Establishing Strategies into South African Retail Industry

ESTABLISHING THE BEST ENTRY MODE/STRATEGIES INTO SOUTH AFRICAN RETAIL INDUSTRY: THE CASE OF CARREFOUR
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Establishing the Best Entry Mode/Strategies into South African Retail Industry: The Case of Carrefour
1 Executive Summary
Firms pursuing internationalization have to select suitable modes of entry into foreign markets. This report focused on the suitable entry modes utilized by Carrefour to enter the South African retail industry. It aimed to establish the entry strategies into the South African retail industry: the case of Carrefour. Figures and facts were obtained from reliable sources such as company annual reports and Statista, among others.
Carrefour is a leading French multinational retailer that has been operational for 60 years. It has reinvented itself over the years and expanded beyond France to serve in over 30 countries. Its mission is to offer quality, accessible products and services to everyone. This makes expansion into foreign markets a core part of its strategy because it can reach everyone and enhance the accessibility of goods and services.
This report utilized data obtained from Carrefour’s annual reports, Statista, Trading Economics, World Bank, and International Finance Corporation. These data sources were selected because of their reliability. In addition, they provided facts, figures, and information pertinent to Carrefour and the South African retail industry. Modes of Internationalization, PESTLE, and Porter’s Value Chain were the main frameworks utilized in the analysis because they examine entry strategies as well as the external and internal factors that influence a firm’s success in a given market, respectively.
The findings of this report indicated that Carrefour has thrived in the past by relying on acquisitions and strategic partnerships as the primary mode of entry. The PESTLE analysis also revealed that the South African market is suitable for Carrefour because of the political stability as well as the high level of GDP compared to other African countries. In addition, the value chain revealed that Carrefour’s internal environment favors penetration into South Africa.
It was recommended that Carrefour utilize acquisitions and joint ventures/strategic partnerships as the mode of entry. The two modes of entry offer Carrefour an opportunity to gain access to the industry with some significant level of control.
Table of Contents TOC \o "1-3" \h \z \u 1.Executive Summary PAGEREF _Toc80250703 \h 22.Scope, Aim and Topic of the Report PAGEREF _Toc80250704 \h 52.1.Scope PAGEREF _Toc80250705 \h 52.2.Aim PAGEREF _Toc80250706 \h 52.3.Topic PAGEREF _Toc80250707 \h 53.Carrefour: Background PAGEREF _Toc80250708 \h 54.Data Collection Sources and Analytical Methods PAGEREF _Toc80250709 \h 94.1.Data Collection Sources PAGEREF _Toc80250710 \h 94.2.Analytical Techniques PAGEREF _Toc80250711 \h 94.2.1.Modes of Internationalization PAGEREF _Toc80250712 \h 94.2.2.PESTLE Framework PAGEREF _Toc80250713 \h 114.2.3.Value Chain Framework PAGEREF _Toc80250714 \h 125.Findings PAGEREF _Toc80250715 \h 145.1.Results of Modes of Internationalization PAGEREF _Toc80250716 \h 145.2.Results of PESTLE Analysis PAGEREF _Toc80250717 \h 155.3.Results of Value Chain Analysis PAGEREF _Toc80250718 \h 205.3.1.Primary Activities PAGEREF _Toc80250719 \h 205.3.2.Secondary Activities PAGEREF _Toc80250720 \h 216.Recommendations PAGEREF _Toc80250721 \h 237.References PAGEREF _Toc80250722 \h 25
2 Scope, Aim, and Topic of the Report
1 Scope
This report focuses on entry modes to a foreign country. Entry modes refer to a firm’s method to penetrate a new, foreign market (Ofili 2016, p.209). There are many entry modes that firms can use. Still, they need to consider various factors such as the level of maturity of the industry in the new country, level of operational involvement, as well as the urgency by which it needs to enter the new market, among others, when selecting an entry mode. Specifically, this report will examine entry modes that Carrefour can use to penetrate the retail industry in South Africa. For the analysis, information will be acquired from reliable sources such as Statista, Trading Economics, and Carrefour annual reports.
2 Aim
To establish the best entry strategies into the South African retail industry: the case of Carrefour.
3 Topic
Using Porter’s five forces model, establish the best entry mode/strategies for Carrefour in the South African retail industry. The retail industry plays an instrumental role in a country’s economy, yet many countries that are home to some of the largest retailers have saturated markets. Such retailers need to understand the best entry mode into new markets because their financial performance depends on these new markets, not the saturated markets in their home countries. Focusing on emerging economies in internationalization is especially important because they are expected to drive the global economy (Al-Mohamad et al., 2020).
3 Carrefour: Background
Carrefour is a French multinational retailer with its headquarters in Masse, France. It was established in 1959 through a partnership between Marcel Fournier, who owned a novelties shop, and the Badin-Defforey family, who owned a food wholesale business (Carrefour, n.d.). The two opened the first Carrefour supermarket in 1960. In 60 years, Carrefour has continued to reinvent itself to suit the changing needs of consumers and dominate the retail industry. In 2020, it was ranked the seventh most international retailer by National Retail Federation (National Retail Federation, 2020). Over the years, Carrefour has gained immense success in European markets, and it continues to expand into other foreign markets to achieve its missions.
Its mission is to “provide our customers with quality services, products, and food that are accessible across all the distribution channels. Through the expertise of our employees, a responsible and multicultural approach, our broad territorial presence, and our ability to adapt to production and consumption modes, our ambition is to be the leader of the food transition for everyone” (Carrefour, n.d.). The company focuses on serving everyone, which is why internationalization is a big part of its agenda. Currently, it operates in more than 30 countries and has opened over 12 000 stores worldwide (Carrefour, n.d.). In addition, it serves over 100 million households across the globe and continues to strive to provide accessible and affordable products to everyone across the globe.
Carrefour focuses on five main retail formats: hypermarkets, convenience stores, supermarkets, cash and carry, and e-commerce (Carrefour, n.d.). While it has always focused more on physical stores, it is working towards establishing a strong e-commerce global presence. With the help of Google, the company has started combining its physical stores with an online website that will facilitate online shopping in each country (Carrefour, n.d.). This will increase its competitive advantage in the retail industry. As shown in figure 1, Carrefour competes with some of the largest e-commerce retailers such as Alibaba and Amazon and other hypermarket retailers such as Wal-Mart. In addition, Carrefour will participate in the retail industry more competitively by combining brick and mortar with click and mortar.
Carrefour was selected for this specific report because of its already established success in foreign markets. As indicated in figure 2, over half of its revenue (53.2%) is derived from its foreign market. Therefore, to continue creating value for its shareholders, Carrefour must continue establishing its presence in foreign markets. Also, as indicated in a report released by Deloitte (2018), Carrefour is one of the only four global retailers that have retained a spot in the top ten global retailers for over 15 years. Thus, examining this company and how it can continue penetrating foreign markets can be helpful to other global retailers and new entrants in the retail industry.
The retail industry is essential for the economic success of any country. It connects producers and consumers of goods. According to the International Finance Corporation (IFC) (n.d.), the retail industry also ensures that consumers can access goods at competitive and fair prices. The global retail industry, in specific, has contributed immensely to the economic growth of countries, more so emerging economies. It has created jobs and ensured that foods and other essential products are delivered to consumers at fair prices (IFC, n.d.). Being an emerging economy, South Africa has benefited from the global retail industry because retailers, such as Wal-Mart, have penetrated the South African market.
South Africa also makes for a good case study for this report because it is a member of BRICS. BRICS is an acronym for the five emerging economies: Brazil, Russia, India, China, and South Africa, expected to dominate the global economy by 2050. According to Al-Mohamad et al. (2020, p. 2), BRICS countries account for over 46% of the global labor force and 40% of the world’s population. Among these four countries, Carrefour only operates in Brazil (Carrefour, n.d.). In South Africa, hypermarkets have become trendy and a preference of many consumers. As Makhitha and Khumalo (2019, p. 23) reveal, South Africans love a good bargain and prefer shopping in price-friendly and convenient outlets. Given that Carrefour prides itself in facilitating accessibility and affordability, there is a niche for a Carrefour hypermarket in South Africa. The retailer will also increase its market share because it will have more access to the 40% of the world’s population.
Figure 1: Top Ten Largest International Retailers
Source: (National Retail Federation, 2020)
Figure 2: Retail Revenue of Top 10 Retailers
Source: (Deloitte, 2018)
4 Data Collection Sources and Analytical Methods
4 Data Collection Sources
Data Source

Justification

Carrefour Website and Annual Reports

Company websites provide pertinent information about a company, while annual reports provide figures and facts about a company’s financial performance or status. In this report, these sources have been used to analyze the company’s performance as well as the strategies it employs to expand its operations.

Statista

This is a good source of statistics about different companies, industries, markets, and countries. It provides insights through market research in over 150 countries and 170 industries (Statista, n.d.), making it a reliable global data source. This source was particularly useful because it provided information about the retail industry globally and in South Africa.

Trading Economics

This is also a global source of data that uses economic indicators, commodity prices, and exchange rates, among others, from 196 countries (Trading Economics, n.d.). Moreover, information from this source is obtained from official sources such as company and /or government reports, making it a reliable source of facts and figures.

International Finance Corporation

This is an international financial organization affiliated with the World Bank. It focuses on developing institutions in developing economies, particularly those in the private sector (International Finance Corporation, n.d.). Since South Africa is an emerging economy from the developing African continent, this particular organization was a good source of information pertinent to understanding how private sector institutions, such as those in the retail industry, are faring in South Africa.

World Bank

It provides unbiased, country-specific data and reports, especially on the economy.

5 Analytical Techniques
1 Modes of Internationalization
Modes of internationalization as a strategy-related technique are vital in arriving at the best way for Carrefour to enter the South African Market. Carrefour’s success in South Africa will depend greatly on the appropriate choice of mode of entry. According to Glowik (2020, p. 87), the mode of internationalization has different implications for a company’s degree of control, the resources it has to commit, the proximity of its target market, and market entry timing. Therefore, the entry mode chosen must be consistent with the resources and the goals of the company.
There are primarily five modes of entry available for a company wishing to enter a foreign country: exporting, licensing and franchising, partnering and strategic alliance, acquisition, and Greenfield venture (Mariadoss, 2019). Exporting refers to the direct selling and marketing of domestically produced goods in a foreign market. Although exporting is characterized by relatively low risk, it entails limited control as well as huge costs. The high costs come from tariffs and transportation and distribution charges (Mariadoss, 2019). While exporting gives the company the chance to avoid the expenses of setting up operations in the destination country, customizing products and services to suit local preferences can be difficult. Licensing and franchising are also an option for internationalization and can be quick methods of entering a foreign country with limited legal and financial risks (Mariadoss, 2019). Through licensing, a company can allow another firm in the destination country to use its property, such as production techniques and patents, in exchange for a fee. In contrast, the foreign company uses the franchisor’s brand name to sell products and services for franchising. While this mode allows for fast entry and low risks, there is limited control of business operations.
Partnerships and strategic alliances are characterized by an agreement with a local company to attain a common goal. A key advantage of this mode of entry is the sharing of risks and resources associated with new market entry. As for acquisitions, a firm seeks to gain full control of the operations of another firm, and it can do this through purchasing the shares of the target company or paying the owners if it is a private firm (Mariadoss, 2019). While this strategy is risky, it can be necessary where scale and control are needed. Finally, a firm can enter a foreign market as a greenfield venture, where a new venture is launched in a foreign market. Again, there is high control associated with this strategy, but it is costly and comes with high risks.
Understanding the challenges and opportunities present in the foreign market is critical to selecting the best mode of internationalization. A company’s strategic priorities, its internal resources, and external environmental conditions are integral in determining the best entry mode into a foreign country.
2 PESTLE Framework
PESTLE is a framework commonly used to analyze factors in the macro-environment that influence a firm’s activities. According to OpenStax (2019), analyzing the macro-environment is essential as it helps organizations identify the opportunities and threats in the external environment. For example, Carrefour’s success in the South African retail industry will be influenced by external factors beyond its control.
PESTLE is an acronym representing six key factors in the external environment. These factors are: political, economic, social, technological, legal, and environmental (OpenStax, 2019). More often than not, factors in each of the six categories can overlap with each other. Regardless, organizations need to identify these factors and, based on their interpretation, can consider them as threats or opportunities. For example, political factors include trade agreements, taxation, tariffs, government stability, and trade restrictions. These are factors that are affected by government activities and can present a threat or opportunity to a business. Also, firms often try to influence these government activities through lobbying to reduce threats and increase opportunities (OpenStax, 2019). Economic factors include unemployment rates, inflation, interest rates, gross domestic product, and economic growth/decline. They are also the economic indicators that firms use to decide when and whether to enter or exit a market. Finally, social factors include demographics, cultural trends, and consumer changes in interests and preferences. These factors create opportunities or threats for firms.
Technological factors include demand for automation, the rise of the internet, access to instant information, as well as online businesses (OpenStax, 2019). Technological factors can disrupt a firm’s business, especially if the firm has always utilized traditional methods and is a laggard in adopting new technologies. However, these factors also create opportunities for firms that are quick to adopt new technologies. Firms such as those in e-commerce have created new opportunities using technology. Legal factors include laws, policies, and procedures that the government has set to regulate an industry. Employment laws, antitrust laws, licensing procedures, among others, are some of the legal factors that firms must consider. These differ from country to country and are important when considering entry into a foreign country. Environmental factors are basic factors in the physical environment that can affect a firm’s business activities. These include natural disasters, availability of natural resources, pollution, and changes in weather patterns.
Although the PESTLE analysis is simple, it only provides a general overview of the external environment (OpenStax, 2019). It does not analyze all the external environment factors, and as such, firms have limited information. For instance, it does not analyze competitors, who are an important aspect of the external environment. Also, it does not classify the factors as threats or opportunities, which might be challenging for firms.
3 Value Chain Framework
Michael Porter developed the value chain framework. Firms use this framework to analyze business activities that can help create value and revenues by examining the costs and contributions of these values (Ricciotti, 2019, p.3). These value chain activities are classified into primary and support activities. Primary activities create and deliver value to consumers by converting inputs into outputs (Ricciotti, 2019, p. 3). They include:
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