Recent years have seen calm with rational retailers retreating from non-core and underperforming markets. This retreat may well now be followed by a renewed period of expansion and consolidation. Have the right lessons been learned, or will retailers be tempted or forced into adventures without due consideration.
Elsevier Food International, Vol. 6, Number 2, May 2003
Pascal Kuipers

The dramatic downfall, last month, of former retail icon Ahold clearly demonstrates the actuality of retail retreat, the flip side of retail expansion. There is of course nothing new to retailers leaving markets they once entered with their hopes set high. Marks & Spencer's decision in 2001 to stop its operations in continental Europe is one of the prime examples that created a lot of turmoil. Ahold is as dramatic an example. It includes several reasons for retailers to back out of a market and may well become a landmark in the process of retail retreat.

Forced divestment
In November 2002, Ahold already said it would divest its non-core and underperforming activities, due to disappointing total company performance. In early February, Ahold announced that it was in discussion regarding the sale of its Chilean activities, but this immediately became peanuts when on Monday 24 February the news broke through of Ahold's acute crisis due to accounting irregularities at US Foodservice, potential illegal transactions within its Argentine subsidiary Disco, and a further decrease in the profit outlook for 2002.
"Within the group of underperforming assets, Poland, Spain, Chile and Asia seem the most likely candidates for a divestiture," says financial analyst Patrick Roquas of Merchant bank Kempen & Co in a note dating 26 February on Ahold with the ominous title 'The Sum of All Fears'. "These countries will require substantial investments to gain sufficient scale and improve profitability, while Ahold's financial means are limited," Roquas says. Since 24 February, however, forced divestment of Ahold's performing assets is an option. Henny de Ruiter, chairman of the Supervisory Board who has been designated to be responsible for the daily supervision of the conduct of the Executive Board, acknowledged that all company assets will be considered and not only underperforming and non-core activities.
According to Roquas, sound cash flow generators in Scandinavia, Portugal, the Czech Republic and Brazil are up for sale, and so are Schuitema - a Dutch wholesale operation in which Ahold has a 73 per cent stake - and Dutch food service provider Deli XL. Acknowledging that selling prices are pressured by a timing aspect and current market conditions, Roquas roughly estimates the proceeds of this divestment to be some €3,450 million (table I). Divesting Ahold's crown jewels in the Netherlands (market leader Albert Heijn) and the US (Stop&Shop and Giant) would take the engine out of the company and essentially mean the end of Ahold as an independent entity. Late February, most analysts did not expect this to happen, even when the extent of the accounting irregularities were by no means clear.

In June 2002, German retailer Dohle cashed in and sold its HIT hypermarkets in Poland to UK retailer Tesco.

Forced divestment by either an acute crisis or disappointing performance are two reasons that are applicable to Ahold. So are the reasons of problematic integration of activities (Ahold in Spain, an operation Wal-Mart is said to be interested in) and insufficient perspective in a local market. A good example of the latter is Poland where Ahold (even before the 24 February crisis) faced the difficult situation of being unable to capture the desired number three position since UK retailer Tesco acquired the HIT hypermarkets in Poland from German retailer Dohle in June 2002. On the other hand, Dohle's divestment of its Polish operation is a clear example of a retailer cashing in and leaving a market that is on the verge of consolidation.

Reasons to retreat
Mid-February, Dutch retailer SHV Makro decided to close its six cash & carry stores in Taiwan referring to a combination of fierce competition (from retailers such as the US Costco and the French Carrefour) and a sluggish economy, which dragged down sales. Early January this year, French retailer Auchan decided to close its two US stores, attributing this move to a sharp increase in local competition in the last two years which made these stores loss making. Previously, in September 2000, Carrefour decided to leave the Hong Kong market because of fierce competition for retail sites.
Unless problems are as serious as at Ahold, retreating retailers often look at external reasons when backing out of a market. The real reason for Carrefour's withdrawal from Hong Kong however, was its lack of understanding of the local market, a senior executive of Carrefour's Hong Kong competitor Park 'n Shop was quoted by a local newspaper after Carrefour announced its retreat. Moreover, in Japan, Carrefour is said to be in trouble after ignoring essential local retail customs such as operating without a Japanese joint venture partner and trying to cut out wholesalers and deal directly with suppliers. According to Reuters, Japanese housewives were disappointed to find the same goods as at their local supermarket and at the same price. "After an initial boom period, repeat customers became scarce and Carrefour withdrew the plan to build 13 stores in Japan by 2003," Reuters comments. Should the French ever decide to quit their Japanese operations, they can always refer to lacking perspective to build critical mass as they - like Auchan this year - did in the US (back in 1993).

Poor and wise strategies
"In general there are poor and wise strategies when it comes to retail expansion," explains J urgen Elfers, head of European Retail Research of Cornmerzbank. "Take Auchan for instance. They recently decided to sell their US assets.
These two stores were located in Houston, Texas. There is no major town or residential area nearby, so Houston is not a good place to start your retail operation in the first place. The same holds true for Auchan's Thai operation that was limited to one store in Chiang Mai (sold in 2001). All major food producers in Thailand are based in the Bangkok area and, given the poor logistic facilities, it takes trucks up to 26 hours to reach that store. This is a poor strategy and Auchan may have to reconsider its position in Argentina and Mexico in the near future, given the economic and political turmoil in the Latin American region. Dohle on the other hand chose a very wise strategy by capitalising on its early mover advantage in Poland by cashing in and selling its HIT operations for a premium prize to Tesco. However, for Dohle there is also a flip side to the coin: the Tesco board was obviously annoyed when they found out that HIT had considerably better purchasing conditions than Tesco. With these conditions transparent, Tesco pushed its suppliers to grant the entire Tesco operation in Poland the same conditions as had been given to Dohle. Now Dohle wants to enter the Bulgarian market but one can be sure that local suppliers - many of them subsidiaries or partners of multinationals - know what happened in Poland and they do not want to run the risk of this happening again, just in case Dohle's Bulgarian operation is one day acquired by a large retailer. Dohle will therefore never be as successful in Bulgaria as it was in Poland and should Dohle ever consider a re-entry into Poland, they will never get such favourable conditions again. You cannot replicate success, especially as a small retailer."

Expansion and globalisation
According to the British Institute of Grocery distribution (lGD) there are three key reasons driving market exit:
• Underperforming markets - this is essentially about local scale/market share as well as economic conditions.
• Effort required to turn the business around and ability to develop it into a profitable successful business in the future - this depends on economic conditions, planning regulations and local competition.
• Prospects for securing a decent purchase price from a potential buyer - this depends largely on the position of other international players in the market.
"Retailers initially believed that their global scale would provide them with access to global buying terms from suppliers," says Louise Spillard, business manager at IGD. "However, this has proved not to be the case with supply deals being principally conducted on a national basis and based on scale in an individual market. Therefore, there have been no real purchasing synergies, particularly in food. Withdrawal from markets often comes with a psychological price and denotes failure, but in these difficult times, investors may actually view certain withdrawals as a favourable move."
"If you want to consider if market exit is a true phenomenon one should look at retailers whose financial performance is clearly impacted by operations abroad," says Elfers. "Casino, for instance, was a relative latecomer when it came to expansion and still depends for 94 per cent of EBIT on domestic operations. That is hardly an international approach. Strategically, retailing is bound for further global consolidation and Casino must further internationalise. Currently, however, it is out of money. Ahold and Delhaize have a much larger share of their businesses abroad and I expect that both retailers will dispose of their Asian activities in the future. Especially Ahold, given the problems it currently encounters."

Reasons for retailers to back out of a country: • poor company performance necessitating the retailers to focus on its core business and divest non-core and/or underperforming assets; • poor local performance; • lacking perspective to build enough critical mass for a solid position; • acute crisis forcing the retailer to sell assets to reduce debt; • overcrowded market on the verge of massive consolidation - cashing in.

Elfers stresses that retailers' retreat should not be exaggerated. "In the years to come, expansion and globalisation is definitely the name of the game," he says. "Carrefour plans to open at least 40 hypermarkets annually and these will not be located in their home market which is not only saturated but also legislatively restricted. Last year, Carrefour opened a hypermarket in the Paris region and it was its first new hypermarket since 1995. Schwarz Gruppe's Kaufland hypermarket operation is rapidly expanding into the Central European countries and the Metro Group is entering markets like India and the Ukraine.
These are clear examples of the expansion game. Expansion based on a sound domestic position is needed for retailers to uphold their growth perspectives."

Retail graveyard
Bryan Roberts, retail analyst with M + M Planet Retail, agrees and looking at the bidding for UK retailer Safeway and a possible takeover of Ahold - he foreshadows "( ... ) a return to the more frenetic and aggressive levels of corporate activity in grocery retailing not seen since the late 1990s". In his view, in recent years talk has turned from acquisitions and market entry to rationalisation and focusing on core activities. Retreating retailers fit in perfectly with this observation, but nevertheless 2002 still saw more than 180 identified deals worldwide, involving nearly 23,500 stores changing hands, which account for retail sales of some €84 billion (US$74 billion). These numbers come from Roberts' research '2002: Global Trends in Mergers and Acquisitions'. Pointing at North America he says that ( ... ) M&A deals in the US in particular have become more defensive, consisting of companies withdrawing from inhospitable markets and selling out to rivals, or even entering bankruptcy and then being bought out." In Europe, Roberts expects more activity. "After events such as Ahold/ICA, Carrefour/Prornodes and Wal-Mart/ Asda, there was a similar mood of calm in Europe as in the USA in 2002," he says. "With several suitors currently circling Safeway in the UK, 2003 looks set to start with a bang, perhaps leading to further consolidation in the sector."
That bang may be of Safeway being acquired or Ahold being torn to pieces or taken over as a whole.
The recent years with calm and rational retailers retreating from non-core and underperforming markets may well be followed by renewed expansionist and consolidation zeal. In that case the flip side of retail expansion remains topical, especially when retailers are tempted (or forced) to join these activities without proper preparation. Germany, for instance, has been a retail graveyard in the past and is a role model for a market that is difficult to enter for a foreign retailer (like for instance Japan or China). In a recent article on foreign retailers in Germany, the German publication Lebensmittel Zeitung brings over-ambitious retailers down to earth. "The idea of seeing one's company name in countries far beyond home-base borders is a fascination that clouded the actual outlook of what is possible, as in the case of Wal-Mart and Interrnarche," the article reads. "The word 'problematic location' was banned from corporate vocabulary. So when, in the euphoria of overall excitement, conceptional pig-headedness is added to a strong unwillingness to learn, and cultural ignorance, it is no wonder that mistakes have to be paid for dearly. ( ... ) The belief that many retailers have been following, that foreign expansion is limitless, has been returned to the floor of reality."