Wal-Mart is developing a presence in China

Wal-Mart is developing a presence in China

Facing mature markets at home and a supplier base becoming ever-more international in scope, the world's largest grocers are expanding worldwide at a rapid rate. In this just-food management briefing, Glynn Davis explains why globalisation is becoming a key feature of the food-retail landscape, which retailers are at the forefront of this trend and which markets the companies are targeting in their quest for growth.

Look no further than 2010's Deloitte Top 250 Global Retailers table – where seven of the top ten operators are grocers with tentacles around the world – for proof that globalisation is becoming an increasingly prominent feature of the food retail landscape.

At the top of this table are the true giants of the industry: Wal-Mart Stores, Carrefour, Metro Group and Tesco. Between them, the four retailers had a combined turnover of US$730bn in 2008, the year on which the Deloitte league collated data. Close behind is a batch of other large players including Aldi, Auchan, Casino and Delhaize.

The common theme among them is that a growing proportion of their revenues are generated from beyond their domestic bases. The key driver of this globalisation at the top of the food chain is that these largest of operators increasingly find the opportunities for growth in their often-saturated home markets restricted. In contrast, the emerging markets offer the prospect of almost unlimited expansion.

The most attractive of these markets are China, India and Russia, along with most of the rest of Asia and also Latin America. Bryan Roberts, director of retail insights at Kantar Retail, says: "For the most successful retailers, particularly in the European markets, the main driver of globalization is saturated home markets with the likes of Ahold, Delhaize, Tesco and Carrefour having substantial expansion frowned upon by their [domestic] regulators."

At the core of the opportunity in emerging markets are their growing populations. China is a great example of this phenomenon. Research from McKinsey Global Institute China shows the growth in urban populations rising from 44% of the population back in 2005 to as much as 66% by 2025.

This is driving a spectacular increase in the number of large Chinese cities, with a forecast 221 conurbations containing over 1m people expected by 2025, which compares with only 35 across the whole of Europe at present.

For global food retailers the big attraction is that these urbanites represent the growing middle classes, who have healthy disposable incomes and aspirations to shop in the stores of Western operators. Such a scenario of rising, more affluent consumers, is playing out across Asia and Latin America and the big increasingly globalised and monied countries of Brazil, Russia and India.

In China specifically, Euromonitor predicts that the percentage of households that are classed as high income (disposable incomes of at least U$15,000) will grow from 10% in 2010 to an incredible 33% by 2020. And the numbers of cars on the roads will grow from 85m in 2010 to 390m by 2030.

Jim Prevor, US-based industry analyst and publisher of Perishable Pundit, says: "Whereas the less educated will stick to the traditional markets, the more affluent want to be in Western stores as it’s a sign of status. I lived in Thailand and I wanted to eastern authentic Thai food but they wanted to eat cheeseburgers."

The growing affluence among people in emerging markets is fuelled by the GDP growth that is outstripping that of mature markets – especially as Western economies are still under great financial stress.

The global economic downturn did have an impact on the buyoant growth seen in some emerging markets but the economies of the East still offer significant opportunity. Nick Everitt, head of market intelligence at IGD, says: "These are far tougher economic times in the Western world and so expansion into emerging markets makes even more sense. Indian GDP growth may have slowed but it is still faster than in the west."

However, this does not necessarily mean it is bonanza time for global retailers in international markets. In fact, it has been very difficult for retailers to achieve meaningful returns in many of the markets they have entered.

The presentations by Tesco management during its City analysts' trip to Korea and China in November were very much focused on the near-term returns that the group expects to generate.

"The key point is that retailers will have to look to drive their returns from overseas even harder," suggests Everitt. "They are more wary of setting out the financial investment case. They've always been mindful of this but with Tesco it's been all about the returns [on its recent analyst trip]."

The global players have recognised over time that the way to generate returns is to gain significant positions in each of the markets they enter, thereby maximising their localised scale, advanced supply chain infrastructures, and global sourcing capabilities.

In the 1990s, Carrefour was renowned for its willingness to enter new markets but under CEO Lars Olofsson it continues to pull back from many unprofitable markets or operations where it sees returns as being too low. "If you cannot become leader sooner or later you will have a competitive problem. If ever I have an offer in markets where I don’t believe we can become leader, I’m prepared to have a look at it," Olofsson has said.

In November, Olofsson delivered on his word with Carrefour offloading its Thailand operation to Casino – number 24 in the Deloitte Top 250 table – for U$1.2bn to instead focus on China and Latin America. However, Carrefour decided to cancel the sale of its Malaysia and Singapore businesses after bids failed to achieve its valuation.

Christopher Hogbin, senior analyst at Bernstein Research, agrees with this strategy. "The simple logic for exiting markets is that local scale matters in food retail and thus if Carrefour can't achieve critical mass, the assets may be more valuable to another player who can."

Although this strategy has been employed by many of the largest retailers, Andrew Seth, former chairman of Lever Brothers UK and author of Supermarket Wars, believes Wal-Mart might be slightly different in this respect.

“It has the determination to push on. It got out of Germany, but even here I do not believe this is forever as it needs to be strong in Europe and it therefore needs to be back in Germany," he says, adding that part of the problem for the company abroad has been cultural differences.

Fitting in with local cultures and the psyche of the indigenous people can play a significant part in globalisation. Prevor suggests that enforcing the Wal-Mart cheer in Germany will have generated "enormous resentment" whereas the Chinese are happy to participate - probably, he says, because they have a "capitalist attitude" that chimes well with that of the US.

The fact Wal-Mart enforced the cheer in Germany was indicative of its failure to adapt to local markets, which is now recognised as imperative to long-term success in new territories. Kantar's Roberts cites the selection of senior management as a previously fraught area with an over-reliance on ex-pats but this has been addressed by more progressive operators like Tesco, which uses predominantly local management.

The ability to operate a multi-format model with store types to suit specific locations in each country is also massively advantageous. "In Central and Eastern Europe, the Tesco hypermarkets have not done so well so it is converting them to its new Extra format that includes services like opticians and phone shops and the comps are up 20%," says Roberts.

Everitt also highlights the need to develop market-specific products such as smaller pack sizes. Local consumers often do not have the financial capacity to buy in bulk in contrast to shoppers in more developed markets.

The development of more tailored products is helped by the fact the big FMCG companies are "even more international" than their retail counterparts, according to Roberts, who says the likes of Unilever and P&G will be in 100 markets around the world whereas even the most cosmopolitan big guns Wal-Mart and Carrefour will each be in 30 at the most.

Wal-Mart will only reach that number should its bid for 51% of South Africa-based wholesaler and retailer Massmart (operator of fascias including Jumbo Cash and Carry and Makro) go through. This transaction would take Wal-Mart into 14 countries in sub-Saharan Africa where it previously had no presence.

The expansion of the FMCG groups around the world has been helped by the fact that, unlike retailers, they do not have to deal as often strong domestic companies buying up local businesses. This can be a problem in certain countries like India [see spotlight on India section].

Prevor says the growth of FMCG companies in overseas markets has gone hand-in-hand with retailers' growth into new markets. "Both groups now recognise that millions of people can now afford these products so there has been some co-operation between retailers and manufacturers in these overseas markets," he explains.