GLOBAL RISKS AND OPPORTUNITIES

John Zarocostas

The return of buoyant growth in the world economy is spurring a revival of expansion into new markets by global food retailers who are willing to take risks.

Analysts told SN the emerging markets in Asia are the most lucrative, and are being targeted this year by big food retailers; India and Russia are being eyed for longer-term development opportunities.

Faddi Farra, manager of consumer goods and retail at the consulting group A.T Kearney, New York, said there has been a re-emergence of activity in global expansion in 2004. Farra, who oversees A.T. Kearney's Global Retail Development Index, a ranking of 30 emerging markets published annually in mid-June, said international retailers entered 12 new markets in 2003, down from 19 in 2002.

Retail analysts and consultants said there are plenty of opportunities for global expansion by multinational food retailers.

Wal-Mart Stores, Bentonville, Ark., is setting the pace in terms of international development. In its latest quarterly results, Wal-Mart said revenues from its international operations were up 22%, while profits jumped close to 50%.

"Wal-Mart is now looking for overseas markets for growth, and is having success," said Swiss-American Securities, New York, a member of the Credit Suisse Group, Zurich, Switzerland, in a report.

However, global players' expansion prospects are limited in major Latin American markets like Brazil and in certain markets in central and eastern Europe, Poland, Hungary and South Africa. Some of these markets are already saturated, and further consolidation is expected to take place in others, analysts said.

In western Europe -- especially in France, Belgium, the Netherlands and Germany -- aggressive price strategies have heated up. The same is true for some markets in Asia. Low prices in these areas are increasingly viewed as more important than customer service, giving an advantage to discounters like Lidl & Schwarz Stiftung & Co., based in Bad Wimpfen, Germany. The company, which operates more than 5,000 stores in Europe, recently canceled plans to expand into Canada, where the discount segment has been expanding as well.

"There's a strong momentum for this model," said Jurgen Elfers, European retail research analyst, Commerzbank Securities, London.

Markets in the Middle East -- particularly the Persian Gulf region -- present opportunities, but are considered high-risk areas, especially for retail groups based in the United States and the United Kingdom. These groups must consider political factors and potential terrorism. However, going into the Gulf region via minority joint ventures with regional players has paid off for French retailers Carrefour and Casino, analysts said. Expansion of the power retailers -- Wal-Mart, Carrefour, Tesco of the United Kingdom, and Metro of Germany -- is also expected to set in motion a wave of aggressive activity by local and regional players. An exception is debt-burdened Ahold, Zaandam, Netherlands, which has already pulled back from Asia and Latin America, and is expected to continue to retrench in Europe.

Analysts said the aggressive expansion by the powerful few is causing operators overseas to regroup and form new alliances to face the increasing competition.

For a variety of reasons, each of the global food powers has done better in some regions than in others. Carrefour has been singled out overall as the most successful of the global players in entering new markets, followed by U.K.'s Tesco. Wal-Mart, on the other hand, has experienced mixed performance in some markets, such as Mexico, and poor performance in Germany.

Thomas Ryan, retail analyst for Union Bank Prive, Geneva, Switzerland, said home markets are no longer the main areas of growth for the larger multinational players. "There's still some room for [home] growth, but not [at] the same pace as 10 to 15 years ago," he said.

Scanning the Globe

A close perusal of the various regions and markets indicates some retailers do better than others in their pursuit of a greater slice of the global food pie. The opportunities and challenges also vary widely from country to country because of socio-economic, political and cultural factors.

Analysts said China is by far the most coveted market in Asia, although efforts by Beijing to cool the overheated economy could limit the pace of development. Korea, Thailand and Indonesia could also be attractive expansion areas for some players.

From a long-term perspective, analysts said India holds opportunity for retailers, providing it can remove some significant bureaucratic impediments.

However, sentiments were mixed when it came to expanding in Japan, the world's second-largest economy behind the United States. Japan's economy has structural problems that make it less attractive, said analysts, although Wal-Mart last week was reportedly considering boosting its presence there by exercising an option to increase its stake in Japanese retailer Seiyu to 50.1%, up from 37.8% today, and by pursuing additional acquisitions.

Analysts agreed that China was an important developing market, but differed in their assessments of the key players there. Christine Cross, a London-based retail consultant, said she believes that while the Chinese economy is overheating, there are still "opportunities for majors, such as Wal-Mart and Carrefour, who are well-established. Down the road, Tesco has declared its intention to enter."

David Rogers, president, DRS Consulting, Deerfield, Ill., said "the jury is still out" for Wal-Mart in China and Japan, where the company is up against "stiff competition" from Carrefour and Tesco.

A.T. Kearney's Farra said the higher level of activity by multinational retailers in Asia is accompanied by a sharp increase in regional activity by local players. He also noted that Hong Kong-based Dairy Farm is entering China this year.

The long-established partnerships in China between major suppliers and retail networks "makes it difficult for new players" to offer supply value, said Elfers. He noted a similar situation prevails in Turkey and Russia.

Elfers said the biggest obstacle for global retailers in Japan is eliminating middlemen from the supply chain. "You need to cut them out of the distribution system," he said. "This seems to be a very difficult challenge."

Some analysts are more upbeat about Japan now that the economy is improving after more than a decade of anemic growth.

"Japan is a hunting ground for all kinds of joint ventures," stated Farra. Tesco is adding new stores there, and Carrefour has opened a new hypermarket, he observed. There also is more room for consolidation and growth, according to Elfers.

He noted the concentration of much of a country's wealth in major cities like Seoul, Bangkok and Jakarta facilitates expansion of the hypermarket format in those areas.

Tesco and Casino are doing an excellent job in Thailand, and the Dutch group Makro and France's Carrefour are also doing well, said Elfers.

Indonesia, where Carrefour, Makro and Dairy Farm of Hong Kong already operate, is another market with potential for further development by multinational food retailers because of its enormous size, analysts said.

India presents a major opportunity for development if the country can improve its restrictive licensing system and limitations on foreign investments, analysts said. Carrefour, Wal-Mart and Casino are looking into the Indian market, and Metro already has three stores there.

"India is a fascinating market" and the obvious next big one after China, said Farra. By 2050, he expects it will overtake China as the world's most-populated nation.

One European-based analyst said India has the potential to develop a hypermarket like China, but cautioned it is still "a difficult marketplace" because of licensing limitations and the endless bureaucratic red tape. He was also not optimistic that the new Manmohan Singh government, despite the prime minister-elect's reform credentials, could move quickly because of political considerations.

Currently, global food retailers are not allowed to sell to customers directly or to set up cash-and-carry operations. Foreign direct investment is capped at less than 50% for consumer businesses.

The restrictions are protecting local players, said Cross. She also noted that big, local, industrial conglomerates may enter the retail business in India.

With the rebound of the economy on the back of strong oil and gas export revenues, Russia -- particularly the Moscow region -- presents "fantastic opportunities," said analysts.

"In the long term, it's of interest because of its size and the fact the economy is turning," said Rogers.

Yet Commerzbank's Elfers said he expects a lot of the oil money will be directed toward local (Russian) joint ventures and the build-up of powerful networks.

Moreover, seven smaller companies have formed an alliance to counter pending global competition. The success of Turkey's Migros, which has more than 20 stores in Moscow, St. Petersburg and Kiev, underscores the importance of cultural assimilation and staying power in a new market. "After an eight-year presence, they are now reaping the benefits," said Cross.

As Carrefour has demonstrated in new and complex markets like China, getting into a market early and studying the local players and consumer and cultural patterns can pay off. Farra said Carrefour is "the cultural leader" among the global players.

The approach of the French group, he noted, is to be patient. In China, Carrefour entered the market in 1993, but waited until 1999 before expanding with new stores. It sent a team in first to learn the habits of the culture, and began a dialog with suppliers, analyzing prices and consumer shopping patterns. In many of its global operations, such as in Turkey, Carrefour has local management.

In contrast, analysts tracking Wal-Mart pointed out how the group's entry into Germany was "a disaster" because of cultural clashes, which some attributed to insufficient review of the potential market. Wal-Mart also faced problems of adjustment in Brazil, Korea and China, but has done better in Mexico and Canada, where the local synergies are better, analysts said.