The early entry strategy of Migros Türk

In search of growth opportunities beyond its domestic market Turkey, Migros Türk is looking further afield and is targeting quite unusual markets in search of an early entry advantage. But how promising is opening a retail store in Baghdad?
Elsevier Food International, Vol. 6, Number 3, September 2003
Pascal Kuipers

The tragedy of Turkey is the fact that the country's economy depends heavily on its fickle political climate. For this reason F. Bülend Özaydinli, board member of Migros Türk and CEO of its parent company Koç Group, did not shy away from political comments in October 2002, when he addressed a speech at the 'Meeting to inform the press and the public'. This somewhat State-of-the-Union like speech has become a tradition at Koç Group as it was held for the eighth consecutive time.
"Our politicians can entirely change the direction of the country on any given day just with their statements," he said. "In this volatile and slippery economic environment, our country is going through one of its most stagnant periods in terms of the economy." Özaydinl commented on the economic troubles of 2001, when Turkey's GOP plummeted, the inflation rate remained sky high and the trade deficit increased further. "Turkey has been putting off problems that have added up for years and last year the country experienced one of the most severe crises in its history," he complained. "It is not possible for us to go on with our habit of consuming through borrowing without the due production. ( ... )Sustainable growth is possible only with low inflation and price stability."
In 2002, the Turkish economy performed better after strong support by the IMF and a tight fiscal policy. Still, it had to deal with political volatility due to the general elections that were held in November 2002. Turkey's high unemployment rate and decreased spendable income negatively affected consumer spending. The Turkish retail industry therefore did not see any recovery, forcing retailers to cut costs and close stores.

The roots of Turkish retailer Migros Türk go back to 1954, when the company was founded as a joint venture between the Istanbul municipality and the Swiss cooperative retailer, Migros. It intended to source food supplies and distributes these under hygienic conditions and at economic prices. In 1975, Swiss Migros decided to withdraw from Turkey. The Turkish Koç Group obtained the majority of shares and retained Migros Türk as a brand name. According to Hoover’s, Koç is Turkey’s top industrial conglomerate, Controlled by the Koç family, Turkey’s wealthiest dynasty. Koç Group (in 2001 accounting for US$4.9 billion in sales) is represented especially in the automotive industry. Next to the Migros Türk retail business, Koç Group is engaged in large household appliances (Arçelik) and energy (distribution of liquefied petroleum gas) Subsidiaries engaged in food production, construction, international trading, and hospitality and tourism. Koç also operated banking, securities brokerage, and insurance businesses.

Cutting costs
"The severe economic downturn in 2001 and 2002 led to a consolidation of domestic operations with the main focus shifting to operational efficiency," says Haluk Yükler, foreign investments coordination manager at Migros Türk. "Throughout 2002 we reviewed store performances and closed inefficient stores, most of them trading under our discount banner Sok. As consumers became increasingly price conscious and price competition intensified, Migros Türk focused on cost efficiency to protect margins. We outsourced logistics, extended B2B procurement among suppliers and we used customer relations management to design more effective promotion campaigns. We have access to valuable consumer data and we communicate efficiently with our 2.7 million Migros Club Card holders. We closely watch our costs while boosting our sales through creative sales campaigns. Cost control will payoff, especially in periods with strong sales as we expect in the second half of the year."
And the figures prove this, says Yükler: "In 2002, Migros Türk generated the highest gross margin (20.5 per cent) within its peer group and the second highest EBITDA margin (3.3 per cent). Migros Türk has the best working capital cycle in its peer group and generates the highest net interest income with US$17 million in 2002. Our bottom line profitability is supported by interest income as the company traditionally enjoys a strong net cash position that reached US$81 million. The financial debt remained stable at US$24 million."
Yükler indicates that after closing underperforming stores, Migros Türk retained 299,000 square metres of selling space. Despite Turkey's difficult economic outlook, he points out the market leader's ambitious plans for its domestic market. "We intend to increase our sales area to 500,000 square metres by 2005 by opening new stores".

Engines of growth
Migros Türk is market leader in Turkey with - according to M + M Planet Retail - a 5.5 per cent share in this US$22 billion market. Runner up is BIM, a privately owned retailer, and third is German retailer Metro Group with a 3.3 and 3.2 per cent share, respectively. Yimpas, like Migros Türk a subsidiary of a business conglomerate, is fourth with a 2.4 per cent share, followed by retail giant Carrefour that holds a modest 2.1 per cent share in Turkey.
With top five retailers accounting for only 16.5 per cent, Turkey still has a very fragmented retail industry which offers opportunities for growth via acquisitions. "It is very likely that this sector is open to consolidation," acknowledges Yükler, "We are the leading retailer in Turkey with solid financial abilities and have a strong competitive advantage. We will continue to pursue the strategy of buying out individual stores as we did with Turkish retailers Besendik and Oypa."
For organic growth, Migros Türk's discount format Sok might be an option given the economic malaise and reduced spending power of Turkish consumers plus the fact that most Sok outlets are located in the western part of the country, leaving eastern Turkey as virgin territory for retail expansion. "Due to the fragmented structure of food retailing, which stems from the socio-economic realities of Turkey, Sok will be a smart tool to capture some market share from the mom and pop stores and to generate penetration for our private labels which in turn help boost profitability," replies Yükler who stresses that the supermarket and superstore formats under the Migros banner will be the main engines of growth.
According to M + M Planet Retail, small business segments are kiosks under the Bakkalim banner (some 700 outlets in 2002 accounting for some US$33 million in sales), food service (Migros Toptan Sat is with sales of US$9 million) and e-commerce (a US$4 million business; over 60 Kangurum e-stores delivered more than 282,000 orders in 2002).

Better performance abroad
Comparing Migros Türk's domestic and total company sales & profits data, the decision to venture abroad has been a wise one. At home, interest income is beneficial to the bottom line as Yükler explains, but on an operational level operating profit (EBIT) is negative. Abroad EBIT data look much better and positively affect the bottom line.
In 1996, Migros Türk first expanded abroad by setting up shop in Azerbaijan where it currently has three relatively modern Ramstore superstores with some 15,000 product lines in the country's capital Baku. This first foreign market of entry is now the company's smallest operation abroad. The largest foreign growth in sales and returns comes from Russia, where Migros Türk set up shop in 1997 via Ramenka, a 50/50 joint venture with the Turkish construction company Enka. Ramenka was immediately confronted with a fierce financial crisis the following year. In the longer term, however, this was a blessing in disguise as Russian consumers - who saw their life savings evaporate due to the Ruble crisis in 1998 - had become very suspicious of banks. They preferred to spend their incomes, which increased in the years of economic recovery that followed.
"In 2002, the major driver of growth has been international expansion, mainly in Russia and Kazakhstan," says Yükler. "In 2002, international operations increased by 28 per cent and generated US$282 million. Russia took the lion's share of this. On the international front we will continue our aggressive expansion strategy to keep Migros Türk ahead of its competitors, especially in Russia".
Yükler predicts an increase in foreign sales this year of over 40 per cent: "In 2003, we expect an international sales level of US$400 million. In Russia, Ramenka will capitalise on its first mover advantage and continue to expand its sales aggressively. We are to invest US$100 million in the construction of three shopping malls and eight new stores. Ramenka is to penetrate outside of Moscow and has already opened new stores in Krasnoyarsk and Kazan. New locations in St Petersburg will also follow."

From the Balkans to Baghdad
According to the foreign investments coordination manager, Migros Türk expanded less aggressively in its other international ventures, Azerbaijan, Kazakhstan and Bulgaria. "We are satisfied with our retail operations in Kazakhstan and we expect a healthy growth in the long term," says Yükler. "The Kazakh economy registers a higher growth than the Russian economy and for 2002, the three Ramstores reported a sales increase of 20 per cent and a positive bottom line. This year, Migros Türk plans to open another supermarket.
The investments in Azerbaijan have been negatively affected by the adverse economic conditions, but looking ahead, the initiation of the Baku-Ceyhan pipeline promises an improvement in the country's macroeconomic outlook, that will be reflected in Ramstore's performance. A new store is planned to open in Baku.
Migros Türk opened its second store in Bulgaria in 2002. Bulgaria stands out as the country to enter the EU in 2007 and the positive business climate in the country also fosters Migros Türk's presence there. 2003 will be the year to increase its savings by reaching the optimum operational efficiency and improving its sales through the opening of new stores with low investment costs."
Yükler stresses that international operations are a key component of Migros Türk's strategy.
"There will be some new countries in the coming years such as Iran, Ukraine and Macedonia," he says. "We would rather enter into underdeveloped countries in terms of food retailing."
This is somewhat of an understatement given the fact that Migros Türk - according to M + M Planet Retail - has plans to open an outlet in the Iranian capital of Tehran in 2004 and that it apparently established an Iraqi Committee in Baghdad, through which it will evaluate the opportunities for investment in the country. "Iraq is also of interest to us," confirms Yükler. Sure, Migros Türk and its parent Koç Group are experienced with politics affecting business. Entering one of the most unstable regions in the world would not only make Migros Türk a leader in early entry expansion strategy but also a retailer that boldly goes where no retailer has gone before...