Carrefour's Misadventure in Russia - Case Study Example

Case 6: Carrefour’s Misadventure in Russia Introduction With a move to the globalised era, successful businesses and large corporations are continuously looking for the opportunities of international expansion. The last trends show that emerging economies, especially BRIC (Brazil, Russia, India, and China) become more popular destinations for business development purposes. While there are many examples of successful penetration and business establishment on these markets, there are also examples of failures and misadventures. Entry strategy of the France-based retail giant Carrefour to the Russian market has been unsuccessful, and the company’s sudden exit has raised many different opinions in this respect. Below there is provided an overview of potential factors that might have its impact on the company’s failure continued with the further analysis of the Russian food retail market based on the Porters’ five forces model. According to Thierry Garnier, member of the Carrefour Group Executive Committee, “We are confident that retail business in Russia has considerable long-term potential, and the market is strategically important for the development of our company.” In light of this statement, what were the factors that led to Carrefour’s sudden exit from the Russian market? While there was not clearly defined the reason of why Carrefour has made a decision to exit suddenly the Russian market, there were mentioned some obvious factors that might have contributed to this decision. These factors include: social and cultural factors; legal factors; late entry decision; absence of sufficient organic-growth prospects and acquisition opportunities ( ICMR 2009, 17), and political factors. Social and cultural factors Such social and cultural factors that have been identified as the potential barriers to the Carrefour’s expansion in Russia included: bureaucracy, corruption, red tape (including: difficulties with clearing goods through customs, obtaining visas, finalizing property deals, etc.) Legal factors The legal factors mentioned in the case study covered a broad issue – the whole legislative framework and its complexity for a foreign operator (ICMR 2009). However, as some experts stated, Carrefour’s management had spent a lot of time while analyzing the Russian market and its external environment. These factors do play a role in doing business in any country and usually influence a decision either to enter the market or not, but the fact the Carrefour has entered the market and even opened three stores in Russia makes both legal and social/cultural factors less relevant to the company’s decision to exit Russia. Late entry decision Carrefour has started its business expansion activity in Russia quite late, when the food retail market was already captured and divided by other retail giants. This made Carrefour position to weak in order to develop its brand from the beginning, as there were no other acquisition opportunities available. The company has made an attempt to open its stores without partnership or joint venture, however, this strategy was not fitting the overall corporate plans of the company “to position within the medium term, establish brand quickly and secure a return on investment” (ICMR 2009, 19-20). Failure to capture leading market position through the acquisition of established retailer The company’s plan was to become the top three retailer in the country through the acquisition of already established player. This factor played a crucial role in the Carrefour’s expansion strategy as it enabled the company to enter smoothly the Russian market, getting immediate access to the developed distribution network and logistics (ICMR 2009). However, failure to acquire the grocery chain Sedmoi Kontinent in Russia has made company’s plan non-viable. In addition to the access to the distribution network and supply chain system, acquisition of the existing well-established retail operator also implied Carrefour’s safety and political protection. It is not a secret that the majority of oligarchs in Russia own businesses and protect them due to their personal roles and political relationships. Russian political environment is closely interrelated with the business environment and is characterized by a lack of transparency in decision making, and high levels of behind the scenes activity by various groups (Russia Retail Report 2010). Thus, for example, Vladimir Gruzdev, the shareholder of the Seventh Continent has a very active political career since 2001 (governor of Tulsky region, the deputy in the Moscow city council and in the State Duma) (Forbes.ru, 2014). In my personal opinion, the acquisition of the Seventh Continent ensured Carrefour with protection from competitors often acting through political and regulatory pressures. Having no political protection, Carrefour might have been “asked” to exit the market, what the company actually suddenly did. According to Jamie-Vasquez, analyst at JPMorgan Chase & Company in London, “Stores in emerging markets are the only ones doing well and offering good growth prospects, so selling them makes no sense other than making short-term financial plan.” In my opinion, this statement is not relevant to the Carrefour’s case study and Russian market and doesn’t really reflect the real situation. Based on this statement, only the formats of retail stores can have potential in the emerging markets. However, many retail giants including both Russian-based and international companies have successfully entered and captured the emerging economy in Russia by opening hypermarkets. Thus, for example, by 2009 X5 Retail Group, Okay, Lenta, Auchan, Metro, Seventh Continent, Real, Mosmart and Stokmann operated in total 95 hypermarkets in Moscow and St. Petersburg (ICMR 2009, 24). Russia is only one of the examples of the emerging markets where the format of retail hypermarkets is quite efficient business model. The other international examples can be viewed in the other BRIC counties: Brazil, India and China, as well as in the African continent. Wal-Mart Stores Inc. also went globally and expanded its retail hypermarkets and warehouses in emerging countries (Corporate.walmart.com, 2014). Massmart retail chain was successfully operating on the Sub-Saharan continent and later was acquired by the Walmart (Corporate.walmart.com 2014). This example provides evidence that stores in emerging markets are not the only ones doing well and offering good prospects. The statement of the JPMorgan Chase & Company expert that “selling them (stores) makes no sense other than making short-term financial plan” also doesn’t seem to be relevant to the case, as the Carrefour’s management has clearly stated that the company pursued long-term strategy and was viewing Russia as the strategically important market for the company’s development (ICMR, 2009). This statement is supported with the Carrefour’s business development during which France-based retailer opened its stores in 39 countries by 2009, and exited only several of those, namely: Mexico, South Korea, Hong Kong, Chile, Czech Republic, Japan, Switzerland and Russia (ICMR 2009). If the company’s corporate goal was to make short-term financial plan it would not achieve its global recognition as the # 2 Top global retailer (ICMR 2009). Carrefour has exited Russian market not because of an objective to make short-term financial plan, but because of the failed entry strategy through the acquisition of the strategic partner, fierce competition in retail industry and lack of political support/protection. Critically analyze the Russian retail market in light of Porter’s five forces model. Do you think the market is lucrative enough to attract more foreign players? Russian retail market can be analyzed with a help of Porter’s five forces model, covering the following criteria: Buyer Power Buyer power in the Russian retail industry is moderate (Marketline 2013, 13). In food retail industry the buyers in the market are usually end-consumers, who may change their customer’s behavior and therefore have great impact on the company’s revenues due to the volume of potential customers. This factor weakens the buyer power (Marketline 2013). Buyers make their choices based on two critical factors: pricing and convenience of the store location. The trend of growing health awareness also raises consumer’s concerns in relation to the assortment of products and its quality. Retailers should be sensitive to the potential buyers and their needs. Moreover, retailers practice usage of various incentive programs for the shoppers in order to increase customer retention (Marketline 2013). In overall, buyer power in the Russian retail industry is moderate (Marketline 2013, 13). Supplier Power Supplier Power in the Russian retail market is moderate (Marketline 2013, 13). The food retail industry is supplied by the following players: food manufacturers, farmers, and agricultural co-operatives. Large retailers usually have more capabilities to diversify their supplier’s base, and thus to minimize risks related to price changes or sourcing (Marketline 2013). This makes retailers less dependent on the suppliers and therefore to have stronger position. Long term contracts are usually avoided when it is possible. Having good distribution channels, large retailers can take dominating position in negotiations with the suppliers. Suppliers with less power might not have such privilege (Marketline 2013). Range of sourcing options is often limited in niche areas. Retailers are mobile in choosing suppliers of popular products and can switch easily to more low-cost supplier (Marketline 2013). Because many retailers began to develop their own-brand products, some suppliers had lost their orders. However, suppliers are capable to diversify their products making it attractive to the end consumer and thus, attractive to the retailer (Marketline 2013). New entrants The threat of new entrants to the Russian retail market is strong (Marketline 2013, 15). There are many different retailers in the food industry, varying from large hypermarkets and supermarkets such as the Seventh Continent, X 5 Retail Group, Magnit, Kopieka, Dixtry Group (ICMR 2009, 21) to small specialty, organic or luxury food stores (Marketline 2013). Market share of the retail giants in 2012 comprised 12% and was forecasted to increase to 14% by the end of the year (ICMR 2009, 22). Such an increase is viewed to be a result of the: aggressive pricing strategies adopted by the large-scale retailers; fast expansion of new locations, and strong branding efforts (Marketline 2013). However, these efforts do not guarantee that new entrants will not consider Russian retail market as the location for international expansion. Relatively low costs for entry and exit, economic growth, shift of the consumer’s behavior towards healthier products make Russian retail market especially attractive for the new entrants willing to take specific niche (Marketline 2013). The number of existing both local and international retail giants makes direct competition extremely difficult for large retailers, willing to enter the Russian food retail market (Marketline 2013). Threat of substitutes The threat of substitutes is between the ranges from weak to moderate (Marketline 2013, 16). Food service is one of the substitutes to food retail as the presence of fast food companies and local restaurants represent an alternative to the end-consumers (Marketline 2013). However, this substitute does not have much power, as food service is more often accompanying food retail. Subsistence agriculture is another relative substitute to the food retail as people tend to farm products to satisfy their needs. This number of individuals tends to decrease as a result of modern pace of life and machinery technologies, and growing population (Marketline 2013). While in some regions and villages of the Russian Federation subsistence agriculture will have strong threat of substitute to the food retail, it will not be the case in large industrialized cities. Degree of rivalry Rivalry in the food retail market in Russia is strong (Marketline 2013). Food retail industry is characterized by stiff competition among both large retailers and large number of specialty or independent retailers. Food retail market has a limited level of differentiation and players are quite similar to each other (Marketline 2013). The two basic instruments of the differentiation include pricing and products range. Large retailers tend to expand their business lines and sell other non-food retail items, such as home ware, pharmaceuticals, electronics, clothing, etc. (Marketline 2013). Competition in food sector is aggressive and fierce and the degree of rivalry is very strong. Based on the Porter’s Five forces model, the Russian food retail market is still lucrative enough to attract more foreign players. However, more likely this market will be interesting for smaller retailers with some unique or competitive products that is not commonly sold in every supermarket. If these smaller retailers will find its niche area on the market it can become a lucrative business with a high potential. Large foreign retailers will have to face fierce competition of the existing established retail giants and it can be very challenging to grow business in this environment. Conclusion Carrefour’s misadventure in Russia has been reviewed from different prospects and angles that might have become a reason of its sudden exit. Carrefour has exited Russian market not because of an objective to make short-term financial plan, but because of the failed entry strategy through the acquisition of the strategic partner, fierce competition in retail industry and lack of political support/protection. Analysis of the Porter’s Five forces model has shown that the Russian food retail market is still lucrative enough to attract more foreign players. However, more likely this market will be interesting for smaller retailers with some unique or competitive products that are not commonly sold in every supermarket. Large foreign retailers will have to face fierce competition of the existing established retail giants, as Carrefour did. References: Corporate.walmart.com,. (2014). Walmart Corporate - Experience Walmart's History. Retrieved 28 May 2014, from http://corporate.walmart.com/our-story/history/history-timeline Forbes.ru,. (2014). Gruzdev Vladimir. Retrieved 28 May 2014, from http://www.forbes.ru/profile/vladimir-gruzdev MarketLine,. (2013). Food Retail in Russia (pp. 12-17). London. Russia retail report - Q2 2010. (2010). Business Monitor International. London. Retrieved from http://search.proquest.com/docview/872458811?accountid=32521 ICMR (2009). Case 6 Carrefour’s Misadventure in Russia. Iternational Center for Management Research. Read More