Carrefour Contemplating an Entry into India (Case #1, Notes)
Overview
This case introduces Carrefour's performance in the Asian market, specifically its success in China, its failure in Japan, and hence, the CEO's contemplation of future expansion into the Indian market. What lessons should Carrefour learn from the other Asian markets? The varying cultures within India, as well as the political atmosphere, the economy, as well as financial environments are provided in this case. India's current retail industry's performances, as well as Carrefour's competitors are also presented in order to help make an informed decision on the most appropriate entry strategy.
Case Review
Carrefour is a French international hypermarket chain, with a global network of outlets. It is the second largest retail group in the world in terms of revenue after Wal-Mart. In 1989, Carrefour became the first international retailer to establish a presence in Asia when it entered Taiwan through a joint venture with Uni-President Enterprises Corporation. It then leveraged the experience it gained in Taiwan to expand into other Asian markets.
Carrefour's entry in China has been a big success. When it decided to enter China, it formed a joint venture with Chinese retailer Lian Hua and the first two stores were opened in Shanghai and Beijing in late 1995. By October 2006, it was operating 83 hypermarkets in 34 cities from Urumqi (in the Western reaches of the Middle Kingdom) to Harbin (near the Russian border) and Kunming (in the South). In addition, Carrefour also operated Champion supermarkets and Dia convenience stores. Its 2005 turnover was about 1.7 billion euros (US $2.2 billion) (including value-added tax), making China Carrefour's fifth-largest market and by June 2006, the company was reporting sales of 1,259 million euros (US $ 1,621 million) on the mainland alone. Carrefour expected its sales in China to grow by 25 to 30 % annually over the next five years due to its successful adoption of the local culture and the resulting consumer satisfaction. In addition, Carrefour's strong bargaining power with suppliers helps guarantee its price advantage. What's more, "government marketing" which means a strong relationship with local governments by leading economic development and increasing employment is another significant factor in Carrefour's success in China.
Unfortunately, Carrefour's entry in Japan turned out to be a failure. The revenue and other operating numbers for Carrefour Japan are undisclosed, but total sales for its 8 stores for the fiscal year ending March 2004 are said to have resulted in a loss at 235.9 million Euros (32.3 billion yen). Carrefour had planned to offset the estimated 5 billion yen per store capital costs by opening another 13 new stores in 2003, thereby increasing total sales. However, it was unable to pick up the pace of new stores openings, and therefore could not expect to see improved profits. Carrefour is currently considering selling its Japanese assets for a total of 44 billion yen. Its failure in Japan is mainly due to the lack of catering to high quality conscious consumers rather than low price and high volume consumers. Also, its store appearance was less appealing for Japanese customers who prefer specialty supermarkets other than General Merchandise Stores. What's more, the lack of a local partner in the Japanese market made it difficult for Carrefour to expand alone. Further, the issue of trust is also important in a high-context culture society. After the company got caught mislabeling substandard Japanese pork as higher quality American produce, it was again caught several months later selling ham products with expired selling dates. Since then consumer trust in the company has fallen dramatically.
Due to the fast growing market in Asia, Carrefour is considering entering India. Recent research from the McKinsey Global Institute indicates that India will be a nation of upwardly mobile middle class households within the next generation and will eventually pass Germany as the world's fifth largest consumer market. Retail is India's largest industry, accounting for over 10% of the country's GDP and around 8% of employment. However, more than 98% of retailers are unorganized, which means traditional shops consist of the store in the front and the owner's house in the back, functioning in less than 500 ft² of shopping space. However, the organized retail sector is expected to rise 25% to 30% by 2010 and by 2016, modern retail industry will be worth US $175 to $200 billion. The growth factors in the Indian organized retail sector are various but include the booming economy, the rise in the relatively young working population, hefty pay-packets, more nuclear families in urban areas, the rise in the number of working women, more disposable income, western influences and growth in expenditure on luxury items. In addition, the Indian government in 2005 allowed foreign direct investment in single brand retail up to 51% and governments of states like Delhi and National Capital Region (NCR) are allowing increases in land use for commercial development, which has opened up several opportunities for investors. Local competitor, Reliance Industries Limited, plans to invest US $6 billion by opening 1,000 hypermarkets and 1,500 supermarkets. Pantaloons plans to increase its retail space to 30 million ft² with a US $1 billion investment. Tesco is in talks with Bharti Telecoms, a local partner for a $750 million joint venture and Wal-mart and Metro AG are also planning to set up shop in India. However, many challenges to entering the Indian retail market also exist, such as lack of retail space and rising real estate prices due to the increase in demand from this sector. Also, the shortage of trained manpower, stiff competition from local and global competitors, allowance of only one-brand stores, and poor infrastructure in India are all challenges being faced by global retailers.
Intended Case Objectives
Global Marketing Strategy
The issues of global competition and competitive advantage are important in this case. Due to the hypercompetitive nature of retail industry, gaining and maintaining competitive advantage is a crucial strategy for giant players such as Carrefour. Drivers pushing companies to enter new global markets include competition, markets, governments and costs. The growing economy of India has become a competitive battleground for the retail industry and Carrefour's global competitors such as Wal-mart, Tesco and Metro AG are considering their own entry strategies. In addition, other market drivers in India such as the booming economy, strong income growth (leading to more disposable income for consumers), favorable demographic patterns (e.g. relatively young working population and the increase in the number of working women), more nuclear families in urban areas, the influence of western culture and growth in expenditure for luxury items, etc. are appealing reasons for Carrefour to enter India. What's more, favorable government policies such as increasing foreign direct investment in single brand retail to 51%, and state governments (like Delhi and the NCR) increasing permits for commercial development has opened up several opportunities for investors. Emerging technologies that facilitate retail operations as well as high technologic demographics, and the country's low labor costs are some of the cost drivers in Carrefour's consideration of entering India. All these drivers have pushed Carrefour towards making its entry decision.
Global Entry Strategy
The decision as to which entry mode to undertake in a new global market is determined by many factors. For example, company objectives, internal resources, assets and capabilities as well as external factors such as the cultural environment, political environment, economic and financial environments, market potential, current industry performance in the global market, competitors, etc. will all affect the company's performance.