LONDON (FNS) -- The big just keep getting bigger -- and more international. The third annual SN list of the world's top food retailers illustrates that size is more than ever one of the industry's major driving forces as companies scurry to acquire smaller competitors. Many of these acquisitions are taking place in developing markets as food retailers push to become global leaders.
The basic mantra -- eat or be eaten.
"It's a race," said Luc Vandevelde, president and chief operating officer of French retailer Promodes. "The opportunities to be a global player are disappearing fast. If you're not part of the club today it's hard to imagine how you will be able to get into it."
Wal-Mart, a retailer feared by its competitors, is the model of the push for size, with total global sales of $139 billion. It's also one of the companies aggressively expanding in international markets, last year buying Spar hypermarkets to bolster its existing position in Germany and continuing to expand in the Far East.
But while Wal-Mart executives have openly talked about their goal of growing the business outside the United States, the company remains a lightweight internationally compared with such food retailers as Promodes, Carrefour, Casino, Ahold and Metro. The same holds true for all U.S. retailers.
"Most American retailers aren't international," Vandevelde said. "The market opportunity in the U.S. is so immense and the consolidation process there is far from being completed, so American companies understandably are focusing on their own market first."
The sheer size of the American market -- and the consolidation among the leading players -- means the largest American companies will automatically be ranked among the global leaders. For example, Kroger Co. -- already the largest food retailer in the United States -- factoring in the arrangement to buy Fred Meyer Inc. leaps to the third spot on this year's list from No. 12 on SN's 1998 list. Albertson's, which has an agreement to merge with American Stores Co., leapt to No. 5 from No. 22 while Safeway's announced purchases of Carr Gottstein Foods and Dominick's Supermarkets pushed it up to No. 13 from No. 17 last year.
The focus of American retailers on their home market doesn't mean their potential arrival isn't feared by their competitors in Europe or the Far East. U.K. companies have been trembling for months over rumors that Wal-Mart was looking to break into the market by acquiring a British retailer. Wal-Mart executives recently dismissed the reports, saying the company has no plans to enter the United Kingdom in the foreseeable future.
But at least one major merger has partially resulted from Wal-Mart's feared arrival and industry analysts expect more to follow. Kingfisher plc and Asda plc, the United Kingdom's third-largest food retailer, announced plans in April to merge their operations to create a global retail group with sales of more than $24 billion and operations stretching from food to apparel to electrical appliances.
The $9.43 billion merger was seen by some analysts as an attempt by the two companies to create a European Wal-Mart. The deal propelled the new combined group to No. 19 on this year's list. Neither Kingfisher nor Asda was on last year's list.
"This is another important step on the road to being a global winner," Sir Geoffrey Mulcahy, Kingfisher's chief executive, said in announcing the merger. "There is an excellent strategic fit between the two companies, which reinforces our leading market positions and financial strength, the key criteria for success in today's brave new world of global competition."
Global is the key word. While American retailers might feel the U.S. market is enough for them to cope with, the danger is any further delay in breaking into international markets might mean they miss the boat entirely. Cees Van der Hoeven, chairman of Ahold, suggested as much to SN in an interview earlier this year and warned the Americans might not be able to catch up.
"This is a game that requires substantial amounts of experience and knowledge," he said. "And in fact most cards are being dealt as we speak. That's the end of the story in a few years' time."
Hans Gobes, Ahold's senior vice president of communications, said that only lately have American retailers realized there is a huge potential market outside the United States. But he warned: "Latecomers to international markets still have to learn the hard way that cultures and ways of doing business differ considerably from what they are used to in the U.S."
The importance of international markets to current and future growth is proven by the numbers -- of the world's Top 25 retailers, 20 have extensive operations outside their domestic markets. And these 20 are dashing to enter more countries.
Vandevelde said the goal for Promodes is to be among the Top 3 retailers in each country it enters. The problem is that most of its competitors have the same goal. That's why there is such urgency for the French retailer to break into new markets -- the earlier it gets there, the better chance it has of putting down strong roots before others arrive. It's a game of strong financial resources, which enable patience to wait out the long haul for a financial return.
"Twenty-five years ago when we built our first hypermarket in Spain there were five partners with us," Vandevelde said. "They all moved out because it took too long but we stayed. It took us four years before we built another one. Today we have 59. If you assume the same thing will happen in South Korea, Indonesia and other countries, that's why global competition has us all moving in the same direction.
"Once the Top 3 positions in emerging markets are taken, it's difficult to move in as No. 4," he added. "We decided not to go into Thailand because there are already four local competitors. Poland -- there are 23 international retailers there. You have to make your choice of countries and then hit hard."
In Vandevelde's view, the key regions for the foreseeable future are the Mercosur countries of South America and selected countries in the Far East, excluding China and India. Promodes broke into Argentina in 1997 and last year bought 49% of the local retailer Norte. Vandevelde admitted it paid a slight premium for the stake but in his view the price was worth it to gain a stronger foothold.
Ahold also is targeting South America, with strong positions in Brazil, Argentina, Chile and Peru, Gobes said. In each country it has joint ventures with strong local partners that know the characteristics of the market.
"It is Ahold's strategy to strengthen our position in all four regions -- the U.S., Europe, Latin America and, under conditions, Asia," Gobes said. "The rationale is as follows: we see it as our mission to become the world's best and most successful supermarket company."
The key is to ensure the operations eventually will be profitable. That is one reason Ahold is for the moment cautious about Asia -- the economic turmoil there. Gobes said the company might look to invest there once the economies pick up again. It's also why Promodes is cautious about China, although Vandevelde said that market is the big prize every retailer with global ambitions is aiming for.
Many industry executives believe companies can't afford to wait for such markets as China to stabilize, no matter how long it might take to get a return on the investment.
"Within three to five years most of the countries will have their Top 3 players," Vandevelde said. "Then there won't be enough room for expansion, and consolidation will have to happen. That is what is driving today's mergers and acquisitions, which aren't always economically justified. These moves are in anticipation of what the market is going to be like five years from now."
So expect even more megadeals among food retailers, not just in the United States but worldwide. The companies that want to be leaders in the future have no choice. As Gobes said: "We believe that medium-sized and large food retailers that don't make it internationally will become niche players and risk stumbling on hard times in the near future to remain competitive. They will lack the economies of scale and also have no access to new know-how and experience."