Title: International business strategy: Carrefour in Egypt
Carrefour is the world’s second-largest retailer. This France-based company has achieved tremendous success by venturing into the Egyptian retail market. The Egyptian economy has for decades been under tight regulation by successive governments. The joint-venture approach has worked well for Carrefour in its efforts to promote local responsiveness while at the same time seeking to achieve the goal of capturing a foreign market.
The acquisition approach has also worked well for the company. However, the retailer risks being perceived to be entrenching itself as a monopoly by acquiring too many leading Egyptian supermarket chains. To maintain legitimacy, Carrefour should approach the acquisition strategy with extreme caution. Acquisitions should be made only for strictly strategic reasons. An assessment of political and financial risks and identification of measures to deal with them is necessary as part of risk management efforts in the course of the company’s operations in Egypt.
This report examines the entry strategy of Carrefour, a French retail chain, into the Egyptian market. A country analysis of Egypt is carried out to set the stage for a better understanding of the local business environment. This is followed by the identification of the most appropriate entry strategy. Functional strategies are then outlined to determine the conditions that must exist for Carrefour to achieve success. Lastly, the report presents recommendations on how the company should deal with the political and financial risks of conducting business in the Egyptian market.
Egypt is in a political transition. The country has in recent years endured a period of political instability. The current episode of instability started in 2011 when the Arab Spring revolution spread across the Arab world. The revolution led to the ouster of President Hosni Mubarak. Mubarak had ruled the country as a dictator for decades. Mubarak’s rule was repressive while Islamic groups have been known to launch deadly attacks targeted at tourists and Coptic Christians.
The road towards democratization in Egypt has been a rocky one. After Hosni Mubarak was ousted, Egypt became polarized. The Islamists became more assertive while secular and liberal forces continued to reaffirm their political ideology. This polarization continued to exist even after the election as president of Mohammed Morsi, a candidate of Islamist Muslim Brotherhood, in 2011. Morsi’s rule did not even last three years; he was overthrown by the Egyptian military. Today, the political situation in the country remains volatile.
The rate of economic growth for Egypt remains weak. Since the late 1990s, Egypt has been undertaking economic reforms aimed at dismantling the country’s post-independence legacy of a highly centralized economy. Between 2004 and 2008, the country made numerous efforts to attract foreign direct investment. However, these reforms suffered a major setback during the global recession in 2008 and 2009.
The Egyptian economy remains relatively centralized. The military continues to dominate many industries as the country’s dominant force. Companies owned by the army operate as monopolies. Most of these companies operate in cement, construction, oil, and hotel industries. Cronies of former government officials dominate other industries. The Egyptian GDP stood at $498.1 billion in 2010. This makes the country the world’s 26th largest economy. A majority of the country’s population is reliant on the Nile basin for agriculture and trade. The highly fertile basin greatly informs the country’s social-cultural and economic heritage. Despite this position, economic uncertainty remains high.
Egypt’s population, which stands at 78.2 million, continues to grow at a high rate of 2 percent. The country has a labor force of 25.8 million people and an unemployment rate of 9.2 percent. Egyptian society is characterized by a high level of antagonism. Different social groups and institutions have been brought at loggerheads with each other because of social, political, and economic factors. For ordinary Egyptians, who are the majority, social alienation is evident through a lack of access to basic social amenities such as water, sanitation, electricity, proper housing, and health facilities.
Egypt has made tremendous progress on the technological front. A large section of the country’s population has access to mobile communication, information technology, and internet connectivity. The level of technological advancement in the country was demonstrated by the successful way in which the leaders of the revolution of 2011 used social media especially Facebook and Twitter for political mobilization and organization. During the last few years, the information technology market in Egypt has grown significantly. The growth may be traced back to 1999 when the Ministry of Communications and Information Technology was formed.
One of the main ways through which successive governments have continued to maintain tight control and regulatory role over economic issues is through formulating stringent legal and regulatory frameworks. Laws and regulations governing issues such as equal opportunities, product safety, consumer rights, workplace safety, and taxation are a reflection of strict control by the government.
Nevertheless, the move to introduce reforms aimed at attracting foreign direct investment has created the need to amend certain laws (Riad, 2000). This explains why the country’s legal environment looks promising at present. In these amendments, the objective is to offer incentives for foreigners and Egyptians to invest in different fields of activities including retail trade, industry, mining, tourism, and maritime transport.
Environmental issues are of utmost relevance in Egypt given the country’s proximity to two major physical features: the red sea and the Nile River. Since the country’s survival depends largely on the Nile River, the Egyptian government always takes extra caution to protect this crucial natural resource. Pollution by organizations and companies is never tolerated in Egypt. The ecosystem of the Red Sea is also of great importance to Egypt particularly because it is a major attraction for tourists.
Carrefour is a France-based company that specializes in retail distribution. The distribution chain comprises of supermarkets, hypermarkets, convenience stores, and e-commerce stores. The company engages in the sale of food and non-food items such as household goods and clothing. In its internalization strategy, Carrefour has invested in partially-owned or wholly-owned subsidiaries in Europe, the Americas, and Asia. For example, the company had been wholly-owning Colombia Holdings Alpha BV until November 30, 2012, when it sold the 100 percent stake in the company. Carrefour has also entered into several joint ventures in the Middle East.
One of the Middle Eastern countries that Carrefour has ventured into is Egypt. Given that the company is based in a Western country, it needs to modify its products to suit the
Egyptian market, which is an Arab nation. The Islamic culture of the Arab world differs remarkably with that of the predominantly Christian culture of the West. Failure to modify its products may lead to a negative response by local consumers. As Devinney (2000) points out, the company must maintain a balance between global integration and local responsiveness. The pressure to maintain this balance is well illustrated in the integration-responsiveness theory (Devinney, 2000).
There are several examples of how Carrefour can adapt its products to suit the Egyptian market. One of them entails the need to specialize in a range of clothing brands that promote the Arab culture. By introducing western brands, the hypermarket chain may be perceived to be attempting to westernize the country. The same thing may be said regarding the range of foods and beverages that the company sells to Egyptian consumers.
Carrefour entered into the Egyptian market through a joint venture with Majid al Futtaim Holding. This approach enabled the company to break into the country’s market with minimal risk. The choice of Majid al Futtaim was an appropriate one given the success that the retail company has already achieved in Egypt. Majid Al Futtaim Holding and Carrefour have been partners since 1995. This partnership has led to a successful venture through which the two companies operate 44 supermarkets and 50 hypermarkets in different countries in North Africa, the Middle East, and Central Asia.
The joint venture brought together two successful businesses; Carrefour is the world’s second-largest retailer with 9,900 stores while Majid Al Futtaim Holding has changed the face of shopping, leisure, and entertainment in the North Africa and the Middle East region. This was a strategic move on the part of Carrefour in its quest to break into the Egyptian market. In May 2013, Carrefour Group sold its 25 percent stake in Majid Al Futtaim Hypermarkets to Majid Al Futtaim Holding with a view to strengthen the partnership. This underscores the importance that Carrefour attaches to the joint-venture approach.
Years after maintaining a grip on the Egyptian market, Carrefour has embarked on the acquisition approach. In December 2012, the retailer entered into negotiations to acquire Kheir Zaman and Metro Markets, two Egyptian supermarket chains. This move would increase Carrefour’s share of the Egyptian retail market to more than 60 percent. The acquisition approach is also acceptable since it did not alter the existing relationship between Carrefour and Al-Futtaim. In the agreement, Al-Futtaim Group would retain the right to operate and manage Carrefour’s operations in the country.
However, not everyone approves of Carrefour’s move to acquire Metro and Kheir Zaman. The Egyptian Chambers of Commerce expressed opposition to the acquisition deals, arguing that it would promote monopoly in the country’s retail market. The deal even prompted the Egyptian Competition Authority to consider enacting a law that would prohibit such takeovers in the future. Opponents of the move argued that Carrefour would acquire the capability to offer lower prices, thereby making it virtually impossible for smaller supermarket chains to compete and increase their market share. However, these concerns are unfounded since they smack of protectionism. The sentiments expressed by these opponents demonstrate that Egypt is yet to break away from tight control over economic decisions by government agencies. Such laws, if enacted, would reverse the gains made through reforms introduced in the 2000s with a view to attracting foreign direct investment.
Multinational retailers should put in place a variety of functional strategies to enable them to become successful in the target market. In a discussion of functional strategies that can lead to success in a mode of entry, Killing (2013) argues that most managers dislike joint ventures. Despite this dislike, many of these managers quickly realize that they are inevitable (Killing, 2013). The success of a joint venture is critical to the overall success of the companies involved. The main reason why companies enter into joint ventures is to penetrate new markets as well as get access to raw materials.
To maintain focus on functional strategies, Carrefour should look at the factors that led to the formation of the joint venture in the first place. For Carrefour, the main reason was to gain access to the Egyptian retail market. According to Dawson (2001), the retail sector must continue undergoing structural change for two reasons. The first one is that it continues to operate in an environment where rapidly-growing retailers are emerging. The second reason is that the balance of externalized and internalized functions is increasingly being redefined. As retailers move into new markets, they continue to encounter cultural variety (Dawson, 2001). Yet they must always put into consideration the overarching functional requirement of growing and gaining scale economies.
It is proper to argue that one of the main functional strategies that Carrefour must implement to be successful should involve efforts to maintain a balance between externalized and internalized functions. This strategy is at the heart of the retailer’s decisions regarding joint ventures and acquisitions. Devinney (2000) argues that the company should balance between the functional strategy of global integration and local responsiveness.
In Carrefour’s operations in Egypt, the main functional areas include human resources, finance, production, marketing, and organizational strategy. In terms of human resources, Carrefour counts on the strategic partnership it has established with the Al-Futtaim Group. This enables the company to source employees with local cultural competencies on the one hand and global outlook on the other.
The financial strategy also has a lot to do with the joint venture with Al-Futtaim. All the acquisitions that have taken place since the launch of the joint venture have been aimed at strengthening the retailer’s footprint in the Egyptian market. The company hopes to gain a return on investment in the long run by dominating the market, thereby affording to offer products at a price lower than that of competitors. This move is an ideal one because it will enable the company to make up for its shrinking market share in its home country as well as the wider European market. However, Carrefour also needs to ensure that a sizeable share of its financial resources is channeled into glocalization efforts. Glocalization is the practice of packaging products for the global market while at the same time adapting them to the specific needs of the local market (Pollifroni, 2006).
The production strategy, Carrefour’s supply chain in Egypt continues to grow in terms of vibrancy and efficiency because of entry of new suppliers and partners. However, the retailer may still be said to be at the “transition stage” as far as efforts to work out a long-term production chain is concerned. This is evident in the way Carrefour continues to engage new partners mainly through acquisitions. The main targets of the company’s supply chain strategy in Egypt include on-shelf availability (OSA), information sharing, increased product rotation, and Shelf Ready Packaging (SRP). An additional target that Carrefour ought to focus on is logistics costs. The company should assess these costs by comparing them with logistics discounts as a way of creating a good-management rule within the overall supply chain strategy.
The company’s marketing strategy also constitutes a critical functional area in its operations in the Egyptian market. Since venturing into the country, Carrefour has continued to pursue a low-price strategy. Most of its marketing messages are targeted at low-income consumers. This is a good approach is beneficial because it enables the retailer to gain mass appeal across the country. However, this strategy would have worked even better if Carrefour had restricted itself to forming joint ventures with only those retail chains that share its marketing strategy. By acquiring retailers that have traditionally been targeting the high-income segment, Carrefour risks creating an environment of disorientation as far as its overall marketing strategy is concerned. The company must avoid such joint ventures and acquisitions otherwise it may be at crossroads in the near future over whether or not to abandon the marketing strategy that targets low-income consumers.
The organizational strategy also constitutes a primary functional area for Carrefour. The Egyptian business environment no doubt calls for a change of tact in terms of organizational structure. However, the company has retained its hypermarket shopping format, which continues to revolutionize the Egyptian retail industry. This is not a good move because it creates a perception of monopolistic tendencies in the minds of the country’s authorities. Such sentiments were expressed when Carrefour launched negotiations to acquire Metro and Kheir Zaman, two well-known Egyptian supermarket chains. By introducing new shopping formats, Carrefour may miss out on opportunities for making significant gains in terms of local responsiveness.
On the basis of the analysis made in this paper, the following recommendations are made:
- The joint venture is an increasingly common mode of entry in the retail industry. Therefore, international retail companies should consider it as one of the leading modes of entry.
- Upon gaining a foothold in a foreign market, retail chains can use acquisitions to widen their market share. It is imperative for more acquisitions to be made as one of the business strategies of achieving greater local responsiveness.
- Nevertheless, too many acquisitions may turn out to be counterproductive in countries with a heritage of strict government control over economic affairs such as Egypt. Foreign retail companies that rely too much on acquisitions are likely to be perceived to be promoting monopolistic tendencies. Therefore, foreign retailers must seek to maintain a delicate balance between global integration and local responsiveness.
- Carrefour should consider globalizing its products by adapting them to the Egyptian market while at the same time pursuing the overarching goal of global expansion.
- To deal with risk in international business operations, Carrefour should put into consideration four types of risk: cross-cultural risk, financial risk, commercial risk, and country risk.
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