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07/01/2014

Global Challenges: The More Things Change...

Foreign markets represent a tempting growth option to challenges at home. But packaged goods sellers globally face familiar trials that require smart operators.

British grocer Tesco learned the lesson when it halted its fast expansion of the Fresh & Easy chain in Arizona, California and Nevada, selling last year to Ron Burkle's Yucaipa Cos.

"Tesco tried to grow the concept far too quickly in exactly the wrong place at exactly the wrong time, at the start of one of the worst recessions in living memory," says Marc de Speville, founder of Strategic Food Retail. "Most of Tesco's international problems look cyclical rather than structural, and it has some great businesses, notably in South Korea and Hungary.

"The best–performing food retailers in the U.S. are those that have tapped into the increasing trend for healthy eating and local and ethical sourcing, such as natural/organic stores and the likes of The Fresh Market and Sprouts Farmers Markets. These formats succeed by creating an emotional attachment with food instead of presenting it as a commodity," de Speville says.

Bringing a fresh, well-run concept to other countries will face fewer challenges in a global economy that's growing stronger.

Emerging and developing economies are contributing nearly half of global gross domestic product. This year they'll show a 4.8 percent growth rate. But NY-based global research association The Conference Board sees that pace as unsustainable, and predicts a slowdown to 3.2 percent beyond 2020.

WEAKER DEMAND

Consumer products companies should expect "weaker demand in some markets in the short term than previously expected," says Deloitte vice chairman Pat Conroy.

China's growth already is slowing. It's lowered its official estimate of gross domestic product to 7 percent growth.

To see how this plays out, look at Walmart. Common themes in the chain's many foreign markets are increasing the number of smaller concepts, big-box expansion into midsize markets, and meeting local competitors at every turn.

Walmart's China operation plans to build 30 new retail stores and warehouses this year, including Supercenters for third- and fourth-tier cities. It also plans $94 million to remodel 55 of its 400 existing stores. Local rival Sun Art Retail, which operates Auchan and RT-Mart, is expanding as well.

Small- and medium-sized stores cater to Chinese daily shopping habits. Walmart has been building convenience stores in China for five years. Hong Kong grocer PARKnSHOP plans to open 300 midsized supermarkets in South China over the next few years, A.T. Kearney says in its global report.

Brazil and Chile, A.T. Kearney's choices as emerging growth prospects, both have a strong Walmart presence. The ranking is based on factors such as international and modern retail presence, urban and youth markets and minimal political or financial risk.

In Brazil, Walmart faces expansion and renovation plans from Pão de Açúcar and Polishop supermarkets and RaiaDrogasil drugstores.

In Chile, where it leads the supermarket category, Walmart "has showed international players that they can win in this market," Kearney says in its "Global Retail Development Index" report.

In Mexico, Walmart is locked in an expansion race with Soriana, Comercial Mexicana and Oxxo. The four control 60 percent of modern retail, which is concentrated in large cities. Bodega Aurrera, controlled by Walmart, now is moving into midsize cities as well.

COMPETITION HEATS UP

Competition among global and regional businesses is likely to speed mergers and acquisition.

Food and beverage deals have accelerated, notably in the bidding war for Sara Lee spinoff Hillshire Brands, the $7 billion purchase of U.S. pork processor Smithfield Foods by China's Shuanghui International, and the $23 billion H.J Heinz buyout by Warren Buffett's Berkshire Hathaway and private equity firm 3G Capital.

Through May this year, London-based Dealogic counted 581 mergers worth $85.6 billion in the global food and beverage industry, compared with 1,340 deals worth $121 billion in all of 2013. Anglo-Dutch Unilever sold its North American pasta sauces to Japan's Mizkan Group for $2 billion, and Kraft spinoff Mondelez merged its coffee business with the former Sara Lee brands of Dutch firm DE Master Blenders.

Grocery consolidation contributes to the activity, Jones Day law partner Andy Levine tells the Financial Times.

A fragmented market "presents a bundle of opportunity" for acquisitions, Frost & Sullivan says in its 2012 global survey of 1,057 public food companies. It found 642 in Asia, predominantly in India, Japan and China. The average revenue per company was $658 million in Asia, versus $3.2 billion for North America.

HIGHER-VALUE ITEMS

As suppliers try to amass market power, grocery operators are adjusting their product mix toward higher-value items, and their supply chain to deliver them.

The value shoppers put on fresh food places added demands on retailers' ordering systems. A McKinsey & Co. study finds retailers that refine their purchasing formula and train their staff to use it, can simultaneously reduce shrink, increase availability and keep fresher products in stores.

Buyers that monitor their daily and weekly negotiations can have a quick impact on profit. "A European grocer boosted fresh margins by 7 percentage points; a national retailer in the Middle East saw its fresh margins rise by 6 percentage points," according a McKinsey report from consultants in Zurich and Paris.

A European grocer cut shelf space for slower-selling products and presented fresh and dry items together, such as peelers and juicers next to oranges. Employees were taught to separate products that mature at different rates, such as carrots and peaches, to help cut shrink levels 20 percent.

HEALTHY IMPULSES

Frost & Sullivan expects food and beverage companies that exploit demand for "green, safe and healthy" items will be global leaders by 2020. This extends beyond product labels to things like online dieting services and health-related mobile apps.

Euromonitor International analyst Monica Feldman notes growing consumer interest in medical conditions, prevention and healthy living, including mobile apps and health monitors.

Regulators across the world are monitoring the impact of products on consumers' health and well-being. "Many regulators are trying to levy higher taxes on products that are considered unhealthy, introducing measures to improve product safety, scrutinizing product claims and labels, and discouraging marketing to children," says Deloitte's Conroy.

Large groups of retailers can bring order to global regulations by dictating purchasing standards, according to the Institute of Food Technologists.

Tesco this year will remove candy at convenience store checkouts to the relief of many parents, following the lead of German discounter Lidl.

"As well as being seen as becoming a more responsible retailer, this is good business," says Euromonitor International analyst Jack Skelly.

Grocers have been under pressure to respond to the growth in childhood obesity. But Tesco's move also makes room to replace sweets with higher-margin nuts and other healthy snacks. Euromonitor analyst Matthew Hudak says candy makers' attempts to address obesity are limited to packaging smaller portions.

NOT GUILT-FREE

Allergens and food allergies are drawing much of the international interest. Celiac disease diagnoses are rising in Europe, and support group Allergy and Anaphylaxis Australia says 10 percent of Australian babies will develop food allergies by age one.

"There is a great opportunity for companies whose business is selling food to help customers understand what foods they should avoid and what they should eat more of to help manage their particular sensitivities," de Speville says.

"Helping customers understand what foods they should avoid and what they should eat represents a huge opportunity for those willing to treat employees as assets to be nurtured rather than costs to be cut."

Health concerns vary by region, according to Euromonitor's Feldman. Gluten-free diets are popular in North America, while lactose-free diets are prevalent in Latin America. "Asian consumers are most focused on the effects of allergen exposure or avoidance during pregnancy," Feldman says.

Obesity rates are rising across the globe. The World Health Organization expects obesity to rise in nearly all European countries by 2030.

AVOIDING FOODS

Transparency Market Research, based in Albany, N.Y. with offices in India, says consumers in developed countries tend to cut food categories rather than focus on portion or variety.

"More traditional health or eating behaviors, such as adopting a vegan or vegetarian diet and taking vitamins or supplements, tend to be equally as popular among consumers in developed and emerging markets," says Transparency analyst Lisa Holmes.


"More traditional health or eating behaviors, such as adopting a vegan or vegetarian diet and taking vitamins or supplements, tend to be equally as popular among consumers in developed and emerging markets."

– LISA HOLMES,

Transparency Market Research


Europe has the largest share of the organic food market at $28 billion, Holmes says. Beyond Europe and North America, demand is concentrated in Japan, South Korea and other affluent markets.

Undeveloped infrastructure and logistics also restrain the market, Holmes says, along with certification in emerging economies.

Some health trends tie into cultural norms. The Middle East accounts for almost one-third of non-alcoholic beer sales by volume, according to David Coffer of British hotel adviser the Coffer Group. Health concerns draw interest in alcohol-free beers in Japan.

GOING ONLINE

Online grocery sales are a wild card in global growth. In most countries, as a percentage of sales, online is still in low single digits, but in Britain they've reached a disruptive 12 percent.

"Online is the elephant in the grocery room today," de Speville says. "First, the incremental costs of order fulfillment and delivery usually outweigh the extra sales. Even Tesco, which still has a 50 percent share of the online grocery market in the UK and is currently the most efficient in terms of order fulfillment, is seeing its comparable store sales and profits erode.



"The profitability of the pure online model is likely to rise with scale and further improvements in automated order fulfillment technology."

– MARC DE SPEVILLE,

Strategic Food Retail


"Second, the profitability of the pure online model is likely to rise with scale and further improvements in automated order fulfillment technology. One leading independent UK equity research firm is forecasting that Ocado will be more than three times more profitable than its far larger brick–and–mortar competitors in five years' time. This would in theory allow Ocado to be cheaper for both delivery and products than the likes of Tesco, which is 30 times bigger!

"Hence the need for traditional supermarket operators to find new ways of combining the best of the online and in-store experience. Think big, test small, fail fast–all of these apply if one wants to stay ahead of the next wave."

Brenda Russell is a Chicago-based freelance writer who has written for Crain's Chicago Business, the Chicago Tribune, el Restaurante Mexicano and Specialty Coffee Retailer.