Chapter 2. Theory and Problem

There is a plenty of strategies for a retail company willing to penetrate a new market abroad. Obviously each of them has its advantages and disadvantages.

Licensing: this strategy requires the least capital investment and risk, but offers the least control as there is no equity ownership. Firms license foreign retailers to sell their goods, often their own labels.

Concessions: another low risk, low cost method, based upon the operation of mini-shops within larger stores. Boots, for example, is using this approach in Thailand in collaboration with the Ahold-owned supermarket chain, Tops.

Equity investment: by taking a non-controlling interest in a foreign firm, a retailer can have an operationally influential role in its running. Ultimately, both control and risk are circumscribed however.

Franchising: this option offers a balance between maintaining a measure of control over foreign operations, and levels of capital expenditure and risk. The key mode of expansion for a number of well-known specialty shops and fast food retailers, including the Body Shop, Benetton, Subway and McDonalds.

Joint Venture: reduces the time, cost and risk of entry by working with a partner already familiar with local market conditions. Tesco, for example, entered the South Korean market through a partnership with Samsung’s distribution division.

Merger & Acquisition: a costly but quick entry route. Costs may derive from the fact that companies available for acquisition may be in financial difficulty, as was the case for some Asian retailers in the immediate period after the Asian economic crisis of 1997/8. A well-publicised example of a large takeover was Wal-Mart’s purchase of ASDA in the UK in 1999 for almost $11billion.

Self-start entry: a store network being built up from scratch. Relatively rare and may be prohibited by regulations in some target markets. In China, for example, retailers can only enter into joint ventures, and may not own more than 65 percent of such operations

As we see initially Carrefour chose what is considered to be the hardest strategy – self-start entry. A company was going to buy a piece of land and build its own premises. Probably the reason for choosing greenfield approach over brownfield was a lack of well-qualified buildings among existing ones. Carrefour surely faced typical Russian problems: high administrative risks, difficulties while searching for land, communications problem. In May 2009 a preliminary contract was signed with LLC «Primel»: Carrefour was going to buy land in Penzenskaja oblast’. However a deal wasn’t concluded and in September management announced that “due to the changes in strategy” company then preferred renting land instead of buying it. But a month later a decision about leaving market was made.

Company was also considering a merger of a Russian retail chain “SedmoiKontinent” but also cancelled a deal.

According to Burt, Dawson and Sparks (2003)⁷ failures root in four sources and thus can be divided into four categories:

1. Market failure

2. Competitive failure

3. Operational failure

4. Business failure

Market failure

Market failure takes place when market does not «behave» as expected and sales do not meet expectations.

Overrated expectations took place in case of Russian retail market. In 2008, analysts for the investment bank UBS predicted Russian retail sales would grow 22% annually through 2010⁸. Investors piled on, and shares in grocery stores and retail chains soared. Instead, retail sales in August 2010 were down 9,8%⁹ compared to a year earlier, according to the state statistics agency. We may assume that management of Carrefour decided to penetrate Russian market following positive analysts’ forecasts. "We were waiting for the best moment to enter the market,"¹⁰ — said Thierry Garnier,Carrefour Group executive director.Indeed these calculations appeared to be too optimistic.

Competitive failure

Competitive failure means that operational performance does not match that of competitors or regulation impacts upon competitive capabilities. For instants, such factors as:

• Inefficient marketing strategy (including those due to lack of adjustment to cultural differences)

• Unstable competitive advantages

• Legislation issues

From this perspective company faced legislative barriers on its way. Complicated legislative framework, widespread bureaucracy and red tape were significant obstacles of success. Carrefour was scared of uncertainty in retail regulations. It was very pessimistic about Trade Act that was about to be passed and threatened with restrictions for regional chains development.

Also we need to mention severe competition from local retailers that Carrefour had to face. In addition to this its worldwide competitors – Aushan and Metro Cash&Carry – outstripped Carrefour: in 2009 there were 34 Auchan hypermarkets and 27 Atak supermarkets (Auchan group) in Russia.Auchan operates in eight Russian cities, with 20 locations in the greater Moscow area alone. Metro has 48 Russian locations.

Business failure

Business failure takes place when decisions impacting upon the international business are made because of changing domestic circumstances (performance, stakeholder expectations). As we know one of the reasons for such a quickly leave of the Russian market was the pressure from shareholders. Maybe their decision was somehow affected by the French retail market circumstances. Anyhow management was forced to focus on increasing the added value of the company, and selling off assets in developing countries (Russia foremost) was perceived as an important step in gaining it.

Operational failure

Operational failure takes place when domestic retailer is simply not a good international retailer and domestic competencies do not transfer. We believe that this reason has nothing to do with our case because Carrefour is present in many countries (including developing markets) and is successful at most of them, so we do not doubt company’s great experience of transferring its competences abroad.

Problem

On the 18th of June 2009 Carrefour announced the start of business operations in Russia. "We were waiting for the best moment to enter the market," – Thierry Garnier, Carrefour Group’s Executive Director said. "We are in Russia for the long term." A little bit earlier, in May, a preliminary contract was signed: the company was going to buy a land in Penzenskaja oblast aiming to build a hypermarket there. But in June it became clear that plans have changed. The company began with two rented hypermarkets: the first one was opened in June in Moscow, the second one in September in Krasnodar. Also in September Carrefour announced that it changed its strategy from building its own facilities to renting them. Less than in a month in the financial report it was stated that the company decided to leave Russia: «Decision to sell the Group’s activities in Russia and pull out of the market, given the absence of sufficient organic growth prospects and acquisition opportunities in the short-and medium-term that would have allowed Carrefour to attain a position of leadership». ¹¹What has happened during just 4 month? How could a second-largest retail group in the world commit such a failure? Our research aims to find it out.