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Retail Management in Business Expansion - Research Paper Example

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This paper analyses the plans required to be framed by Migros, the Swiss retail chain store that wants to enter the German market. The present paper first discusses the Umbrella strategy and then examines the MIGROS company by conducts a SWOT analysis…
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Retail Management in Business Expansion
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RETAIL MANAGEMENT Retail Management: MIGROS Expansion into Germany 1. Introduction When a company that is successful in one country wants to set up operations in another country, a country entry strategy has to be followed that will include the investment plan, marketing plan, HRM and staffing details and many other important aspects including carrying out a SWOT analysis of the company. This paper analyses the plans required to be framed by Migros, the Swiss retail chain store that wants to enter the German market. Though Migros already is active in Germany, for the sake of this paper, it is assumed that the company wants to set up operations in Germany by using the Umbrella strategy. The paper first discusses the Umbrella strategy and then examines MIGROS company by conducts a SWOT analysis and then framing and investment, marketing and HRM plan. 1.1. About Umbrella Strategy An Umbrella strategy has a number of feasible steps, specific goals, assignments and sources that are integrated to form the strategy. Business decisions can then be taken in the logical framework that is created by the Umbrella strategy. The strategy helps the firm to reach the set short and long term goals and it helps to bring the business vision of the company closer to realization. The strategy is typically executed in different phases that run sequentially, one after another. There are also different analytical levels that form a matrix with the phases. The analytical levels are more important as they give teeth to the strategy while the phases give the overall framework and steps for the strategy. The analytical levels are the formation of the company, business units and departments and the tactical and operation aspects. Following figure illustrates the different phases of the strategy (Littler, 2008). Figure 1.1. Umbrella Strategy Illustration (Littler, 2008) The Umbrella Strategy is proposed for the Migros expansion into Germany case. 2. About Migros This section provides a brief company overview and performs a SWOT analysis 2.1. Company Overview Migros - Migros-Genossenschafts-Bund is the largest retailer in Switzerland. It operates through 12 cooperative groups and its business comprises about 580 stores including supermarkets, convenience and department stores. The company also operates banking and insurance business, a printing and publishing concern, restaurants, music and computer software retailing, furniture business, holiday and travel arrangements, hotel business, and gasoline tank stations. In addition, it operates other businesses across Europe. Migros operates supermarkets in France and Germany and exports products to Austria, the UK, and the US. Retailing is the company's core activity, which is supplemented by various related and unrelated businesses. In Switzerland, the company operates across various geographical markets including Aare, Basel, Genf, Luzern, Neuenberg/Freiburg, Ostschweiz, Tessin, Waadt, Wallis and Zurich. Migros has an eCommerce venture through which it offers a variety of products for Internet shopping. In 2006, the company had revenues of 20.64 billion CHF and employee strength of 79000. There are about 601 retail stores and outlets and the company offers discounted special products that include groceries, fish and seafood, chocolates and other items. The retail stores as a policy do not sell alcoholic beverages and cigarettes. The company has used the cooperative model for development and growth and it is estimated that there are about 2 million Swiss citizens who are shareholders of the cooperative (Migros, 2009). Figure 2.1. Migros Website (Migros, 2009) Depending on the size of the establishment, the company assigns up to three alphabets of M, so the supermarket would be classified as M, MM and MMM. The concept was started in 1996 with the M-Budget stores that offered up to 70 special low cost items. The stores now offer a range of products that include mp3 players, apparel and foot wear and other items. The policy of the stores is that the prices are below the retail stores but are above the wholesalers who may offer bulk discounts for large orders. The company has shown remarkable success in its growth and acceptance among the other retailer such as Wal-Mart and even other cooperative stores in Switzerland such as Coop. Major competitors of Migros-Genossenschafts-Bund are: Carrefour S.A., Casino Guichard-Perrachon, Wal-Mart Stores, Inc., Coop (Swiss), REWE Group and ALDI Group. (Migros, 2009). 2.2. SWOT Analysis This section provides a SWOT analysis that gives the analysis of the strength, weakness, opportunity and threats for Migros (Datamonitor, April 2009). Strengths Migros has a leadership position and strong brand name among the retailers and its customers. It has a good amount of control of the Swiss food retailing market and it is the largest market player in the Swiss food retail market. The group and Coop, the second-largest supermarket chain hold about 45% of the market share. It also promotes its brands aggressively which makes it difficult for foreign brands to enter the sector. This provides the group with a competitive advantage positioning the Swiss retail market. Migros also has a diversified products and services portfolio. Migros offers diversified product and services including food items, electronics, computers, home appliances, furniture, and office equipments. Apart from food and general merchandise, the group offers in-club services, where Migros operates food court. In the food court, the group offers food item. It also provides Holiday and travel arrangements services. The group also offers services to its business members. It offers services required by offices such as office supplies, cleaning products restaurant and catering supplies, hotel amenities, fresh and frozen foods. A diversified product and services portfolio enables Migros to generate more customer traffic and earn better margins. The Migros-LeShop alliance with LeShop, an online grocer is a strategic alliance to collectively market products online. The alliance created Switzerland's biggest online supermarket with about 6000 products on offer. The companies expect significant increase in sales from this venture. This provides Migros with a strong online trading platform, which adds an additional channel for reaching prospective customers (Datamonitor, April 2009). Weakness Migros has a relatively low scale of operations and it operates on a much narrower range as compared to its competitors. The group operates through 580 supermarkets, convenience and department stores. Whereas, its competitors such as Carrefour operates through 12,547 stores in 29 countries and Wal-Mart operates 971 discount stores, 2,447 supercenters, 591 Sam's Clubs and 132 Neighbourhood Markets in the US. Owing to its relatively small scale of operations, the group is competitively disadvantaged. This would mean that Migros would remain a marginal player and other major rivals could use economies of scale and deep discounting to wean customers away from Migros. Another issue is that being a cooperative store, the firm would be more conscious of its social role and it would attempt to force very severe and harsh terms on the suppliers (Datamonitor, April 2009). Opportunities There is an increase in private label spending and besides retailing branded products, the company sells products under its own brands. More than 95% of the items on the company's shelves come from its own brands, and many of which are manufactured by the company itself. Private label spending as a percentage of consumer packaged goods spending in Europe is expected to increase from 18% in 2000 to 26% in 2010. In the US, private label spending as a percentage of consumer packaged goods spending is forecast to advance from 13.7% in 2000 to 17.3% in 2010. The increasing private label product market would enhance the group's margins and reinforce its own brand. There is an increasing trend in online sales and Online shopping has steadily grown in popularity. During the second quarter of 2008 e-commerce sales grew 26% as compared with the same period a year ago. Online retail sales reached to $130 billion in 2008 from $104 billion in 2007. Online retail sales are expected to grow annually by 17% through the end of 2009. The online retail sales are expected to reach $329 billion in 2010. In addition to physical store operations, Migros sells its merchandise through online portals. The Migros Stores segment operates the online portal www.officeworld.ch and www.hotelplan.ch. Besides offering the facility of online shopping, the company has upgraded its online site to enable online purchase of products which are not available at Migros stores. Online sales, while offering convenience to customers, also improve a company's margins by cutting down operating costs. Migros is well poised to benefit from the expected increase in online sales (Datamonitor, April 2009). Threats Migros faces increased competition and the major competitor is Coop, which has the second largest market share in the Swiss retail sector. Retail prices in Switzerland tend to be higher than in other countries because of weak competition. However, competition policy is expected to be tightened in future. This may adversely affect the company's revenues. Furthermore, Switzerland based retail chains are seen as not being cost effective in their distribution and may face increased competition from French and German companies. The Economic slowdown in the Eurozone would have a severe impact since Europe is the key market for Migros. According to the European Central Bank (ECB), GDP growth Eurozone is expected to slowdown in 2008. The GDP growth in the Eurozone is forecast to decline from an estimated 2.6% in 2007 to 1.4% in 2008. A weak economic outlook for Eurozone would put pressure on the revenues of the company. Economic slow down in Eurozone could impact consumer spending, which would adversely affect retail chains like Migros. Increasing labour costs in Europe that is the primary market for Migros. However, labour costs are increasing in Europe. Real wages per employee have increased 6% in Germany 12% in France, 18% in Italy and 27% in Spain in 2007 over 2000. More importantly, Germany's unit labour cost is expected to rise further in 2008. An increase in labour costs in Europe would adversely affect Migros' bottom-line (Datamonitor, April 2009). 2.3. PEST Analysis of Germany Migros is thinking of venturing into Germany and hence a PEST analysis of the German market is performed. The PEST analysis would give detailed information about the political, economical, social and technological forces that are at play in the environment. Political According to the report by CountryWatch (2009) Germany has a stable and safely regulated market. Regulatory bodies in Germany, France and the UK are concerned about the impact of consolidation and intense price competition on manufacturers. As a result, government organisations have been set up to monitor the level of competition in each country. However, European countries differ in the level of severity of its competition policy. In Sweden and Italy, for example, regulation is very strict to prevent price wars. This has deterred retailers from entering the market and limits growth opportunities. In Germany, the government has always been strict on competition policies and supplier relations. In January 1999, the government made changes to the Acts on Restraints on Competition. The law seeks to shift the balance between large retailers and producers and is similar to the Loi Dutreil. The law forbids retailers to set prices permanently below purchase prices to ensure that a manufacturer’s margins are not squeezed relentlessly (CountryWatch, 2009) In Europe, the food retail market had a value of $1,041 bn in 2005, and over the next 5 years it is expected to experience steadily increasing growth rates of market value to reach $1,207.9 bn by 2010. Regulation limiting market share growth is particularly strong in Sweden, Germany, Italy and France. In France the government is currently in the process of changing the law to confirm the supremacy of the manufacturer’s terms of sale, rather than the retailers, reversing the current system. German discounters Lidl and Aldi are operational in many countries in Europe and one of the top players in most of the countries, apart from Italy and the UK. Tesco. Increasing pressure is being put on manufacturers by retailers due to key changes taking place in the European food and drinks retail market. These changes include: Increased discounter presence; Private label development; Format diversification; Consolidation of retailer market share and Price pressure (Sadler, 2009). Figure 2.1. Retail market value by country, $ bn, 2005-2010 (Sadler, 2009) Economic Germany’s food retail market is a competitive and highly saturated marketplace. In the country, economic stagnation combined with price wars driven by discounters contributes to its low growth rate. The Netherlands, the UK, France and Germany, and are all very consolidated markets with 61.5%, 56.7%, 56.6% and 42.7% of the market taken up by the top 5 retailers, respectively. In these markets: Prices have been forced down; Larger retailers are changing their product offering by introducing more non-food items; Larger retailers are developing and growing private label share; Many retailers are diversifying their formats. German discounters are operational in many countries in Europe and are leading top players in all of the countries in which they operate, apart from Italy and the UK. For private label manufactures that supply the stores, there is considerable opportunity to adapt their products for the global market. For branded manufacturers, the discounting trend is a key threat because it reveals an underlying shift towards value and price-led purchasing. Discounters are also gaining a foothold in Spain and Belgium. In Belgium, both Aldi and Lidl increased in market share between 2003 and 2004. Aldi increased by 1 percentage point to 11.3% in 2004 and Lidl increased by 0.5 percentage points to 4.6%. In Spain, Carrefour is the leading retailer, but its most successful format in the country is the group’s discounter, Dia (Sadler, 2009). Figure 2.2. Market Consolidation and market share of top 5 and top 10 retailers (Sadler, 2009) Social Following figure analyses the sophistication of different European countries and it provides a benchmarked picture of each market and their growth opportunities. Markets that have strong consolidation tend to have low share of foreign players due to strong national retailers that make the market less attractive. Consumers in those countries are more likely to trust the current leading retailers, similarly making it more difficult for new players to establish themselves. However, the mature markets of France, Germany and the UK, are more dynamic because are actively driving growth by Diversifying formats; Increasing floor space; Developing private label and Offering more non-food (Sadler, 2009) Figure 2.3. Maturity and sophistication of the European food retail market by Country (Sadler, 2009) Technology Technology is rapidly catching up with the retail industry with RFID devices, voice enabled ordering systems in warehouses, high level of computerisation of warehouses that reduce manpower and the overheads have become more and more popular. Many leading retailers are diversifying into smaller and convenience store formats because the hypermarket and supermarket sectors in many countries have become consolidated. The convenience market in Europe will increase in value between 2005 and 2010 with a CAGR of 3.3%. Italy and the Netherlands will grow the fastest with respective growth rates of 5.0% and 4.9%. To appeal to a wider audience, discounters are expanding their product offering in two key ways: introducing fresh produce and increasing the number of branded products in store. Online retailing and selling has become very popular and people prefer to buy private label products through online methods. Following figure shows the food retail market segmentation (Sadler, 2009). Figure 2.4. Food retail market segmentation: % share, by value, 2008(Sadler, 2009) 2.4. Summary and Implications From the SWOT and the PEST analysis and the company profile, the following points have emerged: Migros has a strong advantage of private label retailer and it should steer away from the heavy discounters such as Wal-Mart. There is a discrete market and customer segment for private label products manufactured and sold by Migros. There is a trend of opening smaller convenience stores with area of around 5000 square feet. These spaces are easier to maintain, have lesser overheads and cost less. High technology support in the form of RFID, supply chain management, warehouse and logistics are important. 3. Investment and Other Plans The decision to enter German market needs to be supported by a proper investment and other plans and these are discussed as below. 3.1. Investment/ Financial Plans According to the report by Business Insights, the best cities that can be considered for entry for retail stores chain are Munich, Stuttgart, Düsseldorf and Hanover. These cities are considered since they have a large urban population with many industries and a cosmopolitan demography. Initially, one store would be opened in each of the cities and later more stores can be opened in the same cities and then a lateral move to other cities can be considered. The cities also have a number of working class couples that can be considered as above median salary holders, who would be interested in private label retail products and who would not depend totally on lower priced discounted products. The real estate market has been facing a severe downturn because of the recession and good properties and appropriate locations are available at reasonable costs. It is further proposed that a ground floor location with about 1000 square meter floor space area is appropriate for the single M or M-Budget stores. Initially a rental accommodation is preferred and it can be taken on long lease. If the business is promising, Migros can have the option of buying the space (Sadler, 2009). Rental cost of one store @ 15 Euros/ month rental cost/ meter square = 15,000 Euros. . Rental cost of 4 stores = 75,000 Euros ---(1) Cost of work capital and goods is a major component as material would be locked in inventory and it is expected that each store would have at least 50,000 Euros worth of groceries and food items. There has to be a rolling stock here and suppliers have to be paid as per the weekly or fortnightly payment terms. We will have to assume that the inventory is turned each week or that there is a sales of 50,000 Euros/ week. Therefore inventory carrying costs are 50,000 x 4 Euros = 200,000 Euros/ week ---(2) Cost of advertising is a huge burden that the company has to bear since initially, the advertisement costs would be very high and Migros has to advertise to increase the brand visibility. Estimating the costs of marketing is done by first breaking up the costs for different media. The media plan would be directed to reaching out customers using a number of methods and media. Please refer to ‘Appendix A1. Advertising and Communication Costs’ that gives information about rates and tariffs. Information provided in the above tables would be used to create the costed media plan as below: Creation of mascot and preparation of five-cartoon films: 50000 GBP. These movies will be run on TV and online advertisement on the sites. Advertisement in Magazines = 8 issues, outside back cover = 3006x8 = 24,048 GBP Banner Ads at top of web pages for 12 months = 1200 GBP Premium listing for 1 year = 1000 GBP Airing of prepared cartoons on TV for 30 second spot on two channels for sport and livings for 6 months = 52, 560 GBP Advertisements in Facebook @ 350 GBP/ month x 1 year = 4200 GBP Preparation and applying of posters at hoardings and other public places = 10000 GBP/ year. Total budgeted costs for advertising are about 1,50,000 GBP -------------(3) The effectiveness of these advertisements would be studied to find if there is any appreciable increase in business for each month and appropriate review would be done to increase or decrease the media spend on selected channels. In addition, there would have to be investments made for logistics supply teams, hiring trucks and warehouses, computerisation of the IT systems, hiring personnel, training personnel and so on. These will have to be costed on an individual basis. 3.2. Marketing Plan The marketing plan would be finalised after the investment plan is approved. Different elements of the marketing plan are included in the costed media plan. Please refer to Please refer to ‘Appendix A1. Advertising and Communication Costs’ that gives information about rates and tariffs and the type of media to be used for the plan. Efforts will also have to be developed towards building up the online trading system for the firm. 3.3. HRM Plan It is proposed that a decentralised system of reporting be followed and while each store would be able to decide on the staffing requirements and have a certain level of autonomy. Each store would be headed by a store manager who would look after the store operations and handle all personnel. It is proposed that the there should be two teams who would work in shifts and there should also be temps who can fill in for any shortage or other types of work. It is assumed that each store can have four floor sales executives who could assist the customers to make the decisions to select and buy. The whole store would be run as per self service and there would be three or four checkout counters that would be manned by four staff. So this makes a total staff of about 10 per store. Security functions would be outsourced along with housekeeping functions. 4. Conclusions The paper has researched the way and means by which Migros would enter Germany to make a start. A SWOT and PEST analysis was carried out and the analysis revealed that there is a demand in Germany for private label products, such as the ones manufactured and sold by Migros. Four German cities were selected for initial store opening and the investment plan, marketing plan and HRM plan was developed for them. References Datamonitor, April 2009. Migros-Genossenschafts-Bund: Company Profile. Datamonitor PLC. Publications, London, UK. CountryWatch, 2009. Germany: Country Profile. CountryWatch, Inc. Houston, Texas. Littler Dale. 2008. The Blackwell Encyclopedia of Management. Blackwell Publishing Inc. Migros, 2009. Migros Overview. Retrieved 12 June 2009 from www.migros.ch Sadler Jessica, 2009. The future of European foods and drinks retailing. Business Insights Ltd., UK. Appendix A1. Advertising and Communication Media and Costs 1. Ad Rate Card for Magazine (http://www.travelplusmedia.co.uk/magazine/ratecard/index.html) 2. Advertisement charges for Internet Ads (http://streamingmedia.co.uk/index.php?option=com_content&task=view&id=18&Itemid=37) 3. Animation Movie Production, rate is approximately 1000 GBP per 30 seconds (http://www.the3drevolution.com/) 4. TV Advertising Rates (http://www.mcps-prs-alliance.co.uk/productionmusic/ratecard/tvadvukcabsat/Pages/default.aspx) Read More
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