Proposed New

Strategy:

the Strategy Approach “Y”

Proposed New Strategy: The “Y” Strategy Approach Based on all the gathered information we propose a three piece strategy approach. Strategy Zero is to be implemented immediately and applied for 5-8 years. After that period we predict that enough clear new information will be gathered for the company to decide whether the company will apply proposed Strategy One or Two. The time frame for applying those strategies starts in about 5-8 years and it ends in 20-25 years. This proposed new strategy has in mind preparation for the endgame result of consolidation in the sector. When we researched for important data concerning the food retail sector it has been made clear that there is no clear dominating trend. Food retail sector is like any other sector of the economy, and we expected the consolidation trend to be clearly manifested in everyday practices of retail companies. Even dough there are important consolidation trends like Wal-Mart entrance in UK and Germany, Carrefour’s response by merging with Promodès and the state of maturity of the food retail markets in Europe, still companies which reach double digit annual growth are concerned only with their primary (domestic) markets, and apparently have no long-term acquisition/merger strategy in mind.

Based on the data collected we think that that it is too dangerous concentrating only on growth through acquisitions of only growing through niche market orientation. It is our prediction that trends will become clear in 5-8 years time and that than Merkator can choose a specific strategy (Strategy One of Two).

Strategy Zero

Strategy Two Strategy One

present

5 – 8 years

20 – 25 years

Decision Time

Figure 0 – Proposed new strategy

Strategy Zero suggests following: No one trend is dominating the global markets so Merkator has to prepare

and gather as many important pieces of information as possible. A New Research team should be formed which must act as an information gathering center and accumulate all pertinent new developments in global food retail. The decision (in 5-8 years time) whether to choose Strategy One of Two will be made upon the data collected by the new team. In the mean time Merkator should continue to reaffirm its brand as high-added-value food retailing company, on one hand. As such, Merkator has a leading role in food retailing across ex-Yugoslav countries. On the other hand, Merkator should begin to make connections to other leading players in the market. Like the strategic partnership with Rodic, other mid-size market players should be on Merkators list, especially in Bosnia and Herzegovina, Croatia. If not real partnerships, Merkator should have informal understandings with possible future acquisition targets about common goals, and thus pave the way for implementation of Strategy One. Such two-fold activity is easily achievable and holds no threat for possible future growth.

Strategy One suggests following: Currently consolidation trends are present but not dominating. Strategy

One proposes that Merkator leads the way in consolidation (acquisitions and mergers) in ex-Yugoslav countries. Mekator should reach an understanding with the region’s other dominating players on making one cross-border retailing conglomerate, which would cover all parts of food retail specter and become a monopoly in the ex-Yugoslav region. Through informal political influence local reform measures can be slowed for a period of time giving enough breading space to the newly formed conglomerate for reaffirm its monopolistic position. After such measures are put in place the dominating conglomerate would be sold to the foreign competitor. The price of the stock would increase at least 3 of 4 times. Merkator wouldn’t be destroyed as a brand but would continue to cover hi-end of the retail market where it is already well known and established throughout ex-Yugoslav countries. This strategy is fairly easy to put in place because it holds great benefits for all the concerned parties.

Strategy Two suggests following: This strategy suggests that Merkator should hold on to what Merkator knows best and that is high-end food retailing (Niche Market Approach). Being already the leader in this part of the food retail specter, new opportunities can be found in countries like Macedonia, Bulgaria, Georgia and Azerbaijan which hold potential for penetration, and countries like Albania, Moldavia, Ukraine, Russia, Romania, Belarus which are being analyzed by Merkator’s annalists. Those are new emerging markets, with new possibilities. Mekator should also continue to develop its private labels and retail of generic products. The markets that are currently in Merkator’s expansion plan are particularly well suited for private label growth. Only focussing on its niche market (high-end retailing) Merkator doesn’t restrict itself for future growth. As an example we can use supermarket food retailer Meradona for Spain. It is the 14th fastest growing retailer (food and non-food) in the world (for the period 1998-2003). Its sales have grown more than 25 percent per year over the last half-decade. The rapidly growing chain added 89 new stores in 2003 and now operates more than 800 supermarkets. Today, it is the 82nd-largest global retailer, while still only operating in its home country. Just three short years ago it was ranked 178th-largest. The information shown below describe the major developments in food retail sector. That is the information basis for our proposed strategies, and it gives evidence for our “Y” strategy approach. Developments have been analyzed on global as well as more local level. Special attention has been paid to occurrence of consolidation trends, and as our data shows, while important consolidation movements have been registered, there is no clear dominating trend.

Global Retailing Industry

Over-all picture

The latter half of the 20th Century, in both Europe and North America, has seen the emergence of the supermarket as the dominant grocery retail form. The reasons why supermarkets have come to dominate food retailing are not hard to find. The search for convenience in food shopping and consumption, coupled to car ownership, led to the birth of the supermarket. As incomes rose and shoppers sought both convenience and new tastes and stimulation, supermarkets were able to expand the products offered. The invention of the bar code allowed a store to manage thousands of items and their prices and led to 'just-in-time' store replenishment and the ability to carry tens of thousands of individual items. Computer-operated depots and logistical systems integrated store replenishment with consumer demand in a single electronic system. The superstore was born.

On the Global Retail Stage, little has remained the same over the last decade. One of the few similarities with today is that Wal-Mart was ranked the top retailer in the world then and it still holds that distinction. Other than Wal-Mart’s dominance, there’s little about today’s environment that looks like the mid-1990s. The global economy has changed, consumer demand has shifted, and retailers’ operating systems today are infused with far more technology than was the case six years ago. Saturated home markets, fierce competition and restrictive legislation have relentlessly pushed major food retailers into the globalization mode. Since the mid-1990s, numerous governments have opened up their economies as well, to the free markets and foreign investment that has been a plus for many a retailer. However, a more near-term concern, has been the global economic slowdown that has resulted from dramatic cutback in corporate IT and other types of capital spending. Consumers themselves have become much more price sensitive and conservative in their buying, particularly in the more advanced economies. From an operational point of view, active practitioners have voiced their opinion that retailer concerns in 2000-2003 have turned to deflation, lack of pricing power, global overcapacity, low interest rates, economic stagnation, slump in world tourism and declining consumer confidence. But, even before the global economic slowdown that forced retailers into monitoring costs more effectively, technological advances were a way of life in retail organizations. On the other side prospective for the period 2005-2008 holds good news for retailers. Technology has become the real enabler for retailers over the last six years. Supply chain innovations for retailers were particularly strong in the second half of the 1990s and have continued into today. With all the emphasis on technology and cost-cutting, a major thrust of retailers continues to be demand-based: finding new markets through globalization efforts. Four years ago, more than half (53 per cent) of the top 200 retailers operated in only one country. Today, only 44 per cent remain single-country merchants. This globalization trend can only intensify in the years ahead. The benefits of increased sales and greater economies of scale are too large to be ignored.

The global retail industry has traveled a long way from a small beginning to an industry where the world wide retail sales alone is valued at $ 7 trillion (food and non food) (Source:2003 Global Retail Report, Deloitte Touche). The top 200 retailers alone account for 30% of worldwide demand. Retail sales being generally driven by people’s ability (disposable income) and willingness (consumer confidence) to buy, compliments the fact that the money spent on household consumption worldwide increased 69% between 1980 and 2005. The leader has in-disputably been the USA where some two-thirds or $ 6.6 trillions out of the $10 trillions American economy is consumer spending. About 40% of

that ($ 3 trillions) is spending on discretionary products and services. Retail turnover in the EU is approximately 2000 billion Euros and the sector average growth looks to be following an upward pattern. The Asian economies (excluding Japan) are expected to grow at 5% consistently till 2008-09. Positive forces at work in retail consumer markets today include high rates of personal expenditures, low interest rates, low unemployment and very low inflation. Negative factors that hold retail sales back involve weakening consumer confidence.

Rank Country of Origin

Name of Company Formats

2003 Group Sales*

(US$mil)

2003 Retail Sales

(US$mil)

2003 Group

Income/ (Loss)*

(US$mil)

Countries of Operation

5 yr Retail Sales

CAGR % (Local

Currency)

1 US Wal-Mart

Discount, Hypermarket, Supermarket, Superstore, Warehouse

258,681 256,329 9,054

Argentina, Brazil, UK Canada, China, US Germany, Mexico, Puerto Rico, S. Korea, ,

13.2%

2 France Carrefour

Cash & Carry, Convenience, Discount, Hypermarket, Specialty, Supermarket

79,796 79,796 1,834

Argentina, Belgium, Brazil, China, Colombia, CzechRep., Dominican Rep., Egypt, France, Greece, Indonesia,Italy, Japan, Malaysia, Mexico, Oman, Poland, Portugal, Qatar, Romania, Singapore, Slovakia, Spain, S. Korea, Switzerland, Taiwan, Thailand, Tunisia, Turkey, UAE

20.8%

3 US Home Depot DIY 64,816 64,816 4,304 Canada, Mexico, Puerto

Rico, US 16.5%

4 Germany Metro

Cash & Carry, Department, DIY, Food Service, Hyper- market, Specialty, Superstore

60,674 60,503 647

Austria, Belgium, Bulgaria, China, Croatia, Czech Rep., Denmark, France, Germany, Greece, Hungary, India, Italy, Japan, Luxembourg, Morocco, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Switzerland, Turkey, Ukraine, UK, Vietnam

3.1%

5 US Kroger

Convenience, Discount, Specialty, Supercenter, Supermarket, Warehouse

53,791 53,791 315 US 14.4%

6 US Tesco

Convenience, Department, Hypermarket, Supermarket, Superstore

51,535 51,535 1,843

Czech Rep., Hungary, Japan, Rep. of Ireland, Malaysia, Poland, S. Korea, Slovakia, Taiwan, Thailand, Turkey, UK

12.5%

7 US Target Department, Discount, Supercenter

48,163 46,781 1,841 US 8.9%

8 Netherlands Ahold

Cash & Carry, Convenience, Discount, Drug, Hyper- market, Specialty, Supermarket

63,473 44,584 (1)

Argentina, Brazil, Costa Rica, Czech Rep., Denmark, El Salvador, Estonia, Guatemala, Honduras, Latvia, Lithuania, Netherlands, Nicaragua, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Thailand, US

10.7%

9 US Costco Warehouse 42,546 41,693 721 Canada, Japan, S. Korea, Mexico, Puerto Rico, Taiwan, UK, US

11.8%

Rank Country of Origin

Name of Company Formats

2003 Group Sales*

(US$mil)

2003 Retail Sales

(US$mil)

2003 Group

Income/ (Loss)*

(US$mil)

Countries of Operation

5 yr Retail Sales

CAGR % (Local

Currency)

10 Germany Aldi

Einkauf Discount,

Supermarket 40,060e 40,060e n/a

Australia, Austria, Belgium, Denmark, France, Germany,

Luxembourg, Netherlands, Rep.of

Ireland, Spain, UK, US

14.4%

11 Germany Rewe

Cash & Carry, Discount, DIY,

Drug, Hypermarket,

Specialty, Supermarket, Superstore

44,355 38,931e n/a

Austria, Bulgaria, Croatia, Czech Rep, France, Germany,

Hungary, Italy, Poland, Romania,

Slovakia, Switzerland, Ukraine

1.5%

12 France Intermarché

Cash & Carry, Convenience, Discount, DIY, Food Service,

Specialty, Supermarket, Superstore

37,472e 37,472e n/a

Belgium, France, Germany, Poland, Portugal, Romania,

Spain

2.4%

13 US Sears Department, Mail Order, Specialty

41,124 36,372 3,397 Canada, Puerto Rico, US -2.5%

14 US Safeway, Inc. Supermarket 35,553 35,553 (170) Canada, Mexico, US 7.7%

15 US Albertsons Convenience,

Drug, Supermarket

35,436 35,436 556 US 17.2%

Rank determined by 2003 retail sales Source: WWW.STORES.ORG

* includes non-retail n/a = not available ne = not in existence (created by merger or divestment since 1998) e = estimate CAGR = Compound Annual Growth Rate Name after forward slash is retail segment of parent company Name in parentheses is former name of company

Understanding The Performance And Dynamics Of Global Food Markets

Summary

Understanding the performance and dynamics of global food markets is no longer a matter of understanding the fundamentals of international trade. At $3.2 trillion, processed food sales are a major component of global food markets and account for about three-fourths of total world food sales. Still, only 10 percent of processed food sales are traded products. Although consumer demand for processed food continues to grow globally, growth in processed food trade has generally stalled since the mid-1990s. While trade policy may contribute to this disparity between trade levels and market performance, many other factors are at play.

Understanding the competitive nature of the global food industry means understanding changing consumer preferences and the food industry’s efforts to meet these demands. The task of moving food from the farm to the table has become more complex, involving diverse local, national, and global agents and networks. Food markets are constantly evolving, driven not only by changes in consumer preferences, but also by technology, linkages between members of the food supply chains, and prevailing policies and business environments. Sophisticated supply chains and distribution channels are now being adopted across different regions and national boundaries.

Developing countries are expected to largely account for future increases in food

demand, resulting from both increases in population as well as increases in per capita food consumption. Annual growth rates of retail sales of packaged food products in developing countries range from 7 percent in upper-middle-income countries to 28 percent in lower-middle-income countries, much higher than annual growth rates of 2-3 percent in developed countries.

The food industry will continue to evolve in response to specific consumer

demands in individual markets, with significant differences between industry strategies in the developing and the developed countries. Across all countries, modern food markets are responding to consumer preferences at a local level, even as the food industry becomes more global. In mature developed-country markets, product differentiation, value added, and consumer trust are important considerations for retailers seeking to retain market share. Many retailers, particularly in Western Europe, have developed private label products that capture these qualities. To ensure that their branded products meet quality and safety standards demanded by consumers, retailers coordinate and develop relationships with other upstream sectors in the food supply chain.

In rapidly growing developing-country markets, multinational food companies are expanding and changing regional food industry landscapes. Foreign investments by these firms have played major roles in the diffusion and expansion of supermarkets in Latin America and Asia. While supermarkets accounted for 15-30 percent of the national food retail sales before the 1980s, they currently account for 50-70 percent of the retail sales in many Latin American countries, registering in one decade the level of growth experienced in the United States in five decades. Although the supermarket sector in Asia is 5-7 years

behind in its expansionary process, it is registering faster rates of growth than in Latin America.

In all markets, market forces are expected to push the evolutionary process toward increased efficiency, higher quality products, and more integrated food supply chains. Increased private label products in developed-country markets are contributing to the global trend in more integrated food supply chains. Likewise, changes brought about by multinational retailers are upgrading the food-marketing sector in many developing countries, while leading to more integrated supply chains serviced by fewer producers. The quest for efficiency and cost reduction has encouraged investments in new technologies and joint ventures with marketing intermediaries and producer associations able to meet big volumes and high private standards.

In a food industry driven by consumers’ retail pull, food manufacturers have to continuously reorient themselves to remain competitive. Firms that respond to market signals are better able to adjust and maintain their positions in the industry. Flexible organizational structures that enable firms to make adjustments at various stages of the production process in response to consumer demand are better suited for the current industry. Such a business structure is possible if firms operate in close coordination with producers and other sectors of the supply chain.

Expansion in foreign markets is contributing to the growth of large multinational food manufacturers. But, although significant concentration may exist in certain individual product markets at the local level, at the global level, even the largest food company accounts for less than 3 percent of total world food sales. The diversity of consumer demand creates opportunities for smaller firms to successfully compete in the marketplace.

New Directions In Global Food Markets

Understanding the performance and dynamics of global food markets is no longer a matter of understanding the fundamentals of international trade. At $3.2 trillion, processed food sales are a major component of global food markets and account for about three-fourths of the total world food sales. Still, only 10 percent of processed food sales are traded products (figure 1). Although consumer demand for processed foods continues to grow globally, growth in processed food trade has generally stalled since the mid-1990s. While trade policy may contribute to this disparity between trade levels and market performance, competition in the global food industry is also influenced by many other factors. Understanding the competitive nature of the global food industry means understanding changing consumer preferences and the food industry’s efforts to meet these demands. The task of moving food from the farm to the table is becoming increasingly complex, involving diverse local, national, and global agents and networks. Food markets are constantly evolving, driven not only by changes in consumer preferences, but also by technology, linkages between members of the food supply chain, and prevailing policies and business environments. Sophisticated supply chains and distribution channels are now being adopted across different regions and national boundaries. The ongoing changes and innovations in global food markets, as well as the trends in different sectors of the food industry, make up a complex puzzle with consumers, producers, and global retailing and manufacturing firms representing the many pieces.

A growing trend in food markets is the shift in growth of food sales from high-

income (developed) countries to lower income (developing) countries. Despite the shift, per capita commercial sales show wide regional disparities worldwide, though growth in food sales in the developing countries is expected to continue in the coming decade. In anticipation of this growing market, food firms appear to be repositioning themselves and investing in many developing countries. Supply chains are the mechanisms for transmitting signals from consumers to food manufacturers, as well as delivering products from the farm to the consumer’s table. The major components of a supply chain are input supply, production, processing or manufacturing, and retailing. In response to consumer demands, suppliers can choose to add value and market products that meet specific needs. Additional value can be added at any of the four points in the supply chain prior to reaching the consumer. In the evolving global food economy, signaling the additional value (quality) of the new product is as important as developing the product. Modern technology, such as point-of-sale scanners, provides retailers with first-hand information regarding

Figure 1. Only 10 percent of $3.2 trillion global food sales are traded products, 2002

Source: Trade data from UN Comtrade, 2002. Global commerce in processed food is approximated by Euromonitor.

Non- traded 90%

Traded 10%

Rest of world 5%

US Imports 1%

US Exports 1%

Intra EU 3%

consumer food preferences, positioning retailers to interpret and transmit changing consumer demands. However, food retailing is a service industry and does not generally engage in the design and manufacture of new products. Rather, the development of specific products desired by consumers requires coordinated efforts and cooperation among all segments of the supply chain. Degrees of coordination and cooperation among the different elements of the supply chain are more pronounced in developed countries, particularly in the European market, which may serve as a model for many markets in high-income countries.

Food distribution/retailing channels differ across regions in the world. Consumer shopping habits, income levels, and lifestyles all influence how the food retail sector is configured in different countries. However, liberalized trade and globally focused commodity and financial markets have initiated the move toward convergence of the world food retail structure, as evidenced by the growing presence of supermarkets and hypermarkets across the globe, often with multinational chains operating across many countries. In developed countries, a large share of retail food is sold through supermarkets/hypermarkets. The United States has the largest share, at 62 percent (table 1). Despite developed countries having similarly large shares of supermarket sales, cultural and lifestyle differences influence the structure of retail outlets in specific developed-country markets. For example, consumer demand for convenience and efficiency in Japan accounts for the relatively high share of food sold through convenience stores and petro-gas outlets, 18 percent, which is much higher than shares in other developed countries. In developing countries, where supermarkets/hypermarkets are newly establishing, independent stores and traditional markets still account for very large shares of total retail sales, as shown by the growing presence of large multinational food retail firms in Latin America and Asia. The reorientation of global food markets has prompted food manufacturers to adopt more focused growth strategies to maintain leadership positions in specific sectors. Food manufacturers compete in the retail sector by marketing and promoting their own products. It is increasingly common for private firms to own trademarks, brands, formulas, and processing technologies associated with manufacturing.

Table 1 – Share of food sales for retailers in selected international markets, 2002

Retail outlets United States

Western Europe

Latin America Japan Indonesia

Africa and

Middle East

World

Percent sales Supermarkets/hypermarkets 62.1 55.9 47.7 58.0 29.2 36.5 52.4 Independent food stores 10.0 10.0 33.0 11.3 51.1 27.1 17.8 Convenience stores 7.5 3.8 3.1 18.3 4.8 10.0 7.5 Standard convenience stores 5.7 2.5 1.8 18.2 4.8 9.5 6.4 Petrol/gas/service stations 1.8 1.2 1.3 0.1 0.0 0.5 1.1 Confectionery specialists 0.5 2.0 1.7 0.3 0.1 1.3 1.2 Internet sales 0.2 0.1 0.1 0.4 0.0 0.0 0.2 Chemists/drugstores 0.2 0.3 0.2 0.4 0.2 0.3 0.3 Home delivery 0.4 0.2 0.0 0.0 0.0 0.0 0.1 Discounters 7.4 10.3 0.2 2.2 2.7 6.2 5.7 Other 12.0 17.5 14.0 9.0 11.9 18.6 14.9 Total 100 100 100 100 100 100 100 Source: Euromonitor, 2004.

Licensing and marketing agreements with other national and multinational firms

play a role in determining how a food manufacturer’s products are sold in foreign markets. Of increasing importance is the manufacturer’s ability to establish business relationships with supermarkets and other retail chains. For example, Ben and Jerry’s, a popular U.S. ice cream manufacturer, had its products introduced into the Japanese market via a partnership with a single retail chain, 7-Eleven (Hagen, 2000).

Another increasingly important strategy of multinational companies is winning

public support for business activities in developing countries. This strategy is reflected in current annual reports of most international companies, which once focused solely on financial reporting but now include substantial sections on corporate social responsibility. Consumer concerns about the environmental impacts of agriculture and inequities in income distribution arising from food production are growing. It is not enough for firms to allay consumer concerns for food quality and food safety to preserve product loyalty or win the public trust. Rather, firms are increasingly driven to integrate plans for sustainable development of the world’s natural resources into corporate strategies and responsibilities1. Firms are reviewing not only their product-market portfolio but also their specific roles in the food chain.

Given the profits from catering to specific consumer demands and preferences in each market, global firms with wide geographic coverage are not necessarily the largest or the most diversified firms. Rather, firms with a flexible business structure that enables them to respond to demand signals and a more focused market orientation are more competitive in global markets. Producer-owned firms, such as cooperatives, successfully compete in global food markets by adopting vertically integrated approaches to delivering quality products to consumers. The ongoing evolution of the global food industry is driven by changes in consumer preferences and the food industry’s response to those changes at the local, national, and global levels. References • Euromonitor International. 2004, http://www.euromonitor.com. • Hagen, J.M. “Educator Insights: Ben and Jerry’s-Japan: Strategic Decision by an

Emergent Global Marketer,” Journal of International Marketing, Vol. 8, No. 2, 2000, pp. 98-110.

• United Nations. COMTRADE, Commodity Trade Data Base, UnitedNations Statistical Division, http://unstats.un.org/unsd/comtrade/

1 Companies listed in the Dow Jones Sustainability Index are selected by asystematic assessment of corporate sustainability practices. They must actively lead their industries and set industrywide best practices in strategy innovation, governance, and relationships with shareholders, employees, and other stakeholders.

Factors Shaping Global Food Markets

Consumers today are upgrading their diets to include more higher valued products than in the past (Regmi, 2001; Rosegrant et al., 2001). Initially, this trend was accompanied by rapid growth in trade for high-value foods, fueling speculation of continued trade growth in the sector. However, contrary to conventional wisdom, global food trade patterns have shifted again and the trade share of high-value food, particularly processed products, has started to decline. Competing in the global food industry is a complex undertaking, as firms must continually react to the demands of wealthier and more selective consumers for higher quality and more varied products. Markets for individual food products, however, are not becoming global. Rather, consumer demand for food products varies based on income and regional cultural preferences. Successful local, regional, and global firms supplying foods to these diverse markets employ increasingly sophisticated technologies and business practices to customize food products to meet local tastes and preferences, and thus satisfying consumer’s wants. On the other hand to successfully satisfy those goals food retail companies must embark on an intensive merger game.

Size and Changing Shape of the Global Food Market

Food is sold either through retail stores or through foodservice establishments, mainly hotels and restaurants. Global sales of food, including food sold through foodservice establishments, are estimated at $4 trillion in 2002 (table 2). Over 40 percent of the total value of global food sales is currently accounted for by the foodservice sector. With consumers increasingly demanding convenience, it is likely that the value of global foodservice sales will overtake global retail food sales in the future. The demand for convenience is not limited to consumers in developed countries. In the developing countries, rising demand for convenience is reflected by the rapidly expanding fast food sector2.

As the food sector is not consistently defined across countries and regions, nor is food sold in the same manner, it is difficult to measure precisely the actual size of the world food market. For example, in developed countries, the foodservice sector accounts for a large and growing share of total food sold. However, food service covers a wide variety of outlets, and reliable data are generally hard to obtain across different countries. In developing countries, a large share of food is traditionally sold through street-side stalls. Products sold in such markets include food prepared at vendors’ homes and sold to consumers in a ready-to-eat form.

Table 2 – Global food sales, 2002 Retail outlets Retail stores Food Service Total Billion dollars Fresh food 531 382 913 Processed products 1762 1420 3182 Packaged food 1148 828 1976 Beverages 614 592 1206 Alcoholic drinks 316 422 729 Hot drinks 53 12 65 Soft drinks 245 167 412 Total Food 2293 1803 4096 Source: Euromonitor, 2003.

2 The World Bank defines high-income countries as those with year 2000 per capita Gross National Income (GNI) above $9,266; upper-middle-income countries as those between $2,996 and $9,266; low-middle-income countries as those between $756 and $2,995; and low-income countries as those below $756. Countries in the low- and middle-income groups are generally considered to be developing countries.

At the retail level (which excludes food service), a relatively consistent comparison across regions is possible through the use of food sales data from grocery stores. However, these data fail to completely capture all food sales, especially in the developing countries. Although supermarkets are increasingly prevalent in developing countries, the available food sales data from these outlets may understate the actual size of individual developing country markets. Nevertheless, lacking alternative sources, this study uses retail sales data collected by a commercial vendor, Euromonitor, which consists of globally consistent food categories.

At the retail level, food can be broken down to fresh ($531 billion) and processed ($1.7 trillion). Processed product sales are the combined sales of packaged food ($1.1 trillion) and beverages ($641 billion). High-income regions, including European Union (EU) countries, the United States, and Japan, accounted for over 60 percent of packaged food sales in the world in 2002. Packaged food accounts for about half of total food expenditures in developed countries but only a third or less in most developing countries (fig. 2). In most countries, packaged food accounts for about two-thirds of all processed products sales, with alcoholic beverages, soft drinks and hot drinks constituting the remaining one-third. The value of packaged food sales varies among countries based on per capita incomes (table 3).

Market sizes, as indicated by the value of retail sales, are much larger in high-income countries, but market growth has generally been faster among developing countries (table 4). Among developing countries, oils and fats, dried food, and dairy products have sizable retail markets with strong growth trends. While smaller in terms of retail value, the breakfast cereals market has skyrocketed, registering double- and triple-digit sales growth in some developing countries.

In the mature markets of high-income countries, processed food retail sales are growing at a slower pace than in the developing countries. Ready-to-eat meals are one of the fastest growing sectors in developed countries, while breakfast cereals are making inroads in the nontraditional French and Singaporean markets. As growth rates of ready-to-eat products have risen, growth rates in retail sales of items used in meal preparations, such as oils and fats and dried food, have slowed or turned negative in many high-income countries.

In Eastern European countries, retail sales of processed food products grew rapidly during the 1990s3.This growth resulted from ongoing westernization of both consumers and food marketing sectors in the region. Multinational companies and Western brand products have become increasingly visible in these markets. At the same time, Eastern European consumers are growing more sophisticated, with greater demand for products offering health benefits and convenience. Czech and Hungarian consumers, in particular, have increased consumption of nutrient-enriched and low-fat products, such as yogurts and specialty drinks. The busy lifestyles of young professionals and entrepreneurs have accounted for increases in the demand for labor-saving breakfast cereals, snack foods, and ready-to-eat meals. Sales of such products as canned ready meals, frozen pizza, and dehydrated soups are high in the region. Dried food products, particularly pasta and other noodles, have been one of the most dynamic growth sectors in this retail market. Foreign investments in private label product development have also helped drive the demand for high-value processed foods in some Eastern European countries. 3 Except Russia, where retail sales trends mirror those of high-income countries.

Retail food sales in Latin America and developing countries in Asia are undergoing changes similar to those in Eastern Europe. However, the markets in such countries as China and Vietnam are at the early stages of transformation, with smaller shares of multinational retail chains and limited penetration of packaged food products in the rural areas. As in Eastern Europe, wealthier consumers in Latin American are purchasing more timesaving products and products associated with higher health attributes. Low fat yogurt and lean chilled and frozen food products are becoming very popular in Brazil, while meal replacement drinks are one of the strongest growth sectors in Colombia. Latin American consumers are also developing a taste for different ethnic foods, with pasta being the fastest growing dried packaged product sold in the region.

Table 3 – Annual average growth in retail sales of packaged foods Total retail growth Per capita growth

Country group Per capita

gross national income (2000)

Per capita 2002 retail sales 1996 - 02 2002 – 08* 1996 - 02 2002-08*

Dollars Percent Percent High-income >= 9266 979 3.2 1.7 2.5 1.1 Upper-middle-income 2996 - 9265 289 8.1 4.0 6.7 2.8 Lower-middle-income 756 – 2995 143 28.8 4.4 28.1 3.8 Low-income <755 63 12.9 6.1 11.9 5.3 Note: Country classifications as per the World Bank. Retail sales are sales of packaged foods.

* Retail growth projections made by Euromonitor.

Source: Euromonitor, 2003.

Reflecting the increased demand for variety as incomes increase, the number of

products purchased at retail outlets is greater for wealthier countries. For example, the top five product categories account for 71 percent of processed food retail sales for Mexico and 74 percent for India, but only 48 percent for the United States and 47 percent for the United Kingdom. In most countries, the top five product categories are bakery, dairy, confectionery, carbonated drinks, and chilled foods.

Figure 2. Food share of total expenditures declines while processed food share of food expenditures increases with Income, 2002

Source: Euromonitor, 2003: World Bank classification of countries

50%

40%

30%

20%

10%

0%

Low income Low middle income

Upper middle income

High income

Packaged

Non-packaged

Note: The World Bank defines high-income countries as those with 2000 per capita Gross National Income (GNI) above $9,266; upper-middle-income countries as those with per capita GNI between $2,996 and $9,266; low-middle-income countries as those with per capita GNI between $756 and $2,995; and low-income countries as those with 2000 per capita GNI below $756. Countries in the low- and middle-income groups are generally considered to be developing countries.

Table 4 – Retail sales size and growth of selected food items Retail sales, 2002 Average annual growth rate (1998-2003) Oils &

fats Breakfast cereals

Ready meals

Dried food

Dairy products

Oils & fats

Breakfast cereals

Ready meals

Dried food

Dairy products

Million dollars

Percent High-income countries: France 2294 646 2924 1085 14733 1.3 5.0 4.8 1.5 3.8 Germany 2413 711 1986 1969 13798 -1.7 0.4 3.4 2.2 2.4 Japan 2713 300 11573 22510 18801 -1.8 2.2 4.9 -1.5 0.9 Singapore 35 17 22 139 134 2.2 10.0 3.6 3.6 4.7 United Kingdom 1997 1999 6172 1215 10239 1.1 1.0 5.9 3.5 1.8 United States 4676 9476 17278 9965 46969 -0.1 1.3 5.8 1.4 3.8 High-middle-income countries: Brazil 2559 117 203 3369 7106 24.0 .8.9 17.3 16.1 13.4 Chile 250 48 10 217 747 1.0 10.3 4.0 -0.2 3.7 Czech Rep. 443 19 201 221 1427 0.8 12.4 10.8 11.3 4.4 Hungary 319 40 124 378 1206 6.9 16.2 10.2 7.9 8.6 Mexico 1105 1008 36 1754 7393 9.6 14.6 13.8 20.8 9.8 South Africa 964 144 196 637 1404 10.4 4.0 3.3 7.9 6.2 South Korea 782 141 24 3936 2608 4.9 9.2 5.0 4.6 4.1 Turkey 2097 27 33 447 4692 1.5 2.2 -1.1 -1.8 3.0 Low-middle-income countries: Bulgaria 142 6 4 60 348 2.9 14.5 5.0 4.4 5.1 China 1576 - 665 4615 4479 11.2 - 2.9 10.4 15.4 Colombia 909 58 20 754 3266 5.6 11.0 8.9 11.0 13.3 Morocco 697 1 1 98 705 3.5 16.1 5.1 5.1 5.9 Philippines 492 23 30 305 571 8.0 12.0 4.8 12.0 11.0 Romania 270 6 3 169 652 29.4 27.8 34.6 37.3 27.3 Russia 3095 207 618 1543 3790 -3.6 2.5 9.3 -3.8 1.8 Low-income countries: India 1466 16 - 437 1245 5.5 11.7 - 10.6 9.8 Indonesia 404 20 12 1944 895 6.7 10.8 9.5 3.8 14.8 Ukraine 1177 9 33 457 651 19.6 20.7 12.5 12.6 10.4 Vietnam 208 0.2 - 96 156 14.7 182.0 - 30.6 10.6

Note: – = unavailable sales data.

Source: Euromonitor, 2003.

As the demand for processed foods is also driven by the demand for higher quality

and labor-saving products, the items consumed by countries at different income levels reflect different levels of demand for services embodied in the products. For example, ready-to-eat meals account for about 4 percent of total retail sales in the United States and the United Kingdom, but only 0.06 percent in Mexico, 0.55 percent in China, and 0 percent in India. On the other hand, intermediate products, such as fats and oils, while accounting for over 7 percent of total processed food retail sales in India, 13 percent in Indonesia, and 5 or more percent in many developing countries, account for less than 2 percent of retail sales in high-income countries (0.79 percent in the United States).

Trends in the soft drink and beverage sector are often an indicator of the ability of consumers to purchase higher value foods. For example, growing affluence in the developing countries is associated with greater expenditures on soft drinks, which, in turn, indicates increased consumer ability to purchase processed foods. In fact, foreign direct investments (FDI) in the beverage sector often function as a bellwether in the local food industry (Bolling, 2002). The global market for soft drinks is rapidly expanding, with large growth in sales in Eastern Europe and Asia (table 4). Growth in soft drink sales is particularly high in East Asia, with markets expanding at rates ranging from almost 12 percent (Philippines) to 22 percent (Indonesia) annually. The soft drink markets in developed countries, however, are sluggish, with average annual growth rates for all soft drinks ranging from 3 percent in Germany to about 5 percent in Singapore. The growth in sales of carbonated drinks is considerably lower in all developed country markets, where many consumers seek more healthful alternatives to carbonated drinks, with annual

growth rates at or below 3 percent, and negative for Singapore. Sales growth data for soft drinks offer a picture of future growth for processed food sales.

Although high-income countries account for over 60 percent of total processed food retail sales, they are essentially mature markets with limited future growth potential in this sector. In developed countries, growth in food consumption is expected to arise mainly from slow rates of population growth rather than from increases in per capita consumption. Developing countries, on the other hand, are expected to account for most future increases in food demand, resulting from both increases in population as well as increases in per capita food consumption. Diet upgrades made possible by income growth are expected to double the quantity of meat demanded by consumers in developing countries by the year 2020, as well as increase the demand for other high-value food products (Rosegrant et al., 2001).

Table 4 – Retail sales size and growth of selected food items

1997 – 2002 annual average growth 2002 sales

Share of carbonated

drinks All soft drinks Carbonated drink

Million liters

Percent High-income countries: France 12755 14.4 4.4 2.4 Germany 18920 31.2 2.4 2.9 Japan 16885 16.3 4.5 1.0 Singapore 448 41.2 4.9 -0.9 United Kingdom 10031 57.3 3.6 1.9 United States 91286 66.0 3.1 1.4 High-middle-income countries: Brazil 16630 71.8 5.9 2.5 Chile 1762 85.2 2.4 1.9 Czech Rep. 2524 33.3 10.7 8.0 Hungary 1561 44.1 7.0 1.6 Mexico 34874 46.0 8.6 4.1 South Africa 2938 80.1 6.8 6.2 South Korea 3737 33.4 5.7 3.8 Turkey 7508 32.2 6.7 5.2 Low-middle-income countries: Bulgaria 774 52.3 14.3 10.4 China 22952 27.4 15.9 8.8 Colombia 3484 76.0 -0.1 3.3 Morocco 961 38.6 3.5 2.8 Philippines 4998 64.2 12.0 8.4 Romania 1561 41.8 13.5 9.9 Russia 5010 47.6 7.9 2.7 Low-income countries: India 3282 60.3 13.9 7.9 Indonesia 9017 8.9 21.7 7.8 Ukraine 1378 47.7 7.9 6.0 Vietnam 539 58.4 4.8 -1.8

Source: Euromonitor, 2003.

While retail sales of packaged foods have grown at about 2-3 percent annually in high-income countries, they have grown much faster among developing countries, ranging from 7 percent in upper-middle-income countries to 28 percent in lower-middle-income countries. The dramatic growth among middle-income countries is partly due to tremendous growth in sales among Eastern European countries, such as Romania, Poland, and Hungary. With sales in these countries nearing their peak potential, future growth in packaged food retail sales among developing countries is expected to be much slower, but will continue to exceed the rates for high-income countries. As with retail sales in the soft drink and beverage sectors, a slowdown in sales of packaged foods in Eastern Europe is expected to be offset by growth in sales in East Asia. China, Thailand, the Philippines, Indonesia, Vietnam, and India are expected to be some of the fastest growing markets for packaged food retail sales in the next 5 years.

Based on per capita income levels, retail sales of different food products vary

across countries, with greater sales in higher value-added products occurring in wealthier countries. In fact, high-income countries currently account for most global retail sales of processed foods. However, these large markets offer little potential for future growth in this sector. On the other hand, markets for processed foods and beverages are rapidly expanding in developing countries. References • Bolling, Chris. “Globalization of the Soft Drink Industry,” Agricultural Outlook, No. 297,

December 2002, pp. 25-27. • Euromonitor International. 2003, http://www.euromonitor.com. • Food and Agriculture Organization of the United Nations (FAO). Statisticaldatabase,

www.fao.org • Hentzepeter, V. “Corporate Responsibility: Reporting Beyond Financials,” Elsevier

Food International, No. 4, November 2003, pp. 34-38. • Regmi, Anita (ed.). Changing Structure of Global Food Demand and Trade,

Agriculture and Trade Report WRS-01-1, U.S. Department of Agriculture, Economic Research Service, May 2001.

• Reardon, T., and J.A. Berdegue. “The Rapid Rise of Supermarkets in Latin America:

Challenges and Opportunities for Development” Development Policy Review, 2002, 20(4):317-334.

• Rosegrant, M., M. Paiser, S. Meijer, and J. Witcover. Global Food Projections to

2020, 2020 Vision Series, International Food Policy Research Institute, 2001. • SAI, www.saiplatform.org, accessed April 2003. • Seale, James, Jr., A. Regmi, and J. Bernstein. International Evidence on Food

Consumption Patterns, Technical Bulletin 1904, U.S. Department of Agriculture, Economic Research Service, October 2003.

• U.S. Census Bureau. Foreign Trade Statistics, http://www.census.gov/foreign-

trade/statistics/index.html • U.S. Department of Agriculture. USDA Agricultural Baseline Projections to 2011,

February 2002.

Retail Growth and Consolidation Strategies in the EU

Introduction

As in many other industries the conditions for conducting business activities in the retail industry is changing rapidly and as Kumar (1997) implies almost in a revolutionary manner. This is certainly the case for the retail businesses in the European Union (EU). Like in the US (Wrigley, 2001), the retail industry in the EU has experienced an intensified wave of restructuring activities during the past decades (Alexander, 1996; Bell et al, 1997; Fernie, 1997; Keh and Park, 1997; Perkins, 2001; Colla and Dupuis, 2002; Wrigley 2002a). Worldwide retailers seem to constantly launch and develop new retail formats, concepts and products in order to differentiate themselves from competitors and thereby enhance their competitiveness in terms of cost efficiency and their attractiveness to customers in terms of customer loyalty (Hallsworth et al, 1995; Kumar, 1997; Bell, 2000; Kumar and Karande, 2000; Morganosky and Cude, 2000). At the same time retailers are generally exploring and, apparently, to an ever-increasing pace also accomplishing arising opportunities to integrate vertically, horizontally and/or even laterally in their search for ways of reducing risk and uncertainty in the supply chain as well as obtaining and realising economies of scale and scope at the retail level (Bell et al, 1997; Keh and Park, 1997; Wrigley, 2002a; Wrigley,2002b).

The integration activities of EU-retailers cover a variety of modes and have taken

the form of full equity ownership, i.e. mergers and acquisitions (M&As), partial ownership, i.e. joint ventures or minority investment, and no ownership control, i.e. co-operative agreements (Clarke-Hill et al, 1998; Perkins, 2001). The latter kind of integration activities includes the establishment of long-term partnerships in the form of what may be regarded as strategic alliances (Fearne, 1994; Bailey et al, 1995; Reijnders and Verhallen, 1996; Bell, 2000; Elmuti and Kathawala, 2001). Just like M&As, joint ventures and strategic alliances might concern partnerships between similar retailer firms operating in the same market segment (horizontal partnership), between retailers and suppliers in the value chain (vertical partnership) or between retailers and firms in other industries (lateral partnership). However, in contrast to certain (hostile) M&As, joint ventures and strategic alliances are entered into voluntarily by independent firms. Furthermore, a strategic alliance must by definition be advantageous to each party involved. “Strategic alliances are partnerships of two or more corporations or business units that work together to achieve strategically significant objectives that are mutually beneficial.” (Elmuti and Kathawia, 2001, p 205) This does not mean that strategic alliances have to be equally beneficial to each party involved, but only that all parties to the strategic alliance are expected to be better off having entered into the partnership (Clarke-Hill et al, 2001).

Until recently consolidation and other restructuring activities in the grocery retail industry have primarily been domestically oriented (Colla and Dupuis, 2002) and mainly concerned growth opportunities on the retailers’ home market. To a certain extent this may be explained by the fact that “…the largest European retailers are food retailers which tend to view their operating markets as national markets…” (Fernie and Staines, 2001,p 30) However, along with the on-going political processes in the EU, but also between the EU and other parts of Europe toward harmonisation and integration of markets, this home market focus of grocery retailers gradually appears to begin to alter and is not as pronounced any longer. Akhurst and Alexander (1995, p 1) pay attention to this development and declare “… in recent decades the apparent convergence of markets and

the increased internationalization of other business sectors has led to fundamental changes in the environment which retailers operate.” In combination with the ever higher degrees of concentration and saturation in many domestic markets, the retailers instead tend to become increasingly interested in cross-border activities (Fernie, 1993; Akhurst and Alexander, 1995; Myers, 1995; Bell et al, 1997; Kristensen et al, 2001). Domestic markets are no longer regarded as more or less inviolable (home-market) areas reserved for incumbent retailers only and, lately, there has been a number of cross-border M&As as well as transnational strategic alliance agreements involving market-leading grocery retailers in the EU (Keh and Park, 1997; Kumar, 1997; Gielens and Dekimpe, 2001; Ågren, 2001a; Perkins, 2001; Wrigley, 2002a).

Although internationalization of retail businesses is far from a new phenomenon (Quinn, 1999; Godley and Fletcher, 2001), the magnitude of retailers’ cross-border activities is on a different level today (Colla and Dupuis, 2002). “For example, of the 196 non-domestic retailers operating in Belgium where the date of market entry is known, only 31 entered the market before 1980 and only 5 before 1970. Likewise, of the 135 non- domestic retailers operating in the UK, only 12 were operational before 1980, only 2 before 1970.” (Akehurst and Alexander, 1995, p 5) This implies that the retailing business climate in Europe in terms of market conditions, including the legislative environment, is now more in favor of cross-border retail activities than ever before. This picture is, however, not unison for the whole of Europe. The European grocery retail markets are still fragmented and it is yet to early to talk about a single European market (Perkins, 2001; Flavián et al, 2002). Furthermore, as Guy (2001) quite rightly points out, there also remains a regulatory space constraint in most of Western Europe that makes it difficult for potential entrants to establish and open up new large-scale retail stores in general and big complex of stores in off-center locations in particular. Wrigley (2002a, p 83) continues: “This acts as a barrier to entry via organic expansion and suggests that the route to consolidation will essentially be via merger and acquisition.” Thus, this existing localization constraint may in fact stimulate cross-border M&As in this region, but also international partnerships between retailers in the form of strategic alliances are encouraged. Certainly, the high degree of concentration with only a few dominant players on each market may to some extent counteract the process of grocery retail consolidation in Western Europe and slow down the pace of structural changes in the industry (Wrigley, 2002a). The movement towards a pan-European grocery retail market is likely to continue anyhow. The process has already started and up-to-date it seems to have changed the retailing landscape in Europe considerably. Probably, beyond the point of no return. The time when the domestic grocery retail markets in different European countries were evolving side by side with relatively clear borderlines between them is definitely forgone. Motives behind cross-border retail expansion

As retailers are becoming increasingly engaged in cross-border activities, the interest is growing among academic researchers in finding out and explaining important motives underlying the international expansion of the retail industry. The framework provided by Hollander (1970) is thereby regarded as pioneering (Quinn, 1999). He makes a distinction between commercial, i.e. growth and profit oriented, non-commercial, i.e. social, political, personal or ethical, inadvertent motives. The latter kind of motive is related to events outside the control of the management, like the changing of country borders, and may therefore be classified as an imperative external reason for a retailer’s internationalization. Commercial and non-commercial motives are then more assignable to the decisions of managers and/or owners. The focus below will be on commercial motives

even though non-commercial motives, like hubris and empire-building, may very well be the real motives for international expansions in some cases.

There exist plenty of different commercial motives behind retailers’ international

expansion, but in spite of the complex nature of motives Quinn (1999) is contented to observe that researchers tend to acknowledge the reactive and proactive internationalization approaches originally initiated by Hollander. “Reactive internationalization occurs when saturation and marginal opportunities in the home market are the key influences on a company’s decision to expand internationally whereas proactive internationalization stems from the firm’s willingness to exploit international opportunities before the domestic market reaches saturation.” (op. cit., p 103) He continues to notice that earlier research studies on British retail firms lend support to the reactive approach, whereas more subsequent ones find the current consolidation wave to be more proactive implying that retailers are now merely attracted by growth opportunities in foreign markets than just responding to deteriorating market conditions domestically. The latter observation is very much in line with the outcome of his postal survey in which the responding retailers declared that ‘size of overseas market’, ‘level of economic prosperity in overseas market’ and ‘niche opportunities in overseas market’ substantially influence decisions to go international. However, ‘international appeal of the retail formula’, ‘possession of a competitive advantage’ and ‘managerial commitment’ were also regarded as motives of significant importance. These findings were similar to the ones that Alexander (1996) presented from a comparative study of retailer motives in 1988 and 1993, albeit he distinguished a slight increase in the retailers’ perceived importance of home market saturation between 1988 and 1993. Quinn (1999) also investigated whether motives are related to the retailers’ experience of international operations in terms of the length of time they had spent in overseas markets, but no significant differences were distinguished. However, new and developing internationalists appeared to emphasize reactive motives to a higher degree than internationally established retailers and rated economies of scale more highly in particular. “The economies of scale factor may be associated with reactive motives for expansion in that those companies faced with limited opportunities in the home market need to look abroad for opportunities to expand and to enjoy the benefits of economics of scale.” (op. cit., p 110)

Guy (2001) emphasizes that the mode of market entry strategy retailers adopt is very much dependent on institutional constraints, like e.g. governmental regulation of retail and service activity and restrictions on land and property markets. As already mentioned, such constraints may limit the available modes for retailers to expand abroad so that integrating with a domestic retailer firm becomes the only option. Although this may explain some of the recent takeovers in Europe it is also evident that the prospect of gaining from economies of scale can be an essential motive for particularly horizontal cross-border M&As. In this context Kumar (1997) points out that scale economy is not only important for obtaining cost efficiency in the retailers’ internal processes: “Retailers feel that size brings them bargaining power versus suppliers, and therefore, helps reduce what for many retailers is their biggest expense – COGS or cost of goods sold” (op. cit., p 830)

Fearne (1994) argues that the creation of international strategic alliances might be an appealing integration alternative to cross-border M&As. “While mergers and acquisitions are likely to continue to play an important part in the restructuring of the European food industry, strategic alliances provide a cheaper, more flexible and less risky means of maintaining sectoral growth throughout the food chain.” (op. cit., p 30) Elmuti and Kathawala (2001) mean that a strategic partnership with an existing domestic firm facilitates a retailer’s entrance into the unknown market. They also claim that a strategic

alliance may be a less costly way to obtain new technology and ensure competitive advantages, but it may also reduce financial risks. However, a strategic alliance is not risk free. It may fail due to all from ‘clash of cultures’ to lack of trust, objectives and coordination between management teams. “It is essential that businesses enter into strategic alliances arrangements with a comprehensive plan outlining detailed expectations, requirements, and expected benefits.” (op. cit., p 215)

Large grocery retail cross-border M&As in Europe

The entering of Wal-Mart into the German retail market in 1997/1998 and, particularly, into the UK retail market in 1999 has attracted considerable attention and been widely commented upon by academic writers (Arnold and Fernie, 2000; Burt and Sparks, 2001; Guy, 2001; Wrigley, 2001; Colla and Dupuis, 2002; Fernie and Arnold, 2002). “Wal-Mart is not only the world’s largest retailer – it is nearly the globe’s biggest corporation.” (Fernie and Arnold, 2002, p 92) The incumbent retailer firms were hardly neither indifferent to the sudden appearance of Wal-Mart in the EU retail market. Wal-Mart’s rapid growth on the US market commanded respect even though its international experience up to then was relatively limited. Before moving into Europe Wal-Mart had international operations in only seven countries of which five in North and Latin America (Burt and Sparks, 2001). In 1999 the share of the company’s international sales was still below 10% of its total sales (Arnold and Fernie, 2000). However, its business concept based on lowprices, sales through large-scaled supermarkets or so-called hypermarkets and efficient logistic systems had proven to be a very strong and successful concept. Consequently, Wal-Mart’s entrance into the European market was regarded as a threat (Perkins, 2001). Inevitably, it would change the balance of power in the industry and before soon the two French retailer giants – Carrefour and Promodès – apparently felt more or less obliged to respond by merging their organisations. “That changed the worldwide competitive landscape, and from that point, the new Carrefour/Promodès group became Wal- Mart’s challenger.” (Colla and Dupuis, 2002, p 104)

The motive behind Wal-Mart’s takeovers in Germany and the UK may be characterized as proactive. The US retail market had not yet reached a saturation stage and the European market offered growth potential in a fairly well-known environment to Wal-Mart. “It comprises highly industrialized, developed nations with relatively familiar religious, government and economic institutions. An expanding European Union (EU) and a common currency in the form of the Euro will facilitate pan-European trade. Furthermore, no major national retailer in Europe dominates in the same way Wal-Mart dominates North America. Finally, there is much room to grow in Europe.” (Arnold and Fernie, 2000, p 416) Still, it remains to be seen whether Wal-Mart’s expansion in Europe will be successful in the long run. So far its operations in Germany have not paid off (Perkins, 2001; Wrigley, 2002; Fernie and Arnold, 2002).

Table 5 – Major cross-border M&As in the European grocery retail market in 2000-2001 Acquirer/

parent company Country Target/ parent company Country Sales (m€) No. of

stores Remarks

Intermarché Belgium Spar Germany 6692 4761 Remaining stake Carrefour France Gruppo GS Italy 4940 943 64% share Carrefour France GB/GIB Belgium 4581 518 72,5% share Normura Japan First Quench/ Punch Retail UK 2297 13000

Ahold Netherlands Superdiplo Spain 1500 300 Source: Based on Perkins (2001:746)

The increase in consolidation activities that was expected to follow after the arrival

of Wal-Mart into the European market is slowly beginning.There has been an intense

integration activity during the two last years. “This frenzy of corporate activity has included not only straight acquisitions and mergers, but also many other forms of joint ventures and alliances.” (Perkins, 2001, p 745) Table 5 shows the five largest cross-border M&As on the EU grocery retail markets during 2000 and 2001.

Mergers and Acquisitions Activity in Europe Food Retail - Data

M&A in the European food manufacturing industry held up well in 2004 with deal volumes declining by just seven per cent to 349 deals in 2003 (2002 - 374 transactions). This compares favorably with a 16 per cent drop in deal volumes for the European M&A market as a whole.

Figure 3. European M&A Activity

Source: Dealogic, M&A Global

500

400

300

200

100

0

1999

600

Num

ber

of d

eals

10000

8000

6000

4000

2000

0

14000

Tot

al N

umbe

r of

dea

ls

Food M&A

Total M&A

2000 2001 2002 2003

Figure 4. European M&A Activity by Value

Source: Dealogic, M&A Global

10

8

6

4

2

0 1999

12

Foo

d M

&A

Bn

Eur

os

2000 2001 2002 2003

14

16

1000

800

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0

1200

1400

1600

Tot

al M

&A

Bn

Eur

os

Value <500 bn

Total M&A

Value >500 bn

With a scarcity of large transactions, the total value of disclosed M&A deals in the European food sector was down 40 per cent to e7.7 billion in 2003 compared with e12.8 billion in 2002. The spotlight has been on smaller deals in 2003, with the average disclosed size for European food sector deals at the sub-e500 million level falling to e27 million in 2003 from e44 million in 2002. In 2003 only eight food sector deals weighed in at between e100 million and e500 million, compared to 19 deals the previous year.

Table 6 – Top Ten Disclosed Deals under e500 million in the European Food Sector in 2003

Rank Date Deal Value

(mil eur)

% Acquired Target Target

Nation Bidder Bidder Nation

1 17-Jan-03 397 42 Beghin-Say France Union BS / Union SDA France

2 09-Apr-03 362 44 Cereol SA France Bunge Ltd United States

3 15-Oct-03 292 100 Rohm & Haas Company's European salt unit France

Consortium led by Union d'Etudes et d'Investissement SA

International

4 09-Apr-03 202 62 Schulstad Gruppen AS Denmark Cerealia AB Sweden 5 03-Jul-03 186 100 Lesieur France Saipol France

6 17-Jan-03 123 100 Beghin-Say's Pont d'Ardes and Abbeville sugar manufacturing plants

France Sucreries Distilleries des Hauts de France (SDHF)

France

7 21-Feb-03 104 24 Koipe SA Spain SOS Cuetara SA Spain

8 31-May-03 100 33 Marr SpA Italy

Arca Impresa Gestioni SGR SpA / Barclays Private Equity Ltd

Multi-European

9 27-May-03 96 100 Marlow Foods Ltd UK Montagu Private Equity Ltd UK

10 31-Mar-03 80 100 Frigedoc-Agrigel France Toupargel France Source: dealogic, M&A Global Criteria: Deals with a disclosed value only, acquired stake greater than 20%

The UK has been the most active M&A market for food transactions in Europe

over the last three years. However, in 2003 the UK equaled Central and Eastern Europe (CEE) in deal number terms. Interestingly, the UK had only one deal in the top ten European food deals completed in 2003, being Montagu’s acquisition of Marlow Foods for e96 million. The larger transactions in 2003 occurred elsewhere in Europe. Five of last year’s e100 million-plus deals took place in France. Two involved the Italian energy company Edison in non-core divestments with the e397 million sale of its 42 per cent stake in the French sugar group Beghin-Say to a French farming consortium and the e363 million disposal of its 44 per cent stake in the French cooking oil company Cereol to the USA’s Bunge.

Activity in CEE centred particularly on the eight countries from this region which joined the European Union (EU) on 1 May 2004. Poland recorded 16 food sector deals in 2003 with eight deals reported in Hungary. The largest deal in Poland was the completion of the French company Saint Louis Sucre’s long running battle with the Polish Government to acquire a 95% stake in the state owned sugar company Slaska Spolka Cukrowa for e71 million. Other countries to watch include Bulgaria and Romania - with eight and four deals respectively last year - both are due to accede to the EU in 2007.

The Nordic region saw a significant increase in deal activity in 2003 - up to 40 deals from 31 in 2002. Norway surged from averaging just two deals per year in the last five years to chalk-up nine deals in 2003. Sweden doubled its food M&A activity last year to 16 transactions.

Perhaps due to negative sentiment caused by the difficulties at Parmalat and Cirio

del Monte, M&A activity in the Italian food sector decreased sharply last year to nine deals

from 19 in both 2002 and 2001. As the futures of both companies unwind, we expect to see deal activity in Italy resume more normal levels in 2004.

Looking ahead, European countries outside the UK are likely to be the most fertile hunting grounds for food sector deals as consolidation gains pace. In particular, the low cost, rapidly expanding yet highly-fragmented markets of CEE are likely to be magnets for acquirers.

EU membership is expected to promote greater regional stability and

harmonisation of fiscal, legal and regulatory systems. This should remove some of the ‘fear factor’ associated with deal-doing in these areas, and encourage more buyers to consider opportunities in the new EU member countries.

Figure 5. European M&A Activity by Value

Source: Dealogic, M&A Global

50

40

30

20

10

0

UK

60

Num

ber

of D

eals

70

80

CEE

France

Spain

Germany

Benelux

Scandinavia

Italy

2002

2003

2001

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Bailey, J., C. Clarke-Hill and T. Robinson, 1995, ‘Towards a Taxonomy of International Retail Alliances’, The Service Industries Journal, Vol. 15, No. 4, pp. 25-41. Bell, R., 2000, ‘The Challenge of Food Distribution’. In The Future of the Global Food Industry-Strategic Directions, B. Ramsey (ed.) Financial Times retail and Consumer Publishing Monograph Series, London. Bell, R., R. Davies and E. Howard, 1997, ‘The Changing Structure of Food Retailing: the Implications for Strategy’, Long Range Planning, Vol. 30, No. 6, pp. 853-861. Burt, S. and L. Sparks, 2001, ‘The implications of Wal-Mart’s takeover of ASDA’, Environment and Planning A, Vol. 33, pp. 1463-1487. Clarke-Hill, C., T. Robinson and J. Bailey, 1998, ‘Skills and competence transfers in European retail alliances: a comparison between alliances and joint ventures’, European Business Review, Vol. 98, No. 6., pp. 300-310. Colla, E. and M. Dupuis, 2002, ‘Research and managerial issues on global retail competition: Carrefour/Wal-Mart’, International Journal of Retail & Distribution Management, Vol. 30, No. 2, pp. 103-111. Elmuti, D. and Y. Kathawala, 2001, ‘An overview of strategic alliances’, Management Decision, Vol. 39, No. 2, pp. 205-217. Fearne, A., 1994, ‘Strategic Alliances in the European Food Industry’, European Business Review, Vol. 94, No. 4, pp. 30-36. Fernie, J., 1993, ‘Distribution strategies of European retailers’, Logistics Information Management, Vol. 6, No. 1, pp. 24-31. Fernie, J., 1997, ‘Retail Change and Retail Logistics in the United Kingdom: Past Trends and Future Prospects’, The Service Industries Journal, Vol. 17, No. 3, pp. 383-396. Fernie, J. and H. Staines, 2001, ‘Towards an understanding of European grocery supply chains’, Journal of Retailing and Consumer Services, Vol. 8, pp. 29-36. Flavián, C., A. Haberberg and Y. Polo, 2002, ‘Food retailing strategies in the European Union. A comparative analysis in the UK and Spain’, Journal of Retailing and Consumer Services, Vol. 9, pp. 125-138. Gielens, K. and M. Dekimpe, 2001, ‘Do international entry decisions of retail chains matter in the long run’, International Journal of Research in Marketing, Vol. 18, pp. 235-259. Godley, A. and S. Fletcher, 2001, ‘International Retailing in Britain, 1850-1994’, The Service Industries Journal, Vol. 21, No. 2, pp. 31-46.

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5-Year Growth Trends for Retailers

We have seen substantial compound annual growth rates in sales between 1998 and 2003, with growth calculated from local currency figures. The ranking of the 50 fastest growing retailers over this five-year period shows that there is no one method that guarantees strong double-digit growth. Several of the retailers have developed merchandise concepts that have become a hit with consumers. As a result, many of these retailers are expanding through new store openings. Others have grown largely through acquisition. Additionally, the multi-year housing boom in numerous developed countries has benefited various DIY and home electronics retailers. Of particular note, six of the 30 fastest-growing retailers are US motor vehicle dealerships. These retailers have only recently begun to aggressively acquire smaller regional dealerships, thereby developing into national players. Their “retail” sales are estimated because service-related revenues have been estimated and subtracted from their totals. Sales of motor vehicle parts are included.

The fastest-growing retailer over the last five years was Canada’s Alimentation Couche-Tard. The company is now the fourth-largest convenience store operator in North America as a result of its 2003 acquisition of the Circle K chain of convenience stores from Conoco- Phillips. The acquisition was the largest in the company’s history.

Second-fastest growing was FOCUS Wickes from the UK. The private company operates in the increasingly popular DIY segment and has made several major acquisitions since 1998. Wesfarmers’ Bunning Warehouse chain, another DIY/hardware concept, had the fourth-fastest growth rate mostly as a result of a major 2001 acquisition that basically doubled its retail size.

Very few of these 50 rapid growers are centered in food-related formats, which traditionally are slow-growth concepts. Mercadona, however, is a major exception to the rule. It is the fastest growing food-related company among these 250 retailers. The company, Spain’s largest supermarket chain, has grown its sales more than 25 percent per year over the last half-decade, in part, by developing its own version of the everyday-lowprice concept. The rapidly growing chain added 89 new stores in 2003 and now operates more than 800 supermarkets. Today, it is the 82nd-largest global retailer, while still only operating in its home country. Just three short years ago it was ranked 178th-largest.

Of particular note, the majority of these growth giants have achieved their success through concentrating on just one or two formats. For example, 16 of the 20 fastest-growing retailers operate in just one format. In addition, 35 of these 50 companies operate in three or fewer countries. And 29 are relatively small, being ranked in the bottom half of the 250 list. Thus, many are small and focused. They are concentrating on being the best in their category — and they’re succeeding.

While the table shown here lists only the 50 fastest-growing retailers, there were, in fact, a total of 102 retailers that experienced double-digit growth between 1998 and 2003. At the other extreme, however, 47 retailers saw their sales shrink over the last five years. This period consisted of several economic challenges for various regions of the globe — especially in the US, Japan and Latin America — so perhaps it should not be surprising that nearly one-fifth of these large companies have been struggling. Average annual growth for all 250 retailers was 9.0 percent per year over the five-year period.

When comparing results across all retailers, it appears that those who concentrate in one specialty sector have gained an advantage over multi-format retailers. Specialty-only retailers had average growth of 10.6 percent per year over the last five years, a rate that was superior to the 9 percent annual average for all retailers.

In contrast, retailers who are conglomerates, operating in five or more formats, had average growth of only 7.1 percent per year through 2003, which was below the average for all companies. Most of these retailers were heavily focused on food retailing. Eight of the 44 conglomerates had negative growth over the five-year period. More than half, 26, of these conglomerates were based in Europe and four were headquartered in North America.

Table 7 – 50 Fastest Growing Retail Retailers 1998 – 2003

Gro

wth

R

ank

Sal

es R

ank

Country of Origin Name of Company Formats

2003 Retail Sales (US$ mil)

5 yr Retail Sales CAGR (% Local Currency)

1 131 Canada Couche-Tard Convenience, Food Service 4,377 55.4% 2 214 UK FOCUS Wickes DIY 2,682e 54.2% 3 116 US Amazon.com E-commerce 5,264 53.9% 4 211 Australia Wesfarmers/Bunnings DIY 2,741e 40.6% 5 142 US Asbury Automotive Auto 4,000e 33.9%

6 94 Hong Kong SAR

Hutchison Whampoa/ AS Watson Drug, Specialty, Supermarket 6,631e 31.9%

7 73 Japan Yamada Denki Specialty 8,330 31.1% 8 222 Japan Fast Retailing/Uniqlo Specialty 2,538 30.2% 9 106 US Sonic Automotive Auto 5,939 29.9% 10 213 Japan Daiso-sangyo Discount 2,683 29.9% 11 130 US Bed Bath and Beyond Specialty 4,478 26.5% 12 119 S. Korea Shinsegae Department, Food Service, Hypermarket 4,965 26.2% 13 170 US Starbucks Food Service 3,450 25.6% 14 82 Spain Mercadona Supermarket 7,592 25.2% 15 248 US Lithia Motors Auto 2,200e 25.2% 16 87 US CCA Global Specialty 7,000e 23.9% 17 140 US CarMax Auto 4,024e 23.5% 18 165 US Advance Auto Parts Specialty 3,494 23.4% 19 120 Spain Inditex Specialty 4,930 23.4% 20 166 Italy Autogrill Food Service 3,488 23.3% 21 210 US The Pantry Convenience, Food Service 2,750 23.1%

22 196 S Africa Massmart Cash & Carry, DIY, Discount, Supermarket, Warehouse 2,996e 23.0%

23 61 US Kohl’s Department 10,282 22.8% 24 16 Germany Schwarz Group Discount, Hypermarket, Superstore 33,435e 22.4% 25 204 US Dollar Tree Stores Discount 2,800 21.1%

26 2 France Carrefour Cash & Carry, Convenience, Discount, Hypermarket, Specialty, Supermarket 79,796 20.8%

27 86 US United Auto Group Auto 7,400e 20.8% 28 19 US Lowe’s DIY 30,838 20.3% 29 147 US Group 1 Automotive Auto 3,890 19.7%

30 163 Brazil Pao de Acucar Discount, Hypermarket, Specialty, Supermarket 3,581 19.5%

31 28 US Best Buy Specialty 24,547 19.5% 32 208 US Williams-Sonoma Specialty 2,754 18.9%

33 138 S. Africa Pick ‘n Pay Stores Convenience, Drug, Hypermarket, Specialty, Supermarket 4,050 18.8%

34 241 Spain Caprabo Cash & Carry, Supermarket 2,318e 18.6%

35 104 UK Cooperative Group Auto, Convenience, Department, Drug, Hypermarket, Specialty, Supermarket, Superstore

6,051e 17.9%

36 186 US Whole Foods Markets Supermarket 3,149 17.8% 37 238 US Linens ‘n Things Specialty 2,395 17.6% 38 195 Germany Celesio (Gehe) Drug 3,002 17.6%

39 155 Ireland Musgrave Cash & Carry, Convenience, Supermarket, Specialty 3,782 17.5%

40 219 US Retail Ventures Discount 2,594 17.4% 41 15 US Albertsons Convenience, Drug, Supermarket 35,436 17.2%

42 243 US Charming Shoppes Specialty 2,286 17.2%

43 44 Spain El Corte Ingles Convenience, Department, Hypermarket, Specialty, Supermarket 13,686 17.1%

44 172 Mexico Soriana Hypermarket, Superstore, Warehouse 3,323 17.0% 45 3 US Home Depot DIY 64,816 16.5% 46 107 Sweden Hennes & Mauritz Specialty 5,889 16.4% 47 89 US Dollar General Discount 6,872 16.4% 48 17 US Walgreens Drug 32,505 16.3% 49 148 Japan Bic Camera Specialty 3,886 16.0%

50 151 Norway Reitan Convenience, Discount, Food Service, Specialty, Supermarket 3,820e 15.9%

Rank determined by 2003 retail sales Source: WWW.STORES.ORG

* includes non-retail n/a = not available ne = not in existence (created by merger or divestment since 1998) e = estimate CAGR = Compound Annual Growth Rate Name after forward slash is retail segment of parent company Name in parentheses is former name of company