Analysis of the Foreign Direct Investment Decision; The Case of Carrefour Company Investing in Dubai

Analysis of the Foreign Direct Investment Decision; The Case of Carrefour Company Investing in Dubai

Introduction

Carrefour SA is a multinational firm that operates in the global retail sector. The firm’s headquarters are located in France.  The firm has established a number of hypermarkets, supermarkets, and convenience stores. Convenience stores offer customers a range of food and beverage products. The firm further offers different e-commerce services.  A report by Datamonitor (2011) ranks Carrefour as the 2^nd largest grocery and consumer product retail firm. The firm has established over 15,000 stores globally. In France, the firm has established over 4,000 convenience stores. Its success has arisen from the adoption of the franchising retail strategy. Carrefour is focused on achieving a global market position within the retail sector in which it operates.  The firm has developed an extensive product portfolio in an effort to meet the customers’ diverse needs. Nestle’s substantial product portfolio has enabled it to develop a large customer base.  Carrefour is committed to achieving sustainability in the contemporary global food and beverage industry.  In an effort to strengthen its global footprint, Carrefour has integrated the concept of internationalisation. Internationalisation strategy has been integrated by the firm as one of its strategies in achieving this end.

One of the strategies that the company has integrated into entering the international market entails Foreign Direct Investment. The firm has ventured into the Dubai retail market through foreign direct investment.  This paper presents an analysis of the foreign direct investment decision by Carrefour S.A. into the UAE market.

Analysis of FDI decision

Motive of entry and analysis of location

The highly globalised and competitive business environment has motivated businesses to expand into the international market in search of growth opportunities. Thus, businesses are progressively becoming internationally oriented (Thomas & Maurice 2017).  The high market and growth opportunities in the international market have significantly increased the intensity of competition that firms entering the industry face (Ricks 2006).  Thus, to succeed in the international market, firms intending to enter the international market must ensure that the foreign market entry decision is based on an effective decision (Djarova 2004).

Carrefour’s decision to enter the UAE retail market was necessitated by the need to maximise its sales revenue.  One of the aspects that necessitated Carrefour’s SA management team to select the UAE retail market segment entails the expected rate of growth.  A report by the Dubai Chamber of Commerce and Industry projects that the UAE retail market will grow at an average range of 5% annually (Datamonitor 2007).   For example, the value of the UAE food retail market segment is expected to amount to $12.5 billion, which represents a 47.1% growth from 201 (MakretLine 2015).  Dubai is expected to experience a remarkable rate of growth with reference to consumer spending. Consumer spending is expected to grow at an average rate of 4% annually (Dubai Media Incorporation 2017).

The table below illustrates the trend in the rate of growth in the UAE food retail segment from 2014.

Table 1

Graph 1

Source: (MarketLine 2015)

Graph 1 indicates that the UAE food retail sector has experienced remarkable growth since 2014 and is expected to grow in the future. The increase in consumer spending is necessitated by stability in the level of consumer confidence.  According to a study by AT Kearney Research, the UAE retail sector ranks amongst the fastest-growing economic sectors (MarketWatch 2007).  The sector has not been adversely affected by the decline in the rate of economic growth experienced by Gulf region countries (Dubai Media Incorporation 2017).   In addition to Datamonitor (2011), the decision to enter the UAE market has been increased by the fact that Dubai is centrally located as a retail trading centre globally. Dubai Media (2017) asserts that the Emirati government considers the retail sector as one of the fundamental pillars of the country’s economic diversification. Despite the fact that the UAE retail market segment is estimated to be approaching the saturation level, it is expected that Dubai will remain the retail hub globally.  Carrefour’s management team is of the view that the prevailing market conditions in the UAE will contribute to remarkable improvement in the firm’s performance. Subsequently, the firm will succeed in maximising profitability (Jones 2009).

Mode of entry

In entering the international market, it is imperative for the firm’s management team to ensure that the best mode of entry is adopted. Faeth (2010) accentuates that ‘the right market entry strategy can decide over a success or a failure of an investment’ (p.1). Thus, it is imperative for business managers of firms intending to enter the international market to understand the prevailing market condition in order to successfully make a decision on the most appropriate mode of entry.  This arises from the fact that the mode of entry determines the extent to which the firm entering the international firm achieves sustainable competitive advantage (Ireland, Hoskisson & Hitt 2012). Foreign Direct Investment is one of the most notable forms of market entry that a firm can integrate into entering the international market.  There are different forms of FDI that firms intending to enter the international market can adopt.  In entering the UAE market, Carrefour SA has adopted the Greenfield market entry strategy, which entails establishing a new wholly-owned subsidiary firm in the international market (Hitt, Ireland & Hoskisson 2007).  The firm decided to implement the Greenfield market entry in entering the UAE market was informed by the firm’s quest to gain dominance in the UAE retail market segment. On the basis of the Greenfield market entry strategy, Carrefour SA is able to establish a strong market position.  In line with its Greenfield market entry strategy, the firm’s management team announced a plan to establish 10 new stores across the UAE in 2017. The firm’s Greenfield market entry strategy is based on the franchising strategy.  Ireland, Hoskisson, and Hitt (2012) assert that franchising is an effective method of entering a saturated market such as the UAE. Its effectiveness arises from the fact that the franchisor ensures that the quality of the service or product being delivered is maintained.   On the basis of this aspect, Carrefour SA is of the view that adopting the franchising strategy in establishing outlets in the UAE market will enhance the effectiveness with which the firm achieves consistency in offering products and services to the target customers.

Risks and challenges of the FDI

Firms entering the international market through foreign direct investment experience different challenges from what they experience in the domestic or home country (Johnson, Scholes & Whittington 2008). One of the challenges faced relates to the increasing intensity of competition and the prevailing industry structure. Faeth (2010) asserts that the industry structure varies across industries and from one country to another. One of the challenges that Carrefour SA faces in the course of operating in the UAE consumer retail market sector relates to the increase in the intensity of competition. The competition emanates from local and international firms. One of the market segments that Carrefour is likely to face intense competition from entails the food and beverage market segment. The UAE retail market segment is characterised by supermarkets and hypermarkets, independent and specialist retailers, and convenient stores (MarketLine 2015).  Some of the major competitors that pose a risk to Carrefour SA in the UAE include McDonald’s, Walmart, Tesco, and Sears.  These firms have established a strong market presence in the UAE. Carrefour also faces intense competition from Union Coop and Geant (MarketLine 2015). The firm has established hypermarkets in the UAE. In 2013, Carrefour expanded into the convenient market segment in an effort to tap the growing market opportunity.  The dominance of large firms in the UAE retail market segment has significantly reduced the threat of entry.  Moreover, the dominance of large firms has remarkably reduced supplier power. Thus, firms in the industry can influence the quality of products supplied by different suppliers, which contributes to improvement in the customers’ level of satisfaction. Carrefour’s dominance in the UAE market arises from the fact that the firm have established an extensive network of convenience stores.

In spite of this extensive network of retail firms, Carrefour is likely to experience a challenge arising from the fact that the industry players offer slightly differentiated products and services (MarketLine 2015). The high intensity of competition amongst the local and foreign firms is likely to increase the degree of rivalry amongst the industry players. The firm’s decision to adopt the franchising strategy in establishing outlets in the international market is to ensure consistency in offering products and services to the target customers (Mahoney & McGahan 2007). In addition, to the increase in the degree of rivalry, the large number of firms established in the UAE retail market segment means that consumers are presented with a wide range of retailers to select. This presents a major challenge to Carrefour’s quest to exploit the prevailing market demand. The challenge emanates from the fact that the switching cost is significantly reduced.  Johnson, Scholes, and Whittington (2008) assert that a high cost of switching reduces the consumers’ likelihood to shift to a competing firm. According to MarketLine (2015), ‘lack of switching costs and limitation in product differentiation leads to buyer mobility, which forces larger retailers to maintain attractive pricing schemes’ (p.16). Consequently, consumers can easily shift to a competing firm hence reducing Carrefour’s likelihood of maximising profit.  To overcome the problem posed by the increase in the intensity of competition, it is imperative for Carrefour SA management team to consider undertaking continuous improvement on their products and services. This approach will play a remarkable role in enhancing the firm’s effectiveness in minimising the likelihood of consumers switching to a competing brand. Undertaking continuous product innovation and improvement will further enable Carrefour to address the changing consumer tastes and preferences (Meek & Meek 2012). This means that Carrefour will be able to manage and address the consumers’ sensitive needs irrespective of the fact that consumers in the UAE retail market are characterised by minimal buyer bargaining power.

Conclusion

Expanding into the international market is one of the most effective ways through which a firm can achieve its profit maximising objective. However, it is imperative for a firm’s management team to take into consideration the prevailing market conditions in the international market. Gaining such knowledge provides a firm’s management team insight into the most appropriate mode of entry. Carrefour SA’s entry into the UAE retail market segment by adopting the Greenfield mode of foreign direct investment has enabled the firm to gain dominance in the UAE market. In spite of the challenges that the firm faces, Carrefour is likely to attain sustainability in the UAE retail market segment due to its effectiveness in implementing the internationalisation strategy.

Reference List

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