BORDER CROSSING 1998

JAMES FALLON

LONDON (FNS) -- The food-retailing industry is increasingly consolidating on a global scale, as evidenced by SN's second annual list of the world's Top 25 food retailers.

Of the 25 companies, 20 have operations outside their native countries, including units that stretch from China to Argentina. The companies that don't are all American, and at the moment prefer to focus on the expansion opportunities in the United States rather than look overseas. But even those companies one day will have to begin expanding outside their domestic market, analysts and industry executives predict.

"It's as certain that globalization will continue in food retailing as it is that day follows night," said Robert Clark, chairman of London-based retail consultants Corporate Intelligence. "There's no reason for it to stop. It's a long-term trend that's really just beginning."

The trend is being driven primarily by European food retailers. Such companies as Ahold of the Netherlands, Carrefour of France and Delhaize "Le Lion" of Belgium have been expanding aggressively on the international front for years.

"Local tastes and constraints will still require large adaptations for the foreseeable future," said Pierre-Olivier Beckers, executive vice president of Delhaize "Le Lion." "In Asia, where 80% of fresh foods are still sold in wet markets, stores must be different than in Europe, where the high cost of labor and lifestyles push for more self-service."

Carrefour has operated overseas for more than 25 of its 35 years in existence, said David Shriver, a food retail analysts at CSFB here. Ahold has operations in Europe and the Far East, admits to being on the lookout for more acquisitions in America to further bolster its operations there and earlier this year bought two chains in Argentina and Chile with combined sales of $2.5 billion.

A major reason these companies have blazed the trail in international expansion is that they had no choice. "Global expansion is a natural reaction to the saturated marketplace in most developed countries," said Glen Terbeek, partner in the food industry group at Andersen Consulting, Chicago. "The retailing industry is basically a growth model industry and the general attitude is the bigger the better. But how do you grow in a saturated market? Globalization is a form of growth."

Even Wal-Mart, the world's largest general-merchandise and food retailer, is hopping on the bandwagon of overseas expansion as it runs out of space to maintain its past rapid growth in the United States. It's moved into Central and South America, the Far East and earlier this year took a bold move into continental Europe with the acquisition of Wertkauf, a $1.4 billion chain of 21 hypermarkets in Germany.

While Wal-Mart's overseas push is admired by many, it also indicates the perils of the process, analysts say. Wal-Mart may be a giant in its home market and recognized throughout the industry as a major innovator but its expertise doesn't automatically cross borders. This applies to all retailers, analysts say, adding that for every company that's been successful at moving overseas there's at least one other that's failed.

For example, Tesco plc, the United Kingdom's largest food retailer, sold its Ets Catteau S.A. subsidiary in France to Promodes S.A. in February for $415 million (250 million pounds) after years of trying to expand the operation and turn it into a major player in the French market. The company now says it will focus instead on growing its operations in the burgeoning markets of Central and Eastern Europe, which offer less competition.

Its U.K. competitor, J. Sainsbury plc, is having to work hard to turn around its subsidiary, Shaw's Supermarkets, East Bridgewater, Mass., after a misstep into the Connecticut market. Sainsbury also owns 20% of Giant Food, Landover, Md., which itself is struggling with declining sales and profits following a strike by its truck drivers last year.

"It's an over-used mantra, but you really do have to think globally and act locally," Shriver said. "That's also easier said than done. What Wal-Mart and others have learned is that you can't replicate a management team and simply walk into Shenzhen with your format and the customers will buy."

Terbeek points out that consolidation and globalization can create as many problems as opportunities. "Consolidation if not done right can be a negative," he said. "The natural instinct of any company would be to centralize buying and distribution to cut costs, which might be a mistake in local markets.

"There are local issues all these retailers face in moving into international markets," Terbeek continued. "Take Wal-Mart going to Brazil. In the United States, it's typically one or two people shopping per basket. But in Brazil it's an event for the entire family, so the aisles have to be wider and the product mix a bit different. The key drivers of consolidation and globalization tend to be logistical and distribution models. But they need to be marketing models."

Those retailers most successful internationally tend to be those with the most decentralized organizations. Carrefour; Metro, which bought the Makro hypermarket chain earlier this year; Tengelmann; Delhaize; Auchan of France; and Ahold all operate their overseas subsidiaries as local companies rather than as offshoots of their headquarters. These companies, and others such as Sainsbury, use their expertise in such areas as buying, private-label development and logistics to prosper in local markets that aren't as advanced.

Asian food retailers such as Ito-Yokoda and Daiei, meanwhile, tend to expand internationally by opening stores that cater to expatriate Japanese consumers, analysts said. Other firms, such as the hard discounters Aldi and Lidl & Schwarz, expand globally by exporting their unique formats.

"The advantage those companies have is that they don't have shareholders pressuring them for immediate returns," Clark of Corporate Intelligence said. "They will continue to expand south and west throughout Europe and play for long-term returns."

That is the only way to treat international expansion, especially as the pace picks up over the next few years. Industry executives and analysts predict that it's only a matter of time before the world's leading food retailers start to swallow each other.

It's something that's bound to happen in the United States, where many analysts believe the market will split into major regional players within the next five years. Dino Adriano, chief executive of Sainsbury, however, said the consolidation there is likely to take a bit longer.

"From our viewpoint, the U.S. market is developing clear success characteristics, namely sales volume and regional market share," he said. "Many industry commentators focus solely on sales and argue that a business will not be sustainable below $10 billion of annual sales in two to three years.

"We believe this view is simplistic," he added. "While $10 billion of annual sales is a reasonable level, it must be backed up by being No. 1 or a strong No. 2 in a definable regional market. We also believe that the two- to three-year timescale quoted is too optimistic and, as we have said before, it is likely to take seven to 10 years before the market settles down into multiregional super-players."

Analysts believe the same applies to Europe, where so far there have been few attempts for retailers to acquire competitors in other European countries.

"We believe the legal barriers to organic expansion by food retailers in Europe will be in place for a long time," Shriver said. "But while there are these planning pressures, governments seem less reluctant to see consolidation of the retail sector in their individual countries. The antitrust authorities aren't putting red lights up to stop such mergers and so one would expect to see the leaders in those various countries begin to address the issues of overcapacity and to get greater scale in purchasing."

Yet as inevitable as further globalization and consolidation may be, industry executives and analysts say the danger is that the consumer gets lost in the process. In an age when major food brands are sold at every store and distribution and logistics are fairly standard throughout the industry, the key to success in retailing is differentiation, analysts say.

"The thing that's going to level the playing field for all retailers is the consumer-direct phenomenon, which is only going to grow in the years ahead," Terbeek said. "The rush to global expansion is fine, but retailers can't forget their home markets either. They have to figure out how to get the most out of each of their stores, wherever they might be located. That's the only way they're going to survive long-term."