Tesco's failure in America - Essay Example

? TESCO’s Failure in America by Contents Contents 2 Introduction 3 Reasons for the Failure 3 Market Positioning 3 Customer Relationship 4 Low Brand Recognition 4 Lack of Service 5 Eating and Shopping Habits of Americans 5 Employee Relationship 6 Supplier Relationships 7 Store Location 8 Solutions 8 Change of Brand Name 9 Multiple Brand Strategy 9 Focusing on the Five Ps 10 Product 10 Price 10 Promotion 11 Place 11 People 12 Going Local 13 Conclusion 13 References 15 Introduction Tesco PLC announced in 2012 that it is going to exit its USA operations. This decision has been taken after spending $1.61 billion and 5 unprofitable years in USA (Sonne & Evans, 2012). The flagship stores of the company – Fresh & Easy will be sold off or closed down. The failure in USA for TESCO comes close on the heels of the failure of its operations in Japan. It is also struggling in Poland and Czech Republic. Why is it that the UK supermarket giant has failed repeatedly in foreign lands? In this essay we analyse the failure of TESCO in USA and the possible reasons for this failure. We then go on to provide possible solutions for the revival of the company in USA so that it does not has to shut down its operation Reasons for the Failure Market Positioning Positioning may be defined as the process of creating an image in the minds of the target market for the brand (Ferrell, O. et al., 2000). This positioning can be functional, symbolic or experiential. Functional positioning tries to solve problems and provides benefits to the customers (e.g. - Wall mart’s everyday low prices); symbolic positioning creates affective fulfilment (e.g. - Apple’s products give an ego boost to owners) and experiential positioning provides both rational and emotional fulfilment (Lao, 2013). TESCO entered USA through Fast and Easy (F&E) stores. The F&E stores were positioned between the discount supermarkets and the upscale organic stores. F&E stores were labelled as stores which will provide ‘healthy’ food at low prices. Thus TESCO tried to position itself between Wal-Mart and Trader Joe’s (Sonne & Evans, 2012). The positioning of F&E was neither functional nor symbolic. Wal-Mart succeeds due to its promise of everyday low prices whereas Trader Joe’s provides snob value to the rich and entices them to be different and buy organic food. Trader Joe is clearly positioning it’s product for the rich and Wal-Mart for the mass market. TESCO’s positioning was not enticing to either of the 2 segments. There was no market which wanted health organic food products at low prices in USA. Only 3 % of American population follows the healthy lifestyle unlike in UK and Europe where this trend is the norm (Sonne & Evans, 2012). Thus positioning itself as a store with a healthy image in a nation which loves fast food and soda was the biggest mistake committed by TESCO. This was one of the main reasons for their failure in USA. Customer Relationship TESCO had a troubled relationship with USA customers. This was because it ignored the cultural differences between USA and UK.TESCO looked more like a coloniser who stuck on to its customs and culture rather than adopt the culture of the new country. Some of the mistakes leading to a troubled customer relationship were – Low Brand Recognition USA unlike Europe is obsessed with brands. Americans are willing to spend more money if they consider the brand good and worthwhile (Piercy, 2012). Fresh & Easy was an unknown brand to them. The name TESCO was not associated with F&E stores in any way. TESCO focused its money and resources in opening more stores rather than advertisements on brand building. The Fresh & Easy stores were also highly dependent on private labels in a market which likes to see and buy branded products. This was a big mistake in a country which likes to buy branded products. Lack of Service In order to keep the costs low, F&E stores had adopted the self check out system. The staffs in F & E stores were also kept minimal. This was an alien practice for Americans who are used to being pampered and serviced by the staff. Self Check is also difficult for the elderly customers and those who do not understand English. Once again TESCO did not take into account cultural differences between Europe and USA. Low service levels are acceptable in Europe but not in USA (Rigby, 2010). Eating and Shopping Habits of Americans Any company which comes to a new place has to mould itself according to the local needs and tastes. However TESCO decided the opposite. It tried to change the shopping and eating habits of Americans. They served food which was pre-packed and desisted from giving coupons and vouchers to the people. This was alien to Americans who are used to coupons and discount vouchers. The stores were also basic and utilitarian which went against the trend of the food retail expectations of Americans. Fresh and easy also ignored the like Americans have for frozen food. They did not store frozen foods initially and by the time the store decided to stock them it was too late as they had already suffered from bad word of mouth publicity. This effort of TESCO to change the habits of its target market at a time when the country was reeling under one of the worst recessions backfired (Sonne & Evans, 2012). People preferred to stay with tried and trusted brands rather than hop on to the new experience provided by Fresh and Easy stores. Employee Relationship Another major problem faced by Fresh & Easy stores was the troubled relationship it had with its employees and trade unions. F&E‘s main value proposition was fresh food at low cost. In order to maintain the costs low, most of the staff hired by F&E was temporary and without any affiliation with any trade union. As the staffs was temporary, it had no interest in ensuring that F&E succeeded as it had no long term involvement with the firm. TESCO’s practice of employing non-unionised staff also earned it the ire of the United Food and Commercial Workers union – which represents almost 90000 people in South California (Piercy, 2012). The Union criticised TESCO openly and accused it of being arrogant , out of touch with local communities and failing to appreciate the links between consumers and the grocery workers. TESCO also repeatedly refused to meet the representatives of the union in spite of letters of requests from Hilary Clinton and Barrack Obama. TESCO did not work with either the unions or with the local communities for any community benefit programs in the region where it operated. The Union responded by questioning the ‘organic’ credential of the food served by Fresh and Easy. It called the food store as Fresh & Queasy and accused it of fooling the customers. It was foolhardy for TESCO to assume that it can succeed in a new country without the support of dedicated employees. The problem with the trade unions also came too early in its expansion and could have been deferred to a later date. The union also accuses Wal-Mart with similar things but the retail giant is able to ignore the union because of its sheer size and presence in USA.TESCO had neither the presence of Wal-Mart, nor the customer confidence. In these circumstances it should have tried to create loyal and dedicated employees and defer its showdown with the unions (Piercy, 2012). Supplier Relationships Fresh and Easy approached the question of supplier relationships in a novel manner. It did not try to source the right local supplier but instead decided to bring its UK based suppliers into USA (Lawson, 2012). Wild Rocket Foods and 2 sisters food group – the 2 UK suppliers have invested $100 million each in USA to ensure the success of TESCO’s USA operations. This TESCO claimed would reduce their dependence on local suppliers which were already working with Wal-Mart or other American supermarket chains. The UK based suppliers were also familiar with the product preparation which required by TESCO and would save the training costs of new suppliers. TESCO assumed that the problems of product shortages, poor service and late delivery would be resolved by bringing these suppliers as their survival depended on the success of Fresh and Easy. However this move proved to be disastrous and further alienated the store from local tastes and preferences. Relationships with suppliers is not a one way street where only the supplier benefits (Morrell, 2010). It benefits both the parties. It is important for a foreign company to have local suppliers who ca nudges the company in the right direction if it deviates from local tastes. A foreign company coupled with a foreign supplier has no indication of what the market requires and is a recipe for disaster as was proved in the case of Fresh & Easy. Store Location Ideal store location is important for the success of a retail store. Place is one of the five P’s of marketing and getting is right is imperative for the success of any new venture. Fresh and Easy has confused the American consumers by opening stores in working class areas but targeting the affluent section of the American population (Ries, 2010). This mismatch between the target market and store location has confused the customers regarding the kind of store Fresh and easy is. TESCO claims that stores were located in working class areas in order to ensure low rental costs which will then be passed on to consumers in form of low cost on organic food. However for this to be successful , the store format needed to be similar to Wal-Mart where people go to stockpile month’s ration, not a store for organic foods which have lower expiry timelines. Although the products at Fresh and Easy are cheaper than Trader Joe’s but they are not cheap enough for the working class. This ensures that the local population where the store is located stays away from the stores and as the stores are far off from where the affluent section of the population lives, the footfalls from the affluent section are also low. Fresh & Easy has itself to blame for this mismatch and the resultant low sales. Solutions TESCO has decided to either sell off or close its Fresh and Easy stores and exit itself from its USA operations. However is this right strategy to adopt for the retail giant? USA is the biggest retail market in the world and continued operation in USA can ensure that TESCO has a healthy bottom-line for a long period of time. However it needs to radically alter its strategy in order to be successful in USA. We provide some of the options which can be utilized by the company in order to rebrand itself in the American market. Change of Brand Name The Fresh and Easy brand has been discredited in USA. It no longer enjoys consumer, employee or supplier confidence. It has made a loss of 125 million pounds in 2012 and has been a drag on the company’s finances (Sonne & Evans, 2012). It makes no sense to continue with this brand name. The first step for the revival of TESCO in USA will be to shut down the brand name Fresh & Easy and come up with a new brand name which is acceptable to the consumers. This brand name should be linked to TESCO either directly or indirectly. This is because Americans are brand conscious shoppers. TESCO has a brand image as a successful retail giant in UK. Thus TESCO in the brand name will get the brand more respect and increased footfalls. Multiple Brand Strategy One reason for the confusing value proposition of Fresh & Easy was that TESCO provided no brand differentiation. Everything inside its stores was a part of the Fresh & Easy line. There was no differentiation between discounted or value priced items, organic items or speciality items in the store. This created confusion in the mind of customers’ (Fresh & Easy Buzz, 2009) .They were not able to ascertain what Fresh & Easy brands stand for. In order to solve this problem , TESCO should create three different brands – one focusing on discounted and value priced items , second focusing on organic items and the third focusing on speciality and premium items. The stores which are opened by TESCO should be also differentiated on these lines in order to target all sections of the market. Multiple brand strategy will ensure that TESCO does not have to close down many of its stores which were opened in the working class areas. These stores can be used to sell heavily discounted items whereas the stores in the affluent areas can be premium priced. Focusing on the Five Ps TESCO needs to go back to the drawing board and focus on the basic five Ps of marketing as it has failed to succeed in any one of these. We make some suggestion regarding this – Product Fresh and Easy had product line which was considered too alien for the American customers. TESCO needs to shift the focus away from private labels and focus more on branded products as this is what works in USA (Piercy, 2012). Americans also do not like pre-packaged food items and this practice needs to be immediately abandoned by TESCO. The focus also needs to shift from British products to American products. America is not a small country like UK, so local tastes and preferences also play a very important role. TESCO should ensure that the local store managers are allowed flexibility in deciding their product lines according to the local consumer demands and tastes in each area. Price This refers to the pricing strategy which is adopted by a company. Pricing strategy of the firm needs to be according to the target market .As we have discussed earlier, Fresh and Easy was selling a product which is consumed by the affluent in USA but it tried to price its product for the mass market. This was a huge mistake. We have suggested a three brand strategy above for the brand. This three brand strategy should be accompanied with three different price bands which are appropriate for the market being targeted. Promotion Promotion is absolutely essential to make the customers aware about the products of the company. TESCO poured a lot of money in setting up stores and backend infrastructure but played limited attention to promotional activities. It also established its own food production centre which is bigger than Disneyland (Rigby, 2010). This was wasteful expenditure just when the company was starting operations. Instead of this the focus initially should be to bombard Americans with advertisements. F&E focused on social media advertising but Americans expect television advertisements in order to attract their attention. These advertisements are essential to create brand awareness and brand recognition. Brand recognition ensures that customers are tempted to try out your products. The image of what the company is selling is much more important than what the company is actually selling in USA. TESCO should focus on intensive brand building exercise when it re-launches its three brands in USA. Place Place refers to the area where the product is sold to the consumer. Place is very important for the success of a retail store. Not only is the physical location of the store but also the design of the retail space and visual merchandising important for the success of a retail store. As discusses earlier, Fresh & Easy confused its customers by opening stores in working class areas when its products were targeted at the affluent sections of the population (Rigby, 2010). This anomaly needs to be rectified by TESCO when it re-launches itself in USA. The stores in working class area should either be sold off or used to sell the value priced and discounted product items. Apart from this Fresh & Easy stores were not considered as appealing by the customers and gave an alien feel. TESCO can hire the best visual merchandisers. It should use them to design a store layout which is attractive for the customers. People People refer to the staff working for the store. Fresh & Easy had a troubled relationship with its employees and also with unions in California region. A new store can ill afford such problems. In order to re-launch itself, TESCO needs to make peace with the unions. This will ensure that the unions do not bad mouth and fresh initiative of TESCO like they did with Fresh & Easy. Three brand approaches will also ensure that TESCO is able to hire more staff on a permanent basis as they do not need to focus only on price in order to ensure sales. Permanent staff is more committed to the progress of the company as compared to temporary staff and will be useful for the expansion of TESCO. Going Local Retail industry is one of the few industries which has failed in globalisation (Morrell, 2010). This lesson has been learned by TESCO the hard way due to failure of Fresh & Easy and loss of millions of dollars. The company cannot expect to copy what is successful in UK and hope to be successful in USA too. It has to account for the differences in the culture, tastes and preferences of the two countries. It is much easier to adapt to the local eating and shopping habits than to try to change these habits according to your store layout. In the new brand which is launched focus on small things which are culturally different will ensure its survival such as removing the self check out system which is loathed by Americans use to being serviced. Other small things include having freshly baked bread and coffee, having frozen foods and desisting from pre-packaging food items. Although these differences appear to be insignificant but they played a very important role in the failure of Fresh & Easy. Local sensibilities need to be respected in order to succeed. TESCO should also ditch its UK based suppliers and build long lasting relationships with local suppliers. Although they may take time to get used to TESCO’s style of functioning but this short term pain will benefit the company in a long way in the years ahead. Conclusion Globalisation has now given way to glocalisation. Gone are the days when the format employed in one country could be simply copied and pasted in other country. This is one lesson which can be learned by the failure of TESCO in USA. If the company fails to adapt to local conditions, tastes and preferences, it is likely to fail in the new market. In this essay we have discussed the reasons for the failure of TESCO in USA and have also suggested some methods with the help of which the UK retail giant can recover itself and prevent itself from the pain of complete withdrawal from the land of Uncle Sam. References Ferrell, O. et al. (2000) Business: A Changing World. 7th ed. New Delhi: Tata McGraw-Hill Education. Fresh & Easy Buzz (2009) Fresh & Easy Buzz: Strategy Session: Tesco's Fresh & Easy Needs to Move From its One Store Brand Fits All Strategy to A 'Three Brand' Store Brand Strategy. [online] Available at: http://freshneasybuzz.blogspot.in/2009/05/strategy-session-tescos-fresh-easy.html [Accessed: 22 Apr 2013]. Lao, F. (2013) Marketing Management: Concepts and Applications for Strategic Marketing Planning. Quezon City: Rex Bookstore, p.180 -196. Lawson, A. (2012) Suppliers and retailers: The difference between partnership and confrontation. Retail Week, [online] 18th March 2012. Available at: http://www.retail-week.com/suppliers-and-retailers-the-difference-between-partnership-and-confrontation/5036650.article [Accessed: 21st April 2013]. Morrell, L. (2010) The benefits of local sourcing. Retail Week, [online] 26th February 2010. Available at: http://www.retail-week.com/in-business/supply-chain/the-benefits-of-local-sourcing/5010688.article [Accessed: 21st April 2013]. Piercy, N. (2012) Market-Led Strategic Change. 4th ed. Oxford: Routledge. Ries, A., & Trout, J. (2010). Positioning: the battle for your mind. New Delhi, Tata McGraw Hill. Rigby, E. (2010) Tough times for Tesco’s American dream. Financial Times, [online] 20th September 2010. Available at: http://www.ft.com/cms/s/0/bfa51888-c4e5-11df-9134-00144feab49a.html#axzz2RAcFBlqX [Accessed: 21st April 2013]. Sonne, P. and Evans, P. (2012) The $1.6 Billion Grocery Flop: Tesco Poised to Quit U.S. The Wall Street Journal, [online] 6th December 2012. Available at: http://online.wsj.com/article/SB10001424127887324640104578160514192695162.html [Accessed: 21st April 2013]. Read More