Turkey's fragmented market frustrates foreign retailers ©Hand out from Tesco Tesco's Kipa is struggling in Turkey When Tesco announced this month that half-year profits had fallen by a third, analysts and investors were quick to highlight the problems of the grocer's lossmaking Turkish subsidiary. "It's still another distraction for them and they still have to fix the UK," said one Tesco investor of the Turkish business, Kipa, where like-for-like sales were down 13 per cent on a year ago. Tesco is not the only foreign group to hit problems in Turkey. This year Dia sold its majority stake in its local subsidiary to Turkey's Yildiz Holding, which operates its own discount retailer. Praktiker, the German DIY chain, closed its nine Turkish stores after failing to sell them, describing Turkey as a "persistent lossmaker." After a year-long tussle, Carrefour recently ceded majority control of its local subsidiary to Sabanci, the Turkish conglomerate, which had been its partner. Yet Turkey is a rapidly growing retail market, where sales in the first half for the fast-moving consumer goods sector rose 14 per cent on the same period last year to about $20bn, according to Nielsen. What is it about the country that makes it so challenging for foreign retailers? "I don't see much of a chance for foreign companies," says Haluk Dincer, head of retail and insurance at Sabanci. It is a very fragmented market and very difficult to consolidate because locals are doing well. He cites local groups such as Teknosa, Sabanci's own electronics retailer; Koctas, the DIY chain owned by Koc Holding and the UK's Kingfisher; BIM, the country's leading discount store; and Migros, the biggest supermarket chain. In addition, he adds, for those groups that want to exit, it is a buyers" rather than a sellers" market: "These are sometimes really distressed assets and difficult to turn around . . . On top of that, Turkish retail is still booming; there are 70-plus shopping malls in the pipeline, so your locations are not worth a lot; in such a dynamic market they become useless after some years. Melda Agirdas at Ekspres Invest in Istanbul says that electronics retailers, in particular, have to struggle with the impact of the Turkish lira's volatility on goods largely bought in foreign currency. Last month, Dixons, the electronics group, said it was selling its lossmaking ElectroWorld operations to Turkey's Bimeks, a specialist electrical retailer. Best Buy had previously given up its own push to enter the country, while Darty was recently reported to be looking to sell its businesses in Turkey and elsewhere. Given the culture of scratch cooking, the expectation or need for own-label chilled and prepared food innovation is less - this makes retail very "copiable" in Turkey, and arguably gives the global guys less advantage Philip Norminton, Nielsen Turkey Nevertheless, the biggest problems for foreign retailers often lie in the food sector. Investors, executives and analysts argue that cultural differences make it difficult for groups with foreign executives to prosper, pointing to the succession of expatriate executives at Carrefour before the changeover to Sabanci. "Grocery retail in Turkey is becoming more local," said Philip Norminton, managing director of Nielsen Turkey, highlighting the number of recent exits by foreign retailers. "Given the fairly homogenous food choices in Turkey from retailer to retailer, and a culture of scratch cooking, the expectation or need for own-label chilled and prepared food innovation is less - this makes retail very "copiable" in Turkey, and arguably gives the global guys less advantage." Kipa, 56 of whose 191 stores are hypermarkets, has learnt that people in a country with the highest petrol prices in the world typically balk at driving out of town to do their shopping. In light of the latest results, Jeff Adams, Kipa chief executive, maintained that Turkey was still a "significant opportunity" and expressed confidence that the business would continue to make progress. Meanwhile, Turkey's traditional corner shops or "bakkals," known for their meticulous presentation - including polished aubergines and artichoke hearts floating in buckets of water - still account for as much as half of grocery sales, a share that is only gradually declining. One leading retailer, Migros, is controlled by foreign investors in the shape of BC Partners, the London-based private equity group. But Migros has been present in Turkey for more than half a century and its management is exclusively Turkish. Largely because of problems in the retail sector worldwide, BC Partners has not been able to find a buyer for it. Tesco, meanwhile, insists it is not going to join the foreign exodus, despite scepticism among analysts. Clive Black, analyst at Shore Capital, suggested that, following retreats by Tesco from sub-scale businesses in Japan and the US, "Turkey could be next." Revising the outlook for Tesco's long-term debt from stable to negative this week, Moody's Investors Service also pointedly noted Kipa's travails. We are still wedded to Turkey. We think it's a good opportunity," said Laurie McIlwee, Tesco finance director, when the retailer announced its half-year results.