Companies such as Wal-Mart, Carrefour and Tesco have been international retailers for some time, but there is still room for expansion. As competition in established markets gets tougher and tougher, many retailers are looking to emerging markets such as Russia, China and India, where thorough groundwork is needed, as Kate Barker reports.
“Power is shifting on a global level, affecting everyone in our industry. No one can ignore these changes and every company requires a strategic response.” Thus began Joanne Denny-Finch, chief executive of IGD, in her speech at the food and grocery think tank’s annual Global Retailing Conference earlier this year.
Retailers such as Wal-Mart, Tesco and Carrefour have been “international retailers” for some time, but there is still room for expansion into new markets. US-based Wal-Mart, for example, added US$29bn to its turnover last year. It is now bigger than Carrefour, Ahold, Metro and Kroger combined and looks set for further growth. Recently media reports claimed Wal-Mart International chief John Menzer has met Indian prime minister Manmohan Singh and commerce minister Kamal Nath to lobby for permission to enter India’s tightly-controlled retailing sector, while Carrefour agreed a deal which could help the French retailer expand its business in Malaysia.
This increasing retail globalisation has some very direct implications for the food industry, Denney-Finch told conference delegates, many of who were from big-name manufacturers such as Cadbury Schweppes, H J Heinz, Kraft Foods, MasterFoods, Nestlé and Unilever.
“Perhaps the most significant [implication] is the way that a handful of retailers now take a high proportion of sales for most international suppliers. It means that working effectively with these customers is the dominant factor for those suppliers,” she said.
Global business planning
But such global relationships have many potential benefits for suppliers, ranging from joint global business planning to better ways to solve problems at a local level. Sharing information and transferring best practice between countries can also help. Suppliers can also find themselves playing a role in the retailer’s decision making; for example, suppliers may find out early about retailers’ plans to enter new markets and may be asked for advice where their own local experience is relevant. However, where food businesses are concerned, there is one major stumbling block and that is that eating habits vary from country to country, and even from region to region – a brand that is perfectly suited to one country may not sell at all well in a neighbouring country.
For retailers, the geographical focus is changing. Asia is becoming a top priority, with the emerging markets of China and India grabbing retailers’ attention. However, Tesco’s director of International Operations, Philip Clarke, emphasised that expansion was not something that retailers should rush into. He said Tesco had teams “on the ground” in Japan for a few years prior to the company entering the market. The same approach was used when entering China. The team carried out extensive research into the market by studying local shopping habits, visiting potential competitors’ stores and carrying out market research.
Tesco’s key criteria for entering a new market now are an underdeveloped retail sector, customers with spending power, opportunity for market growth and potential for market leadership. Once a market is identified, research teams can find out exactly what customers are looking for, helping the chain to develop a focus, brand and format for the new market.
Tesco announced last July that it had signed an agreement to acquire 50% of Chinese hypermarket chain Hymall, signalling the company’s first move into China. At the time, Hymall operated a chain of 25 hypermarkets, which Tesco said were in excellent locations. Since then, Tesco has opened a further five stores in China and plans to open 15 in 2005. It made a small profit there last year and hopes to make “a bit more” this year. One example of its local research is its offering fresh fish, which is not as readily available elsewhere – Clarke himself had witnessed over a hundred people queuing outside a Shanghai branch of Tesco before it opened in order to buy the fresh fish that had arrived that morning.
Away from Asia, Tesco and other retailers have had to cope with fierce competition from discounters. Clarke said Tesco has learned to compete against them in markets such as Czech Republic, Slovakia and Poland. While discount outlets are often situated closer to consumers, compared to out-of-town hypermarkets, Tesco has had to make sure it competes on price with the discounters. If it can compete on the price of the limited-range products that discounters sell, then Tesco will have the advantage of also stocking a full range of other products.
As for new markets in 2005, Clarke said the company has teams investigating. He reiterated that conditions have to be right before Tesco makes a move. India, he added, looks “tough”. There are restrictions on foreign investment in retail in India, but retailers also face a very underdeveloped retail market, where many foods are bought from street vendors and packaged foods have a limited presence.
Ahold, meanwhile, has said it is nearing the end of its divestment programme and is beginning to grow its business in key markets through selective acquisitions. One such key market is the Czech Republic, where it recently announced it has acquired up to 67 Julius Meinl supermarkets, taking Ahold’s store count in the Czech Republic to around 300, and around 520 in Central Europe.
Wal-Mart is also reported to be looking to expand in Central and Eastern Europe. According to a July report in The Financial Times, CEO Lee Scott said new EU members Poland and Hungary, as well as Russia, would be attractive in the future. The company is also considering expanding further in Latin America, beyond Argentina, Brazil and Mexico, where it already has a presence, as is also looking at India.
Germany’s Metro is also planning further international growth, in particular in the growth regions of Eastern Europe and Asia. CEO Dr. Hans-Joachim Körber told the company’s AGM: “A focus will be on Russia and China where we plan to swiftly expand our store networks.”