Reasons for Sudden Exit from Russia’s Retail Market
Carrefour SA is a French-based retailing company that is ranked second largest in the world both in global operations as well as in asset assimilation. The extent of the size of Carrefour can be underlined by the fact that by the end of the year 2008, it was operating over 15,430 global stores in forms of supermarkets, hypermarkets, cash and carry outlets, hard discount and convenience stores, and had its annual revenue exceeding Euro 108 billion. With this global success however, Carrefour had not been established in Russia. In light of this, Carrefour started to carry out an extensive market research to map out the best market penetration strategy in the Russian retail market. It is the objective of this company to become among the top three players in the market share in any international market it invests in. With reference to this, Thierry Garnier, an Executive Director for this company said that the company was confident of the retail business in Russia having a considerable potential especially in the long-run, and that the Russian market was strategically important for Carrefour’s development.
However, in mid October year 2009, Carrefour made an announcement that it was planning to make an exit from the Russian market. This was a sudden and an unexpected turn of events especially since it came just four months after Carrefour opened its first store in Russia. As a result, business experts and analysts felt that there were strong reasons behind this sudden departure. To start with, the company itself mentioned that the key reasons behind this turn were inadequate growth and the limited chances of acquisition opportunities. However, the analysts criticized these reasons as just excuses since it had taken Carrefour a couple of years studying the Russian retail market and as a result should have been aware of the expected challenges.
Consequently, the major reason as to why this company exited the Russian retail market too soon was the failure to acquire Seventh Continent. Seventh Continent is a local chain specializing in groceries and at the time operated 140 stores across the entire Russian market. According to the plans by Carrefour, acquiring Seventh Continent was the best market penetration strategy that would help it to compete with already established retailers such as X5 Retail Group, Auchan, Okay, Lenta, Metro, Dixy, and Alye Parusa among other retail players both in Moscow and St. Petersburg, the leading locations for this kind of retail business. Therefore, the failure to acquire Seventh Continent resulted to very low chances of beating the already established competitors mentioned above.
In addition, there are several other obstacles facing international retail companies venturing in the Russian retail market. This also played a significant role towards the sudden exit of Carrefour from the Russian market. To start with, the legislative framework is very complicated so as to discourage foreign investors. More so, the bureaucracy and the corruption levels in this sector of trade also led towards the decision of Carrefour to leave the Russian retail market. A good example to explain this is the fact that Carrefour ended up in a complicated bureaucratic issue while trying to get a license to sell alcoholic beverages in Moscow in its first store, costing it about 15% of the total revenue from the store. The legislation in Russia also had the objective to increase competition in the country, and as a result enacting various rules that also led to the exit of Carrefour from Russia.
Evaluating the Growth Prospects of Stores in Emerging Markets
The sudden exit of Carrefour SA form operations in Russia resulted to high criticisms from analysts and business experts from various parts of the world. The main reason for so much criticism was the fact that Carrefour arrived at its sudden decision after a relatively short period which does not give enough basis for such a long-term decision. As a result, many analysts were of the opinion that Carrefour made the wrong move for exiting the Russian retail market too soon. In the words of Jamie- Vazquez, an analyst in the London based JPMorgan Chase & Company; the stores in the emerging markets prove to be one of the only ones promising business returns and capable of positive growth prospects. As a result, the only sense in selling them is in the short-term financial gain generated. For a number of reasons, I totally agree with this.
To start with, just like Carrefour stayed for a couple of years before trying out the Russian retail market, many entrepreneurs are afraid of meeting the many uncertainties of establishing stores in new areas. However, as Jamie-Vasquez puts it, the long run benefits are quite more compared to the probable short term risks or problems. The newness in the stores is a powerful and important business aspect. To start with, the new stores have the potential to independently define themselves without following in the steps of any of the older stores in other markets. Essentially, the power within the establishment of new stores lies in the ability to draw attention in the new market, and as a result gaining the gradual attraction of customers, potential business partners, and the media.
One thing Carrefour should have been aware is the fact that in most areas, such as in Moscow, St. Petersburg, or in any other business district in Russia, or in any other country, the introduction of a new store always comes out as a major event which always catches the attention of the media. The discussions of the products, whether old or new, the management, the strategic location of the store, among other characteristics always find their way in the media and it is always helpful in establishment especially in the first year, or year and a half. With reference to this, Carrefour should have waited a little longer to enjoy the benefits of increased attention in the media. Unfortunately, they pulled out so soon.
Another reason why stores in the emerging markets require long term consideration for maximum profitability is the fact that with time, they end up being faced by a customer buzz increase. In the case of the store opened by Carrefour in Moscow, it is evident that a new store also generates a general environment of excitement among the customers in a given market. For example, many customers were happy with the introduction of a variety in goods, especially in bread, as a result of the new store opened by Carrefour in Moscow. It is reported that many customers took the advantage of this new store to get new items they did not find in Auchan or other already established stores in Moscow.
The other reason why new stores in given new market should be encouraged is the fact that they are used for creating relationships with other business stakeholders. Through the new stores, an entrepreneur is able to identify the real business requirements in the area in a practical manner. This helps in preparing strategic future plans with fewer uncertainties. For example, in the case of Carrefour, the bureaucratic and legislation problems it experienced with its first store in Moscow should have been used to practically understand the requirements of the Russian retail market and be used to make easy the establishment of future stores there.
Analyzing the Russian Retail Market through the Potter’s Model
The Porter’s Model, also widely known as Porter’s Five Forces is a business too specifically used to increase the understanding of various sources of power in a certain business environment or market. This model is useful due to the fact that it helps in understanding the competitive position of a given business organization as well as the strength of changing positions within the market. Every business organization is able to take advantage of a business environment if it understands where the power to do so lies. As a result, the business organization is able to avoid making the wrong decisions, therefore improving weaknesses in the process. All this is derived from the use of the Potters Five Forces Model in the planning stages for any business organization. In addition, this tool is good for identifying the profit potential for new products or services in a given market.
The first force in this model is the supplier power. This helps in assessing how the suppliers can affect the change in prices. Basically, if the suppliers are many, one can always change to the cheaper suppliers. However, where suppliers are few, they are more powerful and can easily affect the prices of the products. In the case of the Russian retail market, the number of suppliers is relatively high and thus the effect of prices from the suppliers is not very significant.
The second force is the buyer power. This involves analyzing how buyers can drive down or drive up the prices. The number of buyers is important in this case. If the buyers are in small numbers, then they can easily affect the price. However, if they are many, they have insignificant effect on the price. The Russian retail market is characterized by many customers. In fact, Moscow and St. Petersburg alone have millions of potential customers. Therefore, the buyers in this market have insignificant effect on the prices.
The third is competitive rivalry. This refers to the number of competitors: the less the competitors, the better. As seen in the case of Carrefour, the number of established competitors in the Russian retail market is huge. This means that the prices by new players are heavily affected by the presence of these many competitors.
The fourth is the threat of substitution. Basically, this has to do with the ability of the customers to find a different way or provider to satisfy them with their requirements. In the case of the Russian retail market, the fact that there are so many players in the market means that the threat of substitution is relatively high.
Lastly, there is the threat of new entry. In this case, market entry by new business organizations can be measured in terms of how much money is needed for effective market entry and penetration. Referring to the case of Carrefour’s exit from Russia, it is evident that entry into the Russian retail market is difficult due to factors such as complex bureaucracies, corruption and strict legislation requirements.
Form the above analysis; it is relatively true that the current retail market in Russia is not attractive to the foreigners. From the Potter’s Model, the supplier and the buyer powers have little or no effect towards the prices. However, the level of competition is high, and as a result the threat of substitution is high as well. More so, new entry is encountered by a number of discouraging factors as mentioned above. For this reasons, it is now hard for the Russian retail market to attract foreign players.