(Niehm, Frazier, 1998-; Mintel; Rocha & Dib, 2002; Colla & Dupuis, 2002; Dupuis & Prime, 1996)
As demonstrated in the table, Wal-Mart tends to focus their strategy on joint ventures and more recently, acquisitions. Joint ventures were preferred in Asia and Latin America due to the large business distance (economic, political, geographical and cultural). This is because there were higher international transaction costs (Dupuis and Prime, 1996). Another driving force behind initial joint ventures would be to exploit the proprietary knowledge of the partner in an unfamiliar market. More recently, Bob Martin, International Head of Wal-Mart was quoted as saying,
“Acquisitions are a more appropriate first step…. in a sophisticated,
well-developed retail industry.” (Arnold, 1999)
Arnold (1999) similarly argues Wal-Mart now favours acquisitions because of their disappointing experiences with joint ventures in South America and Asia. Clearly Wal-Mart has the financial capability to pursue acquisitions but they may favour this choice of entry because it offers high control (McGoldrick, 1995). Carrefour’s strategies early on in their internationalisation concentrated on Acquisitions and joint ventures, e.g. Brazil and Argentina (Niehm, 1998), however in recent times they favour organic growth e.g. Italy and Malaysia (Mintel). This difference in internationalisation strategy mainly focuses on the fact that Carrefour will test new markets with pilot stores and then expand if that store proves to be a success. This occurred in both Italy and Korea (Niehm, 1998).
After careful consideration of the two company’s strategies it is clear that both Wal-Mart and Carrefour benefit from the Virtuous Cycle (Dupuis and Prime, 1996) (shown below), as both firms are value retailers. However the strategies they incorporated to achieve this position were different.
Lower costs Higher Volumes
Lower purchasing prices
Wal-Mart’s philosophy is based on careful analysis of the retail value chains with the objective to reduce costs in order to become more competitive. With this in mind, Wal-Mart are essentially a downstream distributor (Colla and Dupuis, 2002), as it concentrates on pulling through manufacturer’s branded goods, through integrated technology, to achieve lower cost as a means to a competitive advantage. In contrast Carrefour strives to control the entire supply chain to promote own brands (Ibid.) and sourcing of goods from local area suppliers as a means of differentiation and thus competitive advantage. For example, in 1994 Carrefour was resilient to the Mexican economic crisis as they sourced goods from within the country, whereas US based competitors, including Wal-Mart, sourced primarily from the US (Niehm, 1998).
Carrefour has succeeded in exporting a strong concept through its use of an adaptable strategy on the store level. As such, French style hypermarkets are currently expanding in southern Europe, South America, Asia and increasingly in central and Eastern Europe (Colla and Dupuis, 2002). Therefore, this is why Carrefour now prefers an entry strategy of organic growth as they are able to adapt to the local catchment area due to decentralised management (Ibid.). However, Wal-Mart in the same markets have demonstrated a lesser degree of adaptability in the marketing mix (Colla and Dupuis, 2002) which has resulted in considerable difficulties, and therefore prefers acquisitions as they don’t have a unique store concept and uses its technological infrastructure in the acquired network to gain efficiencies in the new market.
“Food retailers will need to go global to succeed”, Terry Leahy, CEO Tesco
Discuss how far you agree with this statement.
Food retailers will need to go global to succeed, Tesco said in announcing half-year profits. (BBC News, 19th September, 2000) Is Terry Leahy simply justifying his company’s strategy or can food retailers solely concentrate on their home market?
Looking at Tesco’s results, the argument and results for food retailers going international seems very convincing. Tesco’s overall international sales rose 42% to £1.2bn over the last six months to September 2000, with revenue from Asian and central European operations almost doubling (www.tesco.co.uk). Tesco predicts that 45% of their shopping space will be outside the UK by 2002 (Ibid.).
Daniel Bernard, CEO of Carrefour/Promodès says, “Globalisation is a reality which has been imposed on all retailers; underlying it is the emergence of a global middle-class which has a new consciousness which comes from the freedom to move around, to choose, and to reflect on what it wants, and will therefore buy” (Colla and Dupuis, 2002). Thus, Bernard is essentially echoing Levitt’s (1983) earlier proclamation that the world is being driven to a converging commonality and that companies should ignore superficial regional and national differences. This is reflected in the product mix of a Carrefour store as it stocks so many diverse products that the store has universal appeal (Dunne and Lusch, 1999).
The word “global” in Leahy’s statement is interesting to note. Simply speaking he is suggesting Tesco could sell the same products in the same way in Loughborough as it could in South Korea. A global company assumes a standard format used throughout the world (Sternquist, 1998) and views the whole world as nationless and borderless (Parker, 1998), thus achieving the greatest economies of scale, but showing the least local responsiveness (McGoldrick, 1994). On the other hand, multinationals tend to develop or acquire a diversity of formats internationally, usually achieving rather lower benefits of integration (Ibid.). A middle course may be termed ‘transnational’ retailing (for example Carrefour and Wal-Mart), whereby the company seeks to achieve global efficiency while responding to national needs, opportunities and constraints (Ibid.) In our opinion, the mantra of “think globally act locally” (Perkins, 2001) is more applicable, as to develop genuinely international operations successfully, companies need to have a focused strategy, but also adapt to local conditions, as selling food is culturally bound (Sternquist, 1998).
The rhetoric about globalisation has been partly fuelled by the fact that many food marketers are finding that instead of clearly identified markets with distinct sets of customers and competitors, these are becoming increasingly blurred (Reid, 2002). The forces of globalisation seem to be having a powerfully homogenising influence, with consumers being subjected to the same levels and types of communication and the rise and promotion of globally recognised brands. In addition, better education, increased international travel and more leisure time appear to be driving a convergence of lifestyles and food related desires and expectations (Parker, 1998). Thus, there is a growing similarity among consumer requirements with regard to taste, quality and value for money, health, safety, convenience and availability.
Conversely, other food retailers find they are faced with increased fragmentation of consumer markets. They argue this has been driven by increased food choices, varied lifestyles, increased discretionary income and greater exposure to brand promotion and communication (Reid, 2001). Furthermore, peculiarities of national tastes, values and traditions imply that a food retailer cannot standardise many product ranges. For example, Health and Safety regulations prevent food retailers selling the same type of beef in the US and France (Hibbert, 2000). So going global in the true sense of the word could be a risky strategy. As Bernard has said, “If people think that going international is a solution to their problems at home, they will learn by spilling their blood. Global retailing demands a huge investment and gives no guarantee on return.” (Colla and Dupuis, 2002).
If food retailers “need” to go global then it follows that the company should have the characteristics that fit with this strategy. According to Sternquist (1998) there are several characteristics of a global company. These include centralised management, narrow and distinct product lines and rapid expansion. It is illuminating to consider these characteristics in relation to food retailers as it is clear there is a low degree of fit. For example, most food retailers do not have narrow and distinct product lines, far from it, they tend to pride themselves on having a wide choice. Furthermore, management is most often decentralised so as to ensure that stores are more sensitive to cultural nuances. Finally, food retailers do not tend to expand rapidly since they usually concentrate their expansion on a limited number of countries, attempting to gain market share due to the highly competitive nature of the sector. Thus, hypothetically speaking, if a food retailer was to adopt a truly global strategy, that is assuming their customers are homogenous throughout the world, it may experience major problems. Therefore it is interesting to note that while going global may suit specialist stores who have similar product lines, price levels and store design (McGoldrick 2002), this is not the case for food retailers. This is due to the fact that food retailers have to tailor their offering including the format to the specific local conditions. Ironically, Tesco has itself developed the supermarket format and distribution system that has been flexible to adapt to its local markets. This enables Tesco to express itself within the context of the host country, although it is recognised as coming from Britain (Newman and Cullen 2002).
A global company seeks to grow its business by extending its markets while at the same time seeking cost reduction through scale economies (purchase and logistics) However, whilst the logic of globalisation is strong, it also presents many challenges. Firstly, as has been discussed world markets are not homogeneous. Secondly, unless there is a high level of co-ordination the complex logistics of managing global supply chains may result in higher costs (Christopher and Braithwaite, 1991). There seems to be a race amongst the major players to be the first into many new and untapped markets as they seek to fend off the competition and build in scale economies. There are very few (if any) examples of food retailers truly being global, they may standardise certain aspects of their store format but seldom do they offer the same products in the same way in all their markets. This begs the question is global size really important?
Companies such as Waitrose survive just having a presence in the home market. The risk for these types of companies is that a trans-national company such as Carrefour might decide to move into the UK and take the company over. With the increasing scale of international retailers, their bargaining power is so much greater than that of retailers who operate solely in the domestic market. The worry for domestic players is that there is a risk of them being left behind and overtaken in the market place unless they are highly differentiated. Indeed, this seems to be the line that Waitrose is taking. It has positioned itself at the higher end of the grocery market and chosen to concentrate on quality and customer service (www.waitrose.co.uk), offering many niche brands and in so doing has distanced itself from the larger players.
So, Terry Leahy’s comments are too simplistic as there are so many other factors to successful implementation of globalisation. Indeed, it has been shown that although there is an imperative to expand abroad among many of the major food retailers, going global in the true sense of the word, may be a very risky strategy. Leahy’s statement uses the wrong term, as in our opinion, it should read: “The major food retailers will need to go transnational to succeed”. Smaller retailers may not have the capital to internationalise, lack the capability in terms of management expertise or may simply want to concentrate on their core domestic market. If they are highly differentiated then they can survive as niche players and as such they do not “need” to go global to succeed.
Discuss the problems that these retailers have had in establishing themselves in foreign markets
The internationalisation process for both Carrefour and Wal-Mart has not been straightforward in all countries. Indeed, both companies have faced problems in their quest to establish themselves in foreign markets.
Culture refers to the complex group of symbols created by society to shape behaviour that is passed on from one generation to the next (Schiffmann and Kanuk, 1997). According to Dupuis and Prime (1996) cultural barriers might be more important than technical obstacles in the internationalisation process. This contrasts sharply with Levitt’s idea that the world is being driven toward a converging commonality (Levitt 1983) . As he states:
“These days the same countries that ask the world to recognise
and respect the individuality of their cultures insist on the
wholesale transfer to them of modern goods, services and
While for certain goods and services this may be true, Levitt is making a sweeping generalisation here and one that may not be true in the case of groceries, not just in their physical form but also the way in which it is sold by retailers. Looking at both Carrefour and Wal-mart it becomes evident that culture has been a major factor in the problems they have faced in the internationalisation process. Indeed, when a retail format is exported it has to face a new context which may affect its original competitive advantages in three different ways; the retailing mix, the channel mix and the environment. These changes may have three different impacts on the retail format competitive advantage. Essentially, it can be amplified, reduced or have no influence on the current competitive advantage (Dupuis and Prime 1996).
Therefore, success in one country doesn’t always mean success in all countries. Arnold (1999) suggests that the biggest cause for failure in entering foreign markets is failing to understand the culture of the new market. For example, the hypermarket was an overwhelming success in Europe, Mexico and Latin America, but a failure in the United States. Thus, the competitive advantage of the French hypermarket did not fit with US buying practices, that is, the competitive advantage was actually reduced. For example, the one stop shopping concept was not adapted to American consumers, who usually purchase food and non-food goods in different places, often in the same shopping centre (Dupuis and Prime 1996).
Wal-Mart too has faced the issue of culture. For example, when it entered Hong Kong with the mini warehouse club format, customers summarily rejected it as they valued convenience, quality, service and store atmosphere over price and bulk purchases. The store was closed two years later in 1995 (Frazier, 1998). Another major problem Wal-Mart has encountered has been their entry into Germany. This is because Wal-Mart’s concept of large hypermarkets with wide non-food ranges and every-day-low-prices was not new (Mintel, 2002) as the no-frills discounter originated in Germany. Therefore, Wal-Mart struggled for a competitive differentiation. Wal-Mart’s strategy for Germany was to improve in-store appearance (Fernie and Arnold, 2002). When Wal-Mart applied its service techniques it infuriated German shoppers used to a minimum service approach and consequently Wal-Mart finished bottom of a German retail satisfaction survey (Piercy, 2002). Thus, low service was so ingrained into the culture that any attempt to change it was rejected. This is seen as Wal-Mart in Germany ran at a £150m loss a year and expansion strategies have been restricted (Ibid.). Thus, both companies have found it difficult to adapt their retail mix in certain foreign markets as there has been a reduction in their core competive advantage (Dupuis and Prime, 1996). These rejections of the retail mixes can also be attributed to pubic opinion (i.e the environment [Dupuis and Prime, 1996]) since they are reflections of the country’s culture.
Despite the above, evidence would suggest that culture has not been the only problem that these retailers have faced in their international expansion, although it should be noted that many of these additional issues can be indirectly linked back to culture. For retailers of this scale, operational issues and in particular, logistics, predominantly dictate the success of a store. For example, when Carrefour entered the USA it also found that price competition was much more difficult in such a segmented market. Furthermore, logistics were mainly subcontracted and the pilot did not reach the critical purchase size (Dupuis and Prime, 1996). At the same time, its main competititors like Wal-Mart did have centralized logistics and a very strong purchasing capability.
Wal-Mart has faced similar problems in trying to establish in foreign markets. For example, when they entered Brazil, they attempted to apply the same supplier relations they had in the US. However, in Brazil, bargaining power is predominantly with the manufacturer and so when they started to sell products at prices below costs, some suppliers reacted by refusing to deliver into Wal-Mart’s distribution centres (Rocha and Dib, 2002). Therefore supply was not aligned to demand and stock outs occurred. Wal-Mart has faced a similar problem in Germany where they encountered resistance from national suppliers used to delivering directly to stores rather than distribution centres, it did not have significant influence to change suppliers established behaviours. As a result, deliveries failed to arrive on time and out of stock rates jumped. (Fernie and Arnold, 2002). Therefore, this shows a lack of power in the supply chain, as the power Carrefour and Wal-Mart had in the home market was not directly transferable to the new foreign markets. This is an example of failure to understand the external relationships in the channel mix in the new markets.
Carrefour and Wal-Mart in their international activity have both been subject to external environmental factors that have been out of their control. For example, Carrefour suffered economic problems of hyperinflation in Brazil and Argentina, this rendered marketing strategy of low prices impossible to promote as prices were virtually obsolete from the moment they were set (Burt, 1994 in McGoldrick, 1994). Carrefour also experienced problems of public opinion in U.S.A, indeed ‘Buy American’ campaigns exerted a negative influence on its operations (Dupuis and Prime, 1996). Therefore, the rejection of Carrefour can be partly attributed to the nationalistic nature of Americans. Wal-Mart has faced legislative problems in Germany, where loss leading is prohibited, reduced opening hours, refunds for items found cheaper in different retailers and a classification system for EDLP of the same price for two months (Fernie and Arnold, 2002). Therefore these restrictive trading practices have contributed to its constrained growth. Furthermore, the competive and legislative environment has also constrained Wal-Mart’s internalisation strategy in Europe. This can be seen as the geographical position of France makes it an ideal location to bridge its operations in Europe, however there are no suitable targets for acquistion due to the Carrefour-Promedes merger and the strict regulations on new site development restricting organic growth (Fernie and Arnold, 2002).
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