In mid-October 2009, Carrefour made an announcement concerning its plans to exit the Russian retail market, barely four months after opening its first store (McKenzie, Brent, and Igor 2014, p. 179). This was after the company had spent a couple of years on extensive research on the Russian retail market to devise the best penetration strategy. Being the second largest retailing company in the world, its sudden exit was unexpected, and as such, it raised concerns as to the factors that could have contributed to the decision. The company cited insufficient organic-growth prospects and the absence of acquisition opportunities as their reasons for exit. However, analysts were not convinced of these reasons considering Carrefour had carried out extensive research on the retail market and would have foreseen the said challenges. Analysts, therefore, dismissed Carrefours reasons as just excuses and went on to analyze the possible reasons for the sudden exit. This paper aims at analyzing the misadventure experienced by Carrefour in the Russian retail market as well as analyze the prospects of the market for foreign investors.
According to analysts, the major drawback that Carrefour encountered was the failure to acquire the Seventh Continent chain. This is a local chain in Russia specializing in groceries and operating 140 stores in Russia at the time of Carrefours entry. Carrefours market penetration strategy involved acquiring Seventh Continent which would boost its competing ability with the already established retail chains such as Auchan, Lenta, X5 Retail Group, among others in Moscow and St. Petersburg, the leading locations for retail business in Russia. Failure to acquire Seventh Continent, therefore, lowered the chances of Carrefour competing successfully in the market. Additionally, the Russian retail market poses various obstacles to international retail companies venturing into the market. This also played a major role to Carrefours exit. To begin with, there is a very complicated legislative framework meant to discourage foreign investors. It is also meant to increase competition in the country thus unfavorable rules are enacted. More so, this trade sector is infiltrated with bureaucracy and corruption which push up hidden costs, making Russia an expensive and bothersome business destination. For example, Carrefour was caught up in a complicated bureaucratic issue in its attempts to acquire a license to sell alcoholic beverages in its first store in Moscow (McKenzie, Brent, and Igor 2014, p. 181). This inconvenience cost it about 15% of the total revenue from the store. These are the reasons that led Carrefour to exit from the Russian retail market suddenly.
Emerging markets require long-term consideration for maximum profitability. If selling is to take place in an emerging retail market, it should only be based on the short-term financial gain. According to analyst Jamie-Vasquez, the stores in the emerging markets prove to be the only ones promising business returns and capable of positive growth prospects. As such, the only sense in selling them is in the financial gain generated in the short-term. Several reasons support this claim. One, many entrepreneurs are afraid of the uncertainties attached to a new market. This explains why Carrefour took several years exploring the Russian market before venturing into it. However, in the long-run, benefits are more compared to the probable risks. The newness of a store is a powerful business aspect since it can draw attention and eventually attract customers gradually, potential business partners and the media. Therefore, exiting of an emerging chain from the market is not a wise move unless the focus is on the short-term financial gain.
Another reason for long-term consideration for emerging markets is based on the fact that with time, they end up being faced with a customer buzz increase. Ideally, a new store generates a sense of excitement among the consumers in that given market. For instance, in the case of Carrefour, many customers were excited about the introduction of a variety of goods, particularly bread in the store that had been opened in Moscow. Many customers took advantage of this opportunity to purchase new items that were not available in the other retail chains. This means that if Carrefour had not pulled out so suddenly, the prospects of business growth were promising in the long-term. Moreover, emerging stores in new markets should persist since they are useful for creating relationships with other business stakeholders. Entrepreneurs can learn through the new stores the requirements of the new market and use it in the preparation of strategic plans in the future with minimal uncertainties. For instance, the bureaucratic and legislative challenges that were experienced by Carrefour during the establishment of its first store should have been used in understanding the operations of the Russian retail market and making it easy to establish other stores in the country in future. In light of that, if an emerging market is focusing on maximum profitability, it should consider a long-term investment in a new market.
The Porters Five Forces model assists in determining the competitive position of a given business organization as well as the strength of changing positions within the market. Using this model, it is possible to analyze the attractiveness of the Russian retail market to foreign investors (Ormanidhi, Orges, and Omer, 2008, p. 56). The first force in this model is the supplier power which assesses how suppliers affect prices. Where suppliers are many, they hardly affect prices, but when they are few, they are more powerful and can easily affect the prices for products. The Russian market has relatively high number of suppliers and, therefore, their effect on prices is insignificant. The second force is buyer power. Fewer buyers can easily affect prices and vice versa. The Russian market has many customers with an insignificant effect on prices. The third force is the competitive rivalry. The less the competitors, the better. Russia has many competitors in the retail market who heavily affect prices by new players. The fourth force is the threat of substitution. The Russian retail market has many players thereby making the threat of substitution relatively high. Last is the threat of new entry. Basing on Carrefours case, entry into the Russian retail market is hard as a result of bureaucracies, corruption, and strict legislation requirements. From this analysis, it is evident that the Russian retail market is not as lucrative to foreign players.
In conclusion, entry into new markets can be challenging due to various factors. As large as Carrefour is, it was unable to penetrate the Russian retail market successfully and had to exit after only four months of operation. For emerging markets, it is advisable to consider a long-term investment in new markets to achieve maximum profitability. Selling of an emerging store should only happen if the focus is on the financial gains generated in the short-term. Based on the Porters Five Forces Model, the Russian retail market is not an attractive destination for foreign players due to its high number of suppliers and buyers, high competitive rivalry, the threat of substitution and threat to entry. New players, therefore, need to consider these factors before venturing into the retail market.
McKenzie, Brent, and Igor Dukeov. "Retail strategy and policy in Russia." Retailing in emerging markets: a policy and strategy perspective (2014): 176-199.
Ormanidhi, Orges, and Omer Stringa. "Porter's model of generic competitive strategies." Business Economics 43.3 (2008): 55-64.
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