Carrefour Market Expansion Strategies in South Africa - Case Study Example

? Carrefour Market Expansion Strategies: South Africa Introduction Expansion into foreign markets is usually challenging for any business enterprise, however, major retail store Carrefour, a French multinational retailer has enjoyed tremendous expansive growth. Carrefour generates up to half of its revenue from ventures outside France (Justin 2007, p.106) Expansion into a foreign market entails numerous strategies, but they also carry a varying degree of risks and varying levels of commitment from the firm. The successes of the strategies imply that they have implemented over numerous steps (Mintzberg, Ahlstrand and Lampel 2001, p.6). In order to gain a competitive edge in a new market, the concept of strategies adopted should entail steps that are different from those of rivals (Sekhar 2010, p.6). Currently the retail giant operates in twenty-seven countries across all the continents, but surprisingly missing in the world’s largest economy, the United States, after it pulled out in 1994. Various research findings reveal that retail business market penetration in developed nations such as Singapore and Netherlands range from 85 percent to 51 percent respectively. Additionally research work conducted by Ebeltoft Group and MacMillan reveal the business of consumer retail is fastest in developing nations and more so in south America, and Africa (Loeb, 2013). The research also indicated that the net profit in these regions was also the highest amongst retail firms operating there, compared to other regions. In these economies market penetration is not as saturated as the case in more developed economies but the French retail giant is heavily represented in Latin America. Carrefour’s Current Markets The retail giant operates in four Latin American countries; the Dominican Republic, Colombia, Brazil and Argentina collectively having 284 hypermarket stores, 151 supermarkets, 695 hard discounters, 48 convenience stores and 124 cash and carry stores. The retail giant, on the other hand, is weakly represented in Africa with a total of only sixteen hypermarkets, thirty-seven supermarkets and one cash and carry store spread out in North Africa. Given these scenarios, it would be imperative to for the firm to consider an expansion plan in sub Saharan Africa and particularly South Africa. However, while considering entering into the South African market, Carrefour must learn a lot from its previous market entry strategies that failed in, for instance, Japan where it was unsuccessful in understanding and meeting the needs of Japanese consumers. Carrefour failed to conduct thorough pre-entry market research, and thus while carrying out market intelligence, it should consider applying the SWOT analysis; considering each strategy’s strengths, potential weaknesses and how best it can utilize potential opportunities in the South African market. These include first the Strengths it is competitive in prices compared to the rivals, has relatively large stores with a range of non-food items, expansion growth has been impressive and it places emphasis on locally sourced products. Secondly, weaknesses in their home country they are beaten by local rivals, Casino, their own brands are generally underdeveloped and finally it did not study markets in the United States and Japan, which resulted in failure. There is the opportunity in expanding to modest infiltrated market such as South Africa; despite the threat of rivalry from more prevailing Wal-Mart after their entry into the South African market. South Africa It is a middle-income economy and home to bulging number of middle class citizens, and with the government courting foreign investments into the economy; such moves seemed to have attracted Carrefour’s global retail rivals into the country such as Wal-Mart who are planning to enter the market. The country boasts of well-developed infrastructures and these developments provide a boosts for those firms planning to set up footprints into the country. The country is waking up to the devastating effect of the financial crisis that affected the global economy in 2007-2009 periods. The global financial crisis hampered growth of retail business for Carrefour in France research studies reveal that the growth of this retail firm in the home country is expected to be a mere 5.9 percent. However, there are pockets of opportunities for the firm in overseas market and more expansion domestically, but growth at home would involve market share forms of competition. Therefore foreign markets provides the firm with a realistic chance of growth in revenue and profitability this is due to bulging middle class, low levels of competition, and greater pricing flexibility. In addition, building and expanding into new frontiers would assist the company in cushioning it from the effects of the economic downturn in less profitable markets. However, the Carrefour should find out the usual profitability in the industry (Porter 2008, p.88) to gauge the benefits from the market.   Global economies are moving towards a free market system with countries such as China and Russia that had a traditionally controlled economy adopting a more open market system. South Africa has consistently been a market-oriented economy and some of the biggest barriers to entry of foreign firms to the economy gradually eroded. South Africa is sound destination for the firm to set up its retail business; this because the country has advance technologies and this enhances communication and information sharing between consumers and the company. The entry of a firm into a foreign market requires a lot consideration on internal and external factors in order to put into perspective the market’s own particular dynamics. These might cover a wide range of issues such as financing, cost and availability of labour, market demand, supply, and cost of set up amongst other important criteria. Ideally, the retail giant must take into consideration four important factors when expanding into a new frontier and these include marketing, source of supply, investment and control. Markets are different and it should be assumed that if the firm successfully entered and conquered the Brazilian market, the South African market would be the same scenario. Therefore, entry into the market should involve a careful consideration of methods of expansion that equates two important but often contrasting interest speed and control. South Africa PESTLE Analysis Macro environmental factors in South Africa are different from other markets because the country is pushing for attainment of a developed status, and though these factors are beyond the control of the firm, they ultimately influence the choice of entry into the market. Politics play an important role in determination of the choice of entry by an organization into the country of importance is the political climate and the maturity of the political system. In South Africa the long period of apartheid, the company should strive to understand this particular period in the history of the nation and that the current democratic system of the nation provides a good foundation for entry into the market. Economic factors are a fundamental in making a decision entry into a market, certain economic changes into the country influences the choice of the market. Moreover, such factor such as economic growth and GDP levels in the economy are important critical factors when deciding an entry strategy, the South African case provides a compelling case in this context given their burgeoning growth levels since the end of the global financial crisis this would provide an important decision element for the firm to consider. The South African society is an impressive society with perhaps a lot of mixture by different cultures; however, recent moves by the authorities have lead to a more cohesive society providing a good ground for entry of a firm. The technological level of the country is still below par compared to the developed nations, however the current levels of technological level is impressive and it has been acknowledged that it will spar growth for the country in the future. To reiterate the other point mentioned above, the laws in the country with regard to entry of firm are not stringent and the laws that regard to labour are not penetrative however, every firm must take every other measure to comply with them. Up to 30 percent of the people in this country are classified as poor so the issue of the organizations corporate social responsibility must be tackled in this area. Market Expansion Strategies for Carrefour in South Africa The strategy of technological innovation This strategy can be used to win customers in the new market and according to British Retail Consortium (2006, p.52) multinationals should expand broad and utilize advance technology as a bargaining tool when wooing customers to their stores. Three large retailers dominate South African retail market; Shoprite, Spar Group, Woolworths, and they are likely to react if Carrefour announces its entry into the market. In addition, since it is a late entrant into the market the firm must employ new technologies in infrastructural designs and product delivery to eat into the market share of these domestic giants. Product adaptation strategy can also be a key drive to a firm’s entry into a new market (Finne and Sivonen 2009, p.52). The strategy employed by Carrefour of distributing goods unbranded or branded in their own brand can find suitability in this market. Low price strategy This is can prove to be a very effective strategy especially in light of strong local domination by the other three major superstores. With sixty percent of the population in South Africa classified as low middle class, the firm can strategically set up its stores in locations in the country where these people mostly live and set low prices than other firms. Low prices in the market can enhance a push towards market domination (DransfieLd 2001, p.53).Low prices can only be effective if the company can develop ways to lower their operational costs; these costs can be lowered especially costs of labour, employees should be hired from nearby locality. Conformity and adaptation strategy The retail giant can totally choose be retain the brand name but change the overall structure of the firm in South Africa such that it bears semblance to the country’s local culture (Wit and Meyer 2010, p.786). Successful entry into the South African market by Carrefour is dependent on numerous factors and strategies, but time outranks other factors in importance. In addition, they must collect relevant information on the South African retail market trends and other significant concerns (Douglas and Craig 2005, p.11). To instil a sense of loyalty in the brand in South Africa must be accompanied by building of an intelligence system and image creation, these involve commitment of resources such as time, effort and money. Investments and control Typically, the retail giant can use these three methods to enter into a new market franchise, joint venture and full ownership. Each of these methods represents a trade-off between the pace of ownership and the control the company is likely to have over its stores in the new market. If the company intends to enter quickly into the market then it would have content with lesser exertion of control over the affairs of running its new South African stores. There are three method of entry by a firm into a new market and they include franchising, joint venture and full ownership (Doole and Lowe 2012, p.259). Franchising This entry process involves an agreement between the retail giant and a local agency that the local agent is operating under Carrefour’s brand name (Stonehouse 2007, p.218). Franchising can adopt any of these four models; area development franchising model, master franchise model, individual franchise model and finally hub and spoke model. The master franchise model involves a scenario in which there are two main parties the Franchisor and the master franchisee and the latter is granted rights to operate the retail business under the brand name in a given locational context. They are then granted the rights to manage the retailers brand name but within the socio-cultural and economic context relevant to the geographical region. In South Africa, franchising industry business is not really developed, besides, there are no materials and information regarding franchising form of entry into the market and therefore fees that might be involved is not easy to determine. Master Franchisees are, however, required to be having a sound capital base this is very important as this helps them finance the initial fees as well as kick starting their own operation. Master franchisee are also permitted by their license agreement to sell franchises to their own sub agents such an agreement is very lucrative for the master franchisee but not to the parent company. Area development licensing entails awarding of the right to an individual or a local company or even a consortium of companies the right to develop its own controlled franchise in the given set of agreed schedule. Franchising can also involve the giant retailer awarding direct franchising rights to multiple individual directly and not through the master franchisee, this Direct Franchising. Franchising is the fastest mode of entry into a new market but it also involves weakened control over operations in the new market. Franchising agreements can also be customized to make them more attractive to the parties involved; this usually presents a challenge. However, compared to other entry methods, it offers more flexibility and this can ultimately affect control level and the speed of expansion. The choice of a franchise apart from the above mentioned capital base must include a large network of stores and contacts in the country. Franchising can be helpful to the company, as it does not involve a lot of capital outlay as this helps the retailer to moderate capital investments. However, since the brand of Carrefour would be used as an agreement should be carefully drawn that reflect amongst other important issues how investments, publicity, advertisements and local laws would affect the business. This would mean that responsibilities be divided into those that taken the partner, the retailer and finally shared responsibilities. Choosing the right partner is a tricky affair, a poor choice leads to doom and failure whilst good choice leads to more cash inflows. In South Africa, Shoprite holdings limited is the largest retailer in the country and it is a local firm with networks in the country and other countries across Africa, it represents the safest bet to the large French retail giant for such a method. Joint ventures in the country may result in a success if a direct competitor is involved in the expansion plan (Hill and Jones 2008, p.216) and this would take the shape of joining hands with any of the top three superstores. Joint Venture Theoretically, the retailer and the partners can decide to join hands after a careful consideration and analysis of their financial strength, interests and risks. Unlike franchising, this entry method entails higher levels of control and it must involve a partner who has accounted many years of wealth in the retail business. Multiple ownership of business may present complicated challenge to the retailers .This form of entry into a market can be difficult if not troublesome to manage and control particularly in the first moving consumer goods retail industry. Equally, joint ventures may encounter issues at the board level and these may include governance procedures, processes, and accountabilities and may lead to disagreements. Owned expansion This is the most frequent and preferred mode of entry into foreign markets by global retail giants. Unlike the other two strategies of expansion, this method offers the highest level of influence on the business in the target market of entry. However, the rate of expansion offered by this strategy is slower compared to the other two entry strategies. The power that the retailer’s brand name bears would ultimately compensate for the slow manner in which the business was set up in the country. Unlike the other two methods, the company has direct control over the management of their own brand and the fear of brand damage does not arise. Mergers and acquisitions can enable the retail giant to quickly move in and begin operations in the country. Acquisitions are particularly the most preferred expansion technique by most retailers as it helps to drive operational efficiencies. Most writers acknowledge that acquisitions produce the best results when market dynamics in the home nation and the new market are similar. Important factors such as computer preferences, competitive intensity, market trends, and price elasticity’s serve as important pointers towards acquisitions (Hitt, Ireland and Hoskisson 2009, p.75). Conclusion Carrefour has experienced its own share of failure with regard to entry into new markets and therefore, not every entry into a foreign country is successful. Experiences harnessed in their previous expansion plans in countries where they failed and succeeded can prove invaluable when courting the South African market. It would be therefore logical for Carrefour to enter the market through franchising as it also has lower operational costs. Moreover, it is a relatively new strategy being applied by many multinational firms to enter into the South African since it is a low-risk venture. Important elements such as having a local face through hiring of local managers and employees who understand local consumer preferences and how to market to these consumers can be instrumental for the success of the firm.    Choice of locating the store in the country is another major important factor that can influence the success of the firm in South Africa, it is important that the firm set up its operations in large cities such as Johannesburg and Cape Town.  Poor choice of location can be disastrous for the company given the vast investment costs in setting up a new store. In summary successful entry into the market must be preceded by development and designing of a clear reason for being. Customers must be made familiar with that particular brand, but fortunately for Carrefour, it is a global brand and hence selling the brand name locally would not prove difficult. Secondly, the firm must be ready to lend an ear to their local customers and be flexible to their demands this goes a long way in determining the local flavour as each market have distinct and unique flavour. The firm should determine the best strategy to adopt be it joint venture with a large domestic firm such as Shoprite or pursue acquisition or even develop organic owned expansion strategy. The company should understand and respect local cultures and customs and develop a well thought out real estate strategy, only achievable through thorough research work. The firm should also allow the local management to be semi-autonomous so that they respond to market complexities in their own means. Despite its immense global strength, Carrefour must not underestimate domestic firms meaning that they should devise meaningful strategies to counter any home drive moves by these domestic firms. References British Retail Consortium. (2006). British Retail Consortium 2006. London, TSO. 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