Is bigger really better?

A relatively small group of retailers tend to dominate the supermarket industry. But as home markets become saturated and critical of their power, international expansion may be their only growth path. But even investment-hungry emerging markets may no longer be safe havens.
Elsevier Food International Vol.9, Number 1, February 2006 Len Lewis

There is an old saying that “bigger is better.” But is it? Industry giants are continuing to grow but are increasingly seen to be causing more harm than good. The dominant few therefore face stricter regulations for expansion. Ultimately, the success of any dominant chain may not depend upon prices but on how they are perceived in the marketplace when it comes to social responsibility issues.

Over the past decade, retail powerhouses around the world have continued to grow by expanding domestically and in emerging markets of eastern Europe, China and Russia, as well as focusing on new formats and services designed to boost market share in an increasingly competitive business.
As such, industry giants like Tesco, Carrefour and Wal-Mart are generating a greater percentage of sales from outside their home countries. However, top retailers, whose appearance was once considered a panacea to a country’s economic ills are now being vilified for their size and power – incurring the wrath of unions, consumers and some governments who see the dominant few as causing more harm than good to local economies.

Rising opposition
“France has strict regulations on opening new hypermarkets and in the UK opposition to Tesco is building. Regulators are being careful about giving permission to large retailers to expand their business,” said Olivier Rayrole, retail analyst for the Innovest Group in Paris.
Recently, a series of meetings took place in the UK where a coalition of business groups has called for a Competition Commission investigation on the dominance of supermarkets. ”It’s critical that the government uses its powers to stop the Tesco/ASDA/Sainsbury juggernaut from eradicating high street shops altogether by 2015,” said Nick Goulding, chief executive of the Forum for Private Business. Some press reports indicate that Tesco could be forced to sell some stores in order to curb its dominance of smaller high street retailers such as convenience stores – a segment that Tesco was not even in ten years ago. “A lot of advocates in the UK now feel that a retailer should not have more than eight per cent market share,” said Rayrole.
Putting this into perspective, top retailers have less than an eight per cent share in only four European markets, according to figures from Planet Retail – Russia, Serbia, the Ukraine and Bosnia/Herzegovina. Tesco currently has a 19 per cent share of market in the UK and the top three retailers – Tesco, Sainsbury and Wal-Mart – control nearly 40 per cent of grocery food sales. The Office of Fair Trading (OFT) has put Tesco, Asda, Sainsbury and Morrisons on notice that they could be called into hearings. But a report by the UK Competition Commission in 2000 already stated that below cost selling by dominant retailers damaged small neighbourhood competitors and could lead to a serious reduction in consumer choices, the commission said.

The biggest target
Wal-Mart, ASDA’s parent company, is no stranger to controversy. The world’s largest retailer is also the biggest target for unions, community groups and local governments who have successfully kept supercentres out of their communities by claiming they would have a negative impact.
In India, the chief minister of the state of Kolkata, Buddhadeb Bhattacharjee, said he was not in favour of Wal-Mart establishing stores in the area because they would lead to the closure of small vegetable markets. However, he has no objection to Metro, which has promised only to open a wholesale business in the region.
The debate became political when US Consul Henry Jardine said there is no reason for discriminating against Wal-Mart. “If there is opportunity for a German company then it should also be for an American company.” Hans-Joachim Körber, chief executive of Metro called for the Indian government to develop a “national marketing policy” before it allows any foreign direct investment in the retail sector.
Carrefour has filed an appeal with the Supreme Court in Indonesia in order to overturn a ruling by a lower court and the Competition Commission that it was guilty of unfair practices. Meanwhile, the chain is exploring additional opportunities in Europe by Launching Carrefour Express stores in Spain.
However, a big blow to retail dominance came from Poland, one of the most business-friendly emerging markets. Finance minister Teresa Lubinska said recently that hypermarkets are simply not welcome and cited Tesco as a “non-productive investment” that only produces low-skill jobs. Poland has been a focal point for retail expansion in eastern Europe, according to Rayrole. “Jerónimo Martins, Carrefour and Tesco are all increasing penetration here. I was surprised to see what happened in Poland since emerging markets try to attract as much business as possible for investment.”
Another slap in the face of large retailers is taking place in the Czech Republic where the Antitrust Office is trying to push through a bill that would ban payments by suppliers to large retailers for product placement on the shelves.
This lack of enthusiasm for hypermarkets has not been lost on Wal-Mart which is reportedly looking for acquisitions in the discount arena in Europe. This will make the chain more flexible and reduce its reliance on larger stores, which have limited growth potential, observers said. For instance, the chain is reportedly making a bid for German discount chain Norma, in order to compete more effectively with Aldi. The move would effectively double Wal-Mart’s market share in Germany, which is saturated with hypermarkets and open up additional opportunities for small store expansion in eastern Europe, said Boris Planer, global macroeconomics manager for PlanetRetail.

To Russia with love
However, some places are more receptive. Auchan for example, stymied by lack of growth in its home market, is planning to build eight hypermarkets in Russia this year along with distribution centres to support them. At the same time, it continues to explore the potential for new formats and services, including its Auchandrive, drive-in store.
Tesco, while expanding its core supermarket business with smaller high street stores, has also opened its first non-food outlet called Tesco Homeplus – a 2,700 m² store offering clothing, televisions and other consumer electronics. Meanwhile, the chain is becoming a major player in residential development, predicting it will build as many as 4,000 new homes by 2008.
The moves by Tesco and others to expand their operational horizons are directly related to the lack of growth at home. “In the past year or so, dominant retailers have tried to reposition themselves in their domestic markets to make as much volume as possible,” said Innovest’s Rayrole. Nonetheless, Tesco still makes 70-80 per cent of sales in the UK and represents ten per cent of the British food and drug market. Carrefour, despite international expansion, still makes 49 per cent of its sales in France.
“But many areas are mature and the biggest opportunities are in emerging markets like Asia, South America and eastern Europe. “But it takes time to make a profit and these are long-term investments,” he said. “Two years ago, Ahold terminated operations in Asia and South America. But Carrefour and Tesco are still opening large hypermarkets through joint ventures.”

Intangible assets
In the end, the success of any dominant chain may not hinge on prices or other competitive factors, but on how they are perceived in the marketplace when it comes to things like corporate governance, human resources, emerging market strategy, social performance and environmental issues.
Innovest’s Intangible Value Assessment ratings assesses some 36 food and drug retailers on a total of 120 factors. Top marks go to Kesko Limited in Finland, which has an AAA rating. The company, with a 39.2 per cent share of the market in Finland, has continually strengthened its corporate social responsibility, thereby enhancing its reputation in international markets, according to Innovest. It has developed an extremely transparent reporting system that tends to increase the confidence of shareholders and has helped the company turn good relationships into business opportunities.
Additionally, Kesko has a proactive human resource policy that has led to very low turnover and a highly developed environmental management system for stores and its transportation fleet.
Social responsibility is becoming a bigger issue for other dominant retailers, whose sizes continues to foster resentment among competitors, suppliers, unions and, as noted, earlier, government agencies.
Migros, which accounts for 39.8 per cent of supermarket sales in Switzerland and has an 18.5 per cent share of all retail volume in that country, sponsors ski schools for children and funds a think tank.
Wal-Mart, which seems to come under the most criticism and scrutiny, is trying to change its image through a comprehensive outreach programme. Recently, the company held a seminar at which economists were invited to assess Wal-Mart’s impact on the US economy. The company said it plans to release more proprietary information and encouraged researchers to continue studying the chain.
Wal-Mart has also hired Edelman, a Chicago public relations company, as the basis of a team designed to respond more quickly to critics and get more positive stories in the press, such as Wal-Mart’s relief efforts in the wake of Hurricane Katrina. The company has also opened eight community relations offices around the country. It has approached environmental groups about initiatives in cutting waste and reducing energy consumption and is monitoring overseas factories more closely for human rights violations. As chairman and CEO Lee Scott said in a recent interview: “We have to continue to evolve in how we operate and how we interface with society.”

---

Dominant retailers in Europe - Top 3 market shares (2004)

Belgium
Carrefour	25%
Colruyt	20%
Delhaize Group	19%
Others	36%
Denmark
Coop Norden	28%
Dagrofa	19%
Dansk Supermarked	18%
Others	35%
Finland
Kesko	39%
SOK	33%
Tradeka	6%
Others	22%
Ireland
Musgrave	27%
Tesco	19%
Stonehouse	12%
Others	42%
Norway
Norges Gruppen	37%
Ahold	16%
Coop Norden	16%
Others	31%
Sweden
ICA/Ahold	39%
Axel Johnson	24%
Coop Norden	20%
Others	17%
Switzerland
Migros	39%
Coop Suisse	33%
Manor	6%
Others	22%
Estonia
Kesko	34%
Rautakirja	20%
SOK	7%
Others	39%
Slovenia
Mercator	57%
SPAR Austria	18%
TUS Trgovine	15%
Others	10%
Lithuania
VP Market	32%
Kesko	12%
IKI	11%
Others	45%

Dominant retailers in different markets. The selection is based on the top retailer's market share being at least 30 per cent.; or a gap of at least 15 per cent between the market leader and the runner up; or top three retailers accounting for at least 60 per cent of the market.
Source: PlanetRetail