Market Attractiveness

Retailer retrenchment does not mean that the international food industry is backtracking on global expansion. The Ahold crisis but also the weak spots of other global players indicate that expanding abroad implies that overstretching itself and a mere 'flag-planting' in new markets is lethal.
Developing strong market positions is the name of the game and especially China, Russia and India provide the best opportunities.
Elsevier Food International, Vol. 7, Number 1, February 2004
Louise Spillard

Last year, the key them in international retailing included the poor economic climate with strongly growing discount formats fuelling deflation in key markets worldwide; the crisis at Ahold which embodies the risks associated with international expansion; the continued rise of Wal-Mart and its effect on the competitive environment especially in its North American heartland; and challenges and opportunities that may be available in new and emerging markets.
In order to assess the latter theme. IGD developed a Market Attractiveness Rating that aims to assess which markets will be next on an international retailer's target list. The rating has been designed to consider those factors that determine market attractiveness to retailers. There are four analysis factors that constitute this rating:

• Long-term growth prospects: 35 per cent
• Market size and per capita spend: 25 per cent
• Political environment and market infrastructure: 25 per cent
• Competitive environment and presence of global retailers: 15 per cent

The rating provides a general assessment of market attractiveness, although for each retailer there will clearly be additional variables that are applicable when selecting its next target market - including existing geographical spread and core format competencies.
Priority 1 markets are China, Russia and India -these three emerging markets are all of substantial size and have strong future growth prospects. China is the world's largest market in population terms, and as per capita consumer spend increases, so will its market size. The political environment is also changing and becoming more favourable towards foreign investment, following China's entry into the World Trade Organisation. The imperative to enter China is also high and with five 'leading global' or 'leading international' retailers already present in the market, China scores lower than both India and Russia on this attractiveness measure.

Russia is the fifth largest grocery market in Europe, although it has yet to attract substantial foreign retail investment, after its 1998 financial crisis raised the risk profile in the region. Metro and Auchan are currently the only 'leading international' retailers to have established a presence in the market and both are performing strongly. These retailers are modernising the distribution infrastructure, reorganising buying networks and investing in staff training, all of which will benefit future new entrants to the market. However, it is imperative for these potential new entrants to access the Russian opportunity in the short-term, as the race for space in the major cities has meant that land prices are already much inflated.
The long-term strategic importance of the Indian market is apparent and IGD forecasts that the higher birth rate in India than in China will see India become the world's largest market in population terms by 2040. The food retail sector in India has, to date, not seen substantial investment and the only 'leading international' grocery retailer operating in the market is Metro (entry in October 2003) - a factor attributed to a specific law that prevents foreign investors selling goods directly to the public. India's policy on foreign investment has, in general, been eased throughout the 1990s and in the medium-term, is expected to ease in the retail sector, thereby increasing foreign retailer interest. However, the leading international retailers should already be considering their entry strategies for India and negotiating with potential local partners in order to secure an early-mover advantage.

Western Europe
The key markets within Western Europe are Germany, France, the UK, Italy, Scandinavia and Spain - each of which have grocery retail markets worth over US$70 billion. These six markets have experienced a series of common challenges over the past year, for example, Germany, France, Spain and Italy have had to face the reality of strong discounter growth. Foreign retailers have shown increased interest in entering the Scandinavian market: in particular, Ahold and the discounters Netto (Dansk Supermarked) and Lidl. More recently, Carrefour established a joint venture with Norges Gruppen.
The theme of consolidation has also been strong, particularly in the UK, with the battle for Safeway and the substantial consolidation in the UK convenience sector. Meanwhile, Italy remains the most fragmented of all markets within Western Europe and although it has seen numerous minor acquisitions, the principal strategy emerging from the domestic players has been to form retail alliances in order to secure the benefits of purchasing scale.

Central and Eastern Europe
Since the mid-90s Poland has been an attractive target market for foreign investment. Strong GDP-growth, an immature retail structure and future accession to the EU accounted for this. In the past 18-months, the pace of consolidation has accelerated with a series of exits and acquisitions, including Tesco's acquisition of HIT and other full-scale exits from Reitan Narvesen and Edeka. Further consolidation is forecast for 2004, particularly in the hypermarket sector, as planning regulations tighten and it becomes harder to open new stores.
As said before, Russia is a Priority 1 market and the scale of the opportunity in Russia suggests that additional international retailers will enter and Moscow city alone has a population of 10.1 million, with a further five million in the immediate surrounding area - the city in isolation is therefore equivalent to the population size of Hungary. In the medium-term, as consumer wealth increases and infrastructure improves, the main cities of Moscow and St. Petersburg will develop to a level that can sustain greater modern retail investment and this will be followed by investment in the regions. Those retailers interested in establishing a presence in Russia should aim to do so in the short-term, since the market has already seen substantial increases in land prices in the main cities and the early new-entrants are already capturing the best development sites.

South America
This region is dominated by two key markets, Brazil and Argentina. Combined they account for nearly half of the total regional grocery market. In recent years, the South America region and these two key markets in particular, have faced an extremely difficult economic environment. However, these markets now appear to be on the verge of recovery and with Ahold's announcement to divest its operations in the region, there is a clear opportunity for the other retailers to once again invest in these markets and build scale. The retailer acquiring Ahold's assets in Brazil will automatically take the leadership position in the Northeast region, while the retailer acquiring Disco will take at least the number two position in Argentina.

Asia & Australia
The markets of the Asia Pacific region have posed very different challenges. For example, the difficult conditions in South Korea, with the tightening of consumer credit and reduction in consumer spending, has made the market challenging for a number of international retailers, although the domestic players E-Mart (Shinsegae) and Magnet (Lotte) have continued to expand aggressively. Meanwhile, the international retailers have identified and started to exploit the opportunity in China and Japan, while India in Central Asia has been identified as a major opportunity for future development.
China is number one on IGD's Market Attractiveness Rating and is the world's largest market in terms of population, with strong GDP growth forecast for the rest of the decade. To date, Carrefour, Wal-Mart, Auchan, Ito-Yokado, Aeon, Lawson and Tengelmann (DIY only) have entered the market. This level of international retailer interest is making the country increasingly crowded, particularly in the major cities, although the scale of the Chinese opportunity indicates that there is still strong growth potential for existing and new entrants. The Chinese government is also due to lift all restrictions on foreign retail investment by the end of 2004, which is expected to prompt more international retailers to enter and Tesco, Casino and Costco are reported to be researching market entry. Faced with this international interest, consolidation is bound to be an increasing feature amongst the domestic retailers, as they strive to compete with a host of new entrants with substantial financial resources. However, the outlook is not necessarily negative for these domestic players. For example, Lianhua, the number one retailer, is proving extremely aggressive and is learning rapidly from foreign investors and is now seeking to develop a European division. In the short-term at least, these domestic retailers also benefit from a favourable regulatory environment.
Australia has been virtually isolated from the advances of international retail. In the short-term, it is unlikely that further international players will enter the Australian market, as there are currently bigger opportunities available elsewhere and the market is generally regarded to be over-capitalised, making any acquisition relatively expensive. However, in the medium-term it is likely that a strong international player will take the opportunity to acquire a leading position in the market. Woolworths, for example, continues to be the subject of takeover speculation by Wal-Mart and to a lesser extent by Tesco, both of whom enjoy a good relationship with the Australian retailer.

North America
Wal-Mart holds clear dominance across the region, with the number one position in the US, Canada and Mexico. Price-oriented food retail formats are growing rapidly in the US market and include Dollar Stores, limited line hard discounters (e.g. Aldi, Save-A-Lot), membership Clubs (e.g. Costco, SAM'S Club, BJs) and Supercentre formats (e.g. Wal-Mart Supercenter, SuperTarget).
The grocery retail sector in Mexico is effectively shared between four key players: Wal-Mart (Walmex), Comerci, Gigante and Soriana. Wal-Mart is the clear number one and alone is the same size as the other three players combined. The scale and fragmented nature of the Mexican market, in which 'mom and pop' stores, street markets and other 'informal' channels still account for nearly half of all food retail sales, means that there remain ample opportunities for all of the leading retail chains.
However, consolidation is expected to be a key theme in the future as the smaller chains find they can no longer compete with the scale of Wal-Mart and the combined scale of the next three retailers.
In Canada, Wal-Mart is the largest retailer (by total sales) after entering the market in 1994. However, it has only limited exposure in the Canadian food retail sector and operates a portfolio of 213 non-food Discount Stores. In October 2003, Wal-Mart introduced its second format into the market: the membership warehouse SAM'S Club. Wal-Mart has long been expected to introduce its Supercenter format into Canada, although to date this has not occurred and there is speculation that this is due to the dominance that Loblaw holds in the grocery sector.

Global outlook
The Economist Intelligence Unit (EIU) forecasts that world economic growth will show a slow general improvement between 2004 and 2007, after the low of 2.1 per cent GDP growth in 2001. The recovery will be most pronounced in the Latin American economies, while the highest growth rates will be achieved by the so-called 'Transition economies' of Central and Eastern Europe, as well as the markets of the Middle East & North Africa. The US is not expected to return to a growth trend until the first half of 2004, while the Eurozone is expected to lag behind the US recovery and the appreciation of the Euro is damaging growth prospects, by eroding the international competitiveness of companies within the Eurozone. The international retailers' attitude to risk is likely to remain conservative and this risk aversion will hold back investment in emerging markets during 2004, although it is forecast to gather pace in 2005, once markets become more stable and the international retailers have successfully consolidated their positions in existing markets. In the future, both retailers and suppliers will continue to enter new markets and globalisation is not expected to cease. Nevertheless, we will see companies rationalise their global activities and exit countries where they do not foresee an opportunity to develop a leading position or where the outlook and business profitability are disappointing.