WORLD FOOD RETAILERS SEEN SOLIDIFYING MARKETS

CHRISTINA VEIDERS

The world's biggest food retailers took a studied approach to global development and expansion last year.

The biggest deal to draw world attention occurred earlier this year in the United States with the $17.4 billion Supervalu-Cerberus-CVS agreement to acquire Albertsons.

"We've seen a period in which everyone is catching their breath," said Bryan Roberts, retail analyst for Planet Retail, London.

Roberts described 2005 as a period of rationalization among the top retail companies. "It's all gotten a lot more cautious," he said. "The focus is on trying to consolidate the positions you have in different markets."

Once everything finally settles out, Roberts expects to see "retailers rolling up their sleeves and getting back into the whole globalization process."

Countries especially appealing to the top-tier retailers are Russia, China, India and Eastern Europe. However, foreign investment regulations, red tape and other market obstacles have stalled investments in these countries.

SN's Top 25 Worldwide Food Retailers - derived from statistics compiled by London-based Planet Retail, the online provider of media intelligence and research for the international food retailing sector - generated $1.37 trillion in net sales in 2005, about the same as in 2004.

Woolworths, the Sydney, Australia-based retail conglomerate, made its debut on this year's list, replacing the United Kingdom's Morrisons, which moved off the Top 25 list.

Besides Woolworths as a new entry, nine companies advanced their rankings, while nine retailers moved down the list from the previous year. Six companies held onto their position from the prior year, including No. 1 Wal-Mart Stores and No. 2 Carrefour.

The Top 10 of the group generated $855 billion, gaining 5.4% over last year's Top 10. This year, Aldi moved up a position to No. 10, supplanting ITM (Intermarche), which fell to No. 17.

The Top 10 worldwide food players comprise 62% of net sales of the entire group, the same percentage as last year. The activity of individual companies provides insight into globalization trends in the food retailing industry. Here are highlights of the Top 10 leaders.

Wal-Mart Stores, Bentonville, Ark., is the global leader. No surprise here. Net sales rose 9.5% over the previous year. The giant discounter is committed to growing its international presence despite struggling in markets like Germany. Last year, it fortified its hold on Latin America by increasing its stake in Central American Retail Holding Co. to 51%. CARHCO is Central America's largest retailer with 375 supermarkets in five countries. Wal-Mart originally bought a 33% stake in CARHCO from Ahold. It continued to invest in Walmex (its Mexican subsidiary), Brazil and Argentina.

"It is a question of joining the dots between the United States and Mexico and other markets in South America," said Roberts, who added that Wal-Mart's experience in Latin America will benefit its Hispanic offering in certain regions of the U.S.

In Asia, Wal-Mart upped the ante in Japan by increasing its share to a 53.5% controlling stake in Japanese affiliate Seiyu. Wal-Mart has also indicated it is ready for a major expansion in China (see Page 15). "Even though Wal-Mart has moved into China," Roberts said, "it is still very dependent on regional joint ventures."

However, last week Wal-Mart said it is selling its interest in South Korea because a difficult environment prevented it from achieving its targeted scale.

In Canada, Roberts said, "Wal-Mart is slowly taking its gloves off in growing supercenters and Sam's Clubs." The retailer plans to open its first three supercenters in Ontario this year.

A big question is what Wal-Mart will do about Europe. "[Wal-Mart-owned U.K. retailer] Asda is suffering," Roberts said. "Wal-Mart in Germany remains a basket case and relies on huge handouts from the parent company. It does need to do something in Europe - either exit Germany, or enter new markets, to build some sort of regional mass."

Wal-Mart said it is eyeing Russia, India, Hungary and Poland for future entry.

Carrefour, Paris, remained the No. 2 global player, and increased net sales 2.4%. The hypermarket operator has built a vast portfolio of global investments over the last decade. "They are looking at what they've got and exiting markets where they are not capable of achieving a dominant position [being No. 1, 2 or 3]." Roberts said.

While Carrefour has pulled out of Japan and Mexico, it continues to move into new countries. This month, Carrefour announced plans to enter Jordan. It is also eyeing Iran, according to reports.

In its home market, grocery rivals and discounters have hurt Carrefour, but it is beginning to show signs of a turnaround by focusing on price, private label and marketing, Roberts said.

Tesco, London, moved up to the No. 3 spot from No. 5 last year, and grew net sales 11.8%. "Tesco continues to run away with the market and extend the gap between itself and whomever you believe is No. 2," Roberts said. The company is doing this by expanding in all major channels - hypermarkets, Tesco Metro (a small urban format) and convenience. The company reportedly plans to introduce a convenience format, Tesco Fresh & Easy, in Los Angeles and Phoenix next year. Another area of focus for Tesco is e-commerce, Roberts noted. "They will continue to be a world leader in online retailing."

Metro Group, Dnsseldorf, Germany, stepped down to No. 4, with sales slipping 1.3%. By venturing into underdeveloped countries like India, China, Vietnam and the Ukraine, Roberts called Metro the "pioneer in global retailing." Metro said it plans to enter Pakistan with its Cash & Carry operation.

"They really are the adventurous retail/wholesale group by entering emerging markets and helping to modernize the retail sector. Metro paves the way for others," Roberts said.

Kroger, Cincinnati, advanced one position to No. 5, with net sales up 7.2%. Roberts pointed to Kroger's private label, loyalty card data and multiple formats, including its Marketplace, a supercenter-style format, as strategies it has used to increase market share. "Arguably, a retailer like Kroger will reach such a scale it will be forced to look into international markets for growth. A logical progression for Kroger would be Canada or Mexico," Roberts said.

Ahold, Amsterdam, fell two positions to No. 6. Net sales declined 14.3%. Ahold continues to struggle in the United States while it completes the integration of Stop & Shop and Giant of Landover, and Giant of Carlisle and Tops Markets, and while it decides what direction it will go with U.S. Foodservice. According to Roberts, Ahold is doing well with its ICA partnership in Scandinavia, and in the Baltics with a joint venture partnership with Kesko, a Finnish retail market leader. He believes Ahold has stopped exiting international markets. He expects Ahold to begin securing markets that remain, and start fighting for growth, including in the U.S. and in Ahold's home country of the Netherlands.

Costco, Issaquah, Wash., advanced one position to No. 7, with net sales up 12.3%. Costco made an abortive attempt to enter Ireland, withdrawing because of legal restrictions on store size. However, IKEA was granted permission to build a very large store, which may pave the way for Costco's entry, Roberts said. The membership warehouse retailer has been taking a "slow and steady" approach to international expansion. It is eyeing further expansion in Europe with Spain as a possible new market. Costco's attempt to break into Asia has been a struggle, Roberts noted.

Rewe, K÷ln, Germany, dropped one position to No. 8. Net sales rose 2.1%. After testing various formats and banner names in Germany, the company has decided to re-banner its supermarkets under its corporate name in Germany "in hope of securing stronger brand and marketing synergies," Roberts said. He said the discounter has performed well in Eastern Europe with its Billa supermarket operation. Expectations are Rewe will introduce Penny, a discount format, into that region. Reports also indicate the company will extend its presence in Russia.

Schwarz Group, Neckarsulm, Germany, moved up a notch to No. 9, and net sales rose 7.5%. The discounter is expected to move into a number of new markets in the next year or two. Roberts

said its Kaufland format, a discount-hypermarket concept, is doing very well in Germany and Eastern Europe. Kaufland was recently introduced in Bulgaria with Lidl, Schwarz's discount operation, expected to follow. Roberts said Schwarz has been a dynamic player in Europe. Private label is a merchandising focus. Lidl, which represents about 70% of its business, features a broader range of fresh and frozen food and an expanded range of nonfood.

Aldi, Mnlheim an der Ruhr, Germany, moved up one position to take No. 10. Net sales rose 7.3%. According to Roberts, Aldi tends to enter mature and developed markets, and its format is often a point of difference in those markets. Aldi is said to be eyeing Eastern European markets. It is expected to move into Greece, Portugal, Poland and Hungary. It is also expected to extend its Australian reach into New Zealand. Roberts said the discounter has had a "massive impact" on Switzerland, which it entered last year. "The incumbent market leaders in Switzerland have pressured their suppliers not to engage with Aldi." Consequently, Roberts said, suppliers in Switzerland have had to face some repercussions if they deal with the discounter, forcing Aldi to source through Germany, a more expensive proposition.

SN Global List

Methodology

SN's Top 25 Worldwide Food Retailers list was produced in cooperation with Planet Retail, a provider of online retail intelligence and research, and also is based upon SN research. The list is ranked by net sales of companies tracked by Planet Retail. Net sales are for the 2005 calendar year, and are consolidated without VAT or other turnover-related taxes. All exchange rates are calculated full-year averages. While Planet Retail includes retailers such as Sears, Target and CVS on its Top 30 Grocery Retailers Worldwide list, those retailers currently do not meet SN's criteria of generating at least a third of their sales in food. Therefore, they were eliminated from the SN list. As a provider of online retail intelligence, Planet Retail offers up-to-the-minute industry news, analyses and digital media to decision-makers within the retail, manufacturing, finance, IT, entertainment and consulting sectors. With offices in London, Frankfurt and Tokyo, coverage of the retail industry includes more than 1,800 grocery retailers and 4,000 banner operations in over 130 countries. For more information, visit www.planetretail.net.