International Business Carrefour - One of the Largest Supermarket Chains In the World - Case Study Example

International Business – Carrefour - One of the Largest Supermarket Chains In the World 1. Introduction and Background. One of the most important decisions that a firm makes is whether to go international and the manner in which global operations will be managed. Ball (2006) notes that the decision to venture into an international market is a critical one because a firm is faced with completely new and unique challenges. The mere fact that a firm has excelled in the domestic market and also operates in some other international markets is no guarantee that it will excel in a new battle ground Carrefour is one of the largest supermarket chains in the world. In terms of size it is considered the largest in the world and comes second in terms of revenue earned. Its global headquarters is in France but it operates in at least 35 countries around the world. In the year 2000 the hypermarket chain which already had operations in other Asian countries such as China, Indonesia and Thailand decided to enter the Japanese market. Now there are a number of reasons that make a company decide to go international. Increase profitability. Venturing in international markets presents a major opportunity for companies to increase revenue and hence more profitability. (Ball 2006). This is because they will serve a larger market probably with high purchasing power. “A saturated local market coupled with intense competition cannot guarantee company profitability” (P. 25). That is why big firms like Carrefour, Wal-Mart and Tesco seek new fortunes in new markets. Diversification and spread of risk The old adage of not putting all your eggs in one basket also applies in business and finance. (Bradley 2005). A firm therefore goes international so as to diversify risk. Should one market be faced by recession and low purchasing power then the firm can be kept afloat by revenue from other markets which are flourishing. For example Carrefour has operations in 35 countries spreading across four continents. Assuming that the economies of countries in Europe take a beating and purchasing power drops significantly, the retail giant can rely on its stores in Asia and South America to maintain a steady flow of income. To check the expansion of a competitor. According to Bradley (2005), “supremacy battles are always fought in the international market” (P.66). Every firm wants to be the largest or the most profitable in the word. That is why a firm may seek to go international so as to ensure its superiority in the international scene is not challenged. For instance Carrefour may have decided to move into the Japanese market so as to check on the growth of its major competitors on the global scene such as Tesco and Wal-Mart. Challenges faced by Carrefour in Japan. In going to the international market, a firm faces a number of challenges. When Carrefour was moving into the Japanese market, its executives had to grapple with a different language, culture, consumer behaviour, government regulations/host country laws, as well as a whole new business environment with small but potentially dangerous competitors. (Gordon 2005). According to Gordon, the Japanese culture was one of the major headaches for the French executives as they tried to venture into the Asian country. Japanese have their unique way of carrying out business. They value small things and mostly do their shopping in small amounts. This is completely opposite to Europe where most families buy in bulk most probably once in a month. Carrefour also had to deal with government regulations especially on food safety and labeling. They found out the Japanese government had tough rules on food handling. The laws required that each food item sold had to be tested by the national standards body. This caused unnecessary delays and soon the local market was fed up with unavailable food supplies. The supermarket once had an expired ham in its shelves and this caused a huge furore in the overenthusiastic media which was quick to point out the flaws of the new market entrant. As expected language was another problem for the French firm. Japanese is quite different from French and therefore the supermarket chain had to hire several Japanese translators to successfully manage its market communications strategy. Japanese culture was another stumbling block that the French firm had to deal with. First Japanese prefer their things small. Carrefour failed to realise this small but crucial aspect and went ahead to establish large hypermarkets in the hope of earning economies of scale. This did not work out and they were eventually beaten by small discount supermarkets. Warren and Conley (2005) 2. Company Profile. According to its website, Carrefour is the world’s second largest retailer and the largest in Europe. It has is roots in France but it operates in at least 35 countries around the world today. Carrefour operates 15,500 stores in the 35 countries it operates. Basically it operates stores either in the format of a Hypermarket, Supermarket, Discount store and convenience stores. Its mode of entry into a foreign market is mostly through franchising or direct investment. History. Carrefour was pioneered in 1959 as a joint investment by the Fournier and Deoffrey family. The first Carrefour hypermarket was opened in 1963 after the success of its supermarkets in Paris and other discount stores. More was to come from the family business when it set footprints in Belgium in 1969. This was just the beginning of its venture into the international market as it launched its UK operations in 1972. By then the firm had been transformed from a family business to a public company following its listing in the Paris Stock Exchange. By the year 2000, Carrefour had expanded to major international markets notably china. A major score for Carrefour came at the turn of the century when it merged with French based retailer Promodes which enabled it to take over at least 6000 new retail stores preciously operated by Promodes. By the end of 2005 the retail giant and lunched operations in Brazil and also begun operation in the middle east notably in United Arab Emirates and oil rich Qatar. Major Products and businesses. Carrefour operates four major business formats namely the Hypermarkets, Supermarkets, Discount stores and finally convenience stores. It also runs several cash and carry stores and with advancement in technology it is actively involved in ecommerce courtesy of its online shopping model. Currently its Ooshop online retail store is the largest in France and mainly deals with consumer goods. The Carrefour online shop basically handles other non consumer goods such as electronic goods. There are a number of products which are sold by this French retail giant. They range from groceries, food stuffs to non food products. In its non food product range, you will find electronic products such as DVDs, software, music download shops. In the food stuff category Carrefour stores all perishable products ranging from milk products, meat, vegetables among others. Culture and management. Carrefour is a publicly trading company and in its website it clearly states that its key role is to serve the public in a manner that enhances their quality of life. It aims at delivering quality to every consumer where it operates and strives to preserve the environment in which it operates. Carrefour runs several Corporate Social Responsibility programmes in the markets that it operates. Carrefour has a fairly simple management structure and at the helm of the retail giant is Lars Olofsson who is based in the company’s headquarters in Paris France. There is an executive committee which is the ultimate decision making body. To better manage is global operations, Carrefour has divided its operations in the major markets and each market is headed by a chief executive officer who ultimately reports to the group executive director based in France. For example there is an executive director in charge of the South East Asia market which comprises Indonesia, Singapore, Thailand and Malysia. There is also the executive director in charge of part of Europe including countries such as Belgium, Greece, Romania and Turkey. The company merges the operations of small markets. For example the executive heads of Carrefour in Argentina and Colombia ultimately report to the executive director in Brazil. Strength and Weaknesses. The major strengths of Carrefour include its larger than life appearance not only in Europe but around the world. It is the market leader in Europe and thus it is viewed more favourably by consumers as compared to its rivals. Brand familiarity is another major strength which can be attributed to Carrefour. The retail firm is one of the most recognized names in Europe and this a lone gives it an edge over competitors. High brand familiarity gives it free publicity not only through the media but also courtesy of word of mouth by the man on the street. Finally due to its high turnover, Carrefour can afford to spend more on advertising, acquisitions, and new mergers hence pushing competitors further down the pecking order. Weaknesses Low sales in the home market of France during the worldwide crunch exposed the company badly especially with the emergence of smaller discount stores which have proved to be worthy competitors. This led to a decline in profitability in the year 2009 where profits dropped by a massive 45%. Stagnant growth in its online business is also another weakness. Competitors in this business such as eBay and other online retail stores have bitten a huge chunk of this market especially in Europe. 3 Market entry. In international marketing there are a number of market entry strategies that are at the disposal of a potential investor. Bradley (2005) points out that a market entry strategy is chosen depending on the level of commitment that an investor is willing to make. The major market entry strategies include. Exporting, Joint venture, Licensing and direct investment. Carrefour market entry strategy in Japan. Writing in the Wall Street Journal, Warren and Conley (2005) note that Carrefour used the direct investment market entry strategy when it was entering the Japanese market. The company evaluated this strategy based on its previous experience in Asia. Prior to launching operations in Japan, Carrefour had operations in China where by it entered the market via direct investment. It also chose this method since it viewed Japan has a market with good potential for success. Other advantages associated with this entry strategy and played a role in it being pursued by Carrefour include the ability to apply its business strategy well. The retail firm was interested in pursuing a strategy which had worked in both Europe and Asia. i.e. establish large hypermarkets, purchase products in whole sale which would effectively result in lower prices. Using the direct investment strategy, it would be easier for Carrefour to gain more knowledge of the local market and this would enable it compete more favourably with local retail stores. Finally the French executives realised that it is only through direct investment that Carrefour would have the slightest chance of being viewed as an insider by the Japanese population hence better prospects in the potentially tricky market. Operational issues facing the company. Human resource. Companies going international always face a dilemma especially when it comes to human resource management. (Ball 2006). “There are host country laws which restrict how many foreign employees can work in the country” (P.101). While taking host country laws into consideration, investors also take consideration the fact that hiring too many foreigners could have lead to a negative backlash from the local population. Carrefour took this into consideration and in all the eight hypermarkets it operated in Japan, majority of the employees were Japanese. However the top positions such as chief executive officer were reserved for the French as is the tradition with most French firms abroad. Marketing Ball (2006 p.91) also notes that the nature of marketing principles to adopt is also a major area of concern especially when it boils down to advertising. A company can choose to adopt a standardized approach to advertising or customized strategy. In this case Carrefour opted for a customized approach given its experience in the unique Asian market. (Gordon 2005) Expansion Once a business is firmly entrenched in the local market, there is always the desire to expand its market share. Gordon (2005) says that Carrefour initially entered the Japanese market with one store and its aim was to increase them to 13 in three year’s time. By the time the firm called it a day in Japan, it had established 8 new stores which were not doing well financially hence the decision to pull out of the Japan market. Merger and acquisition. A firm can move into a new market by acquiring a controlling stake in an already operating company. It can also merge its operations with a local partner which would result in more synergy for both companies. According to Robert (2005) Carrefour didn’t pursue any of these strategies when entering the Japanese market. The reason behind this is that it had pursued direct investment in other Asian markets and was largely successful. When Carrefour decided to exit Japan, it formed a partnership with Aeon which continued to trade under the Carrefour brand name. However the French retail firm is not actively involved in its operations. 4 Key Success/Failure factors Failure to understand Japanese consumer behaviour. Consumer behaviour refers to the behaviour that is displayed by consumers when searching and buying products that they expect will satisfy their needs. It basically boils down to why consumers prefer one product over the other. Carrefour entered the Japan market with one strategy in mind. Construct big shopping malls; sell in bulk and low pieces. It sought to position its products in terms of quality and price. While this strategy had worked in other Asian markets such as china, it failed in Japan.(Robert 2005). Analysts point out that the major reason why it failed was due to unique Japanese consumption patterns which the French retailer failed to take into consideration. Carrefour entered the market with the view that if it sold products in bulk and at low prices then it would attract more customers as the price leader. What they didn’t know is that the Japanese prefer to do their shopping in small quantities but more often. Most consumers therefore resulted to buying from smaller discount stores which were close to their areas of residence. Unique Japanese culture. Culture is a people’s way of life and it ultimately affects consumption patterns of an individual or group. While not explicit, the Japanese like locally made products over those from foreigners. They also have favour small products over large ones. It is worth noting that most of the products that are consumed in Japan are actually locally made. They have unique mobile phones which mostly serve the local market only particularly electronic products. Robert (2005) argues that Carrefour failed to look at this small but critical aspect and ended up failures. Constructing big hypermarkets was actually not the right strategy as most consumers viewed them as too big for nothing. It was said that the food section of Carrefour was bigger that the ordinary supermarket in Japan. Most consumers found it tiresome moving around searching for consumer products. They eventually retreated to smaller supermarkets with everything under one store. 5 Learning points and recommendations. Never underestimate the strength of a local competitor The size of your firm notwithstanding, it is important to pay attention to local competition since they have excellent knowledge of the market. They understand consumer consumption patterns and can easily play the “buy local” card at the expense of a foreigner. Carrefour was easily beaten in Japan by significantly smaller competitors since they understood the local market well. Pay close attention to the consumer behaviour of your target market. This is what ultimately determines the success of any business venture. After all it’s the consumers who make the market. Carrefour didn’t pay much attention to this aspect and they paid the ultimate price. A good understanding of the local consumer behaviour is enough to give a new investor an advantage over local competitors especially if it satisfies the needs of consumers better. Importance of culture. Culture is a critical aspect in any international marketing ventures since it eventually shapes the consumption pattern of consumers. To understand the culture of the target market, a company should carry out a good market research. The company should pay special attention to the values of the local population, their likes and dislikes as well as the general way of life. For example what is the perception of people towards foreign companies and products? Choice of method of entry Another learning point is the importance of choosing a good method of entry to foreign market. Analysts argue that Carrefour would have been more successful in Japan if it had formed a partnership with a local retailer. The local retailer would have offered the much needed local knowledge. What I would have done differently? Joint venture instead of direct investment My choice of entry to the Japanese market would be through a joint venture with a local retailer in Japan. The major advantage of this method is that the local partner would provide enough information on the slippery parts of the consumer market. For example the partner would have shed some light on the consumer behaviour of Japanese and their shopping patterns. Using a joint venture as a market entry strategy also gives a company the opportunity to be viewed as an insider rather than a foreigner trying to change the local buyer behaviour. Detailed market research There is no substitute for a detailed market research when it comes to international market engagement. Perhaps the biggest mistake that Carrefour made when entering the Japanese market is to assume that the Asia is a homogeneous market with similar buyer behaviour. As it turned out, this was terribly wrong. Consequently I would have carried out a detailed market research paying close attention to the Japanese culture and divorcing it from other countries in Asia. I would also have done enough research to understand the consumption patterns of the Japanese market. Conclusion. The international market presents an opportunity for a company to increase profitability and make its presence felt around the world. It also adds to the prestige of a company and this is the major reason why firms pursue these markets relentlessly. Carrefour is the second larges retailer in the world and the biggest in Europe. Originally started in France, the retailer soon spread its wings around the world and it operates in 35 countries today. Despite its success in other markets, its biggest misadventure was in Japan. It entered the market in 2000 and called it a day in 2005. The then Chief Executive Officer admitted that “Japan was a short expensive adventure for Carrefour. It simply did not click.” Different views were floated as to what caused the hurried exit but one point stood out. Failure to understand the culture of the Japanese and their unique buyer behaviour. Reference: Ball, AD 2006, International business: the challenge of global competition, McGraw/Irwin, Columbus, OH. Bradley, F 2005, International marketing strategy, Financial times/Prentice Hall, London Carrefour 2009, our business viewed November 12, 2009, http://www.carrefour.com/cdc/group/our-business/our-stores Gordon, FT 2005, Carrefour exits Japan and Mexico viewed November 12, 2009, http://news.bbc.co.uk/2/hi/business/4335587.stm Robert, P 2005, Carrefour: The Japanese Misadventure’ Wall Street Journal Warren, J & Conley, TG 2005, ‘The fine details of Carrefour’s exit from Japan’, Journal of International Marketing’ vol. 58, no. 2, pp. 21-25. Read More