Wal-Mart, Tesco and Carrefour do battle in the East
International retailers find mixed fortunes in their expansion strategies
Abstract
Purpose – The paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies.
Design/methodology/approach – This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context.
Findings – The paper finds that saturated markets, growing economies and improving transportation systems are all reasons that large retailers are seeking to grow their businesses overseas – and some countries seem to be more appealing than others. Most recently, Tesco has moved into China and the USA, Carrefour has started pulling out of some eastern European countries in order to focus on its Chinese strategy … and Wal-Mart appears to be moving everywhere!
Practical implications – the paper provides strategic insights and practical thinking that have influenced some of the world's leading organizations.
Originality/value – The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.
Article Type:
General review
Keyword(s):
China; Japan; Corporate strategy; Retailing.
Journal:
Strategic Direction
Volume:
24
Number:
2
Year:
2008
pp:
5-7
Copyright ©
Emerald Group Publishing Limited
ISSN:
0258-0543
Saturated markets, growing economies and improving transportation systems are all reasons that large retailers are seeking to grow their businesses overseas – and some countries seem to be more appealing than others. Most recently, Tesco has moved into China and the USA, Carrefour has started pulling out of some eastern European countries in order to focus on its Chinese strategy … and Wal-Mart appears to be moving everywhere!
Of course, internationalization is not a new phenomenon and research into the subject dates back to the 1970s with various theories relating to methods of entry, export strategies and other similar approaches. However, the pace of international growth in the retail sector in recent years has made the headlines on more than one occasion. So how are the likes of Tesco, Wal-Mart and Carrefour faring in the international arena? And how does this fit with current research into international expansion strategies?
Internationalization strategies
In 2007, Lessassy and Jolibert identified four main strategies in relation to internationalization:
- as a self-established subsidiary;
- through direct acquisition;
- by franchising; or
- by joint venture
Self-established subsidiaries and direct acquisitions are the highest risk and therefore require high levels of investment and because of this, new management skills are critical. On the other hand, franchising requires little financial investment so the risk is not quite as high. However, the retailer does need to ensure there are some HR resources available, and sometimes capital is required for franchisees to acquire land and other material resources.
The lowest risk approach is joint venture, which works by combining knowledge of the host country organization with the technical skills of the entering firm. The main drivers of joint venture strategies are general knowledge of the local economy, reducing risk and gaining quality managerial ability.
Most popular approaches
After identifying these main approaches, researchers then asked 25 large international food retailers to define their international strategies based on criteria such as maximizing profitability, availability of company resources and core competencies such as communication, investment in advertising, sales force and supervisory staff. Companies were asked about risk, geographical and cultural proximity in relation six regions. Risk in this context meant investing in real estate and market research.
Unsurprisingly the authors found that different strategies are employed by different retailers. Wal-Mart was the only retailer that mainly uses acquisition strategy regardless of the region with no adaptation for the relevant market. Carrefour and Lidl also use acquisition strategy but to a lesser extent whereas Auchan and Casino use a mixture of all four strategies.
When looking at regional approaches, the researchers found that in:
- Eastern Europe the main approach adopted was joint venture or by acquiring a majority stake in a subsidiary. There is no franchising due to the lack of trained personnel and financial resources in the host countries.
- Southern Europe again, joint venture and acquisition are the preferred strategies.
- Northern Europe franchising, real estate investment and majority acquisition of a subsidiary were mainly adopted and, interestingly, not a single company selected the “no clear strategy” option in this region.
- North America 66.7 percent opted for the majority acquisition of a subsidiary although some companies did franchise. This is one region where joint venture was not really used.
- South America again, the most popular strategy is majority acquisition but here, joint venture is the second most popular option.
- Asia franchising is not used for the same reasons as in eastern Europe. Majority acquisition is popular (55.6 percent) as is joint venture (22.2 percent) but, more interestingly, 10 percent of respondents believe that they have “no clear strategy” for this region.
Of these regions, the most talked about recently is Asia where international chains are having mixed fortunes as they adopt a number different strategies in a bid for success.
Wal-Mart struggling in Japan?
One retailer making the headlines on a regular basis is Wal-Mart which has successfully expanded into China, the UK and Mexico in recent years. But it has fared less well in Germany and South Korea (having pulled out of both regions) and, despite having spent over $1 billion moving into Japan, there are still question marks about Wal-Mart's success in the Japanese market.
In line with other overseas expansion strategies, Wal-Mart opted for acquisition when moving into Japan and took over a 51 percent stake in the Seiyu stores in 2005. It now has 400 stores in total and increased its sales by 0.6 percent in 2006. However, as analysts point out, this figure pales into insignificance when one takes into account the $479.5 million that the stores have lost to date.
Culture clash
So what has gone wrong for Wal-Mart in Japan? Many believe that this comes down to a basic culture clash. Wal-Mart has found success by employing a simple standardization acquisition strategy when moving overseas. It acquires a major stake in a host business, puts in place a management team and then introduces an essentially American operating model based on “always low prices” to run the stores. Critics believe that this has worked in price sensitive countries such as Mexico and China (and, to an extent the UK), but in Japan, where customers are prepared to pay for quality, this approach has not been as well received.
Similarly, the fact that Wal-Mart has introduced a senior management team of Americans, Britons and Canadians has not proved popular in this country. As Fortune magazine observes, the US companies that do well in Japan understand the need for autonomy and have therefore appointed a number of Japanese senior management. Another area of criticism has been the way in which, prior to taking full control of Seiyu in 2004, Wal-Mart encouraged the company to dismiss 1,500 of its employees. In a country where social harmony is paramount and mass sackings rare, this decision did not go down well with the general public. Earlier in 2007, Fortune believed that investors were waiting to see what Wal-Mart would when it had to decide whether to acquire more Seiyu shares. If it declined then it would have been seen as a vote of no confidence for future investment in the region. However, the retail giant recently announced that it would indeed be acquiring more shares, indicating that it has long-term plans for its Japanese stores.
Tesco and Wal-Mart battle it out in China
Another retailer that has been gradually making its mark overseas is Tesco. Having moved into the European market and started to penetrate the USA, the world's fifth biggest retail chain in the world set its sights farther afield in 2004 when it signed an agreement with Shanghai Hymall Commercial Retail Group in a bid to gain a substantial presence in China.
Although there are still infrastructure problems in the country which makes it difficult to find reliable suppliers, the big retailers are looking to establish themselves in Asia's fastest growing economy. Tesco now owns over 90 percent of Hymall and Wal-Mart is set to enter the fray by acquiring the second biggest hypermarket in China, Trust-Mart. In doing so, it beat off a rival bid from Carrefour who has been in China for 17 years and is the biggest international retailer in the country.
And with the prediction that the retail market will be worth $596 billion by 2010 (up $166 billion from its current value), it is no surprise that these retailers see the potential in China. However, as well as battling amongst themselves for market share, Wal-Mart, Tesco and Carrefour will also have to compete with the numerous other competitors. According to a recent article in the Financial Times, there are 120-130 hypermarkets in Shanghai alone and some experts believe that with the rising real estate costs and increased competition forcing prices down, shrinking margins may mean a gloomy future for the big international chains.
Whether this will be the case remains to be seen as for now, growth potential appears to be outweighing any negatives for these supermarkets. But, however this situation develops, what is clear is that there is no “one size fits all” strategy when moving overseas in the food retail sector.
Comment
This is a review of “Why Wal-Mart can't find happiness in Japan” by Holstein, “Internationalization of retail strategies” by Lessassy and Jolibert and “Big chains stake out their turf in China” by Rigby.
“Why Wal-Mart can't find happiness in Japan” is an interesting piece that looks at Wal-Mart's activities in a region that is proving difficult to penetrate. The author provides some possible explanations for Wal-Mart's lack of profit here which mainly center on cultural differences.
Lessassy and Jolibert's longer article presents empirical research into the types of strategies that retailers think they adopt in different regions. This information is useful for any business thinking about moving into a new market, particularly in the food retail sector.
Finally, “Big chains stake out their turf in China” is a short article that the battle for market share in China's retail market. While no winner is declared, the article points out that there are interesting times ahead for both Wal-Mart and Tesco as they compete for dominance in Asia.
References
Holstein, W.J. (2007), "Why Wal-Mart can't find happiness in Japan", Fortune, ISSN: 0728-5587, Vol. 156 No.3, .
Lessassy, L., Jolibert, A. (2007), "Internationalization of retail strategies", Journal of Euromarketing, ISSN: 1049-6483, Vol. 16 No.3, .
Rigby, E. (2007), "Big chains stake out their turf in China", Financial Times, ISSN: 0307-1766, No.February 13, .