Investment of Tesco in the Retail Market in Thailand - Case Study Example

Running Head: THE INVESTMENT OF TESCO IN THE RETAIL MARKET IN THAILAND The Investment of Tesco in the Retail Market in Thailand [The Name] [The Name of the Institution] The Investment of Tesco in the Retail Market in Thailand Introduction The retail trade in Thailand is certainly one of the nearly all significant economic sectors in the country, accounting for 43.8% of total customer expenditure in 2003. by total retail sales at Bt1,515.4 billion in 2003, this figure is predictable to rise even additional, with the Thai economy having clearly recovered from the 1997 financial disaster, and having also regained the self-assurance of foreign investors and tourists in spite of fanatic threats and the SARS plague. In 2003, there were a total of 380,000 retail outlets in Thailand, of which 296,000 were food retailers and the remaining 84,000 were non-food retailers. Total retail sales area in the similar year stood at 85.53 million square metres. The meaning of the retail trade in Thailand is obvious when it is seen that though employment in retailing engaged 4,985,000 people, or 14.3% of total employment, it accounted for 69.1% of total consumer expenses on goods (Barry Wilson, 2004). The Thai retail environment has distorted radically in the years since the 1997 financial crisis, which saw lots of Thai shareholders having to sell their shares to foreign-owned multinational retail operators, as well as the Thai government's policy to hold trade liberalisation in its wish to contribute in the World Trade Organisation (WTO) and AFTA (ASEAN Free Trade Area) (David W. Raisbeck, 2003). To struggle the financial crisis, the Thai government followed trade deregulation. Thailand has since welcomed an influx of large-scale multinational hypermarket, supermarket and specialist retailers, which are eager for a share of the Thai retail market. This has raised protests from several Thai academics and traditional retailers, which have raised the "nationalist" alarm bells. Numerous Thai-owned minute and medium-sized retailers have been pushed out of business since they could not fight with the much better multinational discount stores, as some better Thai retailers have been bought out by foreign conglomerates. The majority of these foreign investors possess relative advantages in terms of a noise financial base, superior economies of scale, lower costs of production and superior bargaining power, due to their much larger order volumes (E.G., 2005). Foreign Direct Investment (FDI) "In this increasingly open world, FDI has become an important driving force for economic globalisation". (Xinhua News Agency, 2002) It can be supposed that FDI is fine and essential for the development of Thailand. FDI is regarded as a source of power in the globalisation process that sets apart the modern world economy. The process has reduced the value of territorial boundaries and every area of the world is in single way or another engaged in the process (FAOSTAT, 2005). The region should thus raise its international share of FDI. The supposition is based on the possibly incontrovertible roles that FDI can play in the growth of the region. This justifies the anxiety about the call for and ability of the region to increase its international share of FDI inflows. FDI in Thailand Foreign direct investment has been an significant constituent of Thailand's economic development process. Given the rising meaning of industrial competitiveness in an gradually more spirited global marketplace and the possible of the association linking FDI and technological improvement, this research discover two questions opposite Thai policy makers: (i) what are the most effectual ways in which technology relocate can take place during FDI; and (ii) how can such transfers be accelerated and improved during FDI promotion policies FDI in Emerging Markets It is a reality that Thailand, like several other emerging market of this world, needs a considerable inflow of external resources so as to fill the economy and foreign exchange gaps related with an increasing rate of capital accretion and growth desirable to surmount widespread poverty and to raise living standards to satisfactory levels. FDI is at present the other best choice of external capital for the growth of Thailand (Ha-Joon Chang, 2002, 125-136). Before the economic disaster in 1997, Thailand's economic growth was measured as a incessant success with an average economic increase rate of nearly 8% p.a. from 1960-1996. In spite of the world depression of the mid-1980s, Thailand's economy grew at double-digit rates during 1988-1990 and by over 8 percent per year from 1991-1995. This fast increase, driven mainly by growing FDI inflows and exports, was accompanied by a shift towards developed, with the industrialised split of total GDP reaching 29.9 percent by 1995, up from 11.6 percent in 1960. According to the expert analysis the key challenge to Thai-based producers, domestic and foreign, by the mid-1990s was to improve production capabilities and move up the value-added ladder as rivalry from lower wage countries like China, India, Indonesia and Indochina intensified (Wilson, 2005). Key Factors In the Decision of Tesco to Invest In Thailand In March 2002, the Commercial Committee of the House of Parliament conference decided to set up a sub-committee to believe the problems and belongings of foreign retailers in Thailand. The sub-committee would carry on collecting data to be relevant to the retailing business law, which eventually includes law application, organisation structure, regulation, and punishments. Still in the process of drafting, redrafting, negotiating and renegotiating, and caught in the throes of strong debate is the attempted drafting of a Retailing Act by the Department of Domestic Trade, which it has drafted based on the supplies of the cabinet of the government. Though, this has not been the case to date as Prime Minister Thaksin rejected the draft Act in November 2002. The Allied Retail Trade Co Ltd (ART) ART aims jointly small and medium retailers to perform in a cooperative-like manner, where they unite their purchasing power to get better their negotiate abilities with suppliers and customers, and to decrease the cost of their products (State of Agricultural Commodity Markets 2004). The problem is, though, that whilst the law is being measured, large retailers are still ongoing with the violent growth of their outlets, and there is little that the government can do to prevent this. Moreover, being a WTO member implies that the Thai government cannot realise an open policy of "palpable favouritism" alongside the foreign large-scale retailers. The only existing laws that control the size of retailers do so circuitously. For example, in Thailand, there are currently short-term guidelines identified as the Building Control Act that can perform as a tool to check large retailers, earlier to the actual achievement of the Retail Trade Act. Though, it is predictable that it will not be too long previous to the Retail Trade Act comes into force, once the re-drafting of the Bill is completed, subsequent Prime Minister Thaksin refusal of its previous version (The IMF statistics 2005). Lack Dayot, the new running director of Cencar, the operator of Carrefour in Thailand, was quoted as saying, "Though the new retail zoning rules will be issued in the near prospect, the company will not pioneer a new retail format in Thailand (to evade zoning limitations) and will carry on with the hypermarket set-up since we consider it is the appropriate shopping set-up for Thai consumers." In the interim, though, there is also the Town and Country Planning Act (1975), but using that Act to control huge retailers poses problems as it would essentially need the revision of Ministerial regulations, as the Business Control Act (1979) can be compulsory inside two to five months. Though, it is necessary to make sure that the version of the Building Control Act will not have negative consequences on obtainable large buildings in service further businesses. Furthermore, once the Retail Trade Act is imposed, the Building Control Act ought to in outcome be terminated. The main dissimilarity, then, among the Retail Trade Act and the Building Control Act, though they may generate the identical preferred results of limiting the enlargement of large-scale retailers in the short-run, is in their reason. The Retail Trade Act aims to control the augment in numbers of large retail outlets, in meticulous, in positive areas to support smaller retailers, while the Building Control Act sets out to control the size of buildings in general as is suitable to the land use of that area. though, there are institutions, such as the Thai Farmers Research Centre, which voice the view that zoning in the nearby Retail Trade Act draft may not be sufficient, and that to really help small-scale retailers the public sector may require to come up with further regulations, such as restricting opening hours or sales areas for large retailers, or regulations to necessitate new retailers to set aside shelf liberty for the exhibit of local goods. Tesco's Project Evaluation Tesco is one of the biggest food retailers in the world, functioning around 2,318 stores and has more than 326,000 employees. It offers online services through its subsidiary, Tesco.com. The United Kingdom is the biggest market for the company, where it functions under four signs of Extra, Superstore, Metro and Express. The company vends approximately forty thousands food products, together with clothing and other non-food lines. The own-label products (fifty percent of sales) of the company are at three stages, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one of the largest independent petrol retailers in UK. Other retailing services offered include Tesco Personal Finance. Discounted Cash Flow (DCF) The method nearly all usually used in forestry investment psychiatry is the deterministic discounted cash flow process, which is based on the theory of complete information and confidence of future events. Though, these assumptions hardly ever hold. The deterministic discounted cash flow method does not provide a sufficient solution when major risks (difference of costs, product prices, revenues, etc.) exist (Anderson et al. 1985). Risk has been included in investment psychiatry and there have been many examples of its application in forestry. Common techniques comprise adjusting the reduction rate by adding a premium, or calculating rates of revisit based on a variety of values for key variables. The table below demonstrates the sensitivity of Tesco Discounted Cash Flow Model to its most vital suppositions: cost of capital, growth decelerator, and specialty sales percentage. The current cost of capital, 13.52%, equates to a 13:87 debt-to-equity ratio, leaving abundance place for Tesco to increase debt as required in the future. The Discounted Cash Flow Analysis identifies a hypothesis for long term debt-to-equity ratio. Per Tesco WACC calculations, the 12% and 13% cost of capital statistics higher than match up 35:65 and 27:73 debt-to-equity ratios respectively. Escalating the growth decelerator is correspondent to increasing the rate at which store growth, after year 2000, tapers off. In conclusion, one varies the growth of specialty sales by varying its percentage relative to the primary driver of growth, retail store sales. DCF Sensitivity Summary Cost of Capital Growth Decelerator Specialty Sales % Stock Price Baseline Assumption 13.52% 0.10 13.10% $8.52 Vary Cost of Capital 12.00% 0.10 13.10% 15.41 13.00% 0.10 13.10% 12.21 14.52% 0.10 13.10% 8.52 Vary Growth Decelerator 14.52% 0.05 13.10% 9.73 14.52% 0.10 13.10% 8.52 14.52% 0.15 13.10% 7.70 14.52% 0.20 13.10% 7.12 14.52% 0.30 13.10% 6.40 Vary Specialty Sales 14.52% 0.10 13.10% 8.52 14.52% 0.10 18.00% 9.66 14.52% 0.10 23.00% 10.81 14.52% 0.10 28.00% 11.97 Aggressive Scenario 12.00% 0.05 28.00% 23.09 Pay Back Methodology The Retail Trade Act The objective of the Retail Trade Act is to govern retail trade and promote the competitiveness of medium and small-scale retailers. The law will aim to control large retailers in regards to locations, service hours, employment, investments and profits. Moreover, the Act will also deal with issues of environmental management, traffic congestion and parking space problems. It aims to increase the competitiveness of small and medium retailers by allowing them upgrade their administration and financial management. Though the Retail Trade Act is still in the process of re-drafting and consideration, the Thai government has set up an institution known as the Allied Retail Trade Co Ltd (ART). Retail Technology Development The arrival of large-scale multinational discount stores, supermarkets, category killers and specialist stores has brought with it the latest retail technology and technological know-how. This much larger modern retail system has brought in foreign technology and logistics systems to assist its rapid expansion, as well as to deal with the greater quantities of foreign goods being imported into Thailand by these large foreign retailers. Although department store chains (owned by Thais) did not see much technological innovation and outlet expansion during the 1997 economic recession, this was the period in which large foreign supermarkets and hypermarket chains saw aggressive expansion. Their expansion has brought in various new retail technologies from abroad, such as supply chain management utilising ECR (Efficient Consumer Response) systems and category management. ECR strategies are new initiatives that focus on information sharing and improving the efficiency of every part of the supply chain to satisfy consumer needs better, more quickly and more cheaply. However, a critical concern is still a lack of implementation among small and medium size enterprises (SMEs), retailers and suppliers. ECR is able to reduce transportation and distribution costs significantly, as a logistics system that utilises a distribution centre or hub would obviously have lower costs than the traditional system whereby each individual supplier makes their own delivery to the retailers. Country Risk 1) Political Thailand executes a form of administration in which the power of an emperor or queen (monarch) is controlled by an ambassador body having highest governmental powers with the state (parliament), by law, or by tradition. The ruler of state for the present reigning constitutional kingdom is King Bhomibol Adulyadej. 2) Economic Thailand is a part of the Association of Southeast Asian Nations (ASEAN) local community with only 10% of the residents below scarcity level and one of the top performers in East Asia for 2002 - 2004. Thailand keeps on to overcome past fiscal crises and current natural calamities to balance revenues and expenditures. There is an anticipation that the financial system will continue to expand from an arrival of investment and stronger individual utilisation (The World Fact book, 2006) 3) Finance The Gross Domestic Product (GDP)/Purchasing Power Parity (PPP) is about $545.8 billion and the present country financial plan points out approximately $31 billion in revenues and $37 billion in expenditures. There is expectation for augmented revenues through business enterprises such as export-oriented automobile developed and undeveloped productivity. Indecisiveness due to inner politics and the threat of the avian bird flu does give motive for vigilance (The World Fact-book, 2006). 4) Physical Environment With the neighbouring countries of Burma, Laos, and Cambodia there are border disputes, immigrant concerns, and aggression, or the danger of violence, by racial rebels. The lack of obligatory ecological regulations has guide to augmented levels of air and water contamination and deforestation causing soil attrition. Latest natural tragedies such as the tsunami in December 2004 caused major damage. Of the expected 40000 miles of roadways in Thailand a propos 1000 of that remains unpaved. 5) Social, Health, and Environmental The anticipated inhabitants in Thailand are over 65 million with 75% being Thai nationals and 25% envoy of other racial groups. The main creed is Buddhism with a small proportion in other religions fewer comparative to that of the inhabitants figures. Approximately 92% of the populace over the age of 15 is educated. In general, with the life expectation average at 72 years of age the general population is well but there concerns over death rates due to AIDS (The World Fact-book, 2006) 6) Cultural Thai civilisation has deep cultural persuades by India and China and it is replicated in many features. The local language is Thai and main religion Buddhism. Traditional ethnicity and courtesies are skilful; the King and monks are detained in the highest of veneration. Legal and Ethics challenges When it comes down to the legal and ethics challenges on Tesco conducting business in Thailand there are not too many strings attached. The biggest ethical issue that Thailand is facing is HIV affects its population. Tesco still has to abide by international laws of human rights while conducting businesses in Thailand and abroad. This could affect Tesco because it could cost the company extra money for medical benefits for their employees. Tesco cannot discriminate against a person applying for a job just because he or she is HIV positive. DEERS could possibly get around the issue by only offering a limited medical coverage to all employees. The challenges arising are the possibility that too many employees will call in sick at one time and there will not be enough coverage to make or ship out the deliveries in a timely manner. Tesco has to make sure that they have enough people on their payroll to cover when they fall short. The challenge for Tesco is that the company has to hire dependable, responsible, and self-starter people who will get the job done under any circumstances. The legal challenge is the matter of employing someone that is HIV positive more than an individual with no health problems. Tesco will try to limit the workload to those persons that have certain medical conditions to where they are limited on how much they can lift and carry. Tesco will also pay close attention to any other special needs. Unfortunately, this is a big issue in Thailand due to its population size. Ultimately, Tesco will provide a workable retail service throughout Thailand in expectations to go on to further areas. Quite a few things can disrupt the flow of supply. Companies are responsible for providing a workable solution to fix the problem(s), and gain the reputation for being considered a successful organisation that can make a difference and will provide resolution. Rationale for Selecting Thailand In states that are emerging markets, there are confronts and chances for business prospective. Thailand is a nation that offers many innate resources, of which; Tesco can advantage all the way through the procedure of ascertaining and developing a flourishing business and bring supplementary employment chances to the people of Thailand. Thailand is a rising that is situated in the middle of Southeast Asia and therefore presents an excellent corporeal location for businesses that exploit both external and internal means of transport in the procedure of providing a service. Current developments introduce chances for transportation trades related to the development of cultivation and auto manufacturing export necessities as well as those requirements of the individual customer in regions that have since been made almost impenetrable by the Tsunami destruction in 2001. At present there are other trades in Thailand, which do offer vend services, but there residue potential and chance for a retail commerce that will take into deliberation the accurate requirements of the customer and will work industriously to achieve those needs. Tesco intends on gathering that confront and becoming the foremost retail corporation for Thailand. References Cited in Barry Wilson, "Farm profitability key to WTO deal," The Western Producer, December 9, 2004. David W. Raisbeck, "The Role of Agriculture in the Global Economy," World Agricultural Forum, St. Louis, Mo., May 18, 2003. E.G., Wendy Holm, "Cargill's domination a concern," The Western Producer, September 8, 2005 FAOSTAT 2004 data cited in "Productivity growth for poverty reduction: an approach to agriculture," (draft paper for comment) Department of International Development, United Kingdom (July 2005), paragraph 31. Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Anthem Press, 2002), 125-136. State of Agricultural Commodity Markets 2004, United Nations Food and Agriculture Organisation. The IMF statistics are referenced in Duncan Green, "Conspiracy of silence: old and new directions on commodities," Oxfam Great Britain, conference paper presented to Strategic Dialogue on Commodities, Trade, Poverty and Sustainable Development (June 13-15, 2005), 9. Green does not disaggregate agricultural from mineral commodities. Wilson, "Government farm aid on the rise," The Western Producer, September 1, 2005. Read More