When Tesco revealed it was talking to regional Turkish chain Kipa over a possible partnership, earlier this month, jaws certainly dropped in some quarters.
But you can bet your bottom dollar Tesco has done its homework. According to a new report from IGD, European Grocery Retailing, Turkey is the next hot spot.
Forget a megamerger in the saturated markets of western Europe, says IGD. The next battlegrounds in the fight for European retailing supremacy will be Turkey, Russia and Italy. "Turkey's growing population (60% of consumers aged 15-35), and its geographical position as gateway to central Asia, lead IGD to believe its strategic significance will increase in the future." Carrefour and Metro are already in, and Casino and Wal-Mart are rumoured next.
Turkey is not renowned for its economic and political stability, and last year's catastrophic collapse of the currency has not done much to enhance its reputation. However, there is definitely money to be made here.
Tesco's target Kipa is relatively small fry in the market, with just five hypermarkets in Izmir, in western Turkey. But Schroder Salomon Smith Barney analyst Dave McCarthy says: "This is the classic seedcorn acquisition - a Tesco speciality." First, Tesco does its homework, sending out research teams and scouting around. Second, it finds a partner and gets a foothold. And then it starts building new stores.
The attractions are obvious, claims a Tesco spokesman: "Turkey has exceptionally good GDP growth. The population is growing and the retail sector is underdeveloped. We see enormous potential here."
Moreover, "Kipa is a successful retailer with an experienced management team with well developed plans for stores in Ankara and Istanbul".
Metro, which entered in 1990 and now has seven C&C sites, six Real hypermarkets and six Praktiker DIY stores there, is upbeat about its prospects, despite the detrimental impact of the currency collapse on its top line. "It hit sales but not profits," said a spokesman. "But we're in the market for the long term."
Carrefour, which entered in 1993 and now has 124 stores, says it is still being hit by a smaller basket spend as consumers' buying power has plummeted after the currency problems, but customer numbers are up.
Before the 1999 earthquakes and the currency crisis, the economy had been growing at 5% a year, points out IGD international research programme manager Louise Spillard. The government is encouraging foreign investment and committed to carrying out structural reforms. It is also an official candidate for full membership of the EU. And the grocery retail market is ripe for consolidation. "The Turkish market is very fragmented. The top three retailers have an estimated combined market share of just 7%," says Spillard. She adds that the crucial issue is whether the large Turkish holding companies backing the major domestic retailers will divest their retail interests. "These conglomerates hold the key."
Not everyone is bowled over by the market opportunity however. "I can think of better places to set up shop," said one analyst. "Turkey's been a nightmare for years. Metro has struggled to find sites. It hasn't done much for Carrefour's bottom line, and the economic situation is still uncertain. Russia, on the other hand - now there's a prospect."
International retailers are increasingly looking east where there are clear expansion opportunities, rather than contemplating a megadeal in the mature markets of western Europe, says IGD's Spillard. Indeed, while Carrefour has been managing the hugely disruptive megamerger with fellow French giant Promodès, Tesco has quietly overtaken it in markets that the French giant entered first, such as Thailand and South Korea.
Turkey might be a harder nut to crack, but the Tesco buy and build strategy has paid off so far.