Tesco transformed from a domestic UK operator to a global retail giant over 10 years. It expanded internationally through acquisitions in Central Europe in the 1990s, and Asia in the late 1990s and 2000s, becoming highly successful in Thailand and South Korea but exiting Taiwan. Tesco also took the risky move of entering the large US market in 2007. By the late 2000s, 64% of Tesco's operating space and nearly 30% of its sales were outside the UK, making it one of the world's leading multinational retailers.
Just one of the boring presentations on TESCO with happy insights. Discussion on major topics about the company and deep insights on strategies implemented with really killer images in between. So check in if you may learn from it.
Tesco is the biggest retailer in UK now. Having operations in 14 countries with 2,291 stores spread globally, Tesco employs 296,000 people. Now their focus is on “Creating value for customers, to earn their lifetime loyalty” and strives to “be energetic, be innovative and be the first for the customer”. So the 21st customer has taken a great leap over “pile high, sell it cheap “strategy and demanding nature of the customer has forced Tesco to continuously improve
International MarketingRomeo JosonModule 3 A2.docxmariuse18nolet
International Marketing
Romeo Joson:
Module 3 A2
Introduction
Every market treats products differently when they are being introduced. Market penetration is thus an important factor that a firm has to consider when globalizing. This paper has specific focus on Tesco and its venture into the American market. Tesco is a United Kingdom firm that was initiated in 1919. The company has since growth to have over 2500 stores across the world. The largest share of Tesco’s market is in Europe and Asia.
The company has grown in revenue as well as in market capitalization. As a retail for households, Tesco is the third largest company in the world. In market capitalization, the company is second in its category. The company is listed in the London Stock exchange and part of FTSE 100 Index. Measured among all categories, Tesco is ranked 28th in market capitalization among the London Stock Exchange listed companies. This is a good ranking considering the expanse of the United Kingdom market and the competition globally, the ranking is a prove on the success of the management at Tesco.
Preliminary International Marketing Report You will be creating an international marketing report for an international brand/product. You will serve as a consultant to an international company breaking into the US market. Research and analyse at least two (2) current articles on an international brands’ effort to penetrate the U.S. market.
Case summary
Tesco declared its intentions to enter the American market in 2006 and started its first stores in 2007. Between 2008 and 2012, the company opened 200 chain stores in three western states. In 2014, the company sold the outlets in America to Ronald Burble’s Yucaipa Companies. The cost of disposing the branches was 1.2 billion dollars. However, the company retained the pen name fresh and Esay that was used in America for other products in UK.
Identify the relevant and applicable concepts and theories presented in the articles, compare, and contrast these concepts and theories to those from the text and other sources into your analysis.
Ryu, J. S., & Simpson, J. J. (2011). Retail internationalization: Lessons from" Big Three" global retailers' failure cases. Journal of Business & Retail Management Research, 6(1).
The above article identifies the challenges that have led to failure of some multinational companies’ failure in certain international markets. The article uses the case study of Wal-Mart, Carrefour, and Tesco to analyse the organizational needs, penetration methods and the importance of market perception in ensuring that a company’s brand is established in a new market. The authors identify three main causes of globalization failure in some countries by the case study organizations;
(1) Adapting to host culture and market;
(2) Attaining competitive advantages in the new market; and
(3) Achieving global mind set and strategy
While each of the three identified areas is important, the main ch.
Just one of the boring presentations on TESCO with happy insights. Discussion on major topics about the company and deep insights on strategies implemented with really killer images in between. So check in if you may learn from it.
Tesco is the biggest retailer in UK now. Having operations in 14 countries with 2,291 stores spread globally, Tesco employs 296,000 people. Now their focus is on “Creating value for customers, to earn their lifetime loyalty” and strives to “be energetic, be innovative and be the first for the customer”. So the 21st customer has taken a great leap over “pile high, sell it cheap “strategy and demanding nature of the customer has forced Tesco to continuously improve
International MarketingRomeo JosonModule 3 A2.docxmariuse18nolet
International Marketing
Romeo Joson:
Module 3 A2
Introduction
Every market treats products differently when they are being introduced. Market penetration is thus an important factor that a firm has to consider when globalizing. This paper has specific focus on Tesco and its venture into the American market. Tesco is a United Kingdom firm that was initiated in 1919. The company has since growth to have over 2500 stores across the world. The largest share of Tesco’s market is in Europe and Asia.
The company has grown in revenue as well as in market capitalization. As a retail for households, Tesco is the third largest company in the world. In market capitalization, the company is second in its category. The company is listed in the London Stock exchange and part of FTSE 100 Index. Measured among all categories, Tesco is ranked 28th in market capitalization among the London Stock Exchange listed companies. This is a good ranking considering the expanse of the United Kingdom market and the competition globally, the ranking is a prove on the success of the management at Tesco.
Preliminary International Marketing Report You will be creating an international marketing report for an international brand/product. You will serve as a consultant to an international company breaking into the US market. Research and analyse at least two (2) current articles on an international brands’ effort to penetrate the U.S. market.
Case summary
Tesco declared its intentions to enter the American market in 2006 and started its first stores in 2007. Between 2008 and 2012, the company opened 200 chain stores in three western states. In 2014, the company sold the outlets in America to Ronald Burble’s Yucaipa Companies. The cost of disposing the branches was 1.2 billion dollars. However, the company retained the pen name fresh and Esay that was used in America for other products in UK.
Identify the relevant and applicable concepts and theories presented in the articles, compare, and contrast these concepts and theories to those from the text and other sources into your analysis.
Ryu, J. S., & Simpson, J. J. (2011). Retail internationalization: Lessons from" Big Three" global retailers' failure cases. Journal of Business & Retail Management Research, 6(1).
The above article identifies the challenges that have led to failure of some multinational companies’ failure in certain international markets. The article uses the case study of Wal-Mart, Carrefour, and Tesco to analyse the organizational needs, penetration methods and the importance of market perception in ensuring that a company’s brand is established in a new market. The authors identify three main causes of globalization failure in some countries by the case study organizations;
(1) Adapting to host culture and market;
(2) Attaining competitive advantages in the new market; and
(3) Achieving global mind set and strategy
While each of the three identified areas is important, the main ch.
Islamabad No 1 Amil Baba In Pakistan amil baba kala ilm.docxamilabibi1
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2. 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 finance,
telecoms, online shopping channels) and, most significantly,
expanding out of its home market via one of the most com-
prehensive and sustained international diversifications
ever attempted by a UK company.
After commencing the first 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 firm 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 fledgling 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 firm’s global operating space, in the
region (see Table 1). South Korea now provided Tesco with
its second largest market by sales after the UK. Significantly,
Tesco had signalled its commitment to develop businesses
in two of the world’s key twenty-first 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 convenience-
oriented, 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 first 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 firms). 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 sufficient to rank the firm 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 five position in the ranking.
Additionally, those international sales and also operat-
ing profits (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 reflected rates of growth in the international
TESCO 659
Table 1 Tesco’s international operations
Year of Store numbers Regional % of operating
Region Country entry 2008/9 Employees 2008/9 space 2008/9
Europe Hungary 1994 149 21,356
Poland 1995 319 23,569
Czech Rep 1996 113 12,677
Slovakia 1996 70 8,286 30
Rep Ireland 1997* 116 13,764
Turkey 2003 96 7,025
Asia Thailand 1998 571 38,166
S. Korea 1999 242 20,626
Taiwan 2000 Exited market 2005
Malaysia 2002 29 9,872 33
Japan 2003 135 4,007
China 2004 70 19,452
India Announced entry 2008
North America USA 2007 115 2,581 1
* Re-entry in 1997 following unsuccessful entry in 1980s.
Source: Figures derived from Tesco Annual Report, 2009.
Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 659
3. 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,
Carrefour,Ahold,CasinoandDelhaize.Nevertheless,adecade
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 first 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.
660 TESCO
Table 3 Tesco’s international operating space, sales and operating profits as a percentage of the firm’s global
totals
2001/2 2003/4 2005/6 2007/8 2008/9 2010/12 Est
International operating space (%) 42.1 49.7 55.9 61.3 64.6 –
International sales* (%) 15.3 19.6 24.0 26.3 29.7 35.2**
International operating profit (%)
excluding US start-up losses 8.1 16.4 21.4 24.9 25.6 –
(including US start-up losses) – – – (22.5) (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.
Table 2 Leading multinational retailers ranked by sales outside home market 2006/7
International International sales % No. of countries
Rank Name of company Country of origin sales 2006/7 (US$m) of total, 2006/7 of operation
1 Wal-Mart US 77,100 22 14
2 Carrefour France 54,758 52 20
3 Ahold Netherlands 49,562 82 5
4 Metro Germany 45,125 56 30
5 Auchan France 24,204 50 11
6 Aldi Germany 23,476 47 14
7 Lidl & Schwarz Germany 23,103 46 22
8 IKEA Sweden 21,882 92 34
9 Tesco UK 21,678 26 12
10 Delhaize Belgium 19,914 77 8
11 Rewe Germany 17,445 32 14
12 Tengelmann Germany 15,989 46 15
13 Seven & I Japan 14,144 34 4
14 Pinault France 13,283 55 30
15 Costco US 11,793 20 8
Source: N.M. Coe and N. Wrigley (2009) ‘The Globalisation of Retailing’, volume 1, p. xviii. Cheltenham: Edward Elgar.
Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 660
4. In both countries, Tesco has made substantial and con-
tinuous post-entry capital investment to build scale and
accrue market leadership advantages. In Thailand the
investment has been pumped entirely into organic expan-
sion and has required store development programmes
of considerable flexibility. 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. Tesco’s ability
to finance those acquisitions (outbidding its rivals when
necessary) and to sustain a substantial annual capital
expenditure programme has rested on the firm’s steadily
growing profitability. That is to say, on the ‘free cash flow’
for investment generated from both its domestic and
international operations and the ability to raise capital at
advantageous rates which that profitability 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 struc-
tures 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 difficult, Tesco transferred its UK-developed small-
store operating skills and began infilling its hypermarket
framework with dense networks of small-format (Express)
convenience stores, first in metropolitan Bangkok, sub-
sequently in other leading cities. Those stores also had
the additional benefit 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 stripped-
down 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 polit-
ically unfeasible. Finally, it invested considerable effort
in working with local communities to counter mounting
regulatory pressures – explaining the value of the benefits
(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
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 find a suitable local partner and
was therefore obliged to attempt an entry based on de nuovo
expansion. However, not only had many of the potenti-
ally most attractive sites for expansion already been
developed by Carrefour, or were held under future develop-
ment option, but also the highly complex Chinese land
ownership system proved to be a difficult 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 under-
pinned its operations in Thailand and South Korea, With
a market share of barely 3 per cent it became increas-
ing clear both to the firm 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 profits.
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 firm would simultaneously secure
scale and benefit from strengthened market positions in
different countries. It was agreed that in Taiwan Tesco’s
six stores and two development sites would be trans-
ferred 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 Anti-
Monopoly Office. 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
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5. 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 five 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 significant shift in Tesco’s previous ‘emerging
market’-focused internationalisation strategy. As the CEO
of Fresh & Easy was to stress, the US represented: ‘the first
mature, well-served market, that we have opened into, so
actually [Fresh & Easy] is not filling 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 con-
sensus 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 profitability 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 grow-
ing 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-of-
centre stores become increasingly difficult to develop and
competition regulation which blocked large-scale acquisi-
tions 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-square-
feet urban ‘Metro’ stores and, additionally, had begun to
export the Express format to its international subsidiaries.
Growing confidence in its ability to operate small formats
profitably 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 success-
fully 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 opportu-
nities 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 special-
ist 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
significant consolidation of those chains. Additionally, it
recognised the traditional supermarket sector was essen-
tially 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 profitability 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
profitability. Moreover, it was exactly those urban markets
which, as a result of escalating community resistance,
Wal-Mart was finding it most difficult to enter with its
huge supercentres.
Dimensions of Tesco’s market entry and expansion
In November 2007, Tesco opened its first 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 identifier for each distinct
product.
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6. 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.
Significant 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 defining, launch-
ing and embedding the Fresh & Easy brand. Determined
efforts have been made by the firm to use blog and text-
messaging based communication with online commun-
ities of customers and potential customers. Although
occasionally these efforts have rebounded on the firm,
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 community-
specific 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 sim-
ilar 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
have jointly invested $170 million in processing plants
adjacent to Tesco’s DC and feed into the DC both shelf-
ready 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 fierce 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 confined 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 defining
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 financial market
support for the strategy. That was never likely to be pos-
sible with an entry into the USA. Despite the relatively
modest scale of the £1.25 billion five-year US investment
(compared to annual international capital expenditure
in 2008/09 of £2.1 billion) the firm, 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
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7. of the previously fast expanding western US markets
targeted by Tesco had been decimated. The pace of Fresh
& Easy’s store openings had been slowed and the opera-
tions of the chain had been subject to a period of intense
reappraisal. Start-up losses were running at a higher
level than planned, and the UK media was eagerly seeking
opportunities to announce a rare lapse in Tesco’s seem-
ingly unstoppable global expansion. Long term sceptics
amongst the equity analysts continued to argue that Tesco
was likely to ‘head for the exit’ and quit the US, writing off
£1 billion of investment in the process.
On the other hand, economic recovery was beginning
to emerge in the USA, the recession had provided oppor-
tunities for Tesco to build its store networks and acquire
APPENDIX Tesco’s leading multinational retail rivals
Wal-Mart: The world’s largest industrial corporation in terms of sales ($379 billion in 2008/09) and the leading multi-
national retailer. Wal-Mart operates outside its US base in 14 international markets, including Argentina, Brazil, Canada,
China, Japan, Mexico, the UK, and announced entry into India via a joint venture in 2006. Although widely viewed as
essentially a large-format, ‘big box’ retailer, Wal-Mart has increasingly become a multi-format retailer in parts (particu-
larly Latin America) of its international portfolio. Has enjoyed mixed fortunes internationally. Highly successful in Mexico
and Canada, it strengthened its position elsewhere in South and Central America with acquisitions from Ahold. Less
successful in parts of Asia and Europe (with the exception of its Asda chain in the UK) it was forced to exit Germany and
South Korea having failed to achieve market scale.
Carrefour: The world’s second largest retailer (but with annual sales in 2008/09 approximately one-third of Wal-Mart),
this French firm was the pioneer retail multinational. In the late 1980s it entered emerging markets in East Asia (notably
Taiwan) and South America (Brazil and Argentina) achieving ‘first-mover’ advantages and substantial profits. By the late
1990s, after its merger with French rival Promodes, it had operations in over 30 countries across Asia, South America and
elsewhere in Europe. During the 2000s it has divested operations in several markets in which it had failed to achieve
scale, but remains a widely dispersed retail multinational operating both large-format hypermarkets, supermarkets, and
also small-format ‘discount’ stores under the Dia fascia.
Royal Ahold: Leading Dutch retailer which by the late 1990s/early 2000s had an extensive international presence in
the USA, Latin America, East Asia, Scandinavia and Southern/Eastern Europe, promoting itself as a distinctive global
operator. Its aggressive growth strategy and tolerance of high financial leverage lost the confidence of financial markets
and in 2003 Ahold was the focus of a major corporate financial scandal. Subsequently Ahold was forced to sell many of
its operations in Latin America, Asia and Europe to protect its ‘core’ retail chains (Stop & Shop, Giant and Albert Hein) in
the USA and the Netherlands.
Metro: Second largest European retailer, this German firm has stores in over 30 countries across Asia Central, Eastern
and Southern Europe, with foothold positions in North Africa. Distinctively in many markets, it operates solely via a bulk
purchase ‘cash & carry’ format – under either the Metro or Makro fascias. The cash & carry (self-service warehouse) format,
which is targeted towards registered business customers only and in which Metro is the global leader, has frequently
allowed it to enter markets (e.g. India in 2003) as a ‘wholesaler’ where regulation restricts FDI by conventional retailers.
Aldi: German retail group, privately owned by the Albrecht family and divided into two divisions, Aldi Nord and Aldi Sud,
together operating over 8000 smaller format ‘hard discount’ stores in 20 countries across Europe, the USA and Australia.
In the USA an Albrecht family trust also owns the innovative Trader Joe’s chain concentrated in Southern California which
provided a model of the possibilities for Tesco’s US subsidiary.
future development sites with limited competition, the core
positioning of the ‘brand’ described by US Retailing Today
(November 2007) as occupying: ‘the white space where
the combination of good food, good value, convenience
and environmental sensitivity that matters to the emerging
American consumer converge’ retained its logic, and who
would be prepared to bet against Leahy’s reputational
commitment to the venture.
References:
i
Mason, T., The Times, 17 November 2007.
ii
Exstein, M., et al. (2007) ‘It may be fresh but it won’t be easy’,
Credit Suisse Equity Research, 14 February.
iii
Financial Times, 1 December 2007.
iv
Leahy, T. (2007) ‘Fresh but far from easy’, The Economist,
21 June. (Available at www.economist.com.)
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