Every year IGD examines how the world's major grocery markets and retailers are performing. IGD retail analyst Catherine Ellwood looks at the changes that the turbulent economic backdrop has brought for retailers and what big picture market trends they can expect on the road to 2015.

Rapid international expansion gives reason for optimism

Tough economic times have done little to dampen the leading grocery retailers’ enthusiasm for international expansion. As modest growth and mature conditions continue at home, overseas markets will be increasingly important for  Walmart, Carrefour, Tesco and Metro, the world's leading grocery retailers, over the next three years. In fact, we forecast that, for all the top four, international growth will outstrip domestic growth over 2011-2015. Here we explain how:

Walmart: a lot to pursue internationally and in e-commerce

Walmart has a lot to play for in the international arena as it advances towards a predicted 4.9% compound annual growth rate (CAGR) to 2015. It is forecast to deliver over 50% of its sales growth from international markets and, in particular, Latin America and Africa continue to rise up the retailer’s priority list.

Mexico and China will grow fastest among major Walmart markets over 2011-15, but Africa’s potential is considerable. The merger with South Africa’s Massmart is the first significant step which has also strengthened Walmart’s presence in the wider African continent. The current focus is on integrating the newly acquired business and establishing its credentials in providing “every day low prices” (EDLP) as Walmart seeks to replicate its model internationally.  Although it’s early days, this new venture will provide a strong platform for long-term growth in the region.

In parallel to its international expansion, Walmart is re-invigorating its approach in the US with a number of key initiatives which seem to be resonating with shoppers.

The retail giant is committed to its EDLP pricing model.  Walmart US’ Chief Merchandising Officer, Duncan McNaughton, has just re-affirmed the commitment to invest $1bn in retail price in the US this year. This builds upon last year’s announcement of a $2bn investment over a two-year period.

In addition, it is also developing its online business at a fast pace. Both acquisition and innovation are driving change and accelerating progress in Walmart’s digital and social media operations. The @WalmartLabs division has launched its first iPad and iPhone apps, and acquisitions, including that of mobile app developer Small Society, have bolstered its capability in this area.

Carrefour: looking to rebuild at home

Last week, Georges Plassat officially joined Carrefour as the new CEO and change is on the agenda. The French retailer has put the Planet hypermarket reinvention on hold as it looks to adjust, rebuild and accelerate sales momentum at home by tackling commercial and operational issues. Three notable elements of the strategy are hypermarket segmentation, private label focus and multichannel development.

This year will be challenging for Carrefour, with cash efficiency high on the agenda. Mr Plassat has a pivotal role in deciding how to allocate investment between mature and growth markets.  We forecast a 4.2% CAGR for Carrefour to 2015, with sluggish western European markets, but strong growth in China and Latin America. 

Brazil is now Carrefour’s largest market outside of France and will be a major growth engine for the future.  EBITDA grew by 18.5% in 2011 reflecting improved profitability at hypermarkets and ongoing outperformance at Atacadão.  The priorities in 2012 include the development of e-commerce, drawing on their experience from the past eighteen months, as well as driving growth at Atacadão.

Tesco: fastest growing of the global top four

Tesco is likely to be the fastest growing retailer of the global grocery top four with a CAGR of 6.8% over 2011-2015. International growth at Tesco will be driven by exposure to key markets like China, which will be one of the retailer’s top five markets by 2015.

On the other hand, Tesco has no intention of taking its foot off the pedal in the UK, still its largest market by far. CEO Philip Clarke will assume responsibility for the UK business, where the retailer aims to revamp and revitalise customers’ in-store experience. The growth will also be supported by diversification into new products and services, for example the development of the banking business. 

Metro: driving growth in Asia and Eastern Europe

For Metro Group, international operations have long been the key growth engine. We forecast a domestic performance of just 1.0% CAGR between 2011 and 2015 with the group achieving 5.0% overall.

Metro Cash & Carry recently outlined the eight ‘focus countries’ which it considers to be of utmost importance for the business and China is the only non-European market on the list. 

To grow successfully, Metro is actively targeting expansion in second and third tier cities in China.  It is also testing a new, foodservice-oriented concept in China’s third-largest city, Guangzhou.  The Metro Select format is mainly differentiated from other Metro Cash & Carry outlets in China through its product range. The 3,200sqm store offers over 8,200 different products, with around 75% of these being food or drink items. 

In Eastern Europe, Metro is testing a new retail model. Launched in Serbia, ‘Moja Radnja’ (‘My Store’) is a soft franchise format aimed at helping small, independent retailers.  Metro provides marketing support, training and discounts based on the volume of purchases.  The concept has since been rolled out to Bulgaria, Poland and Ukraine. 

BRIC markets will become an even greater priority

Examining the growth potential by geography, Brazil, Russia, India and China will all be in the top five global grocery markets by 2015.

We expect China and India to stand out with the highest pace of development offering the biggest scale opportunities for retailers. By 2015, growth in China will lead the way, while India will also be steadily advancing up the ranks.

India: Still a major market for the top four global retailers

The recent liberalisation of the rules on single-brand retail has raised hopes that change is on the way.  Retailers like IKEA and Marks & Spencer could benefit from this move, which allows them to operate without an Indian partner, and accelerate their expansion with more ease.

However, there is continuing uncertainty about the potential opening up of the multi-brand retail sector to 51% foreign direct investment (FDI). Consultations are still ongoing to achieve a consensus amongst the many stakeholders – from small businesses to politicians.

Despite this, India remains a key market for the top four global retailers. Tesco recently reaffirmed its commitment, whilst Metro announced plans to have 50 stores ‘in all parts of the country’ in the near future, up from nine at present.

What does it mean for the way the industry works?

At this stage of the game, there are no easy wins. Retailers can't afford to take their eye off their domestic markets, as success at home underpins international expansion.

Retailers will value working with suppliers who can support both domestically and internationally, for example, this could mean better tailoring ranges to meet shoppers' needs and missions wherever they are in the world. Emerging markets are becoming increasingly attractive, and suppliers with long-standing expertise in these regions can play an important role in driving mutual growth.

Developments in global grocery continue at pace for all:  Casino has announced its intention to strengthen operations in Brazil; Dairy Farm has acquired a majority stake in a Cambodian retailer; Auchan said it plans to grow its presence in Russia and Costco is investing to ramp up expansion in Australia.

At home and abroad, the rapidly developing online and mobile channels are becoming increasingly integral to retailers' strategies. Wherever and however you operate, it will certainly be an interesting few years to 2015.

Catherine Ellwood

Retail Analyst,

IGD