Sector analysis: the world retail industry
How global food distributors are stepping up their strategic repositioning to boost their margins abroad in a fragile sector
In their report entitled "What are the strategies available for food distributors to protect their threatened margins?" economic and sector experts from Euler Hermes, the world’s leading credit insurer, review the status of the sector as well as its international outlook. In the past year, food distributors have stepped up their strategic repositioning in order to improve margins abroad, by consolidating their market share in countries where they are the market leader (Paris, 14/03/2008)
1.Globalization as an essential requirement for distributors in spite of continuing low profitability
Euler Hermes observes that the growth rate of global groups abroad is still twice that of their overall growth. However, geographic diversification is insignificant: in fact, distributors still mostly operate within their domestic area. According to Annie Girac, a Euler Hermes SFAC sector consultant, "We have found that none of the companies involved is truly global. Most of them derive over 80% of their turnover within their domestic region, be it Europe, North America, Latin America or Asia".
As an example, Tesco's estimated consolidated operating margin for 2007 is 5.8% whereas the non-domestic operating margin is 5.3%. This is even more striking in the case of Wal Mart, with a 5.9% estimated consolidated operating margin for 2007 as compared to a 3.1% non-domestic operating margin.
"Metro is the only company with a non-domestic operating margin that is far higher than its estimated consolidated operating margin for 2007", notes Annie Girac.
Wal-Mart suffered setbacks in its attempts to set up operations outside the American continent: it decided to exit Germany in 2006 after suffering structural losses for nearly 10 years. In Japan, Wal Mart will be posting this year a loss for the sixth year since taking on the Japanese market in 2002.
Distributors are streamlining their debt in order to give themselves breathing space. Ahold's gearing, after radical restructuring, fell from 460% in 2002 to 70% in 2007 (estimated). In the same period, Carrefour reduced its gearing from 128% to 64% and Casino from 104% to 71%.
Carrefour exited countries where its market share is small (from 1 to 5%), such as Switzerland or Portugal, in 2007 (€1.2 billion assets sales) to finance growth and strategic acquisitions in target countries (investments amounting to €1.5 billion), such as Brazil with the purchase of Atacadao.
As Annie Girac comments, "In 2007 distributors' asset portfolios stepped up restructuring in order to boost margins and reallocate financial resources to key countries".
(Excerpt)
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