Aspirations abroad: a matter of staying ahead
Elsevier Food International Vol.9, Number 1, February 2006 Pascal Kuipers
It is a golden rule of internationalisation that you need to be strong at home to be successful abroad. Retailers with international aspirations also need to have deep pockets, as expanding a retail business cross border is very expensive. Quite often retailers with such ambitions state that they do this to become a top three player in the market abroad. Obviously to please investors and other stakeholders, but are their promises reliable?
“What do retailers need to do when selecting a market for expansion?,” asks Jürgen Elfers, head of Commerzbank’s European retail research. “They calculate the population times the average amount spent on food. That’s roughly the market and if you want to become a top three player you need a minimum of ten per cent market share to drive financial performance and get the purchasing conditions needed to obtain your goal. A key question is also what format you want to use, as this clearly defines the level of capital employed. In general, hypermarkets lead to high levels of capital intensity, whereas discount stores lead to low capital intensity. Every choice of format in between leads to high levels of capital employed, especially in emerging markets like central and eastern Europe (CEE). There, no supermarket can be rented or bought as the necessary real estate is simply not available. It’s like the situation in Germany after the fall of the wall. The whole retail infrastructure needs to be built from scratch.”
No blueprint for success
This was surely the case in the early 1990s when the first movers went to countries like Poland, Hungary and the Czech Republic. A well known and well covered example is German retailer Dohle which was able to select the best plots of land for its retail development in Poland which it ultimately sold for a premium price to Tesco in 2002.
Fact is, however, that retail development in the central and eastern European markets has happened at such a pace, involving most of the leading retailers, that it has become a place of fierce competition with limited availability of new and existing retail locations and high capital investment levels. All this puts pressure on a retailer's performance and leads to decisions like Delhaize last year selling its 11 store network in Slovakia to Rewe, Edeka aiming for a sale of its 38 supermarkets in Czechia by mid 2006, and Finnish retailer Rautakirija deciding to sell its 50 per cent in a Czech convenience store joint venture to its French partner and Carrefour deciding to sell its four Slovak and 11 Czech stores to Tesco.
“With only 11 stores we had to invest too much in order to get enough critical mass to turn our Slovakian operation into a profitable business,” explains Delhaize’s spokesperson Hans Michiels. “We are, however, committed to our operation in Czechia, where we have 94 stores. Indeed, real estate prices soared recently, but they are still reasonable when compared to western European levels. Fifty per cent of our stores are located in Czechia’s four largest cities and we expect further expansion in such urban locations, where spendable income increases most. The main problem in Czech retailing remains the still low average spend per basket.”
Another fact is that there is no blueprint for success. The Balkan region is obviously of interest to retailers with cross-border growth ambitions. Development of modern retail structures in countries like Romania and Bulgaria started later than similar developments in central European countries in the early 1990s. Romania and Bulgaria are, however, expected to develop at a much quicker pace. Competition will increase faster, which shortens the lead times to secure the necessary profits to counterweight the investments and build a profitable business.
Take Bulgaria, where Dohle opened its first HIT hypermarket in October 2004. It was its first foreign venture after the sale of its Polish operation. Employing its well-experienced managers who successfully built Dohle’s business in Poland, the German retailer optimistically aimed for ten to 15 hypermarkets in Bulgaria’s largest cities. In Poland, Dohle started its preparations in 1993 and opened the country’s first hypermarket in 1994. It took other retailers more time to set up shop. Casino (1996), Carrefour (1997), Metro (Real, 1997), Tesco (1998) and Schwarz (Kaufland, November 2001) started their hypermarket operations much later, providing Dohle with a crucial time advantage.
Bulgaria, however, is a different story altogether. There, Dohle was ahead of Carrefour (which is to open its first Bulgarian hypermarket this year) but was outpaced by the Schwarz Group which has been acquiring land plots for retail development since 2002 and is now rapidly opening Kaufland hypermarkets all over Bulgaria. By contrast: in Poland the first Kaufland was opened seven years (!) after Dohle’s first HIT hypermarket opened for business.
It is said that Dohle has drawn its conclusions and is searching for either a strong partner to stay in the Bulgarian business, or a buyer in order to pull out of Bulgaria altogether. Rewe and the Schwarz Group are rumoured to be negotiating with Dohle and Tesco is also said to be interested. These retailers are clearly committed to the central and eastern European markets and have the financial stamina to survive there.
Expanding to the ‘new East’
Due to its aggressive expansion and its low-cost business model, which implies a quick return on capital employed, the Schwarz Group puts immense pressure on all players in the market. Also in the discount sector this ‘Schwarz effect’ is clearly noticeable given the aggressive expansion of Lidl all over Europe. Last year Lidl filled up some of its white spots left on the European map by opening stores in Scandinavia and the Baltic states. Opening of the first Lidl stores in Switzerland and the Ukraine is imminent. In the longer term, the Balkans may be considered – Schwarz is already represented in Romania and Bulgaria with its Kaufland operation – and then there is the promising Russian market, which offers opportunities for both Kaufland and Lidl.
On A.T. Kearney’s 2005 Global Retail Development Index (GRDI), which ranks the most attractive emerging markets, six out of the top ten markets are located in eastern Europe. In this region A.T. Kearney distinguishes three distinct areas of opportunity: the ‘old’ or traditional eastern Europe (e.g. Poland, Czechia and Hungary), the ‘new East’ (e.g. Ukraine and the Baltic states) and Russia, which is a league of its own.
Russia remains attractive, ranking second on the GRDI, but the steady inflow of foreign players is starting to saturate the market. Still A.T. Kearney sees a great many opportunities in Russia with top five retailers holding less than nine per cent of the market, an impressive GDP growth rate of seven per cent and many large cities still untapped. “However, as with most emerging markets, Russia requires a longer outlook in terms of profitability,” the latest GRDI report reads. “Relatively thin gross margins, combined with exceptionally high property prices, make it tough to turn a profit. Auchan for example, may not generate profits for seven or eight years.”
In Russia, Metro Group added the first Real hypermarkets to its cash & carry store base. Another German retailer – Globus – acquired three sites and intends to open its first Russian hypermarket this year. Another newcomer to Russia’s booming hypermarket sector is South Korean retailer Lotte, which also intends to open a department store with a hypermarket in Moscow this year.
Foreign retailers that venture into the Russian market are mostly hypermarket operators like Auchan and Migros Türk. Both retailers are further expanding abroad to Romania (Auchan, this year) and Macedonia (Migros Türk). Romania and Macedonia form part of what A.T. Kearney characterises as the ‘new East’. A prime example is Ukraine, a market which – according to A.T. Kearney – comprises all retail success ingredients: a large population of 50 million people that mostly live in urban areas, six per cent GDP growth, 40 per cent increase in total retail sales over the last two years and a still fragmented retail market.
Quite a difference with the ‘old’ eastern European retail markets that lived up to their promises and currently host most of the leading international retailers while newcomers are still coming in. Processes of saturation and consolidation give these markets a less prominent position on the GRDI. Poland for instance, fell out of the GRDI top 30 altogether.
Aldi follows Lidl
Commerzbank’s Elfers already stated that discount stores lead to low capital intensity and primarily because of Lidl’s expansion, discount has been the prime format when it comes to retail internationalisation in recent years. Expanding its Kaufland and Lidl operations, Schwarz is clearly following the opportunities as expressed by the GRDI. Other German hard discounters are following suit, such as Rewe which intends to open Penny discount stores in Romania (where it is already represented with its Billa supermarkets) and Tengelmann which finally opened its first Plus discount stores in Romania after having postponed this for over a year. Last December Tengelmann explained the delay by its reluctance to bribe people in order to obtain the necessary authorisations. “There are over 30 institutions to go for all sorts of authorisations and they all expect something,” PlanetRetail quoted reports in the local press. In the next three to four years Tengelmann aims to open another 120 to 140 stores, but one can only guess if this time schedule will be managed if corruption remains persistent.
Compared to Lidl, Aldi kept a low profile when it comes to entering markets in the last decade. This is, however, changing. Spain (in 2002), Australia (in 2000) and Ireland (in 1999) are among the new markets that Aldi entered between 1995 and 2005. Last year, Aldi set up shop in Switzerland, and is expected to also open its first stores in Slovenia and Portugal in the near future. Aldi has been reluctant to join the masses of foreign retailers flocking to the CEE markets but now it has decided to take the plunge into this highly competitive region (notably ‘old’ eastern European markets like Hungary and Poland).
Aldi’s interest in Poland in particular is remarkable as, due to the cutthroat competition, the availability of real estate is limited. “It is a well-recognised fact that Aldi prefers its competitors to ‘warm up’ new markets”, PlanetRetail commented in December 2005, referring to an Aldi manager who stated in the German trade press that “We will make sure there’s a good clean up,” and “When Aldi does decide to start operations in a new market, it’s long term.”
Lobbying like mad
The GRDI top ten markets are the markets that should be on the radar screen of international retailers, according to A.T. Kearney. These markets are also much referred to when it comes to cross border retail activities. Especially India, where all multinational retailers eagerly await the government to open up the market by allowing higher degrees of foreign direct investment (FDI). Discussions on the issue to liberalise FDI in the retail sector have been going on in India’s political circuits throughout 2005 and a decision has not yet been taken.
India holds the pole position in A.T. Kearney’s GRDI and several figureheads of leading retailers travelled to India in person to lobby. John Menzer, president & CEO of Wal-Mart International, visited India in May 2005 and was quoted by PlanetRetail as saying that “[…] It is amazing that India, which has huge retail potential, is under-retailed. We are looking forward to the government relaxing FDI norms in retail. As and when this happens, we will invest significantly here. India is a huge organic growth opportunity for Wal-Mart.”
“We are all lobbying like mad,” said Sir Michael Arthur, British High Commissioner to India, acknowledging that retailers like Tesco, Carrefour and Wal-Mart were all eager to venture into India if given the go-ahead by politicians.
In July last year, the prime minister of India visited Washington and had an informal meeting with Wal-Mart’s president & CEO Lee Scott. Still Wal-Mart did not yet unveil a concrete plan to set up shop in India. Apparently, Wal-Mart aims for market entry with a cash & carry type of format. In early December last year, local authorities in India’s region of West-Bengal denied a licence to set up a Sam’s Club store, whereas German retailer Metro was allowed to open a cash & carry store in the region.
Metro Group opened its first Indian cash & carry store in 2003 and has since added another store to its operations. It clearly has ambitions for the region, as it also intends to open stores in Pakistan. Metro’s chief executive Hans-Joachim Körber seized the opportunity to meet Pakistan’s prime minister, when the latter visited Germany in July 2005. According to PlanetRetail, Metro intends to open two cash & carry stores in the near future, with the longer term aim of 20 stores in Pakistan.
Elsewhere in Asia, in the saturated Japanese market, developments point in precisely the opposite direction. In December last year the financial Times reported that the Japanese government was considering new rules which would discourage foreign retailers from setting up shop in the country. Construction of large, suburban outlets would be subject to legislation of local governments, the majority of which are concerned with protecting the interests of local retailers. Japanese retailer Aeon already objected to this, by arguing that such regulations are unconstitutional as they violate a law which bans supply-demand manipulation.
“From the point of view of a foreign company, these new regulations and laws would deter investment by retailers. Japan would be seen as a difficult country in which to establish operations,” the financial times quoted Kazumasa Konno, a director of the Japan Chain Stores organisation.
The saturated Japanese market could indeed be increasingly ignored by multinational retailers, especially now China’s huge retail potential is beginning to unfold. Last month the Chinese news agency Xinhua reported that in 2005 a total of 70,000 supermarkets were opened in China’s rural areas. In February 2005, a programme – supported by the Central Government – started to establish 250,000 new-type rural stores across China between 2005 and 2008. Not only in the cities but also in the countryside, China’s huge customer base is getting used to modern retail infrastructure, which makes this emerging market even more attractive for multinational retailers.
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