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GD CASE /TNZ/ IMM 3

?INTERNATIONAL MARKET SELECTION (IMS ) PROCESS OF METRO CASH AND CARRY The Metro Group, with a net turnover of 55.7 billion in 2005 and about 250,000 employees, is the worlds fourth largest retailer. Presence in 29 foreign countries (at the end of 2006) and a foreign turnover of 53.4% (in 2005) make Metro one of the most internationalized of the worlds 30 largest retailers. The roots of the firms belonging to the group today extend back into the 19th century. A reorganization in 1996 led to the formation of the Metro Group, headed by a strategic Management- Holding (Metro AG), which, after some portfolio adjustments, operates sales divisions in four business areas. These are Cash & Carry (with the wholesale brands Metro and Makro), hypermarkets and large supermarkets (Real and Extra), nonfood specialist outlets (Media Markt and Saturn), and department stores (Galeria Kaufhof and Inno) (see Figure 1). The sales divisions operate in the marketplace independently, assisted by cross-divisional companies which provide such services as purchasing, logistics, IT, advertising, financing, insurance, or catering to the entire group. Market selection process in the Cash and Carry division (MCC), generally has a pioneering role in the group in terms of internationalization and has developed a model that all groups companies apply, adapted according to their specific requirements. With its C&C format, the Metro Group is among the world market leaders. Over 90,000 people work for MCC; 50.4% of group sales are generated in this sector, some three-quarters of which are outside Germany. The C&C principle means that the customers, unlike in traditional

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wholesaling, go round the premises gathering their purchases themselves, pay in cash, and also have to transport the goods. The C&C assortment comprises up to 20,000 food articles and 30,000 non-food products. The MCC format operates in three wholesale formats that differ in area, size, and also focus of assortment: Classic, Junior and ECO. The latter two have a smaller sales area and a larger proportion of fresh food. Pre-Decision Factors: Principles, Goals, Strategies and Resources At corporate level in the Metro Group, it is the corporate strategy that is relevant, based on three key pillars: sales growth (aimed at further extending the foreign sales share), portfolio optimization (of the sales divisions in terms of their economic value added), and concept optimization (further development of the retail brands). The internationalization strategy rests on two key pillars. In country markets where there is an existing presence, the goal is greater expansion (penetration) with additional outlets, by first exploiting the expansion potential in large countries and then consolidating the expansion potential in other countries. Openings in new countries as a second key pillar initially have a regional focus (particularly in the Commonwealth of Independent States, Central Asia, Asia Pacific) and second aim at exploitation of individual country opportunities. The following corporate principles and strategies provide the framework for market expansion and selection: .

1. The international commitment is based on the principle of organic growth sometimes


with joint venture (JV) partners, for example in China and Japan. For market selection, this means that countries with high competitive intensity, which would only be accessible through acquisitions, cannot be considered in this observation. 2. . Metros regional focus lies in Europe, Asia and, to a lesser extent, North Africa. North America, South America and Oceania are currently not considered, either because the markets are less attractive or because there are substantial entry barriers (strategic decision). 3. Availability of resources for foreign commitment is limited. market in question and the MCC format must be viewed as a new, innovative concept in a new country market. 4. There must be some potential for achieving a place among the top three in the country

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An important group principle is that MCC is generally the first sales division in the group to enter a new market, i.e. it forms the foundation for expansion by the other sales divisions. This pioneering role of MCC in the groups internationalization process is due mainly to the fact that the C&C concept can be introduced at a relatively early stage in countries whose markets are changing or only just opening up because, for example, the initial market economy structures offer potential for MCC. Newly formed, small private enterprises are the core target group of MCC. In contrast, consumers themselves generally do not yet have the appropriate consumer spending potential. For a long time, successful internationalization in many countries was based on managerial experience or single projects. Since 2003, however, the group has a concept or model for market selection with a twin structure (see Figure 2). The inter-country starting-point comprises all countries that are included in a regional segmentation and evaluated with so-called knock-out criteria (see below). This is followed by a scoring model resulting in a ranked list of countries, containing countries and possible entry dates. The ranking as calculated is contrasted with

group principles, strategic considerations, and situational opportunity assessments as so-called competition and adjustment factors. This list is updated annually. Each country included in the ranking (so-called pipeline) goes through a countryspecific, three-stage feasibility study process when the planned entry date according to the pipeline approaches. Normally, this is one or two years before actual entry, i.e. opening of a first outlet. If all stages yield positive results for the

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country in question, a market entry project is commenced. The process takes between six to eight months; however, this period may be extended depending on the data available. Both market selection processes are described in more detail below. We should point out that the purpose of each stage is to make recommendations to the executive board as to whether the country concerned has potential or not. The executive board then decides whether or not to continue examining the country in the feasibility process and whether or not to enter the market. Inter-Country Market Selection: Funnel Approach The final goal of the multi-stage, inter-country market selection process is to obtain a pipeline of potential new country openings. Pipeline means that these countries are placed in order on a time bar, i.e. each country selected is assigned to a planned entry date or year. Regional Segmentation and Knock-out Criteria All countries, except the existing Metro countries, form the starting point for market selection. So-called regional segmentation is applied to these countries, comprising economic and business considerations combined with Metros strategic focus. In concrete terms, two factors are examined: first, a review is conducted to establish whether there is any potential for the MCC business area; if the answer is yes, this is followed by an evaluation of the intensity of competition. The extent of competitive intensity is used to draw conclusions as to whether the groups principle of organic growth abroad is viable in the countries concerned. If the top three to five retailers dominate more than 40% of the food retail volume, there is little probability of MCC entering the market. This applies in Australia, for example, where there is a low market potential combined with high intensity of competition. These countries are excluded from any further evaluation. Secondary market research is used to collect legal, taxation, and financial data, which are also critical knock-out criteria. Examples of such knock-out criteria are legal aspects (e.g. legal uncertainty, wholesale reserved exclusively for nationals), taxation (e.g. unfavourable tax regime), and financial showstoppers (e.g. currency not convertible). If any of these criteria applies to a country, the country is also eliminated from the selection process. Country Scoring and Preliminary Country Ranking The remaining countries are assessed in a scoring model. A set of factors relating to macroeconomics, politics, competition, and administration is used to determine a country score. Each factor is calculated from different variables:

1. The population, natural resources, GDP per capita, inflation, private consumer spending,
cars per 1,000 inhabitants, poverty line, urban population, and number of cities with a

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population of over 500,000 are included in the macroeconomics factor, which accounts for 40% of the country score. 2. The politics factor (20% of the country score) evaluates the variables ethnic conflicts, power base (of the government), and foreign affairs. 3. As part of the competition factor, which accounts for 30% of the country score, the national and international retail firms operating in the country in question are analysed.

4. Import restrictions, corporate tax, personal tax, clearing, convertibility, land ownership,
and so on, are variables that are included in the administration factor, accounting for 10% of the country score. These variables are surveyed for each country, with the factors being calculated and allocated to the corresponding country score to obtain a preliminary (country) ranking. This consists of a list of the countries remaining, ranked in descending order according to their country score. This ranking reflects the market entry potential for the countries of the list. A realization that this procedure was too stringent (by means of the factors weightings) resulted in the scoring model being modified into a two-stage process. At the first stage a scoring model is still in use but only concerning macro-economic data. The score is calculated by GDP per capita (30%), private consumer spending (30%), population (10%), number of agglomerations/cities with a population of over 500,000 (10%), urban population (10%) and development of GDP per capita (4%), of private consumer spending (4%) and of inflation (2%). This first stage also results in a preliminary (country) ranking as described above. The information on competition, formerly gathered at this stage, now complements the adjustment factors, as specified in the following part and builds the second stage of the process. Competition and Adjustment Factors and Management Decisions These preliminary country rankings are subject to adjustment factors, including assessment of competition, in the next stage, which includes strategic considerations, such as specific goals and opportunities for foreign expansion. These considerations are based on four separate adjustment factors. The first factor is whether there are gaps to be closed in the existing (country) portfolio. This means that if a country that has also been ranked as a potential entry country can be developed and worked by a neighbouring country business unit, and thus has a good chance of success, this country will be able to move further up the ranking ladder. A second regulating factor is benefits from synergies. If, similar to the first factor, a country market can be worked from neighbouring countries (where there are existing operations) and thus, greater synergies can be obtained in purchasing, logistics and administration, the country

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will also move upwards in the ranking. This was the case, for example, with Moldavia, which being a small country was ranked lower, but there were transit agreements with neighbouring countries since it is close to Romania where MCC has been operating since 1996. Thus, the group expected to achieve synergies by servicing this country from Romania. In addition, the government offered infrastructural aid, which moved Moldavia up the ranking and led to market entry being brought forward to 2004. Third, so-called trade-offs are investigated. Since the investment capital available for expansion abroad is limited, it is important when upgrading a country to also look at which country market is downgraded as a result and thus, cannot be entered until a later date. Here, the firm has to decide, for example, whether it is more important to open a further outlet in Russia or to open the first outlet in Estonia. When doing so, it has to consider that it may no longer be possible to enter at a later date following downgrading if, for example, the intensity of competition increases in the meantime and organic entry to the country market is then no longer possible. The fourth factor looks at the so-called provisional risks. These are not like the knock-out criteria identified above, but more short-term and current factors, e.g. political instability or economic problems, that could lead to postponement of market entry. This type of criteria can also lead to postponement of market entry decisions in later phases of market selection, as was the case in the United Arab Emirates, because of the critical mass problems. These four adjustment factors are now complemented by a qualitative analysis of the competition in each country. For this, the structure of competition is surveyed, e.g. by concentration ratio, occurrence of a modern grocery market, saturation concerning cash and carry, hypermarkets and warehouse clubs. Furthermore, it is assessed what kind of Metro wholesale format would best fits into the market. Final Country Ranking Pipeline When the preliminary ranking has been evaluated and adjusted, the result reflects the so-called final country ranking pipeline. Here, the countries are assigned to a time bar, i.e. a planning basis showing which market entries are to be prepared and/or implemented in which year. MCC thus has a pipeline of potential new country markets for some years in the future. Subject to the pipeline suggested, the goals stated and the opportunities for foreign expansion, the top executives decide whether to proceed with a detailed analysis for a specific country. In practical terms, however, further analyses and planning work are required, and detailed data have to be collected on each country in order to achieve market entry at

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a later date. Inter-country market selection is concluded at this point and the decision process moves on to the more complex and more cost-intensive country specific evaluation. Country-Specific Selection: Feasibility Study Processes When a market entry according to the pipeline is approaching, a feasibility study process begins and, if intermediate results are positive, this leads to compilation of a business plan and then to market entry. If the detailed data are not positive in the course of the feasibility study process, indicating that market entry is not (yet) advisable or is not possible after all (e.g. due to previously unknown legal restrictions), the process can either be stopped entirely or resumed at a later date. Here, too, the firm maintains flexibility and the possibility of strategic reaction instead of remaining strictly with the plan. Of course, the process is largely standardized, with the many years of intercultural experience together with the German roots of the Metro Group being considered favourable pre-conditions for successful market entry. All feasibility studies are conducted and controlled by the Corporate Development department, which initiates the first two of the following steps and involves experts if problems are encountered. The full-feasibility study in the third stage is coordinated and supported by the Corporate Development department, but carried out by a team of experts from within the firm who come to a decision and submit their recommendation as a team to the executive board.

Desk Research as a First Step The first step in the feasibility study process is desk research. At the head office, database research, specialized information agencies (such as Planet Retail, Feri, EIU), embassies, chambers of trade and industry, and statistics agencies, among others, are used to compile an exact country profile. Macro-economic, political, competitive, and administrative factors are processed as an information basis in much more detail than in the preceding funnel approach. The data analysed relate, for example, to the geographical and macro-economic profile and potential of the country, to analysis of the main national and international players in the market, the level of market saturation, the political situation and suitability for investment by MCC, as well as to the legal, taxation and financial environment. By way of example, the desk research conducted on the United Arab Emirates (UAE) revealed that this and other countries in the region did not have sufficient market potential. Market entry would only be worthwhile if extended to cover the entire Gulf region and adequate market potential were created by synergies between the various countries. As a result, market entry to the UAE was postponed and the feasibility study process was abandoned at this point, but a fixed date was also set for a renewed study of the Gulf region.

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If, on the other hand, the desk research continues to favour market entry, the process moves on to the next stage. Pre-Feasibility Study as a Second Step This second stage, the pre-feasibility study, involves an initial visit to the country concerned. A small team of around three experts (one or two from the Corporate Development department and one or two experts, e.g. from a neighbouring country, to deal with the more operational tasks) spends approximately one week in the country. They gather initial data and hold discussions, mainly with suppliers. Primarily, the objective is to gain a first impression in the country itself and to assess whether there is a country market there for Metro stores. In detail, this trip is used to meet the main objectives of the pre-feasibility study, these being to validate the preceding desk research findings at first hand and make an initial touch down in the market itself, i.e. take a close look, both figuratively and literally speaking, at the market potential, opportunities, and so on. In particular,income level, unemployment rate and the like often deviate from the official figuresand can be reviewed on the spot. Questions that remained unanswered from desk research, for example on special taxes or taxation of sales and office premises, can be settled and information gathered on suppliers and partly on how willing officials and politicians are to cooperate. A survey of the existing retail environment permits the team to assess the fit between the format and the foreign country, i.e. whether the Metro concept is attractive to the market. In this way, the actual market potential can be assessed more accurately and any obstacles to market entry exposed. The analysed data during this step cover sales (particularly the number of potential Metro customers by category and country level), profit (particularly the average margins for food and non-food), costs (particularly the existence of costs that are significantly higher or lower than average), market (particularly intensity of competition in the C&C and hypermarket sector), knock-out criteria (particularly whether there are any real or potential showstoppers), and appeal (particularly attractiveness of the business concept for the country market). Full-Feasibility Study as a Third Step If analysis of the second step continues to indicate a potentially suitable market, a decision is taken on the third stage, which is the full-feasibility study. In this step, a team of approximately 10 to 15 experts from all disciplines involved (sales, purchasing, finance, taxation, human resources, etc.) conducts, assisted by a feasibility manual, an in-depth analysis, where it tries to obtain as much information as possible beforehand and then supplement this information by means of trips to the country (depending on the topic/department), and from independent or specially commissioned analyses. This analysis comprises checklists and questionnaires, among other things, used to evaluate clear customer potential and spending potential estimates, the

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income relevant to spending, and the number of outlets possible in the country in the long term. These are extrapolated or assessed independently on the basis of the data available and of estimatesmargins and personnel costs, in particular, normally have to be estimated. The sources of information used vary from one country to the next, but include such institutions as the members of state and local government, consultants, customer focus groups, and suppliers. Once again, the key issues relate to sales (particularly the number of Metro customers by category, potential turnover and number of stores), profit (particularly margins and volumes by categories considering market structure, customer behaviour and competition), costs/investment (particularly the costs to operate the business and the overall investment), business plan (particularly the question of how many stores and in what sequence, as well as what type of investment and costs will generate EVA), market (particularly characteristics of MCCs competitors, MCCs competitive position), human resources (particularly personnel requirement, instruction and task structures), final scrutiny and checking of provisional risks (particularly whether there are issues that have not been considered to date and extending to whether a foreign investment list will be requested to facilitate operations). The final result of this process is a business case that indicates exactly how much can be invested, for how long, and with how much return on investment. At this point, the first site selection is made, based on the individual strategy for a particulartown or city. This includes (at this time) the ideal number and position of Metro sites, as well as a recommended sequence of sites. The selection is based on detailed customer and micro-analyses (competition, infrastructure, property prices, etc.). Ultimately, the result is a strategy that maps the first three years of expansion. If, in the end, the management decides to enter the market on this basis, a delegation headed by the Metro Groups CEO often visits the country to finalize the investment. A statement is then made together with a government spokesman, for example, sealing the formal act of market entry. Special Features and Future Prospects In the early days, country-specific internationalization of Metro developed in stages, but in the 1990s there were more and more simultaneous steps, with parallel market entries using synergies between the markets (see Figure 1). The future situation (in eastern Europe, for example, with its extensive presence of Western retailers) will probably lead again to slower development of new country markets. This makes it possible to allocate resources for penetration of larger markets, such as Russia in Europe or China and India in Asia. In China, use of synergies, i.e. developing other Asian countries in parallel, is irrelevant. China alone has so much market potential that setting up an intensive network of outlets could claim the entire internationalization capital. This

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is not possible, however, due to the financial restrictions. Furthermore, the Asian countries still hold substantial economic risks, to the extent that concentration of resources here could lead to financial problems if there is an economic crisis. Nevertheless, Metro was the first Western retailer, in China, to make use of the permission granted to extend joint venture participation to 90% at the end of 2005. Another exception in the expansion pipeline is Japan. The intensity of competition prevailing there would have been a knock-out criterion right away in the market selection process. Still, MCC entered the market there in 2002. The idea here was to gain a successful share of the market with the niche concept ECO, whose assortment contains virtually only fresh products. This was to be tested, also in order to be sure that it is possible to operate successfully in such markets. Following initial problems, developments have taken a positive turn in 2004/2005. The basis of MCCs international activities for the next few years is to increase penetration and expansion. Forty outlets in existing markets and one new country market are to be opened per year. Focus will continue on making economies of scale and scope in order to generate added value. Nevertheless, inter-country selection has also yielded plans to expand into more countries. As suggested, the following motives, for example, are relevant as part of the systematic search for country markets:

closing of gaps in the MCC portfolio and making use of synergies between countries, exploiting opportunities arising in new markets, and .new regional focus, for example on a first Muslim country in Asia for 2007.

Further expansion activities may not make MCC a world-wide player, represented in every country. Instead, the focus lies on a more regional identity, i.e. working with groups of countries that fit together in order to achieve synergies, particularly in regressive value-added functions and processes, for example purchasing or supply chain management. Increasing standardization can be detected in relatively homogenous country markets (such as western Europe) and parallel differentiations in newer markets (such as Japan and in parts of central and eastern europe). There appear to be advantages for a basic strategy geared to specific regions. Case Question: 1. Describe the IMS process of MCC and comment on its effectiveness. 2. Do you think some steps can be omitted or added to make the process more purposeful? .