International Activity of Tesco - Case Study Example

___________ ____________ ____November 2006 Analytical Profile of International Activity at TESCO Overview of TESCO TESCO has its core business located with in the UK.It employs well over 250,000 employees spread over its 1,779 stores. Approximately 80% of group sales and profits are derived from the UK business. Main factors responsible for business growth in the UK business are comprised of new space, extensions to existing stores and a multi-format approach. Sales of non-food, which are growing at around twice the rate of food, also contribute to the overall growth picture.(Tesco Core,2005) UK at a glance Store Formats Number of stores Sales area (million sq ft) % of UK space Extra 100 6.6 27.2% Superstore 446 13.9 57.4% Metro 160 1.9 7.8% Express 546 1.1 4.5% Total Tesco 1,252* 23.5 96.9% (correct to end of 04/05 financial year (UK & ROI: 26 Feb2005)) *The Group also has an additional 527 stores under the One Stop fascia.(Tesco Core,2005) Tesco has four different store formats, each tailored to customers' needs: Express (up to 3,000 sq ft) Express stores offer customers great value, quality and fresh food close to where they live and work. TESCO opened their first Express store in 1994 and now they have over 500 stores selling a range of up to 7,000 lines including fresh produce, wines and spirits and in-store bakery. .(Tesco Core,2005) Metro (approx. 7,000-15,000 sq ft) TESCO opened their first Metro in 1992,bringing the convenience of TESCO to town and city centre locations. Metros cater for thousands of busy customers each week and offer a tailored range of food lines, including ready-meals and sandwiches. .(Tesco Core,2005) Superstore (approx. 20,000-50,000 sq ft) Tesco began opening superstores in the 1970s and during the 1980s and 1990s built a national network, to which additional are being made every year. They have an ongoing programme of extending and refreshing their superstores to improve the overall experience for customers. In recent years they have introduced a number of new non-food ranges into superstores such as DVDs and books. .(Tesco Core,2005) Extra (approx. 60,000 sq ft and above) Since opening their first Extra in 1997,the one-stop destination store has proved extremely popular. Extra stores offer the widest range of food and non-food lines, ranging from electrical equipment to homewares, clothing, health and beauty and seasonal items such as garden furniture. The 100th Extra was opened in 2004 and around twenty new Extras open each year, many from extending existing superstores.(Tesco Core,2005) The TESCO strategy aims for equivalent strength in non-food segment as in its food segment. This has meant that TESCO has been making efforts to offer the same great quality, range, price and service for our customers as they do in our food business. TESCO's widest range of non-food can be seen in Extra stores, including electricals, home entertainment, clothing, health and beauty, stationery, cook shop and soft furnishings, and seasonal goods such as barbecues and garden furniture in the summer. Some of TESCO stores also have opticians and nearly 200 have pharmacies. TESCO's current market share of the nonfood sector is less than 7% and it generates sales in non-food in excess of 6 billion each year in the UK alone. The UK's like-for-like non-food sales growth is currently running at around twice the rate of food. All TESCO stores sell some non-food, with their Superstore and Extra formats offering the biggest choice. By introducing these ranges to more of their stores TESCO hopes to bring down prices and offer customers the convenience of shopping for great value non-food along with their food and household goods. Value, TESCO and Finest own brand products are available across TESCO's non-food offer. For instance heir 3 Value jeans are possibly the most talked about product being sold, but they also offer over 1,000 other Value lines and increasingly, many Finest lines too, including cashmere jumpers and bedding. Some recent examples of own-brand launches include Value microwaves and Finest garden furniture, audio visual accessories, toys and games and gardening tools. TESCO sell an increasing number of DVDs, CDs and computer games in many of our stores and Tesco sold 15 million books in 2004 alone. The Reasons for Internationalization and extent of Internationalization-Strategy Globalization has vitalized the international trade and there have been concerted strategic moves on the part of various organizations to acquire large pieces of the global market place. Communication and information industry has come of age making the internet as a medium which helps the global consumers shrink around clicks of mouse button. Both virtual and brick & mortar global market spaces have increasingly become available. Both multinational corporations and small manufacturers and service providers are making a beeline for the large markets such as China, India etc adopting various entry routes. However it is observed that the new emerging markets have socio-cultural contexts much different from the parallel contexts in western countries. Such cultural differences present themselves both as an opportunity and threat to those organizations expecting to find niche in these markets. If properly researched and read into the cultural dimensions of the foreign market can be woven into the international marketing mix and help establish the global retailer as a trustworthy supplier who understands the local realities. Inadequate research into these aspects and thereby deficient weaving of cultural dimensions in the international marketing mix can prove to be an expensive marketing mistake. By 1980s an unprecedented moves of several large sized retailers outside their domestic markets were seen. This was made possible as either domestic restrictions on their movements got relaxed or the host and target countries eased their market entry norms. In addition these retailers calculated and felt that they had arrived at saturation points as far as their domestic markets were concerned and they strategically chose to move into global forays. This expansion phase into new and emerging global market place continued by opening new places of business in such global market places well into the 1990s, with some retailers developing significant international operations and a wide geographical span of operations. TESCO is no exception. It also has eyed emerging markets and eyed them successfully. Tesco's core UK success was built on low value selling strategy. This implied that TESCO UK was working with thin margins. Turnover based retailing has got a limitation f an organization has to expand. TESCO realized this limitation when it calculated that over 80% of its business was comprised of this thin margin turnover based business. It was time for TESCO to look overseas where margins were healthier. Emergence of new markets in Poland, Russia, and China etc was a boon as it provided TESCO an opportunity to expand and expand profitably by working on better margins. TESCO reports in this context,"With over a decade of international experience, we have developed a strategy which has given us the confidence to grow our existing businesses and invest in new markets. In those countries which formed the first part of Tesco's international expansion in the late 1990s, such as Thailand and Hungary, we now have substantial, successful, local businesses, which help us to develop the blueprint for new markets, such as our Hymall joint venture in China".(Tesco, International)Tesco further states in respect of its international expansion strategy that," We are flexible, adopting a slightly different approach, as every market is unique; We have a local offer, in response to local cultures, local customers, local supply chains and local regulations;_ International expansion requires focus - it's a long-term effort, not about planting flags; No single format can reach the whole market, so we are multi-format; It's not about scale, it's about skill - so we make sure we have capability through people, processes and systems and we develop brands to enable us to build lasting relationships with customers."(Tesco, International) The overall strategy within TESCO includes this strategy of international expansion. TESCO, overall standard strategy can be reckoned as that of expansion and growth comprised in four pronged action format: growth in the core UK business; expansion through international growth; maintain strength in non-food and in food trade and follow customers into new retailing services. As a consequence of this strategy TESCO targets : a better deal for its customers; makes it simpler for its staff; ensures that it reaps the fullest economy to make its overall operations cheaper and reaches all its supplies faster to market. An illustrative case study in respect of TESCO's entry into China and its strategy would illustrate the overall strategy and the international strategy worked within. Five years prior to TESCO's formal entry into the Chinese market, BBC News (1999) reported the following about UK China trade ties and collaborations," UK businesses have won contracts worth $3.5 bn in China. The UK is the sixth largest investor in China, with $13bn of direct investment. "Thus a long learning curve had preceded the formal entry of TESCO in the Chinese market in 2004.Thus by taking on China TESCO was taking up a pathway leading to a blind alley. TESCO made its first foray into China, in the year 2004, with the purchase of a 50% stake in a 25-strong hypermarket chain for 140m ($260m) entering into a joint venture with the Ting Hsin after a long three years' search for an appropriate Chinese partner. (BBC News, 2004).TESCO top management, at the time of entry, clearly made no secret of the lucrative and huge Chinese retail market. In the year 2004 it was reckoned that this retail business served around two million customers a week and was valued at 280m, with sales of 330m. (BBC News, 2004). TESCO had researched its Chinese partner thoroughly before taking up the joint venture stake. Ting Hsin was the largest food supplier in China and owned the Hymall chain of stores, of which Tesco was to have a 50% stake. Hymall had opened its first outlet in September 1998 and had rapidly grown to be the leading hypermarket operators in the country, with French chain Carrefour and US-owned Wal-Mart among its rivals. Most of its stores were located in "high quality" shopping mall developments in the east, north and northeast of China. (BBC News, 2004)The joint venture was premised on the logic that, Ting Hsin would offer its local knowledge and operating expertise, while TESCO would add its supply chain, product development and store operation prowess to "improve the shopping experience" in a strong combination of strengths. (BBC News, 2004). Globalization has brought about intense competition for global markets amongst several major multinational companies. These companies have been looking outwards to reorient their organizational structures and strategies to capture the global markets by positioning their products strategically. A recent study of the US and European companies revealed that 75 percent were taking up the above strategic reorganization in order to stay competitive and staying competitive was considered the single most important external issue on their agenda. Past experiences have shown that poor planning further embattled by rudimentary understanding of the cultural aspects of the global market places had ruined the huge marketing campaigns of even the multinational companies. Coke CEO stated," Coke has had to come to terms with a conflicting reality. In many parts of the world, consumers have become pickier, more penny wise, or a little more nationalistic, and they are spending more of their money on local drinks whose flavors are not part of the Coca-Cola line up. (Rance, 2000). In 21st century international marketeer should seek solution to choice problem between standardization and adaptation. (Ghemawat, 2003). A vital challenge for the international marketing strategy of a firm is the need to understand the different milieus the company needs to operate in. That is comprehending different cultural, economic, and political environments is necessary for the success of a company. Culture is one of the most challenging and devious elements of the international marketplace. These challenges encouraged numerous researchers to take up international marketing studies concerning behavioral differences in consumers across nations (e.g. Lynn, Zinkhan et al. 1993; Nakata and Sivakumar 1996: Brass 1991; McCarty and Hattwick 1991; Hafstrom, Chae et al. 1992; Steenkamp, Hofstede et al. 1999; Chu, Spires et al. 1999; Husted 2000).TESCO has strategically chosen Ting Hsin to provide these very local inputs to its markets in China. In fact this is the retailing solution as a lasting strategy. As has been stated above international marketing mix for a retailer needs to match not only the local expectations of the Chinese clientele but also match the competitors' moves to introduce new products in Chinese markets. However marketing strategy behooves that solution of consumer problems lies at the heart of any particular marketing mix. Any marketing mix can be reckoned as successful only when it has succeeded in resolving consumers' problems and thereby maximized value added for the customer. As Michael Hammer puts it, "MVA (More Value-Added) means that you give the customer more, perhaps far more, than you ever have before....You can visualize the principle of MVA as a ladder with your product at the bottom and the solution to your customer's problems at the top. The more help you provide your customers to fill that gap, the more value you add to them"(Hammer, 2001). Nemetz and Fry (1988), Adler (1988) and Main (1990) draw distinctions between organizational characteristics of a mass producing organization and a flexible manufacturing system. TESCO needs to make concerted attempts to move from a mass producing organization to a flexible manufacturing system in this joint venture. While doing this the general span of control would need to be adjusted from wide to narrow; hierarchical levels would have to be reduced from many to few; specialization inputs would have to be selective and low rather than high and decision making should move from centralized to a decentralized one. In overall terms the organization would need to transform from being bureaucratic and mechanistic to being self-regulating and organic. The product offerings and prices would have to be oriented to Chinese realities. Its joint venture partner is likely to be an effective consultant in this process. It is expected that Chinese consumers may not be evincing as much interest in high value items like expensive consumer durables like plasma televisions or even those items that carry typically western flavor. The former may be strictly due to low disposable incomes and the latter may be more due to socio-cultural factors. Initially products on offer should be low value items that directly address Chinese income levels and daily needs. Advertising and media campaigns for a shopping experience would accordingly need to address these issues while keeping a tab on competition. Once a loyal clientele is obtained by this category of MVA (as above) should TESCO move in with its own initiatives of introduction of products from the western milieu. "In China, we have now launched a price guarantee on key commodity products including rice, eggs and bread. This means that if our customers can buy these products for less from any of our local competitors, we will refund double the difference. The feedback from customers has been very positive"(TESCO,2006). "In 2005, we introduced 500 economy products into our ranges for customers across China. In addition, for the first time, two waves of price cuts were launched where we cut the price on 33 everyday staple foods for customers, such as loose eggs, oil, rice etc and also the price on the top 650 branded grocery items."(TESCO,2006).These two statements more than eloquently clarify and ratify that the above marketing strategic inclination has already sunk deep in the top management at TESCO and they are following marketing strategy typical to local conditions of the Chinese markets. Methods of Entry in International Markets-Asset/Business Restructuring Every time large retailing corporations take up expansion overaseas;they have very many options to make an entry approach in such overseas markets, that is: through acquisitions, following organic growth, by franchising, by entering into joint ventures and through other marketing support to overseas retail operations like in-store concessions. Take franchising, for instance. Most research in international retailing associated franchising activity typically with specific kinds of service providers e.g.. fast food chains(KFC,MacDonalds etc) however franchising has been chosen as entry mechanism in other trade business as well. Examples of retail goods franchising are abound in the likes of Espirit, Body Shop, Yves Rocher and Benetton etc.For these high end goods' retailers the main issue concerned niche marketing as their goods addressed a high income and high profiled clientele. These international retailers, therefore, chose franchising as a major mechanism to make global forays. Franchising ,in their cases, proved to be an efficient market entry strategy and gave them a ready platform to expand their global markets without imposing burden of excessive startup or public relations costs This worked to improve their global sales and operating profits. Franchising retailers of this category essentially can be categorized as what Tread gold's (1988) claims as ''world powers'', where global expansion is readily and efficiently obtained at comparatively low cost. Franchising has also been resorted to by those retailers that did not have unique selling propositions, brand goodwill or an extraordinarily fortified product concepts like the above illustrated niche' marketers had. However lacking a single selling proposition these retailers have preferred to use franchising as one amongst many foreign entry approaches. These ideally depend upon conditions prevalent in host markets. TESCO also can be categorized as a retailer which is using a portfolio of foreign entry options. Other examples of such retailers include GIB (Belgium), the supermarket and hypermarket operators Casino (France) and UK mixed merchandise retailers Marks & Spencer and BhS. While franchising these retailers, both niche and wide market ones, have discovered another advantage in that their local partner comprehends the local conditions better than them as principals and is, therefore, in a better position to bring in host markets cultural and language barriers in marketing mix apart from dealing with host country's bureaucratic red tape, political etc. The local partner is ,therefore, reckoned not only as a revenue point for the international retailer but also as a veritable source of rich local information in redesigning the marketing mix to suit local conditions of the host country (Christiansen and Walker, 1990). This ratifies the discussion carried above in respect of local aspects o the international marketing policy. This was also discussed and clearly brought about in case of China foray by TESCO,though it was not a franchising foray. Most importantly, in franchising, it is the local partner that has maximum capital sunk into the business and, consequently, it is the local partner who is more committed to seeing the business succeed (Chan and Justis, 1992). Joint venture form of foreign entry is perhaps the most acceptable form of foreign entry world wide. Competing forms include direct control through total buy out; agency relationships on commission arrangements; consultancy and R&D based relationships against royalty payments and vanilla export-import relationships. While direct control exposes the foreign investor to the local risk entirely this may include dealing with politics and bureaucracy of the country to start with. Part foreign contributions in form of agency and consultancy do tend to restrict risk to capital but they nevertheless restrict the market opportunity to less than half. Export-import entry forms suffer from the bureaucratic clichs in the system as well as complete buyer-seller risks and are often besotted with quality and payment litigations. Joint venture is perhaps the most acceptable form if the joint venture includes participation at the level of both funding and operations. This is ideal for a retailer like TESCO that has strong presence not only in food products but also non food products. 50 % participation reduces capital risks to half. Moreover a local joint venture partner, who is already hugely successful in the type of business the joint venture proposes to take up, would mean a unique and strong pairing of strengths of the foreign and local partners. To be consistent the China venture of TESCO can be cited again. The local partner, already familiar with Chinese political, legal and bureaucratic realities would help the joint venture get past them; in addition to providing local consult on the marketing mix. TESCO ,being the foreign partner would not only share half the capital risk but also bring to work its rich global experience in retail operations, technology and marketing of retail products. Procter & Gamble, the world leader FMCG manufacturer is fast moving towards a globally integrated organization. However it was not before it had taken up a strategic organization restructuring plan where in it decided to counter local competition in global markets through strategic business relationships with local partners or in the form of its locally constituted business units. Earlier lacking this local inputs its premium brands were fast loosing markets in the presence of local core products that were far cheaper. Examples of licensed franchisee business that have succeeded had one critical fulcrum issue i.e. tight centralized quality control. Coca Cola and Pepsi are typical examples. Pepsi has entered into several joint ventures with local manufacturers on allied food products which are working with great financial success. Similarly ,Esprit, a global youthful lifestyle brand offering smart, affordable luxury and bringing newness and style to life, offers 11 product lines encompassing women's wear, men's wear, kids wear as well as shoes and accessories through over 630 directly managed retail stores and over 9,700 wholesale point-of-sales worldwide. It has succeeded due to its tight quality control procedure brought about by a matrix management structure which spans its international operations. Here are examples contained in the portfolio of foreign entries in the case of TESCO and its attempts at assets' consolidation. Carrefour Deal In September 2005, TESCO announced an asset swap with Carrefour. As part of the deal (which was subject to the usual regulatory approval), TESCO was to acquire up to 11 Carrefour hypermarkets in the Czech Republic and four stores in Slovakia, strengthening their Central European business. This was swapped against its unprofitable business in Taiwan, which had remained restricted and not grown to profitable level, which was passed to Carrefour. The swap was an innovative way of gaining the opportunity to grow our business substantially in the highly competitive Czech and Slovak GIB (Belgium), markets .(Tesco International,2005) Clearly TESCO was looking to rely upon its area of strength and it was also categorical in recognizing an unresponsive market. "Similarly TESCO's acquisition of 142 Leader Price stores from Casino in 2006 was the latest bout of corporate jostling in the busy Polish market. This move strengthened TESCO's presence in the supermarket, rather than hypermarket, sector and shows that all store formats were being hotly contested by the main international retailers. However, some commentators say that all this activity does not necessarily put Poland high on the list of desirable target markets. As the Casino example shows, even big names with an established market are finding it tough. When TESCO describes the market as "highly fragmented and competitive", you know that for most new entrants it would be even tougher. Management consultancy AT Kearney does not even rank Poland in the top 30 of its latest Global Retail Development Index (GRDI), despite the fact that close neighbours Latvia, Slovakia, Hungary and Lithuania make the grade as countries representing attractive investment opportunities. The fact that Poland, the most important single national market in central Europe, has dropped out of this beauty contest does not mean it is stagnating. Far from it, according to AT Kearney head of retail Hana Ben-Shabat."After a first period of growth, there is always a plateau before it starts again," she says. There is a pause as consumers buy into new ways of shopping. "When that switch of consumer acceptance happens, the second wave starts. TESCO is trying to catch that second wave."" This clearly reflects at the foresight and vision of the top management at TESCO. This also exhibits the robust portion of their international strategy in that all incipient opportunities are recognized and quickly acted upon. Palmer (2002) studied TESCO for restructuring and divestment activities. According to this study restructuring and divestment activity is an important feature of international retailing activity. A key purpose of this study is to examine some of the learning dynamics from international retail divestment and market withdrawal experiences. Drawing on in-depth interviews with the leading investment banks and key retail executives at Tesco, the study investigates the company's international restructuring and divestment activities in Ireland and France during the mid -1980s and 1990s. The main conclusion from this study is that Tesco originally did not envisage divestment or de-internationalisation as part of the original internationalisation strategy process. There was no appreciation from Tesco during their early period of expansion of the fact that exit pressures might arise during the course of market entry. Tesco's divestment of the Three Guys and Catteau acquisitions helped improve the company's expansion techniques to prevent the commingling of the management lock-ins and sunk costs which made timely divestment of international operations very difficult. The scope and nature of the divestment activities in both Ireland and France were distinctively different, yet it is also apparent from the divestment cases that there were a number of key similarities. Works Cited TESCO-Core UK Food.(2006).Every Little Helps. TESCO-Non Food.(2006).Every Little Helps. TESCO International.(2005).Retrieved from www.tesco.com on November 29, 2006. BBC News.(1999).Business: The Economy UK investment boost in China. Wednesday, October 20, 1999 .Retrieved on November 11, 2006 from http://news.bbc.co.uk/1/hi/business/the_economy/480585.stm BBC News.(2004). Tesco gains a foothold in China.Wednesday, 14 July, 2004.Retrieved on November 11, 2006 from http://news.bbc.co.uk/1/hi/business/3892713.stm. Rance Crain.(2000).Agencies Press Get Global Plans but Clients Face Local Realities.Advertising Age.February 14,2000. Ghemawat,Pankaj.(2003).Semiglobalization and International Business Strategy.Journal of International Business Studies.34. Lynn, Michael, George M. 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