Question

1. ShopSmart’s International Growth Strategy

ShopSmart, founded by in 1919 by Nick Smart, is a British multinational grocery and merchandise retailer. It is the largest grocery retailer in the United Kingdom, with a 28% share of the local market and the second largest after Walmart measured in revenue. In 2017, ShopSmart had sales of more than £62 billion ($70 billion US dollars), more than 480,000 employees and 6,553 stores in 13 countries.

In its home market of the United Kingdom, the company’s strengths are reputed to come from strong competencies in marketing and store site selection, logistics and inventory management and its own label product offerings. By the early 1990s, these competencies had already given the company a leading position in the United Kingdom. ShopSmart was generating strong cash flows and senior managers had to decide how to use that cash. One strategy they settled n was international expansion.

As managers looked at international markets, they soon concluded that the best opportunities were not in established markets in North America and Western Europe where strong competitors already existed but in emerging markets of Eastern Europe and Asia, where there were strong underlying growth trends. ShopSmart’s first international foray was into Hungary in 1995 where it acquired Globals Stores, a state-owned grocery chain. By 2017, ShopSmart was the market leader in Hungary accounting for 1% of the whole economy of Hungary.

Next, ShopSmart acquired 31 stores in Poland from Stavia Limited. The following year, in 1996, ShopSmart added 13 stores that it purchased from Kmart in the Czech Republic and Slovakia. The next year, ShopSmart moved to purchase stores in the Republic of Ireland.

ShopSmart’s Asian expansion begun in 1998 when it moved into Thailand. In 1999, the company entered South Korea when it partnered with Samsung to develop a chain of hypermarkets. This was followed by entry into Taiwan in 2000, Malaysia in 2002, Japan in 2003 and China in 2004.

The move into China came after three years of careful research and discussions with potential partners. Like many other western companies, ShopSmart was attracted to the Chinese market by its large size and rapid growth. In the end, ShopSmart settled on a 50-50 joint venture with Hymall, a hypermarket chain that is controlled by Ting Hsin, which has been operating in China for six years. In 2014, ShopSmaart combined its 131 stores in China in a joint venture with the state-run China Resources Enterprise and its nearly 3,000 stores. ShopSmart owned 20% of the joint venture. As a result of these moves, by 2017, ShopSmart generated sales of about $21 billion outside the United Kingdom. The addition of international stores has helped make ShopSmart the second largest company in the global grocery market behind only Walmart. By 2017, all its foreign ventures were making money.  

(Source: Adapted from Hill, C.W.L. & Hult, G.T.M., (2019), International Business: Competing in the Global Marketplace, 12th Edition, McGraw Hill Education)

1. Examine two reasons why ShopSmart’s initial international expansion focused on emerging markets rather than competing with established companies in the more advanced markets of North America and Western Europe.

(4 Marks)

2. Discuss two disadvantages that ShopSmart encountered as a first mover into these emerging markets.

(4 Marks)

3. ShopSmart’s entry strategy into the Eastern European countries was through acquisition. Discuss three disadvantages that the company is likely to encounter as a result of this entry strategy

(6 Marks)

4. Identify ShopSmart’s strategic entry into the Asian market and discuss two benefits that the company sought to achieve with this strategy

Answer 1

ANSWER OF PART 1st  

There's no standard metric for differentiating between developed markets & emerging markets but there are a number of identifiable characteristics that are hallmarks of each. There are always risk involved in any investment however investment and expansion in emerging markets can be advantageous as they tend to exhibit higher economic growth rates driven by younger population, higher consumption levels, modernization of infrastructure and integration with the global economy.   

A) Reason showing how  ShopSmart's initial international expansion in emerging markets is more advantageous :

1) IDENTIFICATION OF OPPORTUNITIES : Unlike developed markets that have already attained enough growth to create major economies, emerging markets remain in the early stages of expansion. They typically hold great promise and can exhibit faster growth than what can be achieved in developing markets.

2) DIVERSIFICATION OF ASSETS : MSCI which provides investment decision support tools, tracks performance in nearly two dozen developing markets. These emerging economies are among the largest & fastest growing markets. They also have the greatest potential to influence the global economy.

3) EVALUATING GROWTH AND RISK : Growth is an attractive attribute of emerging markets while high risk can be a major deterrent. For investors, emerging markets would provide expanding economic conditions with reduced risk exposure.

ANSWER OF PART 2nd

There are always risk involved in any investment but the risks of investing in emerging markets are unique such as risks associated with political and economic stability. There's also the risk associated with foreign currency fluctuations as declining currency values can cancel out your gains or amplify your losses. Also accounting standards & financial reporting requirements are much less stringent thereby misleading to fraudulent financial reporting.  

Thus the two disadvantages that ShopSmart can encounter are :

1) POLITICAL RISK : Emerging markets may have unstable , even volatile goverments. Political unrest can cause serious consequences to the economy and investors.

2) ECONOMIC & CURRENCY RISK : These markets may offer suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies. Also the value of emerging market currencies compared to the dollar can be extremely volatile. Any investment gains can be potentially lessened if a currency is devalued.

ANSWER OF PART 3rd

Disadvantages that the company is likely to encounter as a result of this acquistion strategy are :

1) INTEGRATION PROBLEMS : The activities of new and old organizations may be difficult to integrate. Cultural fit can be problematic. Employees may resist it.

2) HIGH COST : ShopSmart may require to pay high cost, especially in cases of hostile take over bids. Value may not be added for the acquirer.

3) FINANCIAL CONSEQUENCES : The returns from acquisitions may not be attractive. Executed cost saving may not materialize.

4) UNRELATED DIVERSIFICATION : This may create problems of managing resources and competencies.

5) TOO MUCH FOCUS : Too much managerial focus on acquisitions can be detrimental to internal developments.

ANSWER OF 4th PART

Wayouts/Strategies to enter Asian market :

1) Consider the influence of diversities with respect to economy, infrastructure, religion,political outlook and policy.

2) Plan for demographic and social trends like housing, recreation, health care and consumer products, tansport facility.

3) Focus on efficient logistics that is increasing costs for fuel, real estate and labour

4) Unlock working capital in the value chain through inventory optimization, management of payables-receivables.

5) Match the supply chain to the product portfolio that is try to deliver the products and services to the consumers at the price they want to pay.

6) Understand trends in such emerging markets like for example E-Commerce.