Different markets, drastic measures

A cash & carry retailer operational in two different regions – Asia and South America – with the Pacific Ocean in between and with corporate headquarters in Europe. That is Makro, a cash & carry subsidiary of Dutch-based SHV Holding.

SHV is a privately owned company with origins in coal trading and whose other businesses are the exploration, production and distribution of oil and gas and recycling (especially metals).
Trade in food and non-food consumer products via the Makro cash & carry format seems an odd part of the SHV Holding industrial conglomerate. Still, Makro – with sales in 2005 of €4.1 billion – represents some 28 per cent of SHV’s total business. Despite the fact that Makro overall has not been performing too well in its two regions of operation, a spokesperson of SHV Holding stresses that “[…] the company remains committed to its Makro activities.”

Drastic decisions
Still, the past shows that the management of Makro does not shy away from drastic measures. Whenever it finds that in a specific market the conditions do not allow for a structurally sound cash & carry operation, it sells the operation – like in Malaysia last year – or it downright closes its stores. The latter happened in 2003 when Makro Asia decided to close its eight underperforming stores in Taiwan. Strong competition and badly located stores – too far away from residential areas – led to this drastic decision, resulting in negative reports on the retailer. For this reason, Makro Asia opted for a more sophisticated exit strategy when it decided to divest its operation in Malaysia.
In mid-2005, Makro Malaysia’s managing director Pieter Boone said he expected in 2005 to meet the 7 per cent growth rate his company realised in 2004, and that Makro Malaysia intended to open seven new outlets in the next three years, bringing the total to 15 cash & carries by the end of 2008. In August 2006, however, Makro Asia decided to put its Malaysian operation up for sale “[…] after a thorough strategic review of its operations.” On that occasion Boone stressed that Makro Malaysia as a cash & carry pioneer in the country, set the stage for the hypermarket and discount store era in Malaysia. According to him, Makro Malaysia was “[…] a well-managed and sound business that offers a good footprint of strategically located stores, experienced staff, proven operating systems and a loyal customer base.” This was indeed a different story to that of Taiwan and the eight-store Malaysian operation was sold to Tesco in December 2006.

Focus on two emerging regions
A major decision by SHV – and a drastic strategic shift – took place ten years ago, when SHV sold its stake in the Makro and Metro cash & carry operations in Europe and Morocco to the German retailer Metro Group. Since 1968, SHV and Metro Group had collaborated to jointly expand their cash & carry businesses cross border. This collaboration included taking minority shareholdings in each other’s foreign cash & carry operations. This sale therefore included SHV selling the majority shares in its Makro operations in Europe and Morocco and the minority interests it had in the Metro businesses in Europe.
This was a major shift in SHV’s cash & carry business and from 1 January 1998, Makro focused on cash & carry operations in two emerging regions, South America and Asia. As these are two different regions, both are managed separately with their own executive and supervisory boards.
In 1997, SHV even considered putting Makro Asia up for sale. SHV later changed its mind and retained the Asian operations with the exception of Makro Korea, which was sold to Wal-Mart in mid-1998. The other Asian operations were given five more years to improve their performance and in the end, Taiwan was closed and Malaysia sold. On the other hand, Pakistan was a new entry market for Makro Asia. Two years after the announcement that it would investigate setting up shop in Pakistan with its local partner Habib Group, the first store opened for business in November 2006 in Karachi.
A second store in Pakistan – in Lahore – is expected to be opened soon. A more important growth market for Makro Asia is China, where Makro has state approval to open 30 new stores before 2010. China is therefore a potential key market for the company in the medium term.
In Thailand, Makro Siam decided in November 2005 not to build new outlets in the near future. It had difficulties in finding new locations due to zoning regulations that had been put into place to ban large retail stores in residential areas. In 2005, Makro Thailand opened two stores while the company’s headquarters targets five new stores per year. The company stated that it would not develop new formats such as convenience stores or small supermarkets as its strategy is to remain specialised in wholesale. In June 2006, however, it  received approval for the opening of two new stores, due to be opened in 2007. This approval was granted three months before the military coup in Thailand and it is still unclear if this will have an impact on the development of Makro Siam’s wholesale operations.

Back to basics
In the South American region, results in the first years of the century were disappointing with sales and profits declining, especially in Argentina and Colombia. To turn things around Makro South America adopted a ‘back-to-basics’ strategy, which meant that Makro repositioned itself as a true cash & carry business, catering to small and medium sized companies and not to end consumers. In addition, improved private label lines and a non-food offering that better responded to customer requirements were part of the new strategy. In 2004, this seemed to pay off as that year sales improved – especially in Brazil and Venezuela. Commenting on Makro South America in June 2005, however, PlanetRetail expressed its doubts whether the better results indicate a structural improvement or that Makro South America was just lucky to benefit from an upswing in the economic climate in 2004. The drop in sales despite the opening of new stores in the first years after 2000, plus continued mediocre performances in Argentina and Colombia still cause concern.
In Colombia, Makro has been modernising its outlets, especially expanding the perishables departments in a move to increase business from institutional clients such as restaurants and hotels. Makro Colombia also introduced 100 new private label products in both food and non-food ranges. SHV’s 2005 annual report reads that the performance in Colombia and in Argentina is improving, “[…] though still unsatisfactory.”
The 2005 annual report expresses satisfaction on the performance in Venezuela and Brazil. In Venezuela, Makro has to deal with interference from the government that imposes price controls on an increasing range of commodity items. A difficult situation as Makro also had to deal with severe supply shortages of some basic goods in the market. In Brazil, the local operation Makro Atacadista reported a 15.9 per cent increase in net sales to US$1,376 million in 2005, but net profit decreased by 0.2 per cent to US$28 million. In its successful 2004 business year, Makro Brazil achieved an increase in net profit of 2.3 per cent and a 19.7 per cent increase in net sales.
In January 2006, Luiz Antonio Viana, the new managing director of Makro Atacadista in Brazil, announced the intention to regain its lost status and prestige by focusing on its 100,000 professional customers and execution of a rapid expansion programme. The company intended to invest US$23 million in the opening of four new stores and US$19 million in the continuation of its store-refurbishing programme. In June 2006, Makro Brazil was mentioned as one of the interested parties to acquire the Brazilian cash & carry retailer Atacadão. This retailer operates 39 cash & carries and is the fourth largest retailer in Brazil. It overtook Makro in 2003 in sales terms. By December 2006, however, nothing had been decided on who was going to acquire Atacadão, which appeared unable to prove that it was a profitable business and therefore deterred possible bidders.

Exploiting synergies
Despite the separation between the two Makro operations, parent company SHV is seeking for synergies to structurally improve the business. Makro Asia therefore adopted the back-to-basics strategy of Makro South America and focused on its core wholesale business. In Asia, Makro was perceived more as a hypermarket than a wholesaler, which did not benefit Makro’s position in the market, where it was facing increased competition from leading multinational retailers.
Both regions also acquired food service businesses. In December 2004, Makro Siam in Thailand announced the acquisition of Siam Food Services (SFS) for US$5.5 million. SFS is Thailand’s leading provider of premium food products – especially frozen and chilled food – and logistic services for the food service industry. In February 2005, Makro Brazil acquired Apprimus, a distribution company that services restaurants, fast food chains and hotels.
In both regions, it was decided that a better connection with the customers would be made by shifting more commercial responsibility for assortment and pricing to store management. “Cooperation among the different Makro businesses has developed further, especially in the area of joint buying,” reads the Makro section in SHV Holding’s most recent annual report (2005). “Purchasing through internet auctions increased in 2005. A number of significant regional supply arrangements with major players were concluded.”
This may well have happened via Makro Asia’s membership of Agentrics, the sourcing and supply chain collaboration company. The Agentrics website only refers to Makro Asia as a member but on inquiry, an Agentrics’ spokesperson states that it works for both Makro regions. “Both Makro Asia and Makro South America are fully engaged and use our sourcing tool”, she says. “Makro’s auction volume has increased significantly in the last 12 months – almost 200 per cent.”
Joint buying should also play an increasing role in the development of Makro’s own brand sales, states SHV in its annual report. “Our own branded product participation has improved, but not as fast as expected,” it reads.
So, there is an additional integration challenge, just as in implementing state-of-the-art business intelligence management information systems. SHV refers to positive results from supply chain efficiency – especially cross docking – and from initiatives to tailor key information to managers on all levels. Outsourcing is also considered, as in November 2005 Makro in the Philippines signed a contract with logistics service provider Exel to manage its warehouse and distribution operations. As the responsible partner for Makro’s centralised cross-dock warehouse in Manila, Exel would implement a warehouse management system that would be fully interfaced with Makro’s enterprise system.
On the assumption that this may well be a pilot project which – if successful in the Philippines – could be rolled out in other Makro markets, an SHV spokesperson only gives a brief comment: “These are different cases which cannot be linked like this. And for the rest I am unwilling to comment.”
In the years to come it will become clear if SHV has succeeded in its effort to build a structurally sound business, or that yet another set of drastic decisions will be needed, meaning an end to the industrial conglomerate’s commitment to its consumer goods business.