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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.
Another goal of the case is to decide the best entry mode for Carrefour by scanning the
local environment as well as Carrefour’s current performance in the Asian market.
Expanding through a franchise partner seems to be the most feasible way. The Indian
government allows foreign direct investment in single brand retail up to 51%, 100% for
wholesale but 0% for multi-brand retail, which has made Carrefour’s entry into India
difficult. However, a local franchisee provides a solution for this challenge. Since
franchise agreements between partners have the characteristic of service agreements and
services cannot be distinguished between retail and wholesale, the restrictions on FDI
currently placed on multi-brand retail, in view of Finance Ministry officials, cannot be
extended to the franchise agreements.
Global Culture and Segmentation
The issue of global cultural differences and segmentation of the market in an effective
way also needs to be discussed. The retail industry deals with everyday life and cultural
differences are the key factors determining retailers’ marketing mix, e.g. product mix,
pricing strategies, distribution channels and advertising methods. Though they are both
Asian Countries, the markets in China and Japan are different and this led Carrefour to
experience both success and failure in the area. Such considerations also must apply to
the Indian market where diversity encompasses its 28 states, 7 union territories and 18
currently recognized languages.
Supply Chain and Logistics
The growth of the retail industry relies heavily on the country’s infrastructure and supply
chain development. The role of the supply chain in the organized retail sector should be a
shelf-centric partnership between the retailer and the manufacturer, as this will create
operations that are loss free. The Indian Supply Chain Council has been formed to
explore the challenges faced by retailers and to find possible solutions. However, the
infrastructure in India in terms of road, rail, and air transportation is presently in bad
shape and so warehousing will play a major role in supply chain operations. Therefore,
another substantial issue in this case would be improving and making use of the current
infrastructure in India. To overcome these problems, the Indian retailer is trying to reduce
transportation costs and is investing in logistics directly or through partnerships. As the
Indian organized retail sector grows the role of the supply chain is becoming all the more
important for the country.
Discussion Questions
1. What lessons should Carrefour India learn from the Japanese and Chinese
markets?
The case presents information concerning Carrefour’s success in China and failure in
Japan. The implication for this is that retail is actually a very localized industry. Catering
to local customer needs is the most significant factor. Finding a good local partner for
entering a different culture or culturally diversified global market is also important.
Success in one market may not guarantee success in other market in the same region.
2. Is it the right time to enter the Indian retail market? If so, what is the best entry
mode?
Although some unstable political factors indicate it might be a little unsafe to invest in
India right now, due to the huge market potential and competitors’ actions, it is suggested
Carrefour should enter the Indian retail market to achieve first comer advantage in the
hypercompetitive environment and the short life cycle for products.
Expanding through a franchise partner seems to be the most feasible way. The Indian
government only allows foreign direct investment in single brand retail up to 51%, 100%
wholesale but 0% multi-brand retail, which has been a challenge for Carrefour in India. A
local franchisee provides a solution for this challenge. Since franchise agreements
between partners have the characteristic of service agreements and services cannot be
distinguished between retail and wholesale, the restrictions on FDI currently placed on
multi-brand retail, in view of Finance Ministry officials, cannot be extended to the
franchise agreements. What’s more, entering a new market through a franchise can
expand Carrefour’s market quickly and help the company gain familiarity with
consumers. Once awareness and preference is established, it would be easier for
Carrefour to embark on its own when government policies permit. In addition,
consumers’ tastes vary from culture to culture so local partners can provide insights for
Carrefour to be able to adapt culturally to the country. Another consideration is the
current infrastructure problems especially in terms of transportation and the need to use
local suppliers for logistics and distribution.
3. Due to the cultural diversity in India, how should Carrefour segment the market
and cater to customer needs?
Different store formats and product mixes are necessary for different areas such as hard
discount stores for price conscious neighborhoods. Also, the company can employ local
workers and partner with marketing agencies, which can provide valuable insight into
local needs and preferences.
4. How can Carrefour improve and make use of the current infrastructure in India?
Carrefour should establish a good relationship with local governments by providing local
jobs and lobbying governments to improve the current infrastructure. Allocating some of
its revenue for public services e.g. construction projects and gaining a reputation amongst
the public while improve the quality of life of its consumers can, in turn, generate more
revenue creating a beneficial cycle for the company. The company should find a strong
and reliable local supplier during its initial entry phase and try to build up its own supply
chain for development. Also, Carrefour can explore its possibilities in the e-commerce
sector.
The Reality of Carrefour’s Efforts
Carrefour is now still struggling to finalize its Indian partner even after six years of
persistent search. As early as 2002, Carrefour appointed its first designated CEO Jean-
Christophe Goarin to start retail operations in India. After two years of market evaluation,
Carrefour decided to postpone its plan for India due to the country’s lack of clarity and
direction on foreign direct investment. In 2007, Carrefour rekindled its Indian retail plans
and resumed looking for a partner in India. It is said that Carrefour would enter Indian
retail market through the franchise route by 2009, and the company currently is talking to
three potential local partners. It has had discussions with around 50 Indian business
houses, and has planned to enter using a multiple-partner format. The company has now
formed Carrefour WC&C India and Carrefour India Master Franchise Company to begin
both Cash & Carry and front-end retailing in India. Up until now now, Carrefour has still
undergoing talks with Bharti Enterprises, the Wadia Group, and Delhi-based realty
companies such as Parsvnath and DLF to finalize decisions.