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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 world’s 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 world’s

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 group’s

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. . Metro’s 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.

4. There must be some potential for achieving a place among the top three in the country

market in question and the MCC format must be viewed as a new, innovative concept in

a new country market.

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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 group’s 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 Metro’s 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

group’s 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

estimates—margins 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 MCC’s

competitors, MCC’s 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 Group’s

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 MCC’s 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? .