to home; after all, he’d been living in the Toronto area with his wife since the two married 35 years ago. But Doust had a third option. In December of that year, Wal-Mart became the majority shareholder in Seiyu, a struggling Japanese retailer that had lost the equivalent of $1.1 billion in the fiscal year ended February 2003. It needed someone with supply-chain expertise to help turn it around. Doust had visited Wal-Mart’s operations in countries such as China, Germany, the United Kingdom and Mexico, and he enjoyed seeing how the retailer operated in other parts of the world. So he jumped at the chance to take over the position of senior vice-president of supply chain for Seiyu. Within a matter of months, Doust was immersed in a totally different culture, and loving every minute of it.

Learning to live in a community where the population is very concentrated can be challenging, says Doust. Toronto is a big city, but Tokyo is three times larger. “When you ride subways or trains here, they are full,” he says. “They’re very safe, very clean and very neat. But they’re full.” He and his wife live in an apartment in one of the city’s many “downtowns” with a view of the 333-metre-tall Tokyo Tower, and she spends her time meeting new people, taking language lessons and trying out her Japanese cooking skills.

Things at work are different, too. Seiyu, a general merchandise chain with nearly 400 stores, doesn’t have much in common with its North American Wal-Mart counterpart, Doust says. Seiyu stores tend to be smaller, are generally situated in dense urban areas and have a large focus on food. In fact, food accounts for between 60% and 80% of sales at Seiyu stores. - by Claire Gagné CANADIAN BUSINESS MAGAZINE

Orange China
Annette Verschuren, the farm girl from Cape Breton, conquered Canada for Home Depot. So China should be a piece of
cake, right?

She doesn't look like an executive when she walks the store floor. She'll show up in black jeans, a ball cap and an untucked oxford shirt, her hot pink construction boots tied with broad fuchsia laces. Many of her visits end with long—even lingering—hugs. Her manner is clearly not that of someone who possesses an MBA. Some days, you might even say she has the air of an overachieving hick.

But head office in Atlanta copies just about every move she makes. Annette Verschuren has shown Home Depot to be wrong more than once. And Home Depot likes it. Now that she's taken the world's No. 1 home-improvement retailer from a stagnant 19 stores to 154 in Canada, she's been given the biggest retail nut in the world to crack: 1.3 billion consumers in the People's Republic of China. And in your spare time, Annette, keep up the great job in Canada, okay?

Today the president of Home Depot Canada and Home Depot China is working both halves of her turf as she and a gaggle of her executives give a working tour of a Toronto store to six of Home Depot's newest leaders. They're managers with the Home Way, the Tianjin-based, 12-store chain that the Home Depot bought in December.

"Look at these bags!" cries Verschuren, beaming as if she's discovered gold. The tough sacks, with reinforced seams, have been presented by store manager Ray Goral. "For two years my customers have been asking for these," says Goral. But he didn't get a scrap of help from head office in the States—he had to source them on his own.

"Dashiell," Verschuren shouts, searching for one of Home Depot's Shanghai-based executives, Dashiell Chien, who handles sourcing for the Chinese stores. "Dashiell! This is driving me crazy, the bags in this company! I want a bag like this, okay? And you know, it's, like, impossible to get the quality of bag we need. It's probably because somebody in Atlanta is doing a spec [reviewing specifications]."

It's rich stuff for a walkaround seminar: Goral has demonstrated the manager-level entrepreneurialism that Verschuren prizes, and wants to impress on her new charges. "You know what? You know what?" she says excitedly. "I'm tellin' you, Ray, this is good for urban stores! This is good for St. Clair [a store in Toronto's west end]. This is good for—there's all kinds of people who walk!"

"Calgary North," one of Verschuren's Canadian managers offers.

"Yeah, Calgary North!"

"Cambie," says another, citing a location in downtown Vancouver.

"Cambie! Gotta have this stuff."

Whereupon Verschuren suddenly calms herself, seeming almost edified. She looks intently at her team.

"So again," she says, "good takeaway." On to the flooring aisle.

From such little victories—and from some much bigger ones—Verschuren has made herself Home Depot's go-to executive for challenging assignments. But China will easily be the toughest dossier yet. She'll have to win on service and assortment and price in a country where logistics almost always prove a nightmare and where brand loyalty doesn't exist. And she'll have to make Home Depot—a company where it can take two years just to get a decent plastic shopping bag—into the most nimble and responsive player in the most competitive retail environment in the world. All this while fending off Lowe's, a formidable retail adversary that is pushing into Canada. Bring it on, she says. "I wouldn't want to be competing against us."

She attended a two-room rural schoolhouse and spent much of her childhood working in the barn—especially after she was 11, when her father suffered a heart attack. This while also enduring four surgeries as a teenager to treat a kidney problem that lingered into middle age.

"Annette worked so hard when she was little, and she did it with very little complaint," her sister, Dorothy Tennant, recalls. "But thanks to the heavy milking machines that she lugged up and down in the barns on the cement floor, her arches dropped. Can you imagine? She did that work right until she went away for college." Along the way, she won the milking competition at the Cape Breton County Farmer's Exhibition seven years in a row.

At St. Francis Xavier University, Verschuren earned an undergraduate business degree. The rest of her resumé reads like a rags-to-riches tale. In one early job, she was charged with finding work for Cape Breton's displaced coal miners. Another was at CN Marine. ("It was a Crown corporation, so it wasn't the most productive place in the world," she says. "I shone very quickly because I got things done.") She moved on to Canada Development Investment Corp., the body responsible for selling off Crown corporations, before landing at conglomerate Imasco Ltd., which soon put her in charge of Den for Men's 63 stores. "I did that for a year, but then I saw that we were going to have to take the number of stores down to 45," she says. "It would have meant an $11-million hit. The company said no." So she left. "They went under. A year later. Uhum."

Verschuren's breakthrough came in the early 1990s, when she persuaded Michaels, the Texas-based crafts retailer, to come to Canada. She opened 17 Michaels stores in just 26 months, building the foundation for a business that's still thriving today. Then, in early 1996, she got a phone call from Atlanta. She didn't have to think twice about the offer.

Just a few months earlier, Home Depot's incumbent leader in Canada had complained about "depression-level" spending on home improvement in the country, and said he didn't expect the company could expand beyond its 19 locations. Many industry observers saw Verschuren's appointment as a sign of the U.S. retailer's desperation. Not only was she a woman in one of the most manly businesses, she was young (39) and she knew nothing about hardware—this was someone who had previously sold pipe cleaners and stick-on googly eyes to school kids. Nor did Verschuren have the academic pedigree of a company head.

Chalk one up for street smarts. No branch-plant order-taker, Verschuren charged ahead. "I had 19 stores when I became president here, and the company thought that it could only do 50," she says. "I remember saying to [then-CEO] Arthur Blank, 'Are you kidding? We can do 100 stores in Canada.' He thought I was crazy. And you know—we're about to open store number 154."

What's more, Verschuren put an independent and Canadian stamp on her stores. In 1998, citing research that showed how important women's opinions were in making big purchasing decisions around the home, Verschuren made her stores brighter and friendlier. She lowered shelves to make items more accessible, and began stocking soft goods: things like floral area rugs and framed "Artistic Innovations" photographs (for $193.99)—merchandise from the far side of the moon for anyone stuck in old-school lumber retailing. She decentralized the company's decision making as well, encouraging store and district managers to shape each location to local demands. One result was that managers took a stronger hand in editing their offerings. With head office's help, they cut stock on average from 48,000 items to 40,000. "Our customers are happier because they don't have to choose from a million things," Verschuren says. Over the past five years, the value of inventory in each store has been cut by an average of $3 million.

As she built new stores, Verschuren scaled down their size from 110,000 square feet to 95,000—just enough to make them a little more efficient and more friendly. And she introduced Eco Options, a successful program that highlights environmentally friendly products. She expanded into Quebec with two stores—now 20 and growing. It was the first market the company had ever entered in third place. In spite of arch-competitors Rona and Réno-Dépôt's efforts, the expansion has turned profitable, Verschuren says, and is steadily gaining market share.

She did much of this—it's worth noting, in light of her trans-Pacific workload—while simultaneously trouble-shooting the company's disastrous Expo stores in the U.S. ("A very sick baby," she recalls.) She closed 20 of the upscale design and furniture stores and brought Expo into profitability.

"Her track record and the team she's built show that she's a great leader," says Michael McLarney, editor of Hardlines, a Toronto-based trade publication for the hardware business. "That said, she's a tough leader: Take no prisoners. I wouldn't want to work for her myself.

"She's well respected by friend and foe alike. Everybody's on a first-name basis with her," he says. How many other women are at Verschuren's level in large-format retailing in Canada? "Let me take my hand out of my pocket so I can count" (the answer is one: Louise Wendling, who runs Costco Canada). "In Canada she's one of the boys."

The people around Verschuren call her a chameleon. She's a master at shifting her look, her style and even the way she talks to suit a crowd. So she'll do the Canadian Council of Chief Executives thing (she's the vice-chair) when she has to—folksy, to be sure, but measured enough to impress in spades. Then, an hour later she'll be talkin' to a crowd of lumbermen, all "huh's" and "heh's," and little words and dropped g's, so you can almost believe she's been out all morning taping drywall. That reflects her background, of course, and Verschuren's still close to her family back in Nova Scotia—one brother's a truck driver, another's a mechanic and the third stayed in the family business, farming. (Verschuren, who has no children, is divorced and has repartnered with Stan Shibinsky, a marketing consultant and teacher.)

At every turn, she has emphasized store-level entrepreneurship. Take that location in Toronto, for instance. It doesn't fit the suburban big-box mould that made Home Depot great. It's a mini-store (72,000 square feet) by company standards, built in a mostly derelict mall, Gerrard Square, whose most prestigious tenant was an unusually tatty Zellers. "This was a big risk, huh?" Verschuren says. "I had to take this deal three or four times to the U.S. to get them to approve it, because it was so unique. So we started it. It's one of our best stores."

To wit: Though Goral, the manager, is expected to turn his inventory 5.4 times a year, he turns it more than six. His "installs" department—another big Verschuren focus—is 44% ahead of plan, with $2.1 million in business in 2006. This in a supposedly depressed neighbourhood. Millwork is 33% ahead of its goal—thanks, Goral says, to the department's entrepreneurial drive. Goral has more decision-making staff than Atlanta's model typically allows. "The difference here is that I want the store manager to run the store," Verschuren tells the Chinese visitors. "In the U.S., you're only allowed three IMAs [inventory management associates]. I don't operate that way. The store manager has a lot of input. You guys have to make sure that they're making the right decisions, but you have to let them make those decisions."

When the call about China came last September, the company didn't waffle with Verschuren, or force her into a drawn-out selection process, she says. They simply asked her if she wanted to lead the company's China expansion. She barely hesitated before saying yes.

The truth is, Home Depot needs China. Like so many poster children for retail success, Home Depot's reputation has faded as it has run out of room to grow: Analysts say U.S. retail markets will soon reach saturation. Meanwhile, the housing market continues to soften. And the company could use a new story after the bruising forced departure of CEO Robert Nardelli for a jaw-dropping $210 million (U.S.), his reward for infuriating shareholders, torpedoing store-level morale and presiding over a stubbornly stagnant stock price since 2000. So China beckons. As Verschuren is fond of saying, it's a market worth a whopping $50 billion (U.S.), growing by a compounded 20% each year.

It's not for want of trying. Huge, colourful signs have been tacked to the façade and hung from the ceiling in an attempt to drum up enthusiasm. "The World's Largest Home Improvement Retailer—Landing in Beijing," the signs proclaim.

But even on a weekend afternoon, when throngs of homeowners fill Canadian Home Depots, this cavernous 90,000-square-foot store is almost devoid of paying customers. The handful of shoppers are vastly outnumbered by the dozens of bored clerks and sales assistants who loiter and chat among themselves. One clerk is reading a novel concealed inside a store catalogue.

A staff member maintains that it's merely a seasonal fluctuation—the winter is never the prime season for home improvements in China. Nonetheless, the lull is a reminder of the complexities of the Chinese market. On the ground, it's obvious that China will not be an easy frontier for Verschuren to conquer.

Chinese reaction to the arrival of Home Depot was a world away from the cheerleading coverage in the U.S. and Canadian media, which accepted Home Depot's claim that the Chinese home-improvement industry is generating that nice fat figure of $50 billion (U.S.) in annual sales, and growing fast. In China, the media skeptically pointed to the cash-flow problems of Home Way's tycoon owner, Du Sha, and his delays in paying his suppliers.

Du, recently ranked as the 14th-richest man in China, founded his chain of supermarkets and home-improvement stores in 1996. After early successes, he apparently overexpanded his empire in the past few years. It is his supermarkets, rather than his Home Way stores, that appear to be suffering the cash-flow problems, but Chinese newspapers suggest that the financial squeeze forced Du to accept Home Depot's terms for a buyout. There are reports that some food suppliers have stopped sending products to the supermarkets, and some have filed suit in court to seek payment. (A spokesman for Home Depot refused to comment on the reports, except to underline that the supermarkets are separate from the home-improvement outlets.)

One of the most daunting challenges for anyone entering China's retail sector is the ferocious competition. Global players such as the Swedish giant Ikea and the U.K.-based Kingfisher (using the B&Q banner in China) are powerful players in the home-improvement sector, but they must vie with domestic rivals such as Orient Home, not to mention traditional construction marketplaces and a horde of corner-store operations. So far, the foreign big-box outlets are believed to have captured less than 5% of the market. And they're fighting over an industry that may be worth as little as $6 billion (U.S.), a far cry from the $50 billion (U.S.) touted by Home Depot, analysts say.

"Home Depot has been smart not to rush in to China's home furnishing and improvements market—it's a tough one," concluded a report by Access Asia, a market research company. The locals have not been a pushover, according to the report. "The multitude of domestic home improvement and furnishings warehouses, their cheap, cheap prices and invariably better locations have meant that life has been tough for the foreigners—Ikea has struggled with crowds in their stores but a lack of queues at their tills, while B&Q has expanded faster but still derives only a dribble in income from mainland China."

Despite China's booming economy, its urban middle-class population of some 110 million is spending only $5,500 (U.S.) per household a year—just over 10% of what the average American consumer spends. Even if the growth continues at expected rates, these won't be the kind of consumers who buy $8,000 Jacuzzi tubs with the optional bubbles package: A decade from now, the cohort's spending will still be only a sixth of the average American household's. "In the context of that, a $50-billion home-improvement market seems outlandish," says Arthur Kroeber, a Beijing-based analyst with Dragonomics, a private research and economic consulting firm.

Kroeber cites the Chinese government's own retail sales number for 2005—it amounted to just $219 billion for the entire country. Perhaps another $200 billion goes unreported, but it's not big-box stuff. "Almost all of that extra that we talk about is stuff that just would not possibly be of interest to foreign retailers because it's just too low-level," says Kroeber. "It's people buying instant noodles at the corner shop, or onions. On that basis, even if we take our high-end estimate, that works out to $346 per capita per year."

Then there's the fact that the Chinese are shrewd shoppers. They are keenly aware that the prices at Home Depot are not as cheap as those at neighbourhood malls and markets, where tax evasion and haggling both drive down prices. On the other hand, Home Depot's quality is seen as more reliable, even if this is not a determining factor for everyone.

"The prices are certainly a bit higher here," says Bu Aixiang, a veteran home-decorating contractor who was shopping at Home Depot on a January afternoon. "Boards that cost 136 yuan here [about $17] are only 110 yuan at a market nearby. But the quality of the products here is relatively guaranteed. They generally won't allow the small brands or fake products. And if you buy too many boards, you can get a refund here. It's impossible to get a refund at a traditional market."

Li Xiaomin, a 40-year-old Beijing woman, says she shopped occasionally at Home Way (before it became Home Depot), but was unimpressed by the selection of products. "I wanted to buy some lamps for my apartment, but they didn't have many choices," she said. She pointed to a nearby Chinese mall, crammed with dozens of home-supply shops. "This building is much bigger than Home Depot and I have many choices," she said. "After buying the lamps, I can stroll around and look at furniture, clocks or other interesting little items. Home Depot might be good for some people, but not for me."

Even with 12 locations, Home Depot is still a relatively unknown company in the world's most populous nation. "I've never heard of Home Depot," says 29-year-old Tang Zhiyuan, who is decorating his newly purchased apartment in Beijing. "I've hired some contractors and I listen to their suggestions. I bought my bathroom and kitchen tiles at a neighbourhood market near my home, and I went to Ikea to buy a small cabinet and some bathroom handles."

Home Depot has had plenty of time to study the Chinese market. Its advisers began collaborating with Du Sha in the mid-1990s, when he launched Home Way. He modelled his stores on the big-box style of Home Depot, and his 3,000 staff wore orange aprons—an obvious debt to the U.S. chain. As Liu Hao, Home Way's president, says during his visit to Toronto, "Ten years ago when Mr. Du built his company, Home Way's target was becoming the Home Depot of China. Now we've become the real Home Depot!" The two companies shared resources, with Home Depot providing employee training and Home Way sharing its sales information.

With that background, Home Depot does have a handle on the peculiarities of the Chinese market. Most of the burgeoning class of new homeowners tend to buy the proverbial "empty cement box"—unfinished shells in high-rise towers that need extensive fitting, usually by hired contractors. This represents some 70% of the home-improvement industry—and it's a business more given to grassroots businesses than multinational corporations.

But as the Chinese home market begins to mature, many apartment owners' purchases are shifting from basics like plumbing and electricals to soft furnishings. This could be good news for Verschuren. "Home Depot's product offering in China may now be well-timed," Access Asia says in its report. "Certainly they've sat around examining the market for long enough."

As much as she knows the markets are different, she can't help but draw parallels between what she's done in Canada and what she must do in China. The Chinese stores, Verschuren says, are reminiscent of Canada's 10 years ago—orange everywhere, but little sophistication. And, sure, China is tough. But listen: "The Canadian market is very tough—more competitive than the U.S. market. The two languages, five time zones. Running 154 stores today in 10 provinces with a flight time of eight or nine hours between the most eastern and western stores. It's tough. And to do it as profitably as we have? For a population the size of California? So, you know, I go into a market that has 1.3 billion people."

The opportunity, in other words, dwarfs the challenge. Though she's wary of committing to specific plans for China, Verschuren says she wants the enterprise to grow from the floor up, concentrating on customer service and local solutions. "I am very customer-focused. If I can instill that in all the leadership team, that will be the key to our success.

"I will never know China the way a Chinese person knows China. I can provide advice, I can provide counsel, I can get them resources. But at the end of the day, the people that grow China will be the Chinese."

She's been learning from her competitors. Some 50% of the space in a typical big-box store in China is sold to vendors who run their own operations within the larger store. That eats up space, Verschuren says—the average B&Q is 160,000 square feet, or twice the size of an average Canadian Home Depot—and doesn't necessarily benefit customers.

She expects that, for the sake of efficiency in the short term, Home

Depot will cluster stores in the big northern cities like Beijing and Tianjin, where Home Way already has a presence. (The stores as a group are profitable, she says.) She's hesitant to be specific about acquisitions, other than to say they "could take quite a while" and the goal is to ultimately have "at least" 50 stores. "There'll be aggressive growth in China, I'll tell you that."

After years of planning, the company will finally launch in Canada this year with between six and 10 stores around Southern Ontario. South of the border, Lowe's may still be No. 2, but most analysts agree that its stores are brighter, cleaner, friendlier, better staffed and more accessible than Home Depot's.

Home Depot is exercised about Lowe's expansion here, says Hardlines's McLarney, because it's the company's first step outside the U.S. "Lowe's knows that the Street expects it to test the water internationally, so they've chosen Canada because it's close. Atlanta really wants to dampen the enthusiasm any investors and consumers might have for Lowe's expansion."

Verschuren declares that she's ready. "We'll have 167 stores by the time they open their first store." She's stocked the Home Depot stores around Lowe's locations with her best people, and has snapped up real estate for her own new locations in many of the areas that Lowe's is targeting. Home Depot will have renovated every one of its older stores by the time Lowe's opens its first Canadian outpost, Verschuren says. "We have battle plans against Rona and against Lowe's. They may take market share away from other competitors. I doubt that they're going to take market share away from Home Depot." Verschuren has brought in a senior VP of operations, Harry Taylor, to carry some of her load in Canada, and she plans to put a deputy in charge of the China stores. (She typically spends one week a month in China.)

For all she's done, Verschuren is off the radar on Wall Street. The Street has been caught up in other Home Depot stories—notably, CEO Nardelli's departure. And Nardelli never gave any profile to his leadership team. "Nardelli was a one-man show in terms of what kind of public face he wanted to put forth," says Donald Trott, an analyst who covers Home Depot for investment bank Jefferies & Co. "We in the financial community had very little exposure to most other executives." And the company's Canadian operations, in spite of their success, are still tiny compared to the U.S.—154 stores versus 1,872. Even the China deal is still relatively small potatoes. Keith Davis, an analyst with U.S. investment bank Farr, Miller & Washington, says it'll be years before China has much positive effect on the bottom line. Trott agrees: "I'm in my 70s, and in my lifetime you're probably not going to see China being that important to Home Depot. It's going to take a lot of time to develop, especially relative to the size of this company."

Whether Verschuren will stick around to see that through is becoming a hot topic around the industry, says McLarney, of Hardlines. "I figure she's destined for bigger things in Atlanta, with the Bob Nardelli show finally over."

Verschuren insists she's happy doing what she's doing. "I got the best job," she says three days after Nardelli's exit. (He was replaced by executive vice-president Frank Blake.) "In the world. Here. Right here."

But what about the CEO's chair in Atlanta? What about all that ambition? Does she want the top job?

"Nope," she says, softly. "Nope." A little bit louder now. "Nope, nope, nope! NOPE!" She's flushed, tapping at the side of a coffee cup, shifting. "No, no! No-no-no."

Well, fine then. We'll quote you on that, Annette. - 2007 March REPORT ON BUSINESS Geoffrey York and Chris Nuttall-Smith