Leroy Merlin sometimes produces similar products in different factories with different suppliers. What types of risks are being avoided by this strategy?
Leroy Merlin sometimes produces similar products in different factories with different suppliers. What types of risks are being avoided by this strategy?
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
Related questions
Question
Leroy Merlin sometimes produces similar products in different factories with different suppliers. What types of risks are being avoided by this strategy?
![Russia, has long been an important growth market for global firms. With a population of
148 million, Russia's economy has benefited from high global energy prices. The country's
huge oil and gas sector accounts for 20% of GDP and 65% of its exports. In 2014, however,
the country faced a sudden drop in its economy. The collapse in the oil price (from more
than $100 per barrel to less than $30 by the end of 2015) decreased export earnings.
Sanctions applied by the United States, the European Union, and other nations in response
to Russia's relations with Ukraine escalated the economic challenges. GDP fell by almost
5% in 2015, and the rapid devaluation of the ruble (which lost two-thirds of its value against
the dollar by the end of 2015) drove up the price of imports, pushing down consumption
of imported goods and services by more than 25%.
The depth and severity of the crisis hit companies hard, causing many international players
to reevaluate their Russia strategy. Some decided to decrease their retail networks for
example the General Motors (GM) to extremely reduce their presence in the country. Other
multinationals, however, see today's tough conditions as a strategic opportunity. They have
chosen to use the crisis, sticking to long-term development plans. Moreover, the economic
situation in the country has created a highly favorable environment for certain kinds of
supply chain investments.
In particular, the real estate infrastructure companies that serve Russian markets has
become dramatically cheaper. Vacancy rates for warehouse and logistics facilities in
Moscow reached 13.6% by the third quarter of 2016, the highest since 2009. Tough market
conditions also meant companies with existing facilities in Russia could renegotiate leases
on favorable terms, or take advantage of additional capacity in the market. For example,
Adidas has purchased the distribution center in the south of Moscow that it had previously
leased. Adidas acquired the 120,000-square-meter building at a relatively low price from a
landlord in need of capital.
Another successful example is the Russian division of the gardening French retailer Leroy
Merlin. Their expansion plan involves around 20 new store openings every year, and the
expanding its geographical scope. It will open its first store in Khabarovsk, which is 9,000
kilometers from Moscow by road. Eric Poulet, director of supply chain at Leroy Merlin in
Russia, notes that while the average Leroy Merlin store in France sells around 3.4 million
items per year, Russian stores sell between 16 and 19 million. In France, the company's
supply chain moves around 470 million items per year. In Russia, that number is now over
I billion. To support its network, Leroy Merlin prefers to build and run its own distribution
facilities where possible. During 2015 and 2016, the company partnered with a developer
to construct a 100,000-square-meter facility to the south of Moscow. 80% of the company's
domestic suppliers are located in the Moscow area, Poulet explains, making the region an
important one for both its inbound and outbound supply chain activities.
To protect their purchasing power during the crisis, Russian families switched to cheaper
products wherever they could. For Leroy Merlin, that meant a huge demand in its lowest-
priced, "basic" product categories. For a company that already operates on an "everyday
low price" basis, that meant increased pressure to keep supply chain costs down. Leroy](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd625d975-5a8b-460a-949e-a511f7ef8c4d%2F037ead8e-56ed-4065-946d-379db5e36f39%2Ft8i6rsx_processed.png&w=3840&q=75)
Transcribed Image Text:Russia, has long been an important growth market for global firms. With a population of
148 million, Russia's economy has benefited from high global energy prices. The country's
huge oil and gas sector accounts for 20% of GDP and 65% of its exports. In 2014, however,
the country faced a sudden drop in its economy. The collapse in the oil price (from more
than $100 per barrel to less than $30 by the end of 2015) decreased export earnings.
Sanctions applied by the United States, the European Union, and other nations in response
to Russia's relations with Ukraine escalated the economic challenges. GDP fell by almost
5% in 2015, and the rapid devaluation of the ruble (which lost two-thirds of its value against
the dollar by the end of 2015) drove up the price of imports, pushing down consumption
of imported goods and services by more than 25%.
The depth and severity of the crisis hit companies hard, causing many international players
to reevaluate their Russia strategy. Some decided to decrease their retail networks for
example the General Motors (GM) to extremely reduce their presence in the country. Other
multinationals, however, see today's tough conditions as a strategic opportunity. They have
chosen to use the crisis, sticking to long-term development plans. Moreover, the economic
situation in the country has created a highly favorable environment for certain kinds of
supply chain investments.
In particular, the real estate infrastructure companies that serve Russian markets has
become dramatically cheaper. Vacancy rates for warehouse and logistics facilities in
Moscow reached 13.6% by the third quarter of 2016, the highest since 2009. Tough market
conditions also meant companies with existing facilities in Russia could renegotiate leases
on favorable terms, or take advantage of additional capacity in the market. For example,
Adidas has purchased the distribution center in the south of Moscow that it had previously
leased. Adidas acquired the 120,000-square-meter building at a relatively low price from a
landlord in need of capital.
Another successful example is the Russian division of the gardening French retailer Leroy
Merlin. Their expansion plan involves around 20 new store openings every year, and the
expanding its geographical scope. It will open its first store in Khabarovsk, which is 9,000
kilometers from Moscow by road. Eric Poulet, director of supply chain at Leroy Merlin in
Russia, notes that while the average Leroy Merlin store in France sells around 3.4 million
items per year, Russian stores sell between 16 and 19 million. In France, the company's
supply chain moves around 470 million items per year. In Russia, that number is now over
I billion. To support its network, Leroy Merlin prefers to build and run its own distribution
facilities where possible. During 2015 and 2016, the company partnered with a developer
to construct a 100,000-square-meter facility to the south of Moscow. 80% of the company's
domestic suppliers are located in the Moscow area, Poulet explains, making the region an
important one for both its inbound and outbound supply chain activities.
To protect their purchasing power during the crisis, Russian families switched to cheaper
products wherever they could. For Leroy Merlin, that meant a huge demand in its lowest-
priced, "basic" product categories. For a company that already operates on an "everyday
low price" basis, that meant increased pressure to keep supply chain costs down. Leroy
![Merlin has also worked hard to accelerate its supply chain, doubling the share of inventory
that passes through its cross-dock operations to 43% this year, with plans to increase that
to 55% in 2017.
When it comes to road transportation, the crisis has created some unexpected challenges.
The weak ruble and resulting collapse in the sales of imported goods meant there were
fewer trucks transporting merchandise from ports in the north and south of the country to
Moscow. That led to a reduction in available capacity in the opposite direction, creating a
capacity crunch for Leroy Merlin, which ships a significant volume from its main Moscow
distribution centers to stores in those regions. "The cost of transport increased a lot on these
routes," he notes.
Some transportation challenges had causes unrelated to the crisis. The start of a new
national system of road tolls has increased costs and administrative complexity for
transport companies, especially for the small owner-operated motor carriers that still
dominate the market in Russia. That change took a lot of capacity out of the market and
pushed up prices in 2016. Other regulatory changes have helped the business, however.
The closure by municipal authorities of informal open-air markets in many regions, for
example, is encouraging more customers to switch to organized retail channels.
Leroy Merlin imports about half of its merchandise, with goods arriving via multiple
routes, including ports at Vladivostok, Rostov-on-Don, and Riga (Latvia), as well as via
road freight from Europe. The remaining 50% of the products sold in Leroy Merlin's
Russian stores are bought from local Russian suppliers and the company aims to increase
the share of local products to 80%. The push for local sourcing is important. "As a big
company, it is our duty to develop the community, but more local sourcing also reduces
our exposure to currency risks."
Among the challenges in Russia, Logistics service providers capable of delivering a
consistent, high-quality service remain hard to find. "The growth in e-commerce has
encourage rapid expansion in the logistics sector, but we now have thousands of providers
all offering the same, low-quality service", "It is difficult to develop sustainable and stable
partnerships."
In early 2017, things appear to be good. The price of oil has risen to a level that favors
Russia's producers, and the ruble has strengthened in response. Forecaster Oxford
Economics predicts that the country's economy will return to growth this year.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd625d975-5a8b-460a-949e-a511f7ef8c4d%2F037ead8e-56ed-4065-946d-379db5e36f39%2Fei7hvww_processed.png&w=3840&q=75)
Transcribed Image Text:Merlin has also worked hard to accelerate its supply chain, doubling the share of inventory
that passes through its cross-dock operations to 43% this year, with plans to increase that
to 55% in 2017.
When it comes to road transportation, the crisis has created some unexpected challenges.
The weak ruble and resulting collapse in the sales of imported goods meant there were
fewer trucks transporting merchandise from ports in the north and south of the country to
Moscow. That led to a reduction in available capacity in the opposite direction, creating a
capacity crunch for Leroy Merlin, which ships a significant volume from its main Moscow
distribution centers to stores in those regions. "The cost of transport increased a lot on these
routes," he notes.
Some transportation challenges had causes unrelated to the crisis. The start of a new
national system of road tolls has increased costs and administrative complexity for
transport companies, especially for the small owner-operated motor carriers that still
dominate the market in Russia. That change took a lot of capacity out of the market and
pushed up prices in 2016. Other regulatory changes have helped the business, however.
The closure by municipal authorities of informal open-air markets in many regions, for
example, is encouraging more customers to switch to organized retail channels.
Leroy Merlin imports about half of its merchandise, with goods arriving via multiple
routes, including ports at Vladivostok, Rostov-on-Don, and Riga (Latvia), as well as via
road freight from Europe. The remaining 50% of the products sold in Leroy Merlin's
Russian stores are bought from local Russian suppliers and the company aims to increase
the share of local products to 80%. The push for local sourcing is important. "As a big
company, it is our duty to develop the community, but more local sourcing also reduces
our exposure to currency risks."
Among the challenges in Russia, Logistics service providers capable of delivering a
consistent, high-quality service remain hard to find. "The growth in e-commerce has
encourage rapid expansion in the logistics sector, but we now have thousands of providers
all offering the same, low-quality service", "It is difficult to develop sustainable and stable
partnerships."
In early 2017, things appear to be good. The price of oil has risen to a level that favors
Russia's producers, and the ruble has strengthened in response. Forecaster Oxford
Economics predicts that the country's economy will return to growth this year.
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