Why Tesco Plc Failed to Capture the Chinese Market - Case Study Example

Number: Table of Contents Introduction 4 Tesco PLC 5 Historical background 5 Factors of influence 5 Environment 6 Social 6 Religious 7 Political 7 Economic 8 Legal 8 Technological 8 Ethical 8 Environment 9 Issues regarding Foreign Direct Investment (FDI) 9 Home and Host Government 9 Business analysis of Tesco Plc in China 9 Industry analysis 9 Competitor analysis 10 Tesco competitive analysis 10 Country analysis 11 Country competitive reports 11 Market analysis 12 Investment climate, risk 12 Host government condition 13 People in China 13 Summary 13 Conclusion 13 References 14 Introduction The report aims at depicting the strategic issues that is encountered by a multinational company in the international grounds. The issues are related to Foreign Direct Investments (FDI), which has enabled companies around the globe to integrate their business in the global context. The company chosen for the report is Tesco Plc, which is the third largest retail giant in the world. Tesco is headquartered in the United Kingdom and is listed under the London Stock exchange (Tesco, 2015). The reason for selecting Tesco for preparation of the report lies in the fact that it had expanded its business globally. The global expansion had increased their profit and market share in the global market; however, the company has also experienced numerous challenges in emerging markets like China. China was regarded as the second largest growing nation in the world during 2010, whose annual growth was above 10% (US-Pacific Rim International, Inc., 2010). This has attracted many companies especially, the retail companies, to expand their business in China so as to cater the needs of the world largest population. Despite the growing economy and lucrative business market, the foreign companies failed to continue a successful business in China because of various strategic issues (US-Pacific Rim International, Inc., 2010). The same situation was encountered by Tesco PLC who entered China through foreign direct investment in 2004. The reason for selecting China is that, many well known international brands such as Wal-Mart, Carrefour and Tesco had to face a number of challenges and even failure due to a number of reasons; few of which is discussed in the report with respect to Tesco Plc. Therefore, it is quite interesting to know the fact behind the failure of Tesco plc to capture the Chinese market. Tesco PLC Historical background Tesco Plc entered China during 2004 with the help of 50:50 ventures with local retailer Hymall. Nevertheless, soon after few years in 2006, the company bought another 40% of the venture (Tesco, 2015; Telegraph Media Group Limited, 2015). Tesco PLC in China employs around 21,000 employees and had opened more than 62 stores and has the goal of opening hundreds of stores so as to reach every corner of China during 2009. Analysts have depicted the fact that the Chinese market has the ability to become the largest country for the business of Tesco. Nevertheless, Tesco Plc had experienced a number of issues in China, which have forced them to close many stores in the past three years (Song, 2013). The main issue was related to the failure of the strategies that it had devised to capture the most populous market in the world. Factors of influence The factors that influenced the business of Tesco Plc in the Chinese market are the cultural difference, competition, human resource issues and lack of consumer awareness. The retail industry in China is quite different than that of other countries. The Chinese people does not have the habit of visiting large stores , instead, they prefer small retails shops, which provides products at a lower price. Though retail giants such as Wal-Mart, Carrefour and Tesco provide products and services to the consumers at a low price, but the companies failed to attract their attention. The product-mix that was brought forward by the UK and US retailers to the Chinese market are not appropriate for the consumers as the population are fond of seaweed, rice and many more, instead of flavoured coffee, doughnuts etc (Telegraph Media Group Limited, 2015). The deep rooted culture of China depicts that the retails shops should have traditional outlook and does not have the feeling of a supermarket. In the stores, the employees or staff shouts out about the products. This atmosphere was not adopted by the retail giants in China; hence, their business was affected to a great extent. Competition is another factor that has failed to influence Tesco PLC in China; here, it is significant to mention that competition from the large retailers such as Wal-Mart or Carrefour is not significant but its business was challenged by the small local retailers, who have actually captured large portion of the market with the local products at cheap prices. The Chinese are one of the most demanding consumers in the world, who are quite suspicious about the quality of the products. It is quite obvious for them to be suspicious as they had experienced number of food scandals, which have not only affected their health but made them financially weak (Telegraph Media Group Limited, 2015). Human resource related issues that are experienced by multinational companies in China are related to delegation of authority. Tesco has the working culture of delegating the responsibility thereby maintaining flexible line of authority. However, the Chinese working culture aims at maintaining a hierarchical structure, where each employee have clear role. Hence, Tesco has to encounter this difference in work environment in China, which has lead to conflicts between the Chinese and British manager (US-Pacific Rim International, Inc, 2010). Environment Social The average life expectancy level in China was 75 during 2013; majority of the population lies between the age brackets 16-64 years (World Bank, 2015). With the increase in population in China, there has been significant change in demand for food products. Along with that, the Chinese consumers are concerned with the product safety after thousands of infants died because of milk poisoning (Arlidge, 2008). Moreover, the Chinese consumers prefer to purchase from the stores and do not use any online means to purchase products or clothes. Thus, Tesco could not capture the Chinese consumer with the online presence. Above all, the consumers do not like to travel far for shopping; rather, they purchase their necessities from the nearby stores. This has affected the business of retail giants in China. Religious The Malaysian government had announced and signed a memorandum for understanding with national Investment management Limited of China during 2007, for facilitating the country by investing $500 million in the FDI for developing and promoting Malaysia International Halal Park (MIHAP) (Fischer, 2008). The retailers and the restaurants are advised to sell halal food items so that the Muslim customers can consume them. Therefore, Tesco in China had to understand the religious aspects that have the ability to harm its business in the long run. Political The retail industry in China is not prestigious and the companies who break the rules are not punished; this indicates that the country does not restrict development in this industry. Moreover, the local government has concentrated on improving the shopping experience of the Chinese consumers by converting the traditional street markets to supermarkets; thereby encouraging retail networks in China. The market has embraced foreign multinationals to set up their business and contributes towards the development of the economy (Jones, 2004). Economic With the increase in population of China, the rate of consumption has also escalated over the past five years. The GDP has also increased over the years in 2014 and the annual growth was about 7.4%. The rise in annual income of the Chinese consumers has improved their spending power (FocusEconomics, 2015). Legal The legal system in China encourages the retail industry to develop innovative products and also embrace international expansion. The laws and regulations in China do not pose any threat to the multinationals as deviation from any legislation does not bring any severe consequences to the companies. Technological There is lack of proper infrastructure in China, which needs to be improved so that the companies manage an efficient distribution channel. The suppliers of the retail industry in China should integrate advanced technology in their distribution system so as to meet the global challenge. The shopping behaviour in China is quite unique as very few Chinese households employ refrigerators for storing food items; hence they have to shop weekly (Wheatley, 2007). Ethical The multinationals in China experience ethical issues as the political power influence the Chinese employees to undertake unethical activities. The companies such as Wal-Mart and Tesco had to face corruption in China, which had forced them to form regulations for the employees. Environment The Chinese government has abolished the use of plastic bags, which have brought radical changes in the Chinese market. It has also encouraged recycling of products. Issues regarding Foreign Direct Investment (FDI) Home and Host Government The home government of Tesco Plc is the UK government and that of host is the Chinese government. The Chinese government has always encouraged multinational companies for setting up the business and contribute towards the development of the economy. Business analysis of Tesco Plc in China Industry analysis The retail industry in China is encouraged by the rise in individual income of the Chinese, which have boosted the consumption rate. The salary of the individuals has increased in 2013 as compared to 2012. Therefore, it has become one of lucrative market in the global context. China has the third largest retail market in the world and the largest in Asia. Moreover, it is expected to beat the US retail industry very soon. During the last quarter of 2013, the sales figure of the industry had increased by 13.6% as compared to 2012 (China Briefing, 2014); therefore, it can be cited that the confidence of the Chinese consumers has been high for the past few years. This encourages the retail companies to innovate new products for the development of the country (China Briefing, 2014). Competitor analysis The Chinese retail market is fragmented and there are many independent stores, which dominate the retail landscape. The big retailers generate about 11% of the total revenue of the sector. The rise in cost of rent and fierce competition has forced the large retailers to lose their pricing advantage. The following figure helps in depicting the market share of the major players in Chinese retail market. Figure 1: Market share of competitors in Chinese retail sector (Source: China Briefing, 2014) The figure depicts that the retail industry in China is dominated by small and independent retailers and the large multinationals such s Wal-Mart and Carrefour had failed to penetrate in Chinese retail market. Tesco competitive analysis Tesco Plc entered Chinese market very late as compared to Carrefour and Wal-Mart. The two retail giants have penetrated into the market with their low priced products. However, the companies failed to gain the confidence of Chinese consumers because they are more comfortable by shopping in local retail stores than to go to supermarkets for their daily necessities. Hence, the main rival of Tesco Plc in China is the small and independent retailers, who have captured the major portion of the market (BloombergBusinessWeek, 2012). The main competitive advantage of Tesco Plc was the Clubcard, which gave special discounts to customers in China. Nevertheless, the concept was not successful in China as the consumers could not adapt it (Warwick Business School, 2015). Country analysis Country competitive reports The following figure depicts the competitiveness scorecard of the countries across the globe: Figure 2: Competitiveness Scorecard (Source: Institute for Management Development, 2015) In the above figure is observed that China Mainland holds the 22nd rank in the world economies. Market analysis The retail market in China is dominated by small and independent retailers, who provide products and services at a very low price. The demand for retail products have increased with the rise in population as well as the income level of the Chinese population. The Chinese market is thus characterized by its growing population, which have also developed a problem for the government. The retail market has experienced growth in the past few years due to the increase in consumption rate. The local retail stores offer products and services to the Chinese consumers at a much lower price as compared to the large retailers. Hence, the Chinese market is quite lucrative and competitive but the local retailers have the competitive advantage over the retail giants. Investment climate, risk The new entrants in the retail industry of China do not encounter any restriction from the government as they encourage new development and innovations. Moreover, with the rise in population in China, the demand for retail items has increased, which is followed by the rise income level of the individuals. Hence, the demand for retails items has escalated to a great extent, which favors the development of new business in China. However, the social structure of China does not encourage the concept of big box stores of Wal-Mart, Tesco etc; rather they prefer to purchase from small retailers. Therefore, this is a potential risk for the new entrants as their investments can bring them loss in the long run. Host government condition The Chinese government plays a significant role in the development of new companies. It does not restrict the new entrants but encourages development and innovation. People in China Summary Tesco Plc had entered China during 2004 much later than Wal-Mart and Carrefour; thus, Tesco lost the advantage of being the first big retailer to enter China. However, the main competitors in the Chinese market are the small independent retailers, who offer products at a cheaper rate. The social structure of China favours the presence of small retail shops than the supermarkets. This is the reason why the strategies of Tesco such as club card failed to attract consumers. Conclusion Tesco Plc is one of the leading retailers in the global market but it failed to capture the Chinese market as it could not understand the taste and preferences of the consumers. Moreover, the company has to encounter tough competition from the small and independent retail shops, which are preferred by the consumers in China as they do not like to visit supermarket for purchasing their daily necessities. References Arlidge, J. (2008). Tesco Express rolls into China. Retrieved from http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article3671705.ece BloombergBusinessWeek, 2012. Tesco Stumbles With Wal-Mart as China Shoppers Buy Locals. Retrieved from http://www.bloomberg.com/news/articles/2012-10-18/tesco-stumbles-with-wal-mart-as-china-shoppers-buy-local China Briefing. (2014). China Retail Industry Report 2014. Retrieved from http://www.interhart.biz/de/China-Retail-Industry-Report2014.pdf Fischer, J. (2008). Religion, Science And Markets. Modern Halal Production, Trade and Consumption. Retrieved from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2529358/ FocusEconomics. (2015). China Economic Outlook. 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