This case considers the emergence of Tesco plc as one of the world’s leading multinational retailers. In a remarkable 10-year period, Tesco has transformed itself from a purely domestic operator to a multinational giant – with subsidiaries in Europe, Asia and North America – and in 2009 had 64 per cent of its operating space outside the UK. Examining market entry into Asia in more detail, the case compares ‘success’ in Thailand and South Korea with ‘failure’ in Taiwan. It also considers ‘a high risk gamble’ in Tesco’s entry into the US market, long considered to be a graveyard of overambitious expansion by UK retailers.
G G Introduction In April 2009, Tesco, the UK’s largest retailer and private sector employer of labour, announced annual sales for 2008/09 of almost ? 60 billion (x66bn or $90. 2bn) together with pro? ts of ? 3 billion (x3. 3bn or $4. 5bn).
After a dramatic decade-long transformation from purely domestic operator to multinational giant, Tesco now had a remarkable 64 per Source: Getty Images. cent of its operating space outside the UK, was developing increasingly strong businesses across 11 Asian and European markets, had a rapidly expanding
‘start-up’ subsidiary operating in the western USA, and had announced its entry into the Indian market. Moreover, as signalled in both the title of its Annual Report (Value Travels) and the prominence given in that report to its international pro? le, the ? rm was publicly expressing its con? dence that it had mastered the art of international expansion, so long a weakness of UK retailing. Tesco’s emergence as the world’s third largest retailer, operating 2025 stores and employing 183,600 staff outside the UK by 2008/09, represents one of the most successful examples of strategic diversi?
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cation by any UK company and offers insight into the role of the ‘corporate strategist’, the CEO. International expansion – from the UK to Central Europe, Asia and North America In the early 1990s Tesco was the UK’s second largest food retailer, lagging behind the market leader Sainsbury’s in G terms of sales density, turnover growth and pro? tability. Over the next decade it managed a remarkable transformation – repositioning itself from its discount roots into a mass market customer-focused retailer serving all segments of the UK market. By judicious acquisition of some smaller rivals, and by innovative and
?exible store development programmes which by the mid-2000s had transformed it into a genuine multi-format operator with 72 per cent of its UK stores in smaller convenience/ supermarket formats of less than 15,000 square feet, it ? rst captured market leadership in the UK then progressively accelerated its lead over closest rivals Sainsbury’s and Asda/ Wal-Mart. By 2007, on a conservative de? nition of the UK grocery market, its share was 27. 6 per cent – almost twice as large as Asda/Wal-Mart and Sainsbury’s with 14. 1 per cent and 13. 8 per cent respectively. Simultaneously, as that gap ?
rst emerged in the late 1990s and then widened, Tesco, as the increasingly dominant market leader, faced growing regulatory pressure relating to both marketcompetition conditions and land-use planning restrictions. It also experienced increasingly adverse media scrutiny and orchestrated campaigns to ‘rein in’ its visibly growing power. In response to the latter it moved quickly to embrace agendas of community responsiveness, urban regeneration, sustainable development, and ethical/responsible sourcing to address what the UK Government’s Department for Environment, Food and Rural Affairs described as ‘rising
consumer expectations regarding the social responsibilities This case was prepared by Michelle Lowe, Professor of Retail Management, University of Survey and Lead Innovation Fellow AIM and Neil Wrigley, Professor of Geography, University of Southampton and Editor of Journal of Economic Geography. It is intended as a basis for class discussion and not as an illustration of good or bad practice. © Michelle Lowe and Neil Wrigley. Not to be reproduced or quoted without permission. Z01_JOHN2020_09_SE_EM18. QXD 10/13/10 9:09 Page 659 TESCO 659 Table 1 Tesco’s international operations Year of entry
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Store numbers 2008/9 Employees 2008/9 Hungary Poland Czech Rep Slovakia Rep Ireland Turkey 1994 1995 1996 1996 1997* 2003 149 319 113 70 116 96 21,356 23,569 12,677 8,286 13,764 7,025 Thailand S. Korea Taiwan Malaysia Japan China India 1998 1999 2000 2002 2003 2004 571 242 38,166 20,626 Exited market 2005 29 9,872 135 4,007 70 19,452 Announced entry 2008 USA 2007 115 Region Country Europe Asia North America 2,581 Regional % of operating space 2008/9 30 33 1 * Re-entry in 1997 following unsuccessful entry in 1980s. Source: Figures derived from Tesco Annual Report, 2009. of supermarkets’.
In response to regulatory pressures, Tesco progressively refocused its operations and capital investment in an attempt to secure long-term growth – diversifying into non-food products and retail services (personal ? nance, telecoms, online shopping channels) and, most signi? cantly, expanding out of its home market via one of the most comprehensive and sustained international diversi? cations ever attempted by a UK company. After commencing the ? rst stage of international expansion in Europe – entering the emerging post-Soviet consumer markets of Central Europe in the mid-1990s (see
Table 1) – Tesco launched the next stage of its strategy in 1998. Following Terry Leahy’s appointment as CEO in 1997, it committed to an Asian expansion programme, initially entering Thailand and South Korea. The growth potential of the Asian markets had been extensively researched by the ? rm for a number of years. However, the immediate catalysts for entry were the rapid liberalisation of previous restrictions on retail FDI across East Asia, and opportunities to make strategic majority-share acquisitions of ? edgling but potentially market leading retail businesses at discounted
prices, which resulted from the Asian economic crisis of 1997/98. Tesco’s subsequent expansion in Asia was dramatic. Just 10 years later it had 1047 stores, accounting for 33 per cent of the ? rm’s global operating space, in the region (see Table 1).
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South Korea now provided Tesco with its second largest market by sales after the UK. Signi? cantly, Tesco had signalled its commitment to develop businesses in two of the world’s key twenty-? rst century economies, China and India. In China it was rapidly building the scale of its operation following entry in 2004, and in India it
had successfully negotiated a partnership arrangement for entering a market in which ownership of retail businesses by international operators was still strictly regulated. On the other side of the world, Tesco had taken the potentially transformational, but high risk decision to enter the USA – the world’s largest consumer market. Building on Leahy’s strategic vision of the market opportunity to develop dense networks of a new breed of convenienceoriented, smaller-format stores served by a short-lead-time integrated food preparation/distribution system, Tesco had announced entry into the western USA in 2006. By
the end of 2008, a year after opening its ? rst store, it had already rolled out a chain of 115 stores together with a 675,000 square feet distribution centre with capacity to serve over 500 stores in Southern California, Arizona and Nevada. As a result of this international expansion, by the mid-2000s Tesco had moved into the elite group of multinational retailers. As Table 2 shows, by 2006/07 there were 15 retailers generating sales outside their home markets of over $11 billion per annum (see Appendix for summaries of the key ? rms).
For a variety of reasons – including the higher development costs (and associated
sales densities) required in the tightly regulated UK market, and the relative ‘immaturity’ of a higher proportion of its international space – Tesco’s international sales growth inevitably lagged behind the increase in its international operating space. Nevertheless, at more than $20 billion those sales were suf? cient to rank the ? rm within the top 10 multinational retailers (Table 2).
By 2008/09 Tesco’s international sales had increased by a further 60 per cent, propelling it into a top ? ve position in the ranking. Additionally, those international sales and also operating pro?
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ts (if US start-up losses are excluded) were slowly but progressively moving into closer alignment with the proportion of international operating space (Table 3).
In turn, that re? ected rates of growth in the international Z01_JOHN2020_09_SE_EM18. QXD 660 10/13/10 9:09 Page 660 TESCO Table 2 Leading multinational retailers ranked by sales outside home market 2006/7 Rank Name of company Country of origin 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Wal-Mart Carrefour Ahold Metro Auchan Aldi Lidl & Schwarz IKEA Tesco Delhaize Rewe Tengelmann Seven & I Pinault Costco International sales 2006/7 (US$m)
International sales % of total, 2006/7 No. of countries of operation 77,100 54,758 49,562 45,125 24,204 23,476 23,103 21,882 21,678 19,914 17,445 15,989 14,144 13,283 11,793 22 52 82 56 50 47 46 92 26 77 32 46 34 55 20 14 20 5 30 11 14 22 34 12 8 14 15 4 30 8 US France Netherlands Germany France Germany Germany Sweden UK Belgium Germany Germany Japan France US Source: N. M. Coe and N. Wrigley (2009) ‘The Globalisation of Retailing’, volume 1, p. xviii. Cheltenham: Edward Elgar. Table 3 Tesco’s international operating space, sales and operating profits as a percentage of the firm’s global totals
2001/2 International operating space (%) International sales* (%) International operating profit (%) excluding US start-up losses (including US start-up losses) 2003/4 2005/6 2007/8 2008/9 2010/12 Est 42. 1 15. 3 49. 7 19. 6 55. 9 24. 0 61. 3 26. 3 64. 6 29. 7 – 35. 2** 8. 1 – 16. 4 – 21. 4 – 24. 9 (22. 5) 25. 6 (20. 3) – – * ex-VAT. Source: Figures calculated by authors from statistics available in Tesco Annual Reports and Financial Statements, except **Bank of America/Merrill Lynch estimate 8 December 2009. subsidiaries which continued to exceed those achievable
in Tesco’s ‘mature’ and highly regulated home market. Success in Asia – Thailand and South Korea At the point of market entry into Thailand and South Korea in 1998/99, Tesco acquired majority stakes in two retail chains (Lotus in Thailand and Homeplus in South Korea) together having fewer than 20 stores or development sites and operating in markets still dominated by traditional forms of retailing. Whilst the growth potential for ‘modern’ retail across Asia was considerable, that potential was simultaneously attracting many of Tesco’s major European and North American competitors – including Wal-Mart,
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Carrefour, Ahold, Casino and Delhaize. Nevertheless, a decade later Tesco had successfully turned foothold acquisitions into positions of market leadership (Thailand) or potential market leadership (South Korea), had developed extensive multi-format store networks (exceeding 800 stores), and had outperformed its multinational rivals to the extent that Wal-Mart and Carrefour had been forced to exit South Korea leaving Tesco as the dominant international retailer in both countries. Some of the key dimensions of Tesco’s success in those markets related to its mode of market entry, its determined
efforts to build market scale, and its adaptive responses to growing pressures across East Asia for tighter regulation of the expansion of multinational retailers. The Asian economic crisis of 1997/98 left major domestic conglomerates urgently seeking cash injections. As a result, Tesco was able to enter both markets via majority-share partnerships in the non-core retail businesses of the leading conglomerates: the CP Group in Thailand and Samsung in South Korea. Initially Tesco’s share of the partnerships was 75 per cent in Thailand and 81 per cent in South Korea. However, subsequent capital injections
by Tesco into the expansion of the chains rapidly reduced CP Group’s share to zero, and Samsung’s share ? rst to 11 per cent and then in two subsequent stages to 1 per cent. Despite this rapid dilution of the local partners’ share of the businesses, the partnerships offered Tesco knowledge of local business/regulatory conditions and consumer culture, plus the ability to build upon the ‘local’ appeal and customer image of the acquired chain – particularly in South Korea where retention of the Samsung name (Samsung-Tesco) proved to be essential. Z01_JOHN2020_09_SE_EM18. QXD 10/13/10 9:09 Page 661
TESCO In both countries, Tesco has made substantial and continuous post-entry capital investment to build scale and accrue market leadership advantages. In Thailand the investment has been pumped entirely into organic expansion and has required store development programmes of considerable ? exibility. In South Korea, ‘within market’ acquisitions – 36 ex-Carrefour ‘Homever’ hypermarkets for ? 950 million in 2008 and 12 Aram Market hypermarkets in 2005 – have been used to enhance its market position and to keep pace (as the country’s second ranked operator) with the domestic market leader E-Mart.
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Tesco’s ability to ? nance those acquisitions (outbidding its rivals when necessary) and to sustain a substantial annual capital expenditure programme has rested on the ? rm’s steadily growing pro? tability. That is to say, on the ‘free cash ? ow’ for investment generated from both its domestic and international operations and the ability to raise capital at advantageous rates which that pro? tability ensures. Capital investment in both countries has occurred against a background of pressures (felt across many parts of East Asia) to tighten regulation and rein in expansion of the multinational retailers.
Those pressures have ranged from attempts to re-impose restrictions on ownership and control, through efforts to protect existing retail structures via land-use zoning, to regulation of store-opening hours, retail formats, and ‘below cost’ selling. In Thailand, as development of large-format hypermarkets became more dif? cult, Tesco transferred its UK-developed smallstore operating skills and began in? lling its hypermarket framework with dense networks of small-format (Express) convenience stores, ? rst in metropolitan Bangkok, subsequently in other leading cities. Those stores also had the additional bene?
t of being unrestricted by opening hours’ regulation introduced to limit trading hours of larger-format stores. Additionally, it developed a novel low-build-cost ‘Value’ store format – essentially a strippeddown small hypermarket embedded within a local vendor market – to provide an entry vehicle for development in low-income rural ‘up country’ towns where expansion using conventional large-format hypermarkets was politically unfeasible. Finally, it invested considerable effort in working with local communities to counter mounting regulatory pressures – explaining the value of the bene?
ts (employment, supply chain modernisation, infrastructure investment, skills training, export gateway opportunities) it offered to the Thai economy, and stressing the potential coexistence of ‘traditional’ and ‘modern’ components of the retail system. Failure in Asia – Taiwan Tesco entered Taiwan in 2000, developed six stores, and exited the market in 2005. In simple terms, several of the elements which had been key drivers of Tesco’s success 661 in Thailand and South Korea were absent in Taiwan. In particular, Tesco entered the market in which one of its major multinational retail competitors, Carrefour, had
been operating for more than a decade and had built a strong and, in practice, unassailable market dominance. Moreover, unlike Thailand and South Korea and Tesco’s subsequent Asian market entries into Malaysia and China, Tesco was unable to ? nd a suitable local partner and was therefore obliged to attempt an entry based on de nuovo expansion. However, not only had many of the potentially most attractive sites for expansion already been developed by Carrefour, or were held under future development option, but also the highly complex Chinese land ownership system proved to be a dif? cult arena in which
to transfer Tesco’s skills in market/site location analysis and property acquisition/development. As a result, despite determined efforts, Tesco was never able to develop the market scale necessary to support the substantial infrastructure investment required for the type of central distribution systems which so vitally underpinned its operations in Thailand and South Korea, With a market share of barely 3 per cent it became increasing clear both to the ? rm and to industry analysts that there was little realistic opportunity of achieving a market penetration level in Taiwan where the subsidiary would
become self-reinforcing in terms of pro? ts. The asset swap market exit solution In late 2005 Tesco announced an innovative strategic divestment solution to its problems in Taiwan. The solution involved a cross-region swap of retail assets with its rival Carrefour, whereby each ? rm would simultaneously secure scale and bene? t from strengthened market positions in different countries. It was agreed that in Taiwan Tesco’s six stores and two development sites would be transferred to Carrefour whilst, in exchange, in Central Europe Carrefour would transfer 11 stores in the Czech Republic
and four stores in Slovakia to Tesco. The deal clearly had competition and consumer welfare implications as it enhanced the dominance of the market leader in each country. Ultimately it was approved in Taiwan and the Czech Republic but in Slovakia was blocked by the AntiMonopoly Of? ce. Nevertheless, the Slovakian element of the swap was relatively small, and Tesco was able to exit its only unsuccessful Asian operation, learn valuable lessons for other Asian market entries, and simultaneously to strengthen its market position in Central Europe. Relative failure had been transformed into modest success by an
agile and innovative strategic divestment. A high risk gamble in the USA In February 2006, after a year of intensive but closely guarded market research by a CEO-selected team of Z01_JOHN2020_09_SE_EM18. QXD 662 10/13/10 9:09 Page 662 TESCO managers despatched to Los Angeles, and building on more than a decade of in-depth investigation of the potential and characteristics of the market, Tesco announced its intention to commit ? 1. 25 billion over ? ve years to enter the western USA. The entry vehicle was to be a chain of ‘convenience’ focused neighbourhood stores, later to be called Fresh & Easy Neighborhood Markets.
The decision represented a signi? cant shift in Tesco’s previous ‘emerging market’-focused internationalisation strategy. As the CEO of Fresh & Easy was to stress, the US represented: ‘the ? rst mature, well-served market, that we have opened into, so actually [Fresh & Easy] is not ? lling a vacuum and has to earn its place’. i It was also, very clearly, a high risk decision as the US market had a long record of proving to be the ‘graveyard’ of overambitious expansion by UK retailers. As a result, the entry announcement generated widespread scepticism of Tesco’s ability to succeed where so many
others had failed. Indeed, even sympathetic analysts questioned Tesco’s ability to achieve the targets (e. g. store productivity) implicitly set for the US venture. The consensus view in Credit Suisse’s (2007) terms was: ‘it may be fresh, but it won’t be easy’. ii Tesco’s decision to enter the US also represented an important reversal of its previous view of the likelihood of success in the market. Indeed, it had consistently resisted many opportunities to enter the USA via acquisition of regional food retailer chains of conventional large-format supermarkets – not least because of their track record
of low pro? tability and the threat posed to them by the decade-long supercentre-driven transformation of Wal-Mart from purely general merchandise to US food retail market leader. The change in Tesco’s assessment related to its growing skills in small format store operation, its belief in the competitive potential of dense networks of ‘convenience’focused neighbourhood stores providing an innovative retail offer, and evidence that the Wal-Mart threat could be countered in the type of urban markets Tesco had targeted for its US expansion. Tesco’s small format retail skills had developed in the
UK as a competitive response to tightening regulation – both planning regulation which made large format out-ofcentre stores become increasingly dif? cult to develop and competition regulation which blocked large-scale acquisitions but offered an opportunity for growth by acquisition in the convenience store market. In part, however, those skills had been developed proactively to gain competitive advantage in a rapidly expanding ‘convenience culture’ market. By the mid-2000s, the result was that Tesco had 700 Express convenience stores in the UK, supplemented by a range of other smaller format stores, e.
g. 15,000-squarefeet urban ‘Metro’ stores and, additionally, had begun to export the Express format to its international subsidiaries. Growing con? dence in its ability to operate small formats pro? tably offered Tesco the opportunity to explore a US market entry focused around ‘convenience’. Additionally, it recognised that the model of dense networks of 10,000 square feet of high visibility corner-location stores successfully used by US drug retailers (chemists) such as Walgreens could be used to structure a chain of smaller format food stores on a mutually reinforcing network logic.
In terms of retail offer, Tesco recognised that opportunities existed to exploit the extensive experience of UK food retailers in chilled prepared-meals development and operation of the cool-chain distribution/logistics systems required by those products. US food retailers, and in turn the US food manufacturing industry, had traditionally offered few of these products to customers and the specialist distribution/logistics and quality control/traceability systems necessary to support extensive retail offers of that type were underdeveloped. As a result opportunities existed to develop a chain focused on offering high quality but
affordable fresh and chilled prepared meal products, served by a short lead time responsive distribution system, supplying higher levels of own label products than typical amongst US food retailers. In respect of the threat posed by Wal-Mart, Tesco recognised that impact to have been particularly strong on the weaker US regional supermarket chains – driving signi? cant consolidation of those chains. Additionally, it recognised the traditional supermarket sector was essentially being squeezed between the Wal-Mart-led supercentre operators and a new group of discount retailers operating
smaller format stores and achieving much higher levels of pro? tability than the supermarket chains. In particular the stores of the Albrecht family – Aldi on the east coast and Trader Joe’s in the west – provided Tesco with evidence that the threat of Wal-Mart could be accommodated. The innovative Trader Joe’s in particular offered a model of what was possible in the metro markets of the western USA, operating with exceptionally high sales densities and pro? tability. Moreover, it was exactly those urban markets which, as a result of escalating community resistance, Wal-Mart was ? nding it most dif?
cult to enter with its huge supercentres. Dimensions of Tesco’s market entry and expansion In November 2007, Tesco opened its ? rst Fresh & Easy stores in Southern California. They averaged 10,000 square feet and carried a tightly edited range of 3500 SKUs1 with a focus on fresh and chilled prepared-meal products. Served by a ‘short lead time’ integrated food preparation/ distribution system, they were based around entirely 1 SKU = Stock Keeping Unit, i. e. a unique identi? er for each distinct product. Z01_JOHN2020_09_SE_EM18. QXD 10/13/10 9:09 Page 663 TESCO self-scanning checkouts.
Described by Fresh & Easy’s CEO as ‘designed to be as fresh as Whole Foods, with the value of Wal-Mart, the convenience of Walgreens, and a product range of Trader Joe’s’,iii the stores were rapidly rolled out in Southern California, Phoenix and Las Vegas, and a year later exactly 100 had opened. Signi? cant features of Tesco’s US experience include: 1 Attempts to engage with an online consumer culture. In contrast to its previous international market entries, Tesco has proactively adopted digital/viral marketing techniques to address the challenge of de? ning, launching and embedding the Fresh & Easy brand.
Determined efforts have been made by the ? rm to use blog and textmessaging based communication with online communities of customers and potential customers. Although occasionally these efforts have rebounded on the ? rm, Tesco has continued to explore these methods and to transfer learning into its wider international operations. 2 Establishing brand visibility and maximising development opportunities via investment in underserved communities. An important component of Tesco’s entry into Los Angeles has been its commitment to develop stores in low income/deprived and ethnically segregated communities
– visibly underserved by its major US competitors. Transferring the development-coalition and communityspeci? c retail operating skills gained since the late 1990s in opening ‘urban regeneration partnership’ stores in deprived areas of many UK cities, Tesco quickly developed stores in Compton, South Central and similar areas of Los Angeles. Its continuing commitment to investment in underserved communities has, on the one hand, gained strong local community support and increasing national recognition, leading to a more rapid establishment of brand identity than might otherwise
have been expected. On the other hand it has provided a rallying point for a variety of groups (notably retail labour unions strongly opposed to Tesco’s decision to operate its US stores on a non-unionised basis) antagonistic to its market entry. 3 Integrated food production/distribution supported by follower-suppliers. To ensure reliable availability of high quality prepared food products critical to its vision of the Fresh & Easy brand in a context where it had concerns about prevailing quality/traceability standards of local third-party production, Tesco has been obliged to take
the unusual step of managing its own food preparation. It has developed an 80,000 square feet ‘food preparation’ facility alongside its distribution centre (DC) in Riverside, and has been supported by the simultaneous move to California of two of its leading UK suppliers – Nature’s Way Foods and 2 Sisters Food Group. These companies 663 have jointly invested $170 million in processing plants adjacent to Tesco’s DC and feed into the DC both shelfready packaged produce and also 40 per cent of the prepared meat, poultry, fruit and vegetable ingredients used in the food preparation facility.
4 A surprisingly muted initial competitive response. Entry of one of the world’s largest retailers into the home market of the global leader (Wal-Mart), and into cities highly contested by leading US domestic operators, could be predicted to produce a ? erce competitive response. Given the inability to protect the ‘front region’ innovations underlying its US chain, Tesco essentially had to attempt to lay down store networks as rapidly as possible before drawing that anticipated response. Within a year of Fresh & Easy’s launch Wal-Mart had begun to trial a chain of small format stores closely
modelled in terms of size, SKUs and neighbourhood orientation on the Tesco stores. However, by late 2009 those ‘Marketside’ stores remained con? ned to just four locations in Phoenix. Although scaling up of the trial was anticipated, Tesco had been given unexpected time to continue developing its store network density and to respond to ‘front region’ innovations (ranging, signage, store atmospherics) in the prototype Marketside stores. 5 The reputational gamble of the CEO. One of the de? ning characteristics of Leahy’s strategic realignment of Tesco as a multinational operator had been his ability to
engineer that transformation largely under the radar of hostile public scrutiny and retain ? nancial market support for the strategy. That was never likely to be possible with an entry into the USA. Despite the relatively modest scale of the ? 1. 25 billion ? ve-year US investment (compared to annual international capital expenditure in 2008/09 of ? 2. 1 billion) the ? rm, and its CEO in particular, was acutely aware of both the reputational risks and potentially transformational consequences of the US venture in the case of either success or failure. We’ve carefully balanced the risks. If it fails it’s
embarrassing. It might show up in my career [but] it’ll cost an amount of money that is easily affordable by Tesco – call it ? 1 billion if you like. If it succeeds then it’s transformational. iv Leahy has, in effect, been required to publicly place his considerable ‘reputational equity’ on the line and has found it necessary to repeatedly signal strategic ‘commitment’ to the US venture. Success or failure in the USA – the jury remains out By late 2009 Tesco had opened more than 130 stores in the USA. In the face of a global economic crisis with origins in the sub-prime US housing market, the growth of some
