In the blue corner we have Wal-Mart, weighing in with annual sales of $285 billion; in the red corner Carrefour tips the scales with a turnover of $90 billion - and also prowling in the ring is Tesco with sales of $62 billion. That these three giants of the retailing world are now squaring up for a bruising battle is an indication of how ultra-competitive grocery retailing has become in recent years. The world's leading operators recognise that the fight is truly on to see which one becomes the dominant force on the world's high streets.
Such a global battle is a new development because the largest supermarket chains have concentrated their efforts on building up their domestic bases over many years. And when they have chosen to go overseas, this has generally been achieved without any direct competition. However, with the populated markets of China and India opening up, as well as the likes of Russia and to a lesser extent the growing prosperity of Latin American countries, including Brazil, the scenery is changing. The battle for power among the world's elite grocers is intensifying.
All the big guns - as listed at the upper end of the Institute of Grocery Distribution (IGD) Global Food Retailers table - recognise that they need to gain a foothold in these regions if they are to have a seat at the table of the new world order of food retailing. Andrew Seth, chairman of the Ingram Partnership and author of Supermarket Wars: global strategies for food retailers, says: "This is the last chance for the grocers to be big global players. In the last few years every guy who has thought they'll be a global player has recognised that they have to be in these (emerging) markets. There is a risk that if they don't get a foothold there, then the gates will close on them."
He suggests that when Tesco made its first meaningful foray overseas, into eastern Europe in 1994, it was regarded as something of a 'luxury' for a company of its size and dominance in its home market to make an international move. But things have changed since then. Such a manoeuvre is now regarded as vitally important, as they know they will have to operate on the world stage if they are to continue to churn out those impressive growth numbers that their shareholders expect.
Richard Lloyd-Owen, head of consumer business at consultant Deloitte, says retailers have recognised the increasingly limited potential for expansion in their home markets: "They can't achieve growth at home, so they need to go overseas. There is recognition from their management that they need to find the future growth engines. And for those who can afford to go, they are going into the emerging markets because none of them wants to play in other people's (mature) markets."
On previous occasions, it has often ended in tears. Tesco's first overseas move into the mature French market through its purchase of supermarket chain Catteau proved unsuccessful and it was forced to sell it at a loss in 1998. There have also been numerous unsuccessful moves into the US by a variety of UK players, including Sainsbury's, which sold its Shaws chain to US-based Albertsons, and Marks & Spencer, which only recently offloaded the King's Super Markets. Wal-Mart's move into Germany has also had its fair share of difficulties.
The simplest reasons for these failures are that the retailers failed to adapt their offers to the local markets and they also felt the full competitive might of the established players protecting their patches.
Avoiding mature markets is a lesson that has been learnt by many of the major grocers - often at great financial cost and embarrassment.
Despite these difficulties, Wal-Mart does at least have the key element required by global retailers: it is the dominant force in its home market.
Without the foundation of a solid domestic base, a retailer's overseas ambitions could be stymied because its shareholders would be reluctant to see management attention diverted from the core operations. "You need a strong home base and to be able to grow fast there, in order to give you the funds to grow abroad," says Seth. He believes Carrefour has suffered from slow growth in its home French market, which has impacted on its overseas activities.
So who exactly are the main contenders in the growing battle for world domination? Top of the pile is unquestionably the mighty Wal-Mart, which is by far the biggest beast in the jungle. Its sales are more than three times that of its nearest rival, Carrefour. However, there is a black mark against it because of its patchy record overseas. Yes, it has been successful in Mexico and Canada, but these countries are adjacent markets.
It's been a different story in Germany, Hong Kong and Japan. Despite this, it is accelerating its overseas expansion with further store openings in China and the acquisition of 140 Sonae stores in Brazil last year. The latter move takes Wal-Mart deep into Carrefour territory.
Carrefour is the most international of all the world's food retailers, having first ventured outside its home market 20 years ago. It is now in about 30 countries, with a particularly strong presence in Asia, Europe and Latin America. Although number two in the IGD table, it has suffered from slower growth in recent years, partly as a result of its domestic market, but also because it has had to compete with Tesco in markets where they have met head-to-head.
Tesco has benefited from its strategy of working with local retailers in joint-venture arrangements, which help it to provide a strongly tailored and flexible offer to each of its markets compared with the price-driven propositions of its international rivals. Wal-Mart has also suffered at the hands of Tesco, which might be much smaller than its US rival, but is the best performing global retailer. "Although it has very little overlap with Wal-Mart, in those markets where it does, it trades very well. Its growth record outside its home market is the best," says Seth.
This has helped Tesco climb two places in the Deloitte Top 250 Global Retailers list to sixth place. That there is only one non-food retailer in the list's top 10 (US-based Home Depot) indicates just how powerful the grocers have become around the world. Their moves into selling non-food lines will provide them with even greater volumes and continue to ensure that the world's largest retailers consist predominantly of grocers.
Other competitors in the global retail battle include German-based Metro, which has built up a strong international operation with stores in more than 30 markets. It has benefited mainly from its cash-and-carry outlets, which represent the bulk of its overseas activities and accounted for 47% of group sales in 2003. According to Nick Everitt, international programme manager at the IGD, these stores have helped Metro to enter emerging markets by supplying local retailers rather than selling direct to consumers.
It entered Russia with its first outlets five years ago and it is now a leader in the Russian grocery market with more than 20 cash-and-carry outlets and three hypermarkets. It intends to use the same technique to enter Pakistan in 2007.
The key for Metro is to successfully make the switch to superstores at the right time in each market; the cash-and-carry stores have only a finite life once the big superstores of rivals move into the emerging markets.
Metro has also been fighting a battle at home against its hard discounter rivals, Aldi and Lidl. They have both moved up the Deloitte table as a result of their stripped-down low cost/limited range model finding favour in many countries - especially in Europe and the US. Schwarz (parent company of Lidl) has performed especially strongly, with a five-year annual compound growth rate of 16.2%.
Some new names from Asia are also making a big impact on the global stage, including Japan-based Ito-Yokoda, which operates in 20 countries - usually through licensing arrangements - and Aeon, which is placed 16 in the IGD table and has a significant presence in Asia. China's Wu-Mart is also a strong competitor, having clearly learnt lessons from Wal-Mart. It even has a similar strap-line to its US rival: 'Everyday Low Prices Everyway High Quality'. It has more than 500 stores in its home market and is enjoying healthy like-for-like sales growth.
There are a number of also-rans that will undoubtedly continue to be successful operators, but will probably have to accept that their prospects of playing in the first division of the world retail league now look slim.
This second division includes the German triumvirate of Tengelmann, Edeka and Rewe, French duo Auchan and Casino, Delhaize of Belgium and Ahold of the Netherlands, which is ranked fourth largest food retailer in the world, but is still undergoing a turnaround after it was hit by serious financial problems in 2003.
Although all these companies have successful overseas operations, they have also made mistakes, which suggests to Seth that they lack the necessary confidence to attack the all-important emerging markets of China and India where the winners will be decided. Lloyd-Owen says they cannot afford to wait before entering these new markets because it could cost them too much money at a later date. The early movers will have settled in and staked their claims to the prime retail estate.
Bryan Roberts, global retail analyst at Planet Retail, agrees, but points to Russia as proof that those entering a market early can come unstuck: "Russia is riddled with corruption, and some who went in early have not done well and have pulled out."
But it should not be forgotten that China has matured very quickly in the key cities, including Shanghai and Beijing. Paul Clarke, head of retail business banking at Barclays, which recently hosted a conference on opportunities in China, says research carried out five years ago found that Shanghai could support up to 60 supermarkets/hypermarkets but there are now more than 120, thus questioning the long-term viability of some.
However, there are still huge opportunities in the territory, including expansion into neighbourhoods outside the major cities and into secondary cities and beyond. The Chinese Ministry of Commerce says that retail sales last year increased by 12.9% to $827 billion compared with 2004. Although all the major players are represented in China, none has yet created a commanding position.
Carrefour has the biggest presence in the country with almost 70 outlets, followed by Wal-Mart, which has 56 stores and intends to open a further 20 units over the next 12 months. Tesco is also building a healthy portfolio with 39 hypermarkets under its belt through its joint venture with local operator Hymall. The joint venture is the company's preferred method of entering new countries and has so far served it well.
Sir Terry Leahy, chief executive of Tesco, has stated: "We needed countries where we would be early entrants that were stable, with sufficient spending power and with growth potential. We recognised that our skill-set involved opening networks of stores rather than integrating pre-existing chains." Using this strategy, it bought into local players in the eastern European markets of Hungary, Poland, the Czech Republic and Slovakia, and then replicated this technique in the Pacific-Asia countries of Thailand, South Korea, Taiwan, Malaysia and, more recently, Japan.
This approach has enabled Tesco to take advantage of the local knowledge of the management teams in these companies and to embrace the cultures.
Leahy believes that this gives the company the advantage of its shoppers thinking they are in a local store. Roberts acknowledges the success of such a strategy: "If you look at the successful examples such as the Delhaize stores in the US, then you wouldn't know that Tesco owned them. Its US business operates as an autonomous unit with the companies it has acquired left alone. The failures are when retailers take a homogeneous approach."
Both Wal-Mart and Carrefour have been accused of this approach. They have sometimes sought to transplant their hypermarkets and management styles 'cookie-cutter' fashion into new markets. When Wal-Mart moved into Germany, it misunderstood completely how ingrained the discounting model was with consumers; and in South Korea and Japan, Carrefour had problems operating from its standard hypermarket format and discount pricing model.
As a result, it pulled out of Japan in 2004 and is in the process of disposing of its 32 South Korean stores either to local operator Lotte Shopping or Tesco (through its joint venture with Samsung) for about $1.5 billion.
However, both Wal-Mart and Carrefour appear to be learning to tailor their offerings to local tastes. Vincent Trius, Wal-Mart's chief executive in Brazil, says that the company is considering developing a format for higher income consumers to complement its existing price-led proposition.
Carrefour is also learning from its mistakes and has developed its offering in China, where its fresh food is now highly respected.
Roberts says: "You need to take on board the local culture, and they've all learned their lessons and now know that if you are in South Korea, then you have to sell live turtles and snakes." This sourcing of local products is absolutely essential in a home market and in some cases it is also starting to have an impact on retailers' businesses in other countries.
Wal-Mart sources so heavily from China for its stores around the world that it is now its second largest exporter of goods.
China has not always been so easy to do business with: strict rules protected local businesses from overseas competitors and the market opened up only in December 2004 after the lifting of restrictions on overseas retailers to set up joint ventures with Chinese partners. A similar situation now exists in India with no foreign direct investment allowed. So although India represents the next big market for growth, most global retailers are restricting themselves to keeping a watching brief on the country until the situation changes.
It is little wonder then that the strategies for entering overseas markets differ country by country and retailer to retailer. Of the main global players, Tesco has made the most progress in creating a global model.
Its international director Philip Clarke developed 'Tesco in a Box', which consists of a fully exportable basic skill-set (see box). This creation evolved slowly, according to Leahy: "There were no texts on how to be successful internationally. It worked in our favour that we didn't start by believing we had all the answers."
But what the company has recognised over time is the need to gain a significant position in each market it enters. Leahy has stated that international economies of scale are unimportant compared with gaining a significant presence in individual countries. "What's important is not to lose any local economies of scale. That's why it's important to be number one in a country and not just build (aggregate) sales across countries."
Roberts agrees: "We are seeing a shake-out of underperforming companies in certain countries because everybody wants to be in the top three in a country. If you are seventh, eighth or ninth, then you're not in the game."
This trend is leading to the big retailers cutting their losses in certain markets where it looks as though they will not achieve the necessary critical mass. "They are showing signs of coming out of markets and swapping assets with each other. Retailers are more realistic about leaving a market and this makes the best sense for shareholders," says Everitt.
The highest profile example is Ahold, which was forced to embark on a serious divestment programme after an accounting scandal hit the company in 2003. At this point, it had a presence in almost 30 countries around the world after pursuing a strategy of aggressive buying throughout the 1990s. Ahold's CEO, Anders Moberg, believes that the move, which leaves the company with stores in only Europe and the US, has ultimately benefited the company by forcing it to focus on being a major player in the countries in which it remains.
Lloyd-Owen expects much more M&A activity over the next few years with companies increasingly making swift moves into new markets. This not only builds mass more quickly, but also enhances buying power - to the detriment of local operators. This is expected to lead to local consolidation as the large retailers acquire these weakened retailers. There is also the expectation of consolidation among the second-tier global retailers.
Only when this scenario has been played out are we likely to see any mega deals contemplated. The one deal that is most often talked about is a tie-up between Tesco and Carrefour, which would create a mammoth-sized retailer to give even Wal-Mart a scare on the global battlefield.
However, with only a small percentage of global retail sales going into the cash registers of the major food retailers, we are still at a very early stage in the battle for domination of the world's high streets.
TESCO'S GLOBAL STRATEGY
As international director at Tesco, Philip Clarke developed a skill-set that he calls 'Tesco in a Box'. This went live in 2004 with its first deployment in South Korea and is now used as the footprint for all new countries that the company enters. It contains the basic lessons that Tesco has accumulated from around the world. A fundamental component of this is an IT infrastructure: Clarke wanted to create a single, agile platform across all international operations and all countries. In a research note in 2005, Tesco's broker, Merrill Lynch, sought to second-guess what else was in the 'box' and suggested it is likely to include the following strategies:
- Treat others with respect - essentially, this is the one component of a food retailing business that cannot be imitated
- Earn customers' lifetime loyalty - do things that customers want and avoid things that they don't want, even if it adds cost
- Keep it simple - favour the 'fewer gimmicks, lower prices strategy', based on what motivates customers
- Standardise the processes - what works in one country will work in another, with some tailoring where necessary
- Supply chain - operate a central supply chain
- Multi-format - expansion in every direction using the format skills developed in the UK, made possible through use of a central delivery supply chain
- Own label - once established, introduce own-label products across all price points - Loyalty cards - help build up shopper insight
- Additional services - home shopping or personal finance help customer loyalty
ASIA'S RISING STARS
Bailian Group: The largest retailer in China after the 2003 merger of Shanghai Lianhua and Shanghai Hualian, which created a group with more than 4,500 outlets, including three supermarket fascias. Annual sales are at about $8 billion, and the company is developing both its department stores and supermarkets with aggressive plans to open more stores. It aims to become the 'Great Wal-Mart of China'.
Wu-Mart: One of the fastest growing Chinese food retailers. It operates approaching 500 stores, mainly around the Beijing area. Its listing in 2003 enabled it to embark on its store-opening programme. Wu-Mart has adopted the techniques of the global operators by introducing a range of own-label products. Its purchase of 12 supermarkets from Japanese retailer Daiei in Tianjin in 2005 will allow it to grow in this affluent city.
Beijing Hualian Group: Like many of China's largest retailers, it consists of both department stores and supermarkets, and has been expanding both divisions. It operates about 150 supermarkets and has group sales of $3.6 billion.
Pantaloon: The leading 'organised' retailer in India. Its portfolio includes more than 20 hypermarkets (Big Bazaar) and more than 30 Food Bazaars located throughout the country in 17 cities. It has successfully evolved from a pure manufacturer to a fully-integrated player.
GROWTH IN THE BIGGEST MARKETS
CHINA - INDIA
The economy is expected to grow by 8% each year until 2010. The Chinese food retail market is worth $277 billion and is expected to grow to $979 billion by 2020.
TURNOVER IN CHINA IN 2004 (dollars m)
Tesco (Hymall) 600
Average GDP growth of 6% has been recorded over the past decade and this is expected to continue over the short term. India has the second largest population in the world (1.08 billion in 2005) and the youngest population in the world with half its people under the age of 25. Urban wealth is well distributed, with 67 cities having a population of over 500,000, accounting for 15% of population but contributing more than 25% of GDP. The food retail market is worth $194 billion and is expected to grow to $504 billion by 2020. Food and drink accounts for 63% of total retail sales. 'Organised' retail accounts for less than 5% of the retail market. It is estimated that there are 4 million 'unorganised' traditional outlets (made up of 'wet' markets and neighbourhood stores).
EXPECTED GROWTH IN FOOD RETAILING BETWEEN 2003 AND 2020 (dollars bn)
HOW TESCO AND CARREFOUR STACK UP
TESCO CARREFOUR COMBINED
Number of stores 2,365 7,030 9,395
Number of employees 360,00 436,000 796,000
Consolidated sales £37.1bn EUR93.6bn $182.5bn
2005 ($66.2bn) ($116.3bn) $182.5bn
Market cap £27.9bn EUR27.9bn $84.5bn
($49.8bn) ($34.7bn) $84.5bn
Number of markets 13 29 42
Profit £1.9bn EUR1.8bn $5.6bn
($3.4bn) ($2.2bn) $5.6bn
SOURCE: Tesco and Carrefour websites. All figures 2005