Multinational food retailers dip their toes in emerging markets
The celebration of Carrefour's first Russian store, a hypermarket in Moscow, was short-lived, however — just three months later, the company said it was pulling out of Russia. In a prepared statement, the company, which operates in more countries than any other retailer in the world, cited the “absence of sufficient organic growth prospects and acquisition opportunities in the short and medium term” that would have enabled the company to attain a “leadership position” in the market.
“That shows that the multinationals haven't cracked every single market yet, and that there are barriers,” Natalie Berg, research director at London-based Planet Retail, told SN.
Despite Carrefour's setback in Russia, emerging markets remain important to the long-term growth plans of the major international retailers, she explained.
“Many multinationals are reaching saturation levels in Western Europe, so they have to look at emerging markets like China, Russia and India,” Berg said. “Carrefour can't really expand any more in France and Italy and Spain and Belgium, and those are its core markets.”
In Carrefour's case, the company had investigated the Russian market for some time before making the decision to grow there organically, but apparently still wasn't able to build stores that appealed to Russian consumers.
“Russia is really tricky in terms of red tape and bureaucracy, and a lot of the retailers have very complex shareholder structures,” Berg explained. “That makes it difficult for a foreign retailer to acquire, because a lot of different parties have a say.”
In addition, some new regulations in the country limit market shares to 25% in certain areas, she explained, which might deter many multinationals.
Still, Wal-Mart has been investigating the market for some time and has been reported for several years to be interested in buying Lenta, a chain of 36 hypermarkets based in St. Petersburg. Planet Retail estimated the company's sales at nearly $1.7 billion last year. This past March, the two retailers were said to be “in talks.”
Russia, hit hard by the global economic crisis of the past two years, also has a slowly declining population that is soon expected to dip below 140 million, according to a Planet Retail report. The report estimated that the country would record about $260.8 billion in grocery sales this year, up about 20% over year-ago levels but about even with 2008.
Any multinationals that enter the market — Germany's Metro Group and France's Auchan have both had success there — have to compete against Russia's own formidable X5 Retail Group, which is the largest grocery chain in the country with more than 2,200 locations and about 8.9% of the market share, according to Planet Retail.
Interestingly, Berg noted, Russia lacks hard-discount chains like Aldi and Lidl that are ubiquitous throughout much of Europe. Instead, both X5 and Auchan have price-oriented supermarkets that seek to tap Russian consumers' increasing demand for value. Auchan, which is the third-largest grocery retailer behind X5 and another Russian retailer, Magnit, has 88 hypermarkets and a market share of 3.4%. Metro Group follows with 96 stores and a 2.6% share, ahead of Dixy Group, with 634 stores and market share of 1.8%.
David Marcotte, director of retail insight at Cambridge, Mass.-based Management Ventures Inc., a division of Kantar Retail, said he's not sure Wal-Mart will be able to enter the Russian market in the near term.
“I just think there's too much uncertainty,” he said. “The Ukraine offers them a better chance to be someplace that's growing, and makes sense for them at the same time.”
Wal-Mart in 2006 abandoned its presence in Germany, which was thought to be a springboard for entering Eastern Europe and Russia.
Auchan, which debuted in Russia in 2002, has been successful in part because of its use of local management talent when it first began expanding there, according to Berg.
“Their expansion has been gradual, but they have taken the time to get to know the market, find the right sites, and used local management and took their time to adapt to the local consumers,” she said.
The company's growth in Russia has been achieved mostly via organic expansion, although it has made one small acquisition there. Wal-Mart, by contrast, appears determined to enter markets through acquisition of existing operators so that it can ramp up its presence quickly.
“The primary advantage of acquisitive growth is the ability to gain an immediate foothold in the market,” said Berg. “Generally speaking, this has been the most successful strategy for the large multinationals looking to expand in emerging markets as they often look to acquire a leading local player.”
In places like bureaucratically structured Russia, with high levels of corruption, acquisitions may be the “least risky form of entry,” she said.
“The primary disadvantage of organic growth is speed to market — it can take years to build up a meaningful business, whereas acquiring an existing player gives them an instant foothold in the market,” Berg said. “There is also an initial outlay in terms of setting up distribution centers, and of course the challenge of getting suppliers on board.”
India, another huge emerging market being closely examined by multinational operators, remains closed to foreign retailers seeking to sell directly to consumers.
The country of 1.2 billion inhabitants will generate about $391 billion in grocery sales this year, and consumer spending on food, both retail and foodservice, is expected to continue to ramp up considerably over the next five years, according to a Planet Retail report.
The market is also highly fragmented, with the five largest chains accounting for less than 2.5% of grocery sales in the country. The country's largest grocery retailer, Reliance Retail, a multi-format operator with some 1,200 locations, captures only 0.5% of the country's total grocery sales, Planet Retail said in the report.
Although retail stores that sell direct to consumers are off-limits to foreigners, cash-and-carry operations that sell to businesses can be operated under certain circumstances.
The U.K.'s Tesco, which has a joint venture in India with retailer Tatas, is expected to open its first such cash-and-carry store there later this year.
Wal-Mart, meanwhile, has a 50-50 joint venture with Bharti Enterprises, an Indian conglomerate. The Bharti Wal-Mart partnership supplies Bharti's separately owned network of retail stores, and also has one cash-and-carry wholesaling store that sells to businesses. Another 10 to 15 such cash-and-carry wholesale outlets are planned in the next seven years.
Other multinationals that have a presence in the Indian market include Metro Group, with five wholesale stores, and a handful of other operators that have established limited joint ventures. Carrefour is reportedly set to debut a wholesale operation there later this year.
China, by contrast, although considered an emerging market, is much further along in its development — and much more open to foreign investment.
With 1.3 billion people and retail grocery sales approaching $1 trillion, it is one of the few markets where Wal-Mart, Tesco and Carrefour all compete against each other.
Wal-Mart, which entered China in 1996, is now the country's fourth-largest retailer with 317 stores generating $4.4 billion in sales and a market share of about 0.5%, according to Planet Retail. Carrefour is close behind with $4.3 billion in sales and market share of 0.4%.
The two companies have differed in their expansion strategies there, however, Berg explained. Carrefour has primarily expanded through regional joint ventures, moving rapidly into new areas. Wal-Mart, on the other hand, has maintained a single base of operations to keep its operations streamlined.
“As a result, they haven't been able to expand as rapidly as Carrefour,” Berg noted.
The global economic malaise has slowed retail development in emerging markets, but some signs of recovery in some parts of the world, along with other conditions — such as available real estate — could indicate that more activity is on the horizon.
“The friction to expand is very low, once you get cash,” said Marcotte of MVI. “Real estate is dirt cheap, and you can hire pretty experienced people for not a lot of money at the moment.”
Retailers that performed well in the recession are beginning to attract investor interest, he noted.
Interestingly, two of the countries that are home to some of the world's largest retailers — the United Kingdom and France — have some of the tightest constraints on capital markets right now, Marcotte explained.
“Cash became a big issue in some of these companies — so going into mergers and acquisitions was just hard,” he said.
In Mexico, one of the nation's most successful retailers, Chedraui, is planning to test the waters of cash availability with an initial public stock offering — the first in Mexico since 2008, Marcotte said.
The family-owned company, with a concentration in Southern Mexico, has been seeking to expand within Mexico and has stated its plans to expand into Central America as well. It is the fourth-largest retailer in Mexico, with about 140 supermarkets and hypermarkets. It also has a stake in Bodega Latina, which operates supermarkets in the Los Angeles area.
A report on emerging markets published last fall by Kantar Retail, in partnership with the Coca-Cola Research Council, found that although the global economic crisis reduced the availability of cash to fund expansion for large international players, many of the financial institutions in emerging markets were shielded by their relatively conservative economies.