Central European Market - Auchans Expansion in Russia - Essay Example

Auchan’s Expansion in Russia Introduction In an article d, Auchan’s entry into Russia: prospects and research implications, Graham discusses the future of the Auchan corporation in foreign markets (49). In this article Graham suggests that the competition in the Russian market is very intensive, hence the need for the foreign companies to adopt appropriate market strategy (68). Russia is one of the fastest growing markets, has numerous opportunities and has a very big population. Russia has experienced a robust economic turnaround since 1998 crisis and the country has benefited a lot from the FDI inflow, and the changing social and political environment. This paper examines the Auchan’s progress in the Russian market. The paper starts with background information and then analyzes the Russian market. The paper also discusses some of the challenges facing the company and suggests ways through which they can be addressed. Auchan in Russia Auchan Corporation is based in Croix, France and had presence in more than 12 countries. The company’s origin can be traced to 1961 when Gerard Mulliez opened the first store in Roubaix, France. Five years later, another store was opened in Roncq, Northern France. The company started expanding to other countries in 1981, when it established a subsidiary in Alcampo, Spain. In 1989, the company opened its first hypermarket in Italy. The company has also established foreign subsidiaries in China, Hungary and Russia. In order to increase its presence in the major economies, the company has also acquired other players in the retail industry. This mode of entry allows the company to expand much faster rather than using wholly owned enterprises. The company is one of the pioneers in the hypermarkets landscape in France and other major European countries. ). The consumers have extended values and intimacy to the corporation and the company has become more than a localized entity in Russia. Auchan prefers organic growth and has 1,450 stores across the globe. Although the organization prefers organic growth, at times it expands to foreign markets through acquisitions. For instance, in 1996, the company acquired Docks de France and partnered with RT Mart in China. In Italy, Achuan acquired La Rinascente’s while in Italy it acquired GCI. Such acquisitions are very advantageous as they are less risky and are associated with positive outcomes such as increased market share, lower cost of operation, higher competitiveness, financial leverage and higher profitability. In most countries where it operates, the Achuan group pursues a strong discount policy depending on the size of the target market. In this regard, hypermarkets are reserved for highly populous cities, while the smaller versions are tailored for small and medium sized towns. Auchan entered the Russian market in 2002, at a time when many retailers including Carrefour were exiting the country. At the time, Russia was going through tough economic times, which saw other companies such as Ramenka and Edeka reduce their interests in the country. Auchan hoped to take advantage of the 142 million consumer market. Since entering the market, the company’s performance has been exemplary and has become one of the major anchors in the real estate. At the start of the year 2010, the company had established 38 stores in Russia and planned to pen six more within the course of the year. As of January 2014, the company had 79 stores, 53 hypermarkets, 21 Auchan city hypermarkets, 5 hypermarkets and 5 garden hypermarkets in Moscow, Voronezh, Samara and Volgograd (Larimo 34). The company concentrates its operations in Moscow and St. Petersburg as the two cities have huge middle-class population. The company offers safe working conditions and serves more than 1.5 billion buyers a year. In Russia, the company employs 30,000 workers; 72% of whom are women while 28% are men (Blinnikov 45). Market and customers The Auchan Corporation is one of the largest retailers in Russia where it operates hypermarkets, compact hypermarkets and supermarkets. The company is popular with shoppers, especially in the Russian capital City, Moscow. According to Blinnikov, Moscow accounts for the largest share of the company’s sales and the major competitors include X5, Magnit, Metro Group, DIXY Group and O’Key (43). Since opening its first store, the company has become popular among the shoppers. During its first years of operation, the company made an agreement with Enka to takeover 14 of its ramstore hypermarkets in Russia. This agreement helped the company to enter the market rather quickly. The company uses a rather common strategy – high volume and low margin sales- and this approach seems to resonate well with the customers. The company always tries to improve the quality of products and services available to the customers. At the same time, the company is expanding its online platforms to ensure customers have ready access to a wide range of products and services. Already, the company has launched a drive outlet where customers can pick goods ordered on-line. The company also hopes to open electronic stores where customers will be able to pick goods ordered online. The company also pursues a discount policy wherever it operates, and in Russia, a “Nasha Radouga’ format was launched to serve medium-sized towns. Following the success of the concept in the Russian market, it is already being replicated in other countries. In France, the concept is already being used to reduce the company’s costs and cut out the stuffed counters. The Priba discounted hypermarket was launched to replace an underperforming Auchan hypermarket in the area. Such stores offer low prices, hence attracting low earning customers. According to Terterov, in future, the Auchan’s discount hypermarket concept may be replicated in other countries such as Spain and Italy. Besides the ‘Nasha Radouga’ concept the company has launched a discount supermarket chain dubbed ‘Atak.’ The supermarkets sell essential commodities to customers in major cities around the country. An even more prominent concept –Banque Accord- has been adopted in Russia to offer credit facilities in hypermarkets. Operating in the country has not been smooth due to several factors. For instance, the Russians are always ambivalent to the foreign products and companies. Instead, they prefer local goods and so foreign firms must make sure they adapt their products to meet the needs of the local communities. There is also the aspect of culture; whereby Russians have great pride in their country and values. They are also risk averse and they prefer stability, security, predictability and social order. Under these conditions, it would be difficult for a firm to market imported products. At the moment, 70% of the products sold at Auchan’s superstores are sourced locally while the rest are imported from other countries (Larimo 31). In order to meet the consumer preferences, the company should increase the share of the local brand, and by so doing it will improve customer loyalty and satisfaction levels. Other factors that the firm needs to bear in mind are the distance between the superstores, the traffic levels and the number of time zones. Such peculiarities influence the location of the business and the time taken for the deliveries to reach the customers. Competitors Although the company has been doing well in the market, it faces huge competition from other key players such as X5 retail group which owns the highest number of stores in the retail industry. Graph 1 shows the main competitors in the retail industry and their sales in the year 2008. Although at the time X5 was the largest grocery retailer in terms of sales, it has since been overtaken by Magnit. The third largest retailer is DIXY which acquired local peer Victoria in 2011. Auchan differentiates itself by selling quality products which are 10-20% cheaper than in other stores (Larimo 52). The company also provides the consumers with a wide selection products, an event that have seen customer continuously flock its stores, even when its economy seems to be declining. According to Terterov the company’s model of ‘modernity, choice and discount’ seems to resonate well with the middle class Russian shoppers (61). Offering customers goods at a cheap price without encountering quality issues mean that the company is doing very well. Customers throng all over the available stores and hypermarkets especially during the weekends. The company also has a wide network of stores thus making it easy for the customers to access the shopping areas. The company fairs well compared to Kopeyka and Pyaterochka whose products are perceived to be of low quality. On the other hand, Sedmoy continent offers premium goods, hence limiting the number of shoppers. Unlike other hypermarkets, customers visiting Auchan are not required to carry entry pass cards. Although the company is doing better relative to its competitors, there are still opportunities that it can exploit. For instance, Russia is a vast country with the major part of its population concentrated in the western regions. The country also lack good road, rail and air infrastructure. Due to these challenges it is very important for the company to devise ways through which can serve the entire country, by strategically positioning stores in the most populous cities. The alternative to establishing an effective brick-and-mortar model would be expanding the digital platforms. Fortunately, Russian is the largest internet marketing audience in Europe and so the company should not have any problem reaching the target consumers. Russia also boasts of a high mobile phone penetration and so it will be very easy for the consumers to collect their ordered products. Already a number of players in the retail industry are using the online platforms for delivery purposes. For instance, ULTRA, has established outposts where consumers can pick their online orders while Euroset has partnered with OZON to deliver products to distribute its products. Such examples illustrate to us, the importance of expanding the online platforms, so as to reach as many consumers as possible. Graph 1: Adopted from Larimo (34) Expansion strategy In 2008, the company had 53 outlets but the number has increased to 75 (Graph 1). The company hopes to open 14 other stores in the year 2014. It also hopes to increase the number of the hypermarkets to 20 by the end of the year 2014 and more stores under the following banners: Auchan, Auchan City and Nasha Raduga. According to the company’s representatives, the Russian market is very lucrative and will continue operating in the country as ling as it takes. Auchan’s expansion in the country is influenced by many factors including a fast growing middle class. According to Blinnikov 15 to 25% of the total population belongs to the middle class with 74% of the Russians living in the urban areas (18). These statistics indicate that Auchan has a ready market for its products and it needs to penetrate more especially in the small and medium-sized towns. Through the expansion process, the company will be able to compete well with the other major player although there are concerns that some of the locations are already saturated. For instance, most of the hypermarkets are concentrated in Moscow and St. Petersburg and there is need for the firm to open more in Western areas where most population is concentrated. In addition, the Company is forced to operate in uncertain business environment. It seems that there is lack of commitment from the government to help the companies operating in the area. One such company is Shell BP, which was forced to cede control of its market share to the state-run Gazprom. Another company that is under increased pressure from the local authorities is Nestle SA which has received warnings for allegedly violating safety rules at its Russian plants. On even a worse note, some of the companies have been forced to quit the Russian market to avoid endemic corruption. Indeed, according to the Transparency International’s 2010 Corruption Perceptions Index, Russia is the world’s most corrupt advanced economy (Molch 14). Reasons for Entering the Market The Russian economy is doing very well economically, and has a huge potential for the international enterprises. The Russian economy has been undergoing a transition from being state-owned to being capitalistic. The transformation offers businesses many opportunities. To strengthen the economic environment, the government has initiated tax reforms, deregulation, property rights and financial markets. The Russian market is very favorable to the company, and has a huge potential and this explains why Auchan Corporation chose to expand it operations in the country. Currently, the country ranks third in terms of GDP growth, only behind China and India (Graph 2). One of the most attractive cities is Moscow with a population of 20 million people. The city accounts for 30% of the nation’s trade and this could explain why Auchan has concentrated its economic activities in this location. However, economic has first been spreading to other towns including St. Petersburg. There is no doubt that the company has invested highly in the country, and according to the recent statistics, it will continue reaping the benefits of a strongly growing economy. Graph 2: Adopted from Hall (13) Difficulties in Penetration Bureaucracy The government plays an important role in creating opportunities and attracting international investment. Firms are forced to perform a risk analysis before investing in any country. The government can adversely affect the business environment by imposing tariffs, quota and taxes on imports and exports. Lack of involvement of the Russian government in promoting a suitable business environment is a major concern. The Russian market is characterized by bureaucracy and sometimes firms are unable to cope with administrative requirements. Firms operating in the country also often find it hard getting information from authorities, as tolerance for the foreign companies is very low. Besides bureaucracy, the country’s laws are arbitrary and non-transparent. In addition, the judicial process is not forth right as sometimes, the government can influence the system. Frequent changes in the existing laws, also makes it hard for the company to comply and this is a major challenge facing Auchan Corporation. The political conditions in the country discourage investment and the existing political system is not likely to change in the near future. Lack of a transparent legal system makes it difficult for firms to obtain licenses without bribing the relevant authorities. High tariffs and entry barriers The custom clearance process is very complicated and time-intensive. At some times, goods can be delayed by the customs department for no apparent reasons. According to Molch, the officials delay goods intentionally in order to get bribes and favors (33). Such delays causes negatively affect the delivery of products and raw materials to the warehouses. As suggested above, 30% of the products are imported from foreign countries, and so it is very important that the company is facilitated by the government in order to compete with the local retailers. Equally important, the government has failed to put in place adequate infrastructure and as a result, organizations cannot be able to run effectively. Improving the infrastructure will allow the retailers including Achuan, to reduce the transportation costs and ensure speedy delivery of goods to the consumers. Corruption and short-term orientation The Russian culture has a short-term orientation whereby the system encourages business entities to make hasty decisions. According to Shirky, the short-term perspective is a product of the economic and political instabilities that the company has gone through (46). Another key barrier that has affected the company’s operation in the country is corruption. Broadman conducted a study to examine the level of corruption in the Russian market and compared the ease of doing business between Russia and Poland (179). In the study, Broadman, found out that majority of the East European States pays bribes to custom clearance officers, local tax inspectors and bureaucrats (181). Broadman found out that operating a business in Russia is four times hard compared to Poland (187). The corruption in the countries adversely affects the company’s ability to open up more stores. Dealing with these corrupt officials is challenging, and to address the problem, the management always strives to share best practices and building trust with government officials. Corruption and bureaucracy not only affects Auchan Corporation, but other entities as well. Mistakes Prior to expanding foreign destination it is very important to conduct a comprehensive analysis. In this regard, an in-depth market research would have revealed the unique challenges in the Russian market. Lack of adequate information about the Russian market has negatively impacted on the company’s ability to deal with the problem of corruption and bureaucracy. On a different note, the company depends heavily on strong supplier networks. Consequently, there is need to build a network of local suppliers to eliminate the need for imports. At the same time, there is need for the company to invest more in training and guiding the existing suppliers. It is also worth noting that business entities in Russia do not believe in making long-term commitments. Consequently, the company needs to change this culture by training the suppliers about the importance of making long-term commitments. Through training the company will also be able to increase supplier competencies, and the general standards of products. Another major mistake that the company has committed is failure to use an appropriate market entry strategy. Failure to work without intermediaries has seen the company loose out on its major markets in the country. Advice According to the available literature, the main market entry strategies in the Russian market include exporting, licensing, franchising, joint ventures and foreign direct investment (Twomey 45). Twomey further observes that the choice of an appropriate market entry strategy is influenced by many factors including the political and the economic environment of the host country (49). Given the prevailing circumstances in the country, it is pivotal for Auchan to use an alternative strategy when opening up more stores in the country. One such alternative is exporting rather than by establishing wholly-owned subsidiaries. This mode of entry will help the company to gain knowledge about the Russian market and acquire capabilities to serve the customers better. Furthermore, the local distributors appointed by the company will be able to manage challenges such as corruption and bureaucracy. Alternatively, due to the high inflation and the unpredictability of the Russian market, the company should establish franchise partners. Using franchise partners will help the company to expand more quickly compared to establishing fully-owned brick-and-mortar stores. Democratic governance As indicated above, Russia is an ultra-bureaucratic state, and that is why businesses find it hard operating in the country. Small businesses are adversely affected by the high levels of corruption and bureaucracy in the country. To address this problem, Auchan should control its expansion rate in the country and should strive to maintain warm relations with the local authorities. If possible, the company should employ the locals in management positions, because they are in a better position to negotiate with the government and the local authorities. Conclusion Auchan is a well known brand with thousands of restaurants across the globe and the organization has made huge achievements in adapting its products to local communities. The company has been motivated to invest in the Russian market due to the economic prospects in the area. However, on the downside, the Russian market is characterized by institutional and administrative barriers and the uncertainty nature of the political system makes it challenging to invest in the country. In addition, the legal system is compromised and the country has not yet transitioned to a market economy. Besides operating in this challenging environment, Auchan is negatively affected by the high level of corruption experienced in the country. To cope with these challenges, the firm should consider using alternative modes of entry such as franchising and indirect exporting. In addition, given the challenges of establishing long-term commitments with the suppliers, the company should spend more resources in controlling its supply chain and enhancing performance in terms of delivery service and costs. Works Cited Blinnikov, Mikhail. Geography of Russia and its neighbors. Guilford press, 2011. Print Broadman, Harry. Reducing structural dominance and entry barriers in Russian industry. European Management Journal 20.2(2009): 179–188. Print Graham, Roberts. Auchan’s Entry into Russia: Prospects and Research Implications. International Journal of Retail and Distribution Management, 33.1(2005): 49-68. Print Larimo, Jorma. Business relationships. Routledge, 2013. Print Molch, David. MacDonald’s Russia: Managing a crisis. GRIN Verlag, 2009. Print Shirky, Clay. Here Comes Everybody: The Power of Organizing without Organizations. New York: Penguin Press, 2008. Print Terterov, Marat. Doing Business with Russia. GMB Publishing, 2004. Print Twomey, Michael. A century of foreign investment in the third world. Routledge, 2000. Print Read More