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.

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

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

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

Ans: 1 There are various halmarks or characteristics through which we can differentiate between the developed economies and emerging markets; ShopSmart's decision to focus on emerging markets rather than established companies in advanced economies is due to the following two reasons:

(a) Developing economies provide opportunities in terms of long term growth particularly China, India and aggeregate emerging market consumption expands more quickly and there are high prospects of consumer oriented sector due to high share of global consumption and high demand and real disposable income growth is much more in emerging economies.

(b) High growth opportunities for retail sector in emerging economies can support their decision because Retailers have certain advantages in tapping emerging market growth that other sectors don't have. First, e-commerce provides a means to support, if not replace, traditional brick-and-mortar market expansion. By partning with the local market player as in case of South Korea  is a successful risk mitigating strategy which significants reduces the risk of being a first mover and risk level of investments is reduced and demand chain is created.

Ans 2 Two disadvantages that ShopSmart encountered as a first mover into emerging markets are:

(a) ShopSmart invested heavily in acquisition of local stores in other countries in order to become a global leader; though this helped a lot but in the long run this could prove to be disadvantageous because of the issue that later entrants could take advantage of the move and by making use of efficient technology or e- commerce can help to create a customer base without acquiring other companies, without so much investment as in case of Amazon.

(b) Later entrants can identify the areas of improvement or making use of efficient technology or because they know what market is lagging can take on ShopSmart; ShopSmart as a first mover has tobe a dynamic organization, as a first mover it has invested a lot in creating a consumer base but other competitors can take advantage of this by launcing innovative products and shift the consumer away from ShopSmart for example by launching a new product or so on.

Ans 3 Three disadvantages that the company is likely to encounter as a result of this entry strategy ie acquisition:

(a) It can lead to integration problem because the activities of new organization as a result of acquisition of a local player are very much different than the old organizations ; nt only that the tastes and preferences of consumers need to be taken care of; it may become difficult to integrate the cultural fit because of new geographical locations and the employees can resist that.

(b) High Cost : ShopSmart has to pay a high cost for the acquisition as result of this curent period's performance is affected, no doubt in future this leads to greater return but today this can disturb the financial stability of ShopSmart; especially in cases of hostile take over bids value may not be added forthe ShopSmart and it undermine the value of acquisition and this in turn can affect the performance. Not only that too much focus on acquisition can lead to ignorance of internal matters of the organization which is very dangerous for the growth of organization.

(c) Unrelated Diversification: This can the create the problem of managing resources and competencies, it may become difficult to manage the big operations and sometimes this can lead to higher costs again, it is also difficult to diversify because in European Countries the taste of the consumers is different and because of these differences diversification is also not possible at all because of the fact that there are cultural and regional differences.

Ans 4 ShopSmart's entryinto Asians Markets wasthrough partnerships with the local companies and the joint ventures which basically help to understand the regional differences and to create a global base of consumers.

(a) By partnering with the local firms, ShopSmart can help to reduce the risk associated with the investment,by partnering with the local firms and jont venture cost is reduced and the domestic and cultural differences are met and understood.

(b) Through this strategy ShopSmart is able to identify the loopholes in its Eastern European startegy and using this it was able to take care of local demand the risk is mitigated and not only this through joint ventures allth eprofits losses and mangerial burden is distributed and there is no undue pressure.