Emerald Emerging Markets Case Studies

Emerald Emerging Markets Case Studies Sainsbury’s in Egypt Terrence C Sebora Michael Rubach Richard Cantril Article information: To cite this document: Terrence C Sebora Michael Rubach Richard Cantril , (2014),"Sainsbury’s in Egypt", Emerald Emerging Markets Case Studies, Vol. 4 Iss 8 pp. 1 - 27 Permanent link to this document: http://dx.doi.org/10.1108/EEMCS-04-2013-0031 Downloaded on: 02 June 2015, At: 10:23 (PT) References: this document contains references to 30 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 1842 times since 2014* Users who downloaded this article also downloaded: Claudio Vignali, (2001),"McDonald’s: “think global, act local” – the marketing mix", British Food Journal, Vol. 103 Iss 2 pp. 97-111 http://dx.doi.org/10.1108/00070700110383154 Ayman El-Amir, Steve Burt, (2008),"Sainsbury's in Egypt: the strange case of Dr Jekyll and Mr Hyde?", International Journal of Retail & Distribution Management, Vol. 36 Iss 4 pp. 300-322 http://dx.doi.org/10.1108/09590550810862697 Nükhet Vardar, (2014),"A global brand in a local market", Emerald Emerging Markets Case Studies, Vol. 4 Iss 8 pp. 1-11 http://dx.doi.org/10.1108/EEMCS-12-2013-0232 Access to this document was granted through an Emerald subscription provided by All users group For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Sainsbury’s in Egypt Terrence C. Sebora, Michael Rubach and Richard Cantril Terrence C. Sebora is an Associate Professor based at University of Nebraska, Lincoln, Nebraska, USA. Michael Rubach is a Professor based at University of Central Arkansas, Conway, Arkansas, USA. Richard Cantril is a Director of special tactics and research, Fiserv, Lincoln, Nebraska, USA. If you lived in Cairo in 1999, the name Sainsbury’s was spoken on every corner. Everyone was talking about the new grocery store chain that sold its products at prices much lower than anyone else. Young men and women hung out in front of the stores just to be associated with the new chain. Consumers who never before would dare to enter a supermarket went to Sainsbury’s to get their groceries and supplies. Even competitors bought products from Sainsbury’s retail outlets. Sainsbury’s stores were flooded with consumers, and the cashier lines were always busy. Yet, by the end of 2000, speculation in the media had risen concerning Sainsbury’s ability to be profitable in Egypt, and there were rumors about the sustainability of Sainsbury’s international strategy. During an interview on BBC Radio 4’s Today program on Wednesday, November 22, 2000, Sir Peter Davis, newly elected Chairman of Sainsbury’s, indicated that unrest in the Middle East, delayed store openings, and “licensing difficulties” contributed to a £10 million loss in Egyptian supermarket operations, in which Sainsbury’s has invested £100 million. He noted that, although the Egyptian market may have attractive longer-term growth opportunities, Sainsbury’s was concerned about its investment in Egypt. Davis outlined Sainsbury’s three strategic options in Egypt: to scale down its operation, to find new local partners or sell the business. Davis noted that there was some question of whether Sainsbury’s should have gone into Egypt in the first place. Sainsbury’s: an overview In March 1999, J Sainsbury plc wanted to revolutionize the under-developed Egyptian retail food industry. It entered the Egyptian market with a vision of expanding rapidly, and during 1999, Sainsbury’s opened, on average, one retail outlet every eight days; more than 100 stores were opened in less than two years. The Egyptian market had never witnessed such an expansion in any industry. Sainsbury’s phenomenal growth even caused some Egyptian grocers to go out of business because they were unable to compete with the new supermarket giant (Figure 1). Sainsbury’s was a UK-headquartered multinational corporation (MNC). It was a leading UK and US food retailer, and it also operated in financial services and real estate. The group comprised Sainsbury’s Supermarkets and Sainsbury’s Bank in the UK and Shaw’s Supermarkets and Star Markets in the USA. Sainsbury’s mission was to be “First for Food,” offering outstanding quality and delivering great service, all at a competitive price. Sainsbury’s objectives were to meet its customers’ needs effectively and thereby provide shareholders with good, sustainable returns (Table I). The chain was Britain’s oldest existing major food retailer. Sainsbury’s first supermarket was established in 1869 by John James and Mary Ann Sainsbury. The founders’ principles and values – to be the customer’s first choice for food shopping by providing high quality, Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The author/s may have disguised names; financial and other recognizable information to protect confidentiality. DOI 10.1108/EEMCS-04-2013-0031 VOL. 4 NO. 8 2014, pp. 1-27, © Emerald Group Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES PAGE 1 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) value for money, excellent service and attention to detail – have historically guided its management. A large Sainsbury’s supermarket offered over 23,000 products, 40 per cent of which were Sainsbury’s own brand. In addition to a wide range of quality food and grocery products, many stores offered bread baked on the premises, delicatessens, fresh meat and fish counters, pharmacies, coffee shops, restaurants and gasoline or petrol stations. Although it had been decreasing, Sainsbury’s 11.9 per cent market share was the second largest among UK retail supermarkets. Its Shaw’s Markets chain with almost 150 stores was number two in its US market, the New England states. In fact, Sainsbury’s was the 14th largest grocery retailer in the world (Table II). Sainsbury’s management believed that the company had a loyal customer base in the UK, which trusted the Sainsbury’s brand and valued the range of services that the company offered. Management believed that the strength of the Sainsbury’s brand was transferable to new markets and that new markets might offset the erosion of market share in the UK. The operating companies shared similar brand values: excellent quality, range, service and value. Sainsbury’s had previously leveraged its brand name successfully within the UK, for example, Sainsbury’s Bank coupled the trusted quality of J Sainsbury’s plc with the Bank of Scotland’s experience and infrastructure. The Sainsbury’s Bank had expanded its financial services by establishing an extensive range of products and services, all under the Sainsbury’s banner. Figure 1 Table I Sainsbury’s group profit and loss account (in £m) 2001 2000 1999 Sales (excluding VAT and sales tax) 17,244 17,414 16,433 Cost of sales (16,082) (15,201) (15,116) Gross profit 1,162 1,070 1,317 Total administrative expenses (629) (542) (481) Operating profit 533 528 836 Profit on disposal of properties 21 53 107 Impairment of Egyptian business (111) – – Profit on ordinary activities before interest 510 581 943 Net interest payable (76) (72) (55) Profit before tax 434 509 888 Taxes (168) (162) (292) Equity interest (4) 2 2 Profit for year 266 349 598 Dividends (274) (274) (294) Retained profit (12) 75 304 Earnings per share 13.8p 18.3p 31.4p Diluted earnings per share 13.7p 18.2p 31.1p PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) In January of 2000, Sainsbury’s released its chief executive officer (CEO), Dino Adriano, the first non-family member to run the company. Adriano was criticized for a lack of vision and strong leadership skills. Sir Peter Davis was appointed CEO in hopes of reversing the sluggish growth of its core supermarket business and to stop the losses in market share to Tesco, the UK market leader. Egyptian retail food industry The Egyptian market offered considerable potential: 65 million people lived in a very concentrated area. There was a sizeable, yet largely unexploited domestic food market, where supermarkets claimed only a 5 per cent share. Relatively, Egyptians spent more than three times as much of their incomes on food than UK consumers. Over 12 million of Egypt’s 69 million people could afford to purchase imported food products. Western products and new products had wide appeal among Egyptian consumers (Table III). In Egypt, a supermarket that sold groceries, meats and poultry was still quite unusual in the 1990s. People were accustomed to using traditional channels: specialized small grocery stores, butcher shops and bakeries located close to their residences where they negotiated the price with sellers whom they knew personally. The typical Egyptian consumer bought meat from a butcher shop and fresh vegetables and fruits from open markets. Prior to the entry of foreign retailers, Egyptian consumers rarely went to supermarkets. However, this began to change. This was especially true for more affluent Egyptians who purchased much of their food from supermarkets. Historically, supermarkets had been located primarily in Cairo and Alexandria, Egypt’s two largest cities, with populations of over 15 and 5 million people, respectively (Table IV). Table II The top 15 Grocery Retailers (2002) Group Country of origin Dominant store type Net sales (€million 2001) Grocery sales (%) Domestic sales (%) Foreign sales (%) 1) Wal-Mart USA Warehouse 243,281 40 82 18 2) Carrefour France Hypermarkets, supermarkets, discount stores 69,486 70.5 49.4 50.6 3) Ahold Netherlands Supermarkets 66,593 92 13.5 86.5 4) Kroger USA Supermarkets 55,959 91 100 0 5) Metro Germany/Switzerland Mixed 49,522 49.7 55.6 44.4 6) Albertson’s USA Supermarkets 72,781 90 100 0 7) Kmart USA Warehouse 38,665 37 100 0 8) Safeway USA Supermarkets 38,314 92 89.9 10.1 9) Costco USA Warehouse 38,131 41 82 18 10) Tesco UK Supermarkets 38,059 90 85 15 11) Rewe Germany Mixed 37,540 70.3 79.5 20.5 12) Aldi Germany Disc stores 32,400e 84 60.6 39.4 13) ITM France Hypermarkets, supermarkets 31,900e 82.4 74.5 25.5 14) Sainsbury’s UK Supermarkets 29,743 90 85 15 15) Ito-Yokado Japan Mixed 29,624 47 64 36 Source: M&M planet retail (2002) Table III Egypt–economic data 1998a 1999a 2000a 2001a 2002a 2003b Nominal GDP (US$ bn) 84.8 90.5 97.9 90.4 84.1 71.1 Population (m) 65.2 66.5 67.8 69.1 70.5 71.9 GDP per head (US$ at PPP) 3,041 3,246 3,431 3,565 3,658 3,719b Private consumption per head (US$) 997 1,021 1,096 985 879 722 Number of households (’000) 13,328 13,653 13,996 14,356b 14,731b 15,127b Notes: aActual; bEconomist intelligence unit estimates Source: economist intelligence unit VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) The retail market in Egypt is highly stratified. A few small-scale, privately owned operations competed for wealthy customers. These groups, comprised three to four branded outlets, stocked imported foodstuffs and generally offered a wide range of services including home delivery and customer loyalty cards. A second tier of less luxurious stores generally competed on price and omitted service. State-owned retailers competed at the lower end of the market. Egyptian consumers had become increasingly aware of quality and variety. Affluent Egyptian consumers expected cleanliness, product range, ease of service and a responsive staff. Consumption of prepared foods increased dramatically in the 1990s due, in part, to the growing numbers of working women who demanded ready-made meals and easy-to-cook foods (Table V). Out of a total population of 69 million, only six million people had bank accounts and less than half a million carried out more than two banking transactions a year. The credit card market grew quickly in the 1990s – from 200,000 cards in 1990 to 450,000 in 1999. However, it was still much smaller than either Morocco or Lebanon. Meanwhile, there are no mortgages, private pensions, consumer loans or life insurance policies in this Moslem country. Table V Food expenditures in Egypt Consumer expenditure 1998a 1999a 2000a 2001a 2002a 2003a Food, beverages and tobacco (US$ m) 28,361 27,702 30,039 27,288 25,266 21,333 Food, beverages and tobacco (% of household spending) 43.6 40.8 40.4 40.1 40.8 41.1 Food Meat consumption (kg per head) 20.9 21.3 22.2 19.4 20 20 Fish consumption (kg per head) 11.7 13 13.9 14.4 13.6 14.5 Fruit consumption (kg per head) 81.8 88.3 88.6 89.6 93 90.5 Vegetable consumption (kg per head) 163.1 180.1 190.4 172.5 174.8 182.3 Confectionery, sales volume (’000 tonnes) 76 78 80 82 84 85 Beverage Milk consumption (ml) 46.6 50 49.4 50.7 52.4 62.1 Coffee consumption (kg per head) 0.1 0.1 0.1 0.1 0.1 0.1 Tea consumption (kg per head) 1.00 1.02 0.9 0.9 0.8 0.7 Alcoholic drinks, sales volume (ml) 34 50 67 80 84 84 Soft drinks, sales volume (ml) 961 1,015 1,075 1,166 1,206 1,232 Tobacco Cigarettes, sales volume (m units) 57,600 59,100 60,800 62,600 63,435 64,271 Notes: aEgypt Retail Food Sector Report 2000, GAIN Report #EG0034. http://apps.fas.usda.gov/gainfiles/200011/60678872.pdf Source: Economist intelligence unit Table IV Food affordability in Egypt Item Price (US$) % monthly disposable income Affordability rank White bread, 1 kg (supermarket) 1.05 2.06 45 out of 52 Sugar, white, 1 kg (supermarket) 0.40 0.78 43 out of 53 Milk, pasteurized, 1 l (supermarket) 0.49 0.95 43 out of 52 Instant coffee, 125 g (supermarket) 2.25 4.41 45 out of 53 Wine, common table, 750 ml (supermarket) 4.61 9.04 42 out of 51 Cigarettes, Marlboro, pack of 20 (supermarket) 1.21 2.38 46 out of 53 Note: Affordability rank: for each country the price of an item as a percentage of monthly personal disposable income is calculated; countries are ranked according to these percentages; the most affordable country will have the lowest percentage and be ranked first PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) The USA, France, Germany, Italy, Switzerland, Greece, Holland, Denmark and South Africa were the predominant suppliers of consumer-ready food products in Egypt. Multinational firms started to invest in Egypt, especially the French firm, Carrefours; the German firm, Metro; and the South African firm, Shoprite. With the expansion of supermarkets through international partnerships, it was likely that international companies and hypermarkets would soon dominate the Egyptian retail food business. Metro developed the “Metro Express” in Cairo and Alexandria, outlets half the size (250 m2) with a quarter of the product line (3,000 items) of its regular Metro stores. A Metro Express did not carry fresh meat, vegetables or fruits. The new stores were located in middle-income, residential neighborhoods in Cairo and Alexandria. Carrefours sought to expand in Egypt, and intended to open its first hypermarket after 2000. Majid Al Futaim of Dubai, the Middle East franchisee for the French Carrefour hypermarket chain, had announced that it will open 15 stores in Egypt over the next 15 years (Tables VI and VII). Entry to Egypt J Sainsbury’s plc foresaw a need to consider additional growth opportunities outside its domestic markets. The specter of Wal-Mart entering the UK market motivated Sainsbury’s to increase its worldwide volume to cover the anticipated loss of UK market share. Moreover, its top managers believed that Sainsbury’s needed to become a global retailer to compete in the twenty-first century and to leverage potential global sourcing opportunities. The top management team saw three opportunities for international expansion:  Short-term return on investment: Largely available in more developed markets such as North America, Western Europe and Australia.  Medium-term return on investment: Emerging markets where investment returns were expected within four to seven years. While growing and offering less competition, emerging markets generally lacked necessary infrastructures. Egypt was perceived as such an investment opportunity; the Egyptian population and economy were projected to grow faster than many European countries, and the Egyptian domestic food market was already greater than that of The Netherlands or Belgium. For Sainsbury’s, Egypt represented a relatively stable country in terms of political and economic risk. Table VI Number of retail food outlets and Sainsbury’s major competitors (1999) Wholesalers Supermarkets Groceries Kiosks Gas stations Other retail outlets* Total Cairo 1,575 143 22,410 4,506 194 2,186 31,014 Alexandria 450 25 7,753 2327 110 487 11,152 Delta region 750 15 9,978 2975 77 450 14,245 Middle Egypt 117 5 3,021 407 35 59 3,644 Upper Egypt 104 24 3,251 337 22 296 4,034 TOTAL 2,996 212 46,413 10,552 438 3,478 64,089 Note: *Other retail outlets do not include coffee shops, nut shops, and haberdashery shops; convenience stores, kiosks, and gas stations sell candies, snacks, juices and soft drinks Source: US department of agriculture (2000), Egypt: Retail food sector report (2000) Table VII Retailer name Ownership Sales ($Mil/Avg) No. of outlets Locations Sainsbury Joint venture $100 111 Cairo & Alexandria Ragab sons Local $45 10 Cairo & Alexandria Fathalla Local $22 7 Cairo & Alexandria Zahran Local $14 5 Alexandria Alfa Local $7 3 Alexandria VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Sainsbury’s was not totally unfamiliar with Egypt; the company had already imported Egyptian products to the UK. Through the use of expatriates, Sainsbury’s believed it could transfer its key retail skills to its Egyptian stores. While currently weak, Egypt had the potential to become competitive in the international supermarket industry.  Long-term return on investment: Significant returns only after seven or more years. These investments were perceived as “seedcorn” investments in countries such as India, China or Central Africa. In 1999, Sainsbury’s decided to enter the Egyptian market. The decision was consistent with the company’s continuous search for growth opportunities outside the UK and US markets. The Egyptian market was attractive because of the size of the potential market, high consumption patterns for consumer goods, the excellent performance of consumer goods multinationals in Egypt over the past 10 years, the quality of the workforce, favorable investment conditions and good relations between the Egyptian and British Governments. The Egyptian market, with its diversified demographics in terms of economic and social classes, together with its large and growing population, was very attractive. Egypt was also viewed as a stepping stone for further expansions into the Middle East region. Sainsbury’s international organizational structure was purely functional. This model was characterized by tight simple controls, with key strategic decisions made at headquarters. Sainsbury’s Egypt reported to the company’s top management team headquartered in the UK. Headquarters tightly controlled the business both from overseas and through their staffing strategies. In Egypt, Sainsbury’s used expatriates. The Egyptian subsidiary was run by 64 expatriates who held senior management-level and other operational positions. The company expected these expatriates to transfer their knowledge, expertise and systems, and then later hand over the operations to the Egyptian staff. Sainsbury’s experiences in the USA were thought to provide some insights into its new market penetration. The recent acquisition of Star Markets helped Sainsbury’s to build scale economies in the USA with its existing Shaw’s supermarkets. Additionally, while achieving a high level of value, Star Markets applied its core skills in its own label development, supply chain management and distribution systems integration. Star Markets skill sets, upscale brand position, locations, customer-tailored product offerings and strong food court operations and formats fit well with Sainsbury’s existing US operations and positioned Shaw’s Supermarkets for further expansion in the USA. However, a total integration between its UK and USA businesses had not been fully realized prior to the rollout in Egypt. Sainsbury’s international operations had previously been restricted to the USA, so it was a challenge to apply what was learned in America to Egypt. Sainsbury’s management believed that its “[s]uccess in the USA is not the limit of our international ambitions and our firmly established world-class retailing skills will drive expansion into other regions” (J Sainsbury’s plc Annual Report and Accounts, 1999, p. 4). Sainsbury’s standardization processes went beyond utilizing global efficiency; it had standardized processes and procedures for most activities. However, standardization was not for the purpose of scale or scope economies, but rather based on the belief that what worked in the UK and USA markets, would work just as well in the Egyptian market. Entry mode The Edge retail group was established by the El Nasharty Group in 1997 and listed on the Cairo Stock Exchange in October 1998. Its Egyptian owners wanted to expand the Edge chain by adopting international business standards and attracting foreign investors to fund these expansions. As part of its plans, the Edge group sought an international retail chain as a partner. The Edge Group was attractive: it operated nearly 100 stores in Cairo, had strong links to the Egyptian Government (it contract managed 50 government stores), had an extensive distribution network and had a strong management. One disadvantage was PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Edge’s relatively weak brand name. In March 1999, the Edge group reached an agreement with J Sainsbury’s plc to form a joint venture. Sainsbury’s initially acquired a 25.1 per cent share of Edge. Prior to 1999, Sainsbury’s had not launched a venture outside the UK or USA, and the Sainsbury’s name was not widely known to the Egyptian public. The first Sainsbury’s branded stores opened in September 1999, adopting a “neighborhood store” concept of convenience and value. David Rowe, chief executive of Sainsbury’s Egypt, outlined Sainsbury’s strategy as seeking to appeal to different social groups, having spent many months examining customer needs through focus groups. What Sainsbury’s Egypt discovered was that Egyptian customers wanted greater competition over prices. Rowe stressed that “in the UK, Sainsbury’s is a mass market retailer, and we will be in Egypt too.” According to Abdel-Razek (1999) in the Al-Ahram Weekly: With Sainsbury’s determined to compete on price, the lower end of the market could well be facing its own shake-up. And given the government’s plans to privatize up to half of the seven public sector and retail companies by the middle of next year, there is always the possibility that other multi-nationals will be seeking to make inroads into the local retail market. Initially, all new store openings experienced strong sales. Based on these initial successes, Sainsbury’s decided to increase its ownership of the joint venture to 80.1 per cent. In January 2000, Sainsbury’s opened its first “food, family and home” store, which was much larger than the neighborhood store, and focused on quality and choice. Sainsbury’s debut in Egypt had looked promising. Crowds of shoppers filled its first warehouse-sized blue and orange store on the Pyramids Road. Rowe stated that the $150 million Egypt operation was well ahead of expectations. Rowe believed that Egypt’s retail market was so fragmented that Sainsbury’s lacked any real competitors. Sainsbury’s staffing Sainsbury’s transferred 64 expatriates from its headquarters to launch the supermarket business in Egypt. These expatriates were the core of the Egyptian subsidiary. Generous fringe benefits were offered to the expatriates to entice them to relocate to Cairo, including family relocation allowances, luxurious cars and apartments. The cost of the expatriates during this initial phase was high. Human resource management was a significant issue for Sainsbury’s in Egypt. One of the main tasks of the expatriate team was to develop and train the personnel required to run the stores. Initially, the recruitment of locals went smoothly. The company targeted new graduates and professionals with limited experience to tailor the new hires to fit Sainsbury’s strategy and culture. Labor costs turned out to be higher than originally forecast, due to low productivity. Sainsbury’s initial assumptions for labor costs/revenues were never met. Local regulations exacerbated the labor costs. For example, Sainsbury’s was guilty of failing to secure the proper work permits for laborers at one store in Cairo, so the employees were on the payroll but without a place to work. Extensive training of local staffers over a short time period did not provide them with adequate time to digest and adapt to the new techniques and standards required by Sainsbury’s. Sainsbury’s culture did not get passed on to all Egyptian employees. Not every employee bought into the mission, and employees often lacked direction. This was especially true at lower levels where employees perceived Sainsbury’s as a foreign partner whose strategy was to extract profits from Egypt. Moreover, Sainsbury’s store managers did not listen to their local employees, who made suggestions. The outcome was often a low level of employee loyalty that led to high levels of shrinkage. Problems were not restricted to employees. Problems also arose when activities were outsourced, and often the performance of these outsourced activities did not meet Sainsbury’s expectations. For Sainsbury’s, developing processes that reflected the Egyptian market was a risk not undertaken in the first year of operations. For instance, a driver in Egypt who would normally VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) earn £.E.500 was earning £.E.2,000 because the compensation and benefits scheme was standardized worldwide and was not adjusted for local circumstances. Sainsbury’s marketing Shifting consumers’ buying habits to supermarkets was a major challenge. Sainsbury’s was extremely successful in removing the fears of many consumers. Sainsbury’s tackled the problem through store designs tailored to match its target customers. The designs concentrated on simplicity, moderate illumination and basic graphics configurations, all of which encouraged people to go to the stores. One of the challenges faced by the meat departments was overcoming the perception that the meat was not fresh; display adjustments and different product positionings were helpful in overcoming this problem. Just as these perception problems were addressed, the fear of mad cow disease led to almost zero demand for beef products. The complete range of products sold by Sainsbury’s Egypt included 10,000 items, but store location determined what was stocked. Continuous modifications were made in response to sales reports and the sales figures for different items. For example, contrary to initial assumptions, it was discovered that higher-quality meats with their higher prices were actually more appealing in lower-income areas. Beverages in cans had unexpected high turnover because teenagers in some lower-income neighborhoods would buy them although they cost more than bottled beverages. These purchases were seen as a sort of social differentiation among friends. Initially, Sainsbury’s expected to import a wide range of its products from the UK. However, high customs duties jeopardized this strategy. Further, problems with customs officials often meant only non-perishable items could be imported. Sainsbury’s made use of its brand name in the Egyptian market, where it branded its own fresh bread and fresh juices and distributed other Sainsbury’s branded products. In Egypt, people started going to Sainsbury’s supermarkets to obtain Sainsbury’s products, and, while in the stores, they started shopping longer and bought more. Sainsbury’s branded products were promoted in Egypt just as they were in the UK. Sainsbury’s brands proved to be very popular in Egypt, especially the freshly squeezed fruit juices. Sainsbury’s main distribution channels were through large stores located in key areas; it focused on big stores located in highly populated areas where potential customers had medium purchasing power. Sainsbury’s tried to appeal to a wide-based market. The initial stores were in areas where price was the main driver (C-class areas). Areas with more affluent consumers (A-class stores) were exploited later. The performance of A-class stores did not meet forecasts because Sainsbury’s was not well received by sophisticated consumers, who perceived Sainsbury’s stores as cheap and not offering quality products. The A-class stores’ images were adversely affected by inconsistent marketing messages generated by this dual marketing approach. Although all A-class stores replaced older, existing stores located at key locations with high traffic, these stores failed to attract the affluent customer and, consequently, reported poor performance. The wider-based target market, which was usually served by local stores, also caused some of the resentment by the public and opposition by competitors. Sainsbury’s offered the best prices in the market. A number of techniques were used to reduce costs and improve margins. Sainsbury’s attracted consumers by identifying 130 Key Value Items (KVIs). Sainsbury’s KVIs generally had profit margins that were quite low, and Sainsbury’s used the KVIs to project its image as a low priced vendor. The KVIs were products that generated traffic when competitively priced. The KVIs were usually the items that gave consumers a feeling about the whole store, i.e. whether the store was inexpensive and prices were reasonable. Based on the KVIs, many consumers decided that Sainsbury’s was the best store for their needs. The KVIs were very competitively priced, often being cheaper than other stores. This technique targeted the entire purchase made PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) by the consumer, both KVIs and other regularly priced items. The KVI strategy succeeded in attracting many customers and the average expenditure reached £E.50, considerably higher than other competitors’ averages of £E.28. The success of the strategy was more obvious in specific stores, especially those located in C-class areas, where sales records were achieved for a limited time. One of the most successful stores had daily sales of over £E.500,000, unprecedented in the Egyptian market. Exclusive supply arrangements with producers were a strategy used for groceries, poultry and meats. The procurement department would buy all of the production of reliable suppliers, which enabled Sainsbury’s to secure lower costs. In addition, after its first quarter of operation Sainsbury’s began to offer private label products produced for it by Egyptian manufacturers. Similarly, Sainsbury’s contracted to buy a complete production run for a specific time period and have it packaged with its brand name. This approach was used successfully for products such as detergents, soap, and macaroni. Sainsbury’s promotion techniques did not include television advertising, only newsprint. This allowed the company to control promotional costs and to match product offerings to target customers. Sainsbury’s was a market leader in making promotional product offers. Sainsbury’s made special offers by bundling products, with supplier support and cooperation. Less appealing products were often bundled with key selling items in special promotions. This bundling enhanced Sainsbury’s buying power with its suppliers. Sainsbury’s marketing techniques depended greatly on speed of service, timely replenishment, and comprehensive sales analysis. Speed of service was achieved through offering items in a convenient visual display, using shelf height and product locations. Meat products were offered in pre-cut packages in weights usually ordered by the consumers, thus matching the customer’s expectation while providing quick service. Given the high sales turnover, the challenge was to keep items in stock and displayed. This required stringent controls on the reordering process, including inventory control systems and point of purchase registers. A basic requirement of these systems was the bar coding of all items sold throughout the stores. However, in the Egyptian market, bar coding was not required of suppliers. Sainsbury’s was able to impose bar-coding requirements on some suppliers. Until a bar-coding requirement was fully implemented, each store had to use bar-coded stickers. The stickers were placed on items by hand, which was quite costly in terms of both materials and labor. Moreover, the cashiers often found items with missing bar codes, yet they sold the items by using the bar code of any other item that had the same price, which led to inventory control problems. Marketing analysis reports were developed from the automated sales systems, and these reports were used to make marketing decisions about which items should be bundled, the pricing of products to maximize profit, and the reordering of profitable products. However, the inaccuracies of the inventory control systems jeopardized the effective use of these reports. Other issues When Sainsbury’s moved into Egypt, it had hopes of earning huge profits as the first company to introduce wide-scale Western supermarket techniques into Egypt’s 40-year-old socialist retail scene. However, the competitive tactics adopted by Sainsbury’s created problems. Sainsbury’s strategy of discounts, mass marketing and weekly sales had not endeared itself to Egyptians whose shopping habits were formed under the Nasser era and had not changed much. Sainsbury’s low price strategy had very negative effects on price stability in the Egyptian market. The pricing of some KVIs under cost led to accusations of dumping and attempts to monopolize. This created yet another challenge for Sainsbury’s, the formation of “Misriyitna” (“Our Egypt”), a cartel of large Egyptian merchandisers. The cartel was able to purchase products at prices comparable to Sainsbury’s and consequently matched many of Sainsbury’s retail prices. There were also media denunciations of Sainsbury’s competitive pricing policies. As a result, Sainsbury’s was forced to abandon its loss leader policy. VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Politically, the Palestinian Intifada in September 2000 led to a boycott of products made by American and English suppliers. (Procter & Gamble had similarly been the subject of boycotts, when its flagship Ariel laundry soap, produced in Egypt, came under fire by anti-Israeli protesters. Ariel laundry soap was targeted because of a perceived connection with Ariel Sharon, the Israeli Prime Minister). Angry local competitors persuaded Egyptians to boycott Sainsbury’s. M Ali Ibrahim, editor of the Egyptian Mail, reported that: [. . .] beleaguered shopkeepers who ran businesses near Sainsbury’s [. . .] asked local preachers to help them. The imams obliged. Worshippers were told that if they bought from the store they would “suffer on the day of judgment.” Some Muslim clerics issued edicts (fatwas) against shopping at Sainsbury’s. Many Egyptian students took to the streets to vent their anger at Sainsbury’s, spurred by the widespread belief that Sainsbury’s was a Jewish-owned supporter of Israel. Chief executive Peter Davis was quoted as saying: [. . .] a few trouble makers in the region said all the profits from our stores were going straight to Israel – depite the fact that the stores were not even profitable. Stone-throwing protests were waged outside stores. These students damaged Sainsbury’s stores and wounded some of Sainsbury’s 3,000 Egyptian employees. A large segment of Egyptian consumers decided to purchase their groceries from their traditional stores even at higher prices. When many people were speaking out on the boycott of Sainsbury’s, Egyptian President Hosni Mubarak tried to persuade citizens to still shop there. President Mubarak expressed that he understood why Egyptians were boycotting Jewish products and assured them that Sainsbury’s was not a Jewish supporter (Smucker, 2000). As a dimension of its marketing efforts, Sainsbury’s had anticipated that the Egyptian Government would support its beneficial economic activities. From the outset, however, the Egyptian Government was not proactive in helping Sainsbury’s to deal with chronic bureaucratic problems such as clearing goods through customs and licensing its products, or in stamping out the campaign against Sainsbury’s orchestrated by local competitors. The Egyptian government, worried about losing foreign investment, took some action by putting out a message in government newspapers that the boycotts were actually hurting the Egyptians who own franchises and work there. Sainsbury’s future in Egypt So, it is against a background of great market potential, rising competition and operational adjustments in Egypt and shrinking market share in his home market that Sir Peter Davis must chose among the three strategic options he outlined for Sainsbury’s in Egypt: 1. scale down its operation; 2. find new local partners; or 3. sell the business entirely. Pressure was significant to sell the Egyptian holdings. But, he wondered, would this be the best decision for the company? * The annual reports for J Sainsbury’s Plc can be found on the company’s website under reports by year or in the report archives. References Abdel-Razek, S. (1999), “Sainsbury’s shopping spree”, Al-Ahram Weekly On-line, 11-17 November, p. 455. Keywords: International strategy, Global expansion PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) J Sainsbury’s Plc Annual Report (1999), available at: www.j-Sainsbury’s.co.uk/files/reports/ar1999/ arep99.pdf * Segal-Horn, S. (2002), “Global firms – heroes or villains? How and why companies globalise”, European Business Journal, Vol. 14 No. 1, pp. 8-19. Smucker, P. (2000), “Boycott ‘forcing Sainsbury’s to sell up in Egypt”, Telegraph Newspaper, 27 December, available at: www.telegraph.co.uk/news/main.jhtml?xml/news/2000/12/27/wsain27.xml (accessed 22 November 2006). Further reading Abdi, A. and El Masry, M. (2000), “Egypt retail food sector report 2000”, GAIN Report No. EG0034, available at: www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp Anonymous (2001), “Debacle on the Nile”, Country Monitor, Vol. 9 No. 4, p. 5. Bowers, S. (2001), “Protests for Sainsbury our of Egypt with £125m loss”, The Guardian, 10 April. Business Middle East (2000), “Egyptian retailing: gaining an edge”, Business Middle East, 16 January. Business Today Egypt (2001), “Learning to love FDI”, Business Today Egypt, 1 April. Business Today Egypt (2001a), “Playing the Sainsbury’s blame game”, Business Today Egypt, 1 May. Business Today Egypt (2001b), “The long kiss goodbye”, Business Today Egypt, 1 May. Economist (2000), “Cairene shoppers’ intifada”, Economist, Vol. 357 No. 8195, p. 50. Eltahawy, M. (2000), “Pyramid selling”, The Guardian, 12 April. Eurofood (2000), “Chain of helm at Sainsbury’s – J Sainsbury’s PLC”, Eurofood, 20 January, available at: http://findarticles.com/p/articles/mi_m0DQA/is_2000_Jan_20 Executive Briefing: Egypt (2005), “Economist intelligence unit”, available at: http://eb.eiu.com/index. asp?layoutoneclick&country_id1640000164 Giant British Supermarket forced out of Egypt (2001), available at: www.islamonline.net/english/news/ 2001-04/10/article5.shtml#top (accessed 24 November 2006). J Sainsbury’s Plc Annual Report (2000), available at: www.j-Sainsbury’s.co.uk/files/reports/ar2000/ar 2000report.pdf *. J Sainsbury’s Plc Annual Report (2001), available at: www.j-Sainsbury’s.co.uk/files/reports/ar2001/ report_2001.pdf * J Sainsbury’s Plc company website, available at: www.j-Sainsbury’s.co.uk Kapner, S. (2001), “Grocer ends Egypt expansion to rebuild its British market”, New York Times, 10 April. MM Planet Retail (2002), “The top 30 grocery retailers 2002”, available at: www.planetretail.net Orme, W.A. Jr (2001), “A grocer amid mideast outrage: Sainsbury’s becomes target of rumors and Israel boycott”, New York Times, 25 January. Owen, T. (2001), “Regional retail: supermarkets vs the souq”, Middle East, Vol. 311, pp. 38-39. Postlewaite, S. (2001a), “How a fatwa altered Sainsbury’s strategy”, Ad Age Global, Vol. 7 No. 1. Postlewaite, S. (2001b), “Sainsbury’s nixes return to Egypt”, Business Monthly Week, April, available at: www.amcham.org.eg/Publications/BisinessMonthly/Dec01/Follow%20up%20(SainsY) Profits down at Sainsbury’s (2001), “BBB news web site”, available at: http://news.bbc.co.uk/2/hi/ business/1358884.stm (accessed 25 November 2006). Sainsbury’s pulls out of Egypt (2001), “BBC News web site”, available at: http://news.bbc.co.uk/1/hi/ business/1268099.stm (accessed 6 December 2006). VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 11 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Sami, A. (2001), “Supermarket in hysterics”, “Al-Ahram weekly web site”, available at: http://weekly. ahram.org.eg/2001/530/ec1.htm (accessed 23 November 2006). Schemm, P. (2001), “Sainsbury’s Egypt retreats at a loss”, Cairo Times, Vol. 5 No. 7, pp. 1-4. Wahish, N. (2000), “Clearing its shelves?”, Al-Ahram Weekly On-Line, 21-27 December, p. 513. Corresponding author Terrence C. Sebora can be contacted at: [email protected] PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) Abstract Title – Sainsbury’s in Egypt. Subject area – International Strategy Study level/applicability – Undergraduate or graduate capstone course in strategy or international management course. Case overview – Faced with increased competition at home, Sainsbury’s decided to expand its international operations by entering Egypt. Sainsbury’s initially created a joint venture with an Egyptian food retailer, but quickly increased its commitment by opening over 100 stores in Egypt. Sainsbury’s dream of capturing the Egyptian food market faded as quickly as it was started. Due to declining profits, Sainsbury’s eliminated its exposure in Egypt by selling its interests to its Egyptian partner. Sainsbury’s first developing-country venture could be regarded as an object lesson in how not to operate. The company failed to properly investigate its market and its partners, and showed insensitivity to local conditions. Moreover, entering the Egyptian consumer business sector may have been ill-advised. Egypt, with a low gross domestic product (GDP) per head of about $1,300 and a population of 65 million, while having growth potential, is a daunting market. Why a poor and frequently disorganized country was perceived as having excellent growth potential was not addressed by Sainsbury’s in its headlong rush to invest. The case should be interesting for students because it highlights a situation where a firm’s international expansion efforts failed after the firm had success expanding internationally previously. Numerous reasons are presented in the case for Sainsbury’s failure. The case highlights the multiplicity of issues which a company faces when it “goes global.” While Sainsbury’s withdrew from Egypt, the case affords students the opportunity to evaluate whether they would have made the same decision by providing a discussion of the alternatives suggested by Sainsbury’s Chairman. Expected learning outcomes – The Sainsbury’s case is capable of addressing several important teaching objectives: the case is an appropriate vehicle to demonstrate what can happen to a firm as it expands globally; students will gain more knowledge concerning why companies expand into foreign markets and the impact of cross-country differences in market conditions; the case presents the multifaceted complexities involved in globalization efforts and issues faced by companies concerned with global competition and global strategy; students should apply the concepts and tools of industry and competitive analysis; students should gain a better understand how to manage globally; students should gain an understanding of the challenges of globalization and global competition; students should gain a better understanding of the evolution of strategy as industry conditions change and new opportunities arise. As with any case study, students should learn to translate good analysis into appropriate recommendations for action. Supplementary materials – Teaching Notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes. Subject code – CSS 5: International Business VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 27 Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT) This article has been cited by: 1. 2015. Sainsbury’s Egyptian misadventure. Strategic Direction 31:3, 4-6. [Abstract] [Full Text] [PDF] Downloaded by UNIVERSITY OF GREENWICH At 10:23 02 June 2015 (PT)