Metro Cash & Carry

A German Wholesaler’s foray into the Indian Markets

Case Analysis

Table of Contents S No. | Topic | Page No. | 1 | Introduction | 3 | 2 | China | 5 | 3 | China – Challenges | 5 | 4 | Russia | 6 | 5 | Russia – Challenges | 6 | 6 | India | 7 | 7 | India – Challenges | 8 | 8 | Recommendations | 9 | 9 | Conclusion | 9 | 10 | Appendix A | 10 |

Introduction & Business Model

The Metro Group is one of German’s largest trade and retail group player which. It is divided into four major business units: 1. Real/Extra - an everyday retail supermarket 2. Kaufhof - an up market department store chain 3. Media Market/Saturn - Europe’s leading electronics retail chain 4. Cash & Carry - wholesale distribution of goods

The first ‘Metro Cash & Carry’ store opened in 1964 and it has been on an expansion route ever since. It initially sold only dry goods and then ventured into fresh goods & non-food items. Over a period of time, the product offerings increased leading to an increase in the customer segment. By 2003 they accounted for 240 Billion Euros of the total German wholesale market.

Metro C&C worked differently than the traditional wholesale system where they sold food and non-food items in large warehouses on a cash basis. Their main customers were restaurants, bars, cafes, bakeries, SMEs and other food retailers. They issued electronic cards to the customer on the basis of which they were permitted entry. To gain a Metro card a customer had to register and provide proof that it was a legal business entity by providing their business registration certificate.

Metro primarily had three types of stores: 1. Classic (10,000 to 16,000 Sq Metres) – These were the largest and present mainly in Western Europe 2. Junior (7,000 to 9,000 Sq Metres) - These primarily served Asia and Eastern Europe 3. ECO (2,500 to 4,000 Sq Metres) – This was the smallest of the three and was set up primarily in France, Japan and Italy.

The arrangement of food items present was on the basis of the size of the store. Another important aspect of their business was the Metro Buying Group. The Metro Buying Group (MGB) was responsible for negotiating with the suppliers on the large scale regarding the prices, Inventory and merchandising activities.

Metro C&C realized the importance of international expansion from the get go and after the initial expansion around Europe in the late 60’s and 70’s, they moved into farther territories in the 90’s (Appendix A – Figure 1 details the time of entry of Metro C&C around the globe). This forward thinking often gave them a first mover advantage.

Metro C&C emphasised on understanding the local cultures before entering a new geography. They conducted a multi-step feasibility analysis to identify potential candidates. This also allowed them to analyze the host country and evaluate their own strategy for entering the particular market. They were fast movers and quickly adapted to the local environment. The format of the feasibility study is detailed in Appendix A – Figure 2.

Metro’s international outlook was also reflected in their management staff. Majority of the Metro managers worked outside their home country and their composition of country management teams composed of various nationalities as clearly shown in Appendix A – Figure 3

Metro scored over the hypermarkets & other small food distributors as they offered an assortment of goods to the retailers at competitive prices. It also helped the small producers to manage their inventory in an organised manner and also makes the distribution channel more profitable.

China
From the 1950s to 1970s, Chinese government entities procured, distributed and sold all agricultural commodities. Even in the mid 1990s, most of China’s national and provincial level wholesalers were state owned enterprises. Retails outlets tended to procure most of the products locally due to China’s poor distribution system and a tendency for local governments to protect local producers and manufacturers.

Due to the large untapped market, Metro made its first foray into China in 1996 by setting up a store on the outskirts of Shanghai. They were required by the central government to take a local joint-venture partner to enter China and hence formed a 60/40 joint venture with Jinjiang group. Jinjiang group was a large state owned enterprise with a nationwide presence and good ties with government agencies. China’s accession to the WTO in 2001 required China to open its retail market to foreign investors and in December 2004, China allowed Metro to increase its ownership stake to 90% in the joint venture. However due to the close relationships Metro had built over the years, Metro chose to maintain its ties.

Challenges
By 2005, China’s central government had decentralized many aspects of fiscal and economic policy down to the provincial level. Hence Metro had to prove to people in local government bodies and gain their trust even if the central ministry from Beijing had given the authorization. Similar negotiations were required to set up the sourcing of perishable goods.

Metro’s expansion strategy in China was a clustered approach with four business units built around the major urban centres of Shanghai, Beijing, Wuhan and Guangzhou. After five years in China, Metro could open only eight stores. This was mainly attributed to the cultural gap between Metro’s German model expectations and realities of China and Chinese expectations. Since few Chinese restaurant owners considered themselves restaurateurs, it was hard for Chinese to see the distinction between wholesaling to business and hypermarket’s retail sales to consumers. Moreover China’s rapid growth had made the land prices very high. Hence Metro could not open new stores in their normal way. Competition from other retail giants like Wal-Mart and Carrefour was also fierce. Talent retention was also an issue Metro faced.

Russia
Metro’s foray into Russia was very smooth. This primarily due to the open invitation they received from the Mayor of Moscow, Yuri Luzhkov. Until the late 1990s, the wholesale competition in Russia was generally fragmented among many small and specialized companies with a total absence of organized international hypermarkets. Large, open-air wet markets offered the lowest prices available and regular working hours but quality of the products was never guaranteed and hygiene problems were typical. Such markets had also become unpopular with local governments as they were eager to modernize their cities and create taxable distribution channels.

Following Luzhkov's invitation, Metro C&C opened the first outlet in Moscow in 2001 and followed up with another 25 by the mid 2006. In terms of sales, Metro C&C Russia accounted for the sixth largest sales from all countries where Metro was present. Metro C&C followed a large to small city model, opening stores in Russia followed by cities with 1 million plus population and then smaller stores in smaller cities. It can be seen that Metro had been both an observer and a participant in the transformation of Russia's modern distribution sector.

Challenges
The challenges that Metro faced in Russia were more of geographic and demographic in nature. A country of the size of Russia was something Metro had never experienced before. Between Moscow and Yekaterinburg, the location of company's central hub, was a 2700 km route passing through mountains and not so friendly terrain. The absence of sophisticated highway system was another issue that Metro faced in Russia as distribution and logistics were major issues.

Another long term challenge was the declining population of Russia. It is believed that the population of Russia will be 50% of its current population by 2050. Although Russia's eventual accession to WTO would increase competition and further open the retail sector in Russia, Metro C&C was confident of its position and success.

India
After their success in Russia, Metro was confident of finding similar success in India. They felt with similar diversity in Geography, lack of infrastructure and the absence of a consolidated or major international player, they would be able to easily corner the wholesale market.

In 2000, Foreign Investment board of India gave approval to Metro C&C to “Establish state of the art cash and carry complexes for food and non-food products at urban locations in India”. The license allowed Metro to “Source products locally, including purchasing products from agricultural co-operatives, manufacturers and producers as well as assist in processing of these products”. The license further read that Metro should “assist agricultural and aquacultural sectors to reduce product losses, to link producers to markets and to assist in enhancing the export value of consumer products”.

During its multi-step feasibility study, Metro analyzed various locations to open its first outlet. They wanted to open up to 10 stores in a cluster to target a larger market. The major areas considered were: * North - Delhi * West – Mumbai/Pune/Nagpur/Ahmedabad – Western Belt * South – Bangalore/Chennai/Hyderabad
Due to high real estate prices in North and Western India, Metro focused towards the South. In the southern region, Chennai was perceived as risky due to an unstable government, and Bangalore seemed promising under the political leadership of a forward thinking chief minister. Hence they opened its first two stores in Bangalore in 2003.
They also intended improve infrastructure by setting up farmer operated grading, sorting and packing centres near the growing areas to enhance hygiene, quality and shelf life. Metro would transport fresh produce in cooled vans from these collection centres to its temperature and moisture controlled distribution centres. Such support would also enhance the export potential of fresh produce and other products. They also set up a packing centre just outside Bangalore. However it took them 3 years to open their next store, which they did in Hyderabad in 2006.

Challenges
Overall, the Indian wholesale market was highly fragmented. Agricultural produce was sold in town squares comprising of various stalls and ‘Kirana’ stores. The industry suffered from poor infrastructure as there were limited cold storage facilities and transportation services. This inferior distribution system contributed to a lot of waste, especially of agricultural produce.

On top of that, as per the Agricultural Produce Marketing Committee Act (APMC), farmers were required to sell in ‘Mandis’, and private institutions such as Metro could not purchase directly from the farmers. The APMC was initially designed to protect the farmers but over time, the agents operating in the Mandis had started exploiting the farmers. This led to inefficient pricing and to rectify this situation a model law was being drafted which would encourage private sector participation. Many believed that the APMC had outlived its use, and an act that was designed to protect the local farmer had now become the reason for the farmer’s demise.

Metro also faced a number of barriers because of the Indian political structure. Central government oversaw FDIs while state governments controlled agricultural marketing. Hence, they had to deal with the central as well as the state government, which generally used to be from different political parties and hence with different ideologies. Added to that, the unpredictable political environment did not help matters either.
Another big hurdle was how they were perceived by the activists & special interest groups. These groups were usually aligned to a state or central political party and a number of them were anti-privatization and anti-liberalization. They accused the Metro C&C of indulging in predatory pricing to wipe out local competition. These groups directly compared Metro C&C to the East India Company, the institution responsible for putting India under the British Empire for over 200 years and thus evoking strong negative emotional feelings. Local trade groups also opposed the entry of Metro C&C into India. There was also major opposition voiced in the local language media.

Legal system in India was another hurdle that Metro C&C faced. The government's economic policies did not allow FDI in retailing. It took a lot of efforts and explaining from the MCC and especially its head Harsh Bahadur to convince the government and the courts of its position as a wholesaler and not a retailer. India had a common law system. The absence of preceding similar cases forced Metro C&C into accepting trade sanctions from the court mandates which imposed minimum quantity purchase requirements and other such barriers that were not required anywhere else.
Recommendations
In spite of all various challenges faced by Metro, India still seems a very attractive option. It clear that the huge market is a tremendous opportunity and Metro should look to expand as quickly as possible. To resolve some of the issues mentioned above, Metro can take the following steps: 1. Partnerships – Metro should partner up with firms that complement their own competencies. By providing financing to customers and delivery services, they can massively increase their revenues. 2. Image Perception – Metro should try very hard to change its brand perception so that it is viewed as a wholesaler that wishes to benefit the Indian Society as a whole. This will let the special interest groups accept the firm and enjoy the benefits it will bring. Sitting in industry advisory boards will also strengthen their position. 3. Lobbying – Metro should lobby with the state and central government in a manner that enables them to align themselves with government strategy and allow them to highlight the fact that they are in the country for the benefit of country in the long run. 4. Investment in Infrastructure – They should invest in infrastructure that will benefit the Indian industry but also benefit them highly. By improving the distribution system, they can easily consolidate a highly fragmented market and establish a huge market share.

Conclusion
Overall, Metro’s entry and stay in India has been successful as they chose the location and analyzed the market carefully. However they underestimated the pressures from the government and special interest groups which has undermined their position and hence slowed their growth. If they align themselves with the special interest groups and the government, they will quickly establish themselves as a leading force in the industry.

Appendix A
Exhibit 1 Market Entry | Country | # of Outlets | 1964 | Germany | 117 | 1968 | Netherlands | 16 | 1970 | Belgium | 9 | 1971 | Austria | 12 | 1971 | Denmark | 4 | 1971 | France | 84 | 1971 | United Kingdom | 33 | 1972 | Italy | 46 | 1972 | Spain | 34 | 1990 | Portugal | 10 | 1990 | Turkey | 9 | 1991 | Morocco | 6 | 1992 | Greece | 7 | 1994 | Hungary | 13 | 1994 | Poland | 22 | 1996 | China | 29 | 1996 | Romania | 23 | 1997 | Czech Republic | 12 | 1999 | Bulgaria | 7 | 2000 | Slovakia | 5 | 2001 | Croatia | 5 | 2001 | Russia | 22 | 2002 | Japan | 2 | 2002 | Vietnam | 6 | 2003 | India | 2 | 2003 | Ukraine | 8 | 2004 | Moldavia | 1 | 2005 | Serbia | 3 |

Exhibit 2

Exhibit 3 BOARD China | CM | French | OP | Dutch | ADM | German | FD | Austrian | NF | German | HR | Singapore |

Board Czech Rep | CM | Spanish | OP | British | ADM | Turkish | FD | Dutch | NF | Dutch |

Board Japan | CM | French | OP | Dutch | ADM | German | FD | Austrian | NF | German | HR | Singapore |

BOARD Poland | CM | German | OP | Dutch | ADM | German | FD | Polish | NF | Polish | HR | Polish |

BOARD Russia | CM | Italian | OP | Dutch | ADM | Austrian | FD | American | NF | Dutch | HR | Russian |

BOARD Ukraine | CM | German | OP | Hungarian | ADM | Dutch | FD | Bulgarian | NF | Romanian | BOARD UK | CM | German | OP | British | ADM | German | FD | Danish | NF | British | HR | British |

BOARD Vietnam | CM | British | OP | Swedish | ADM | Belgian | FD | Australian | NF | Australian |