CARREFOURSS EXIT FROM SOUTH-KOREA

a. Analyze the business environment of South-Korea.

President Roh-Moo-Hyun was elected in December 2002 to a 5 year office term. South
Korean democracy has been firmly established since 1987 with presidential elections free of
any controversy. Sweeping political reforms were opened up making investment in the
country very reliable. Although many reforms had improved the business environment for
foreign investors there was still room for more improvement. President had promised to
pursue more reform that presented market barriers for foreign investment. In March 2004, the
National Assembly controlled by opposing party voted to impeach the President, but shortly
after the constitutional court re-instated him. As a result of the rife between two parties, other
parties were able to gain more parliamentary presence. However, the general political
environment in South Korea was favorable to foreign investment. Even though the political
risk was low, the barriers to entry were light due to little reform regarding large domestic
.retailers
Carrefour established Carrefour-Korea in 1994 to enter into the Korean market opening its
first store in Joong Dong in Bucheon in 1996. Figure shows that the number of stores
increased more than threefold with dramatic increase in sales from 275 billion in 1997 to
1607 billion in 2004.The net income and loss for the year was minus in1998 and 1999 but
.Carrefour-Korea achieved the balance in the black
The main concept of Carrefour-Korea was the hypermarket that originates from European
retail markets. Hypermarket was a new concept that combines super market with discount
store. Therefore, the sales of food took up a high share of its total sales. The sales share of
food and non-food products implied that the discount stores of Carrefour-Korea arte the
traditional hypermarket. The Carrefour-Koreas strategy for locating a store was focused on
operating a store in a new town around a big city. Carrefour-Korea also tried to open stores
near highways or main roads for the customers coming by car. The pricing strategy was to
offer a much lower price and for this, the decision makers at Carrefour-Korea gave a
permission to sell medium or low level products and employed a minimum number of
.workers
South Korea has not done well in establishing a friendly business environment inspite of its
attempts. Apparently, foreign invested enterprises experience many difficulties in course of
doing business in Korea, including bureaucratic red tape and the lack of established systems
and procedures related to administrative regulations. While a number of restriction have been
eased, foreign investors still face a variety of obstacles during the investment approval
process leading to unnecessary delays and costs. Another challenge is Koreas unique
business culture, which confuses international firms by often allowing illegal strikes,
.promoting misdirected goals, and formulating strong policies
Secondly, a survey conducted by the Heritage Foundation and the Wall Street Journal ranked
South Korea 45th out of 161 countries in the economic freedom index. South Korea has been
promoting the nation as a business hub in Asia, yet the ranking shows that it has a long way
to go. The survey pointed to an ongoing dispute between the government and the jaebeol over
economic priorities. More recently, voice has been voiced over a regulation that would

CARREFOURSS EXIT FROM SOUTH-KOREA

require foreign firms that acquire more than 5%of a Korean company to reveal their intention
.of influencing the management
Thirdly, despite the governments efforts to streamline investment procedures, South Koreas
private sector is still bogged down with regulations which are very complicated. The tax laws
as well as regulations on customs and import procedures in particular are regarded as the
most serious impediment to foreign investors. The other obstacles are complexities associated
with corporate registration, notification and licensing and approval requirements many of
.which are a colonial legacy
Fourth, one area of concern to potential foreign investors is a lack of transparency in rule
making and the regulatory system, which adversely affects industries. The real focus should
be on market competitiveness, non-discrimination, transparency and rule of law. Business
decisions based on personal ties combined with corrupt practices and cronyism discriminate
against foreign businesses. The International Monetary Fund has reported that corruption and
cronyism typically discourage Foreign Direct Investment (FDI) and sometimes lead investors
.to pull out of a country
Fifth, currently the investment incentives that South Korea offers include tax breaks and
access to business loans for foreign invested enterprises that introduce advanced technology
or conduct operating in free economic zones as well as reduced rental at designated industrial
complexes. The bevy of institutional and regulatory barriers must be addressed and
disassembled, not to mention the ethos of Korean people and their institutions. It was
believed that South Koreas FDI policy places too much emphasis on incentives rather than
focusing on the fundamentals: market factors, core competencies and industrial
.competitiveness
.Sixth, one important area that has not been adequately addressed is the labour market
South Korea is no longer a country where foreign investors can find an abundant supply of
well-educated, but inexpensive and docile labour. Another challenge is the labor movement,
which has been very active since 1987. Between July 1987 and June 1989, the number of
unionized establishments increased from 2725 to 7380 and union membership increased from
1.05 to 1.83 million. As a consequence, wages increased at a double digit rate in 1989 and the
economy experienced cost-push inflation and deterioration of international competitiveness
in many of its labour intensive manufacturing industries. The inflexibility of labour
regulations allow lay-offs only when companies are faced with a serious management crisis,
and the confrontational nature of labor management relations represent the most significant
.blocks to FDI
Seventh, anti-foreign sentiments often top the list of Koreas weakness from the view point of
foreign investors. The government has vowed to improve business labour relations and shift
from reliance on manufacturing to services, both of which are related to its ambition to
becoming a business hut in East Asia. The countries legal structure gives significant
.advantages to labour and provides weak protection to management
The government has also tightened the so called 5 percent rule, which requires investors who
own more than 5 percent of the shares in listed companies to report their investments and
transactions to the authorities. Many Koreans felt that the foreign investors where more
interested in profits than stabilizing Koreas financial markets. They felt that the Korean
companies were exposed to the threat of takeovers as foreign ownership of shares becomes
.too pronounced

CARREFOURSS EXIT FROM SOUTH-KOREA

Eight, the American Chamber of commerce Business environment survey of 2002 described
.the need to increase Koreans proficiency in English

CARREFOURSS EXIT FROM SOUTH-KOREA

b. According to a report, It defies belief that an organization [Carrefour] which
operates in locales as diverse in consumer sensitivities as Argentina, Colombia, and
the United Arab Emirates could have failed. Explain the reasons for Carrefours
failure in South-Korea.

Discount retailers have experienced various paradigms in the Korean retail market. From
1993 to 2004, the main issue of the Korean retail market was expansion. Each retailer
focused on opening as many stores as possible to occupy a blue ocean. However, this
expansion strategy caused the restriction of the government, and accordingly, retailers had to
change their paradigm from more stores to better stores. After 2005, discount retailers
paid attention to upgrading the store interior, organization, and system. Discount retailers also
focused on increasing the level of customer satisfaction and on offering a lower price. They
adopted Customer Relationship Management (C.R.M.), which is usually adopted by
department stores, and developed various items to attract customers. For example, discount
stores launched a mileage card and installed a cafeteria and other equipment to get more
regular customers. Now, many discount stores are offering one-stop shopping. When
Korean customers visit a discount store, they can eat something, buy glasses, see a medical
.doctor, cut hair, take and print a picture, and deposit or withdraw cash
.In addition, Korean discount retailers have upgraded the quality of their products
As shown in Table 4, the discount retailers switched their products from PBs (Private Brands)
into PLs (Private Labels), which are categorized as premium PBs. Basically, the products sold
as PBs are lower in quality and price than the NBs (National Brands) which are used by
manufacturers. Since the Korean customers who shop at discount stores have high criteria
about product quality, low pricing with low quality is not a good answer on the part of
discount retailers in the Korean retail market. Thus, they improved the quality of PB products
and added value to the products in three stages. Then, their PL products started to become
more competitive than NB products. The Korean retail market has been expanded, and
discount retailers in Korea have increased their number of stores to achieve economies of
scale. A larger size of a retail store enables retailers to strengthen their buying power, which
then can force suppliers to lower the price of their products, and thus offer lower prices for
.customers

CARREFOURSS EXIT FROM SOUTH-KOREA

In addition, the Korean retail market has become oligopolistic. This oligopolistic market
means a more competitive market, and discount retailers should consider other strategies and
expand their business size for lower pricing. However, Carrefour generally adhered to a lower
pricing strategy, and because good locations are already taken by other competitors they
didn't succeed in finding suitable places to open new stores. Therefore, the business
expansion by Carrefour in Korea was not successful, as shown in Figure 2. In the figure, the
numbers of stores of E-Mart and Samsung-TESCO have continuously increased, while the
.numbers of stores of Wal-Mart and Carrefour have not

Failure of localization in Korean discount retailing

When multinational enterprises enter into a foreign market, they are required to develop a
strategy for the successful settling down in the market. Carrefour took a different approach.
They launched their businesses without any local partner in Korea, and have generally sent
C.E.O.s or directors to Korea. They also believed in a lower pricing strategy without much

CARREFOURSS EXIT FROM SOUTH-KOREA

concerns for the quality of products and services. This strategy of theirs has been successful
in their own domestic markets. Nevertheless, Carrefour was more close to the standardization
in the adaptation-standardization strategy spectrum. Carrefour rarely cared about
.localization in the Korean retail market
Korean customers loved the unexpected chance to buy products at very cheap prices. As for
example, Carrefour's mistakes in choosing and arranging sales items at supermarkets can be
presented. Carrefour installed tall supermarket shelves (2.2m) which are generally used in
.European stores
However, these tall shelves are not comfortable for the Korean customers who like shorter
shelves (1.5m-1.8m). Carrefour also made customers walk a long way at its store to shop
fresh food, the main item in their shopping list. Korean customers spread their inconvenient
experiences at stores of Carrefour through words of mouth, and this passing of inconvenient
.experiences had the fatal effect of seriously damaging their brand images
Ineffective supply chain management
Retailers depend on suppliers to buy the products that will be sold at stores. Accordingly,
supply chain management is one of the most important things. Korean discount retailers have
developed a long relationship with suppliers and increased the loyalty of suppliers through
various compensations. For foreign retailers, establishing an effective supply chain
management system in a short time is not easy. However, Wal-Mart and Carrefour with very
strong buying powers arising from their mega-size global businesses paid relatively less
attention to supply chain management in the Korean market. They believed that the great
amounts of product orders will be a key solution to control Korean suppliers, but their
.strategy was not successful
Lower merits of Korean market due to emerging Chinese market
The North American and European markets are the main markets for Carrefour. Table 11
shows that, in 2004, 90% of Wal-Mart stores were located in North America, and 86% of
Carrefours stores served customers in Europe. However, these markets are at the maturity
stage and showed the limitation to grow in the future. Therefore, Carrefour needs to launch
.their businesses in new markets
Carrefour could consider the South American and Asian markets as new retail markets. The
South American market is not very strange for them, but the market is not promising.
However, the Asian market, especially the Northeast Asian market, is a suitable market for
.their future businesses, as presented in Figure 3

CARREFOURSS EXIT FROM SOUTH-KOREA

Wal-Mart and Carrefour opened their stores in Korea as part of their strategies to preoccupy
the retail market in Northeast Asia. However, they encountered local retailers to be strong
competitors and had to be content on being ranked fourth and fifth after E-mart, Samsung.TESCO, and Lotte Mart that jointly took a 68.1% market share in 2005 as shown in Figure 4

Carrefour has been doing their businesses well domestically and globally. But, after
experiencing hardships, Carrefour evacuated their business units from Korea in 2006. The
withdrawal of these two retailers in Korea has resulted in many discussions on the theme that
.success in a home country does not guarantee success internationally
After investigating the factors that have brought about the success or failure of the above
retailers, the four factors that have caused the withdrawal of Carrefour are presented as the
:following
;Ignorance of paradigm for the competition in Korean discount retailing -

CARREFOURSS EXIT FROM SOUTH-KOREA

;Failure of localization ;Ineffective supply chain management .Low merit of the Korean market due to the emerging Chinese market -