International Investment Analysis of Tesco - Case Study Example

TESCO – INTERNATIONAL INVESTMENT REPORT INTRODUCTION Tesco initiated its business in 919 in London and since then it has been continuously expanding itself. Currently Tesco has gained the position one of the world’s leading super market. Under the leadership of CEO Phillip Clarke, Tesco has 60% of business operations in UK with 3,054 stores of different format from small to large scale hyper markets. Currently in UK only Tesco has 300,000 employees while international operations expanded in 14 countries with 520,000 people working with Tesco Group. Tesco group in the year 2011-2012 has generated £72.0bn revenue with 7.4% growth worldwide (Tesco, 2012). Glance of existence and performance of TESCO in international market is presented below: (Tesco, 2012) PERFORMANCE OF TESCO IN EACH REGION (Tesco, 2012) With stated performance Tesco has planned to expand further mainly in the region of China (Tesco, 2012). The underlying report develops assessment of Tesco to launch in Arabian country of Oman. To mention, Tesco already has footings in Arab countries such as Saudi Arabia and Kuwait etc. Therefore, it is to explore the feasibility of expansion in Arab world and specifically in Oman along with region of China. In order to analyse the feasibility of expanding the services to Oman the report analyses the macroeconomic environment of the country, and important factors in the macroeconomic situation of the country that could influence the decision of Tesco of expanding to Oman. Moreover, the report applies the Porter’s five forces model on the situation and then competitive strategies have been discussed. Moreover the report also highlights different risks that the company would be exposed and such risks can be managed. THE MACROECONOMIC SITUATION Oman, officially known as Sultanate of Oman, is an Arab state located in Southwest Asia. Owing to the strategic location of being situated at the Persian Gulf’s mouth Oman stands on the Southeast coast of the Arabian Peninsula. With Muscat being capital, the glimpse of country highlights is as follows: (BTI, 2012) The economic condition of Oman has undergone changes since 1970 under Sultan Qaboos who overthrew his father from thrown. Using the uncontested decision making Sultan Qaboos introduced the reforms for the state with development modernization programs. Like other Gulf Countries, oil serves as the main source of revenue. However, Oman has limited and depleting oil reserves therefore the state does not have extensive international involvement in the oil business. This also formed the reason that during international oil crises Oman did not have immense impact on economy as other gulf countries. The contribution of oil was approximately 3%-4% in the period of oil boom giving country substantial reserves that was then utilized for the economic development entitled “Omanization Process” (BTI, 2012). Despite these conditions the economic situation of Oman is estimated to be considerably healthy with budget surplus estimated to remain at 5% of GDP (Williams, and Martins, 2012). Further, a part of the benefit from increase in oil prices, the declining oil prices even below the USD88/bbl (breakeven price for oil); state was estimated to have no issues in continuing with budget of OMR10bn (Williams and Martins, 2012). Further, Omani banks have also joined the fiscal stimulus with appreciating private lending with the support US $1 billion support from government in just first four months of 2012 increasing private sector lending to 16% on Year On Year (YoY) basis from April 2011 (Williams and Martins, 2012). YoY development on economic indicators is as follows: (Williams and Martins, 2012) Unofficial unemployment sources have stated that high unemployment in Oman is at around 15% (BTI, 2012); however, the employment mainly in past two years have gained momentum with increasing youth population and private sector investment as mentioned below (Williams, and Martins, 2012): (Williams, and Martins, 2012) Sultanate of Oman is constantly taking measures in order to meet the challenges of the growth with reducing dependency on oil, growth to be maintained at least 3% with controlling inflation. Therefore, for the stated challenges Oman is currently operating eighth five-year plan (2011 – 2015) with following major objectives: Diversification of the economy from oil dependency to other non-oil industries and sectors including agriculture, tourism, fisheries, water resources and the gas sector. Following aggressive privatization policy to encourage private sector to share the challenge of growth. Taking measures to balance the increasing social cost with its declining economic resources. Encouraging foreign direct investment in the country. With respect to the political factor, the state has strong control of Sultan therefore no serious unrest has been witnessed even in episode of current Arab up-rise. Though state has Majlis al-Shura (body of representatives) but the body did not undertake any major initiative since 2009-2011 (BTI, 2012). The state of Oman, hence, on the basis of economic and social transformation is given the following ranking by BTI (2012): (BTI, 2012) Further, the Doing Business ranking has also undergone considerable improvements in many factors as given below: (Doing Business, 2013) Apart from the overall macroeconomic situation the retail industry is undergoing an extensive growth. Oman ranked on leading position among the emerging retail markets in A.T. Kearney’s 2012 index (Bhagat, 2012). Further, in Global Retail Development Index Oman is ranked in within top 20 countries with respect to growth (Bhagat, 2012). Thereby, providing healthy reason to establish set up. PORTER’S FIVE FACTOR FRAMEWORK FOR COMPETITION The competitive framework of five forces model for investment in Oman is as follows: BARGAINING POWER OF BUYERS: The bargaining power of buyers is considerably low as the rising demand is not being entertained by the local and existing suppliers hence international retailers are coming in to meet demand. BARGAINING POWER OF SUPPLIERS: The supply with respect to product is low as suppliers are already in contract with Tesco in other countries. Further, new supplier will also have low bargaining power owing to Tesco’s power of bulk buying. Further, supplies facilitators such as transportation and warehousing also have low bargaining power reasoned for investment dependency (Bhagat, 2012). THREAT OF NEW ENTRANTS: The threat of new entrant is high as being rated among top retail market; therefore, many small and large, local and international retail service providers will enter to capture the share (Bhagat, 2012). The assessment is also supported by rising franchising rate (Bhagat, 2012). THREAT OF SUBSTITUTE PRODUCTS: Threat of substitute products is currently low but will move to high in long term as increased attraction of international retailers will provide substitute options. INTRA INDUSTRY RIVALRY: Rivalry is currently very low as can be anticipated from the rising demand for the products. Further, CAGR for the current and next year is 29%; hence, refers to low rivalry in the recent times. Hence, overall competitive forces are low and support the ranking position of Oman as leading retail market with respect to international indices. COMPETITIVE STRATEGIES In the current scenario, most of international businesses such as Starbucks, McDonald Subway, Zara, H&M, etc have entered Oman with franchising business model. It is so for the reason that Oman on way to increase youth involvement in Small and Medium Enterprises for entrepreneurship (Bhagat, 2012). Further, investment in Oman requires sharing 70%-100% FDI in investment based on importance of the project to state. Owing to double digit growth in the retail sector and the benefits Oman state is offering to the businesses entering it is propped for Tesco to take the first mover advantage in developing large scale retail store in Muscat; the capital of Oman. Since most indicators are positive from government as well demand component; establishing a full scale business will provide jobs to large number of people and hence it can also be expected to have chance of getting 100% share. Further, Tesco has both options available i.e. to enter to the market on its own while the other being franchising. Tesco has already recently employed franchising strategy for globalization in Kingdom of Saudi Arabia. The franchising account in KSA has been done with Fawaz Abdulaziz Al Hokair & Co; the company that is accredited for being the largest owner of the shopping malls in KSA (The Hofstede Centre, n.d.); leveraging expertise of developing set up with key understanding of the shopping mechanism of people as well as supply chain of Saudi Arabia. At the same time Muscat Grand Mall of Oman has recently signed franchising agreement with Azadea Group Holding (AGH) of Beirut (Bhagat, 2012) for launching its fashion apparel products; therefore, leveraging expertise from such group as well as its own learning from KSA market Tesco can successfully launch full scale retail store in Oman. ANALYSIS ON THE COMPANY’S OPERATING EXPOSURE MARKET RISK Oman is considerably a different country on various aspects in comparison with UK. On various cultural dimensions the country maintains great disparity with UK like other Arab Countries. On five-dimensional scale (power distance, individualism, masculinity, uncertainty avoidance and long term orientation) of Hofstede; Oman’s parity has been estimated in proxy of Arab Countries including Egypt, Iraq, Kuwait, Lebanon, Libya and Saudi Arabia hence following contrasting results have been found (The Hofstede Centre, n.d.): (The Hofstede Centre, n.d.) Tesco in launching the set-up (though in franchise model) will face great parity in consumers’ behaviors. Further, like Saudia Arabia strict religious code in apparel as well as eating habits is critical factor. Research suggests that impact of current financial crises has resulted in increased security orientation in consumer purchasing behavior (Varshney, and Chacko, 2012). OPERATIONAL RISK: The operational risk with respect to reputation, people and business strategy has increased considerably for Tesco Worldwide in the 2011 as compare to 2010(Tesco, 2012). Further, risk originating from competition in the Asian market is stable. The strategies based on prices and offerings are supportive and will further leverage support from expertise of franchising partner as well as experience from Saudi Arabia. FINANCIAL RISK: The financial risk posed to the investment in Oman is high. The risks are originating from factors including the foreign exchange risk, loan to the subsidiaries that are not in UK. Since the investment model will be combination of debt and equity that maximizes wealth of shareholders; moreover, constituents of debt from local market of UK or Oman’s market are to pose risk. Further the currency exchange rate risk is high as can be anticipated from the graph below for past 365 days backward from 13th March 2013: (Currency Exchange, 2013) Hence, considering this fluctuation the net profits of investment in Oman can have variations and thus it could influence the final profits that the group of Tesco would be receiving. Therefore to minimize the impact of exchange rate fluctuations, Tesco can hedge its position. LEGAL RISK: In order to attract FDI Oman has flattened rates of interest for local and foreign investors at 12% apart from initial exemption Omani Riyal 30,000 (equivalent to €54,500) of profits (BTI, 2012). Further, no extremely well defined model for franchising is given; therefore, any set up upgraded can pose a risk to Tesco operations. However, owing to the expansionary policy of Oman these risks are not apparent in the near future. MANAGEMENT OF OPERATING EXPOSURE Tesco has well developed the capacity of dealing with defined risks as being global market player since long. For meeting such risks the Tesco assesses the level of risk in accordance with the given below model: (Tesco, 2012) The business will continue its central strategy for mitigating its risk exposures centrally by effective communication of the strategy to its employees. It will further ensure the clear transcending its core value, policies and procedures to mitigate risk. Further risks in accordance as identified in Key Risk Register maintained at organization and policies defined in it will be followed under the regular discussions based guidance by Executive Committee and the full Board. Since expansion alike of Oman is already being conducted in Saudi Arabia; hence, strategies with some flexibility suiting to the need of Oman business environment with be employed. SUMMARY AND CONCLUSION The assessment is aimed to evaluate investment in the international market in line with the objective of expanding globalization of UK based Tesco worldwide. The investment report selected Sultanate of Oman for the purpose as the state has expanded its public sector investment as well as liberalized its policies for attracting FDIs. Further, the state has taken an attractive position for expansion option for its retail market with leading position on indices. The investment report suggest expansion in Oman with franchising mode of investment as the mode is growingly being adopted by many international businesses going to Oman. Further, Tesco has also adopted the mentioned mode in KSA. Upon identification of risk exposure and ways to mitigate the report holds the suggestion for Tesco to expand in Oman. References Bhagat, N. (2012). Available from Oman offering rewarding biz opportunities. Franchise, http://www.franchise.ae/article/opportunity/new-franchises/Oman-offering-rewarding-biz-opportunities-22/ [Accessed 14 March, 2013] BTI. (2012). Oman Country Report. Available from http://www.bti-project.de/fileadmin/Inhalte/reports/2012/pdf/BTI%202012%20Oman.pdf [Accessed 14 March, 2013] Currency Exchange. (2013). British Pound Sterling(GBP) To Omani Rial(OMR) History. Available from http://gbp.fx-exchange.com/omr/exchange-rates-history.html [Accessed 14 March, 2013] Doing Business. (2013). Oman. Available from http://www.doingbusiness.org/data/exploreeconomies/oman/ [Accessed 14 March, 2013] Tesco. (2012). Annual report. Available from http://www.tescoplc.com/files/pdf/reports/tesco_annual_report_2012.pdf [Accessed 14 March, 2013] The Hofstede Centre. (n.d.). Arab World. Available from http://geert-hofstede.com/arab-world-egiqkwlblysa.html [Accessed 14 March, 2013] Varshney, S. and Chacko, V. (2012). Impact of Middle East Crisis on Expat Buying Behaviour in Oman. Pacific Business review international, vol. 4, no. 3, pp. 1-7. Williams, S. and Martins, E. (2012). Middle East Economics. HSBC, Available from http://www.rakftz.com/en/media/get/20121128_HSBC-Presentation.pdf [Accessed 14 March, 2013] Read More