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  1. Analysis
July 1, 2008

Local retailers ready as global giants eye expansion

The retail world is becoming a globalised one. As a new report from just-food demonstrates, the likes of Wal-Mart and Carrefour have been busy building their businesses worldwide - but they are now encountering powerful, home-grown retailers in the race for the gold-rush in emerging markets.

The retail world is becoming a globalised one. As a new report from just-food demonstrates, the likes of Wal-Mart and Carrefour have been busy building their businesses worldwide – but they are now encountering powerful, home-grown retailers in the race for the gold-rush in emerging markets.

Given the huge power wielded by the likes of Wal-Mart, Tesco and Carrefour in their domestic markets, the idea that these behemoths have “no alternative” but to expand internationally in order to progress is hard for some to get their heads around.
 
But the globalisation of retail is a clear trend in the international food market and, in response to maturity in their home markets, the retail giants are stepping up their activities in this area.
 
Moreover, according to a recent report published by just-food, Globalisation of the food retail industry – forecasts to 2013, the fortunes of the big international players are improving.

Pointing to data from Deloitte, the report states that there has been a change of fortune for retailers operating in more than one country. In 2007, retailers operating in three or more countries grew sales by nearly two percentage points faster than retailers operating in only one or two countries, whereas in 2006 retailers preferring to ‘stay local’ to their domestic market had outpaced the internationally active groups in terms of growth.

Retailers with operations in more than ten countries posted an average net profit margin of 4.7% compared with 3.1% for those in only one or two countries, according to the Deloitte figures.
 
“Retail players seeking growth are expanding their operations further afield seeking a bigger global market share and increased profits from new markets,” the report states. “Established retailers recognise that with domestic organic growth becoming more difficult to sustain in mature markets, expansion into new markets is a necessary step towards securing future profitability.”
 
In particular, emerging markets, notably China, India and Central and Eastern Europe, have been a focus for the major international groups. “Retailers are choosing to expand into new markets – particularly the top three hotspots of Russia, India and China – as they represent higher-growth sectors compared to the more consolidated, mature and saturated markets such as the UK, US and Western Europe. Growth rates in the top three hotspots are showing stronger and longer stamina than those in the more developed markets, tempting retailers to invest outside of their domestic region.”
 
However, tapping into these growth opportunities is not straightforward. As the report points out, there are often complex rules and local legislation governing foreign investment. But it is testament to the potential rewards on offer that international retailers are persisting in these emerging markets.
 
While much is made of the competition between Carrefour and Metro or Tesco and Wal-Mart for pole-position in new retail markets, the report points out that the rapidly developing economies in these countries have spawned their own home-grown conglomerates which are becoming increasingly powerful adversaries.
 
“Countries such as Russia, China and India have their own ‘Wal-Marts’ in the shape of X5 Retail, which is Russia’s largest retailer and runs Perekrestok stores and Pyaterochka outlets; Bharti Enterprises, a local conglomerate, which had, until investment from Wal-Mart, made its money in telecoms, agri-business and insurance; and Wumart, a leading Chinese supermarket operator. While these emerging markets are attracting foreign investment, the domestic retailers are holding their own, and are ready to face international competition.”
 
The report also points out that the restrictions placed on foreign investment in a number of markets afford the local players some significant advantages. “Given the ongoing red tape and regulatory restrictions surrounding foreign investment in retail, particularly in China and India, local companies have a strong advantage over their international rivals,” the report states. “Acting quickly and adopting best-practice strategies from international retailers can be the key to success ahead of the imminent emerging markets’ ‘gold rush’.”
 
The report continues: “Domestic retailers in these hotspot countries (and other emerging markets) can reap the rewards of their hard work in their local market, as consumer spending increases and interest in modern mass grocery retail (MGR) formats rises.”
 
However, it warns that even powerful domestic retailers have to be aware of the constantly evolving business environment in such high-growth markets. “Domestic retailers must also up their game and become more aware of global strategies and events, as bigger players’ attentions turn to the emerging markets through mergers, acquisitions, joint ventures and franchise activity.”
 
As for the international players, the path to global domination is not an easy one, the report contends. “Going global but keeping a local focus is a lot easier said than done. Choosing which market to focus on – if a plan of total world domination is unlikely any time soon – is the first step to the process of globalisation. Even the most carefully considered plans can go awry, regardless of the retailer’s success in its home market.”
 
In 2006, for instance, Wal-Mart retreated from Germany at an estimated cost of US$1bn (GBP536m) and back in 2001, UK retailer Sainsbury’s left Egypt after just two years, incurring losses of more than GBP100m. “Choosing the wrong market is a major factor in retailers’ failures in new markets,” the report states. “Taking the domestic business model and applying it in an emerging market is likely to have its flaws. Rushing in head-first can also be detrimental – gaining first-mover advantage is pointless if the retailer then backs out two years down the line.”
 
Understanding the culture, consumer shopping habits and the country’s way of doing business are key factors, and here too local players are clearly at an advantage. For the international groups, therefore, buying local expertise is vital and for that reason, M&A and joint-venture activities are critical.
 
“Mergers, acquisitions and joint ventures are fundamental to international expansion strategies,” the report states. “Such deals permit entry to complex and heavily regulated markets such as India and Russia, and enable companies to build on the local expertise, existing supply chains and logistics. Pressure on retailers to find suitable property is also a factor influencing M&A decisions: working with existing premises and suppliers is an easier and quicker option for companies seeking expansion and a more rapid return on investment.”
 


For more information or to download the just-food report, Globalisation of the food retail industry – forecasts to 2013, go to https://www.just-food.com/store/product.aspx?id=65230&lk=rotw_arch

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