How Successful is Carrefour's Joint Venture in the UAE?

The term organized retail is used to describe activity by large branded retail chains such as Woolworths, Tesco, and Walmart. While gaining access to an emerging market such as the UAE in 1995, Carrefour decided to enter into a joint venture with Majid AL Futtaim after the evaluation of laws and market conditions. One of the major reasons for this kind of agreement was that in order to enjoy exclusive presence in the region and be protected from contract termination, the foreign companies needed to have a joint venture with nationals or commercial entities owned solely by UAE Emiratis. Carrefour saw the qualifying condition as a plus point since it would entail sharing the liability of ownership between the parties involved. In addition, the UAE is characterized by a strong food culture with religious and cultural restrictions; thus, if it operated as a joint under taking with a local sponsor, it would be easier to obtain food health certificates like the halal slaughter certificate (for the slaughter of animals for meat as per the laws permissible under Islam) and to import food. Furthermore, Carrefour would be subject to the same barriers as the sponsors, or none at all, on most inventories, excluding some items such as cigarettes. Although there are a lot of benefits to forming a joint venture, Carrefour had to face certain problems. To begin with, the biggest difficulty lays in finding the most suitable local partner who would be able to handle the complexity of local import statutes and pre operational regulations, such as product licensing, providing access to product samples, and testing in the local municipal labs to make sure the cultural and health criteria are met. Secondly, operating costs are linked to the size of a particular location. Carrefour operates as large hypermarkets rather than smaller supermarkets so it would have to pay huge sums of money on renting stock, shelving, and listing. The UAE is part of the Gulf Cooperation Council (GCC), which states that if the food products imported into the country do not have half or more of its shelf life remaining at the time of entrance, clearance cannot be issued. Thirdly, adapting to the local customs and traditions of working is imperative. For example, the weekly offs might vary and not fall on the conventional Western weekends (Saturdays and Sundays).

Partnering with Majid AL Futtaim (MAF) was a good decision since they are a major pan-regional company with ownership in shopping malls, hotels, and business communities. MAF offered Carrefour profitable locations such as high-traffic malls and properties which they already owned. Furthermore, this would limit direct competition since no other hypermarket would be able to open shop at the same mall. Carrefour wanted to expand throughout the Middle East and since MAF operated in the region, it could facilitate the expansion under the same partnership. Most importantly, MAF had previous experience with foreign retailers and business enterprises and was the candidate most likely to be able to handle Carrefour's operations. Establishing a strategy in Dubai with MAF in order to adapt to the local culture was crucial. Dubai has a very strong mall culture primarily because of its harsh climate. The idea was to create a city within a city by locating Carrefour inside shopping malls instead of its usual location strategy of using a freestanding building. Dubai is a very diverse emirate with a sizeable population of expatriates, so accepting foreign credit cards, different GCC currencies, and international currencies like the Euro and the U.S. Dollar was a must. Language was not a problem; English is widely spoken in Dubai and Carrefour set up bilingual signs across all stores. MAF managed local promotions and coordinated regionally in the Middle East. Due to the overall high cost of living, sales promotion was really important for the different demographic segments. At the time of Carrefour's Dubai entry, the Emirate's local demographic accounted for only 17 percent of the population, expatriate Asians (85 percent) and Westerners (3 percent) making up for the rest of it. The expatriates, who form the largest segment, have the lowest disposable income but are open to buying Western electronics and products

Carrefour faces some challenges as well, particularly in the food segment, where competition is increasing and thus reducing profit margins. While Walmart is not yet considering the Middle East, some European hypermarkets are. For example, Union Coop in 2006 opened an 180,000-square-feet hypermarket in Dubai. Inflation in Dubai is a serious problem, especially with rapid growth, greater liquidity, high demand, and low supply; economists expect actual consumer price inflation to be at 20 percent per year. Inflation affects the revenues and raises the costs of inventory and staffing. Moreover, the dollar decline compared to other currencies translates to lower revenues when exchanged. Lately, the UAE government has implemented stricter regulations: it is now harder to obtain work permits and tourist visas, which has especially affected the tourism-dependent Dubai. Further, as Dubai depends on more foreign investment than any other emirate, it is more vulnerable to economic crisis. To conclude, joint ventures seem to be a success given the increased number of stores opening in Dubai and their further expansion to other Middle Eastern and North African countries. It is said that Carrefour was successful only because it had the first-mover advantage and adapted so well that it was embraced by the locals. The aggressiveness with which Majid AL Futtaim pursued its growth added to the chain's prosperity. In 2005, the venture published sales worth$1 billion out of its 13 stores, around 1 percent of the global sales. In 2007, sales rose to $2.5 billion regionally.

Discussion Questions 1. What are the reasons behind Carrefour choosing joint venture as a method of entry? 2. Why do you think Carrefour chose UAE as a steppingstone to expand into the Middle East? 3. State Majid AL Futtaim's (MAF) characteristics that allow them to be a good partner. 4. Do you think Carrefour's joint venture was a good choice? Validate your answer.