Case Study
Internationalisation of Tesco

Introduction to Tesco

Started with a humble beginning in UK, Tesco has been growing very fast to become a powerful international retailing company around the world. In fact, it may be more appropriate to mention that Tesco had already become a diverse international business, thanks to the new strategic direction set by Tesco in 1997 – that is to broaden the scope of business for Tesco in order to achieve sustainable long term growth both in domestic UK and foreign markets. Today, Tesco is not merely a pure retailing company, but is also delivering various value-added services to consumers around the world (Lowe, 2009).

Current Operations of Tesco

Basically, most of Tesco revenue is derived from the retailing business around the world. Under the retailing business, it can be separated into two broad segments: (a) food and (b) non-food (which is further separated into the electrical, entertainment, toys, clothing, and online division). Besides the retailing business, Tesco is also offering retailing services to customers through four business units/ channel as follow: (a) Tesco Bank, (b) tesco.com, (c) Tesco Telecoms and (d) dunnhumby (Annual Report, 2010).

Tracking Tesco in the International Market

Generally, Tesco operated in three main regions around the world, namely Europe, UK and Asia. The countries in which Tesco has operation are shown in Figure 1 below. Apparently, Tesco has been expanding to less risky regions that promise future growth prospects. For example, to expand to US and countries around the Europe region (where most of them are developed countries) can deliver promising growth prospect for Tesco because there are a population with high purchasing power around these nations. Tesco expansion to these countries is of lower risk because: (a) relatively stable political environment, (b) many of these countries has similar (although not entirely same) culture with the British culture, (c) many citizens from these country can speak English, and have pretty similar social value with those people from UK. Similarly, many of the countries from Asia in which Tesco had expanded to have promising growth prospects, despite having a relatively less stable political environment. As the world economic growth is increasingly dependent on Asia, it is simply reasonable for Tesco to shift their growth attention to this region.

 

Figure 1: Tesco Stores around the World.

 1

Source: Annual report 2010 by Tesco PLC

Scanning/ Selecting the Most Promising Unexplored Market

As we had discussed above, although Tesco is an international company, it is found that there are many other countries where Tesco has not expanded to. This presents the company a lot of opportunities for future growth by expanding to these unexplored markets. In order to select the most suitable market for expansion purposes, Market Scanning Model proposed by Bray (2003) will be applied and adjusted. Figure 2 shows the adjusted Market Scanning Model by Bray (2003) that will be used in this paper.

 

Figure 2: Market Scanning Model

 2

Source: Bray (2003)

Identification of Corporate Strategy

As explicitly stated in the Annual Report of Tesco PLC in 2010, the strategy of Tesco is to “broaden the scope of the business to enable it to deliver strong, sustainable long-term growth by following customers into large expanding markets at domestic and new market abroad, initially in Central Europe and Asia and more recently in the United States”. As such, several observations can be made regarding the strategic intent of Tesco PLC:

  • Growth is to be achieved by expanding to new markets.
  • The three regions to be focus on for growth prospect are: Central Europe, Asia and US.
  • The new markets to be venture into must be large and expanding.

Selection of Key Region of Interest

As such, it is found that three regions are relevant for Tesco expansion for better growth prospects in the foreign market. The selection of these three regions (i.e., US, Europe and Asia) are reasonable, because (a) political stability in these regions are higher than those in other region (for example, particularly when compared to Africa or Middle East), (b) these combined regions contribute most of the market share around the world (i.e., contribute more than 85% of total world GDP), (c) combined population within these regions are the largest in the world, (d) most of the countries in these regions have friendly attitudes toward businesses and foreign direct investment (FDI), and (e) there is a trend of rising standard of living within people in these regions. Apart from that, since Tesco already having operations in these regions, it is more sensible and lower risk to choose a new market from these regions to be venture into. By doing this, Tesco may enjoy several benefits as follow: (a) synergy effects due to proximity of geographical location, (b) a better understanding on the local culture, (c) economies of scale and more easily planned and optimized value chains, (d) more recognized brand name in the region, and (e) more easy to collect data/ information required for formulation of new insight for the new venture.

However, to further select the best possible region for international expansion purposes, a comparison between these regions will be performed in table 1 below. For this, PESTLE framework for each of the region will be presented.

 

Table 1: Comparing Viability of the Three Regions – Europe, Asia and US (North America)

 table-1

From the analysis presented above, it is found that to expand to regions such as the North American or Europe region can be attractive, due to similarity of culture, excellent infrastructure available, good legal framework and structure and stable political structure and environment. However, the drawback of these regions is the gloomy economic outlook as well as a highly competitive business environment for the retail industry. From another perspective, Asia has less developed infrastructure, and marginally higher political risks. The cultural and social factors are also different. The attractions of expanding to Asia are due to the fast growing economy among the region, and partly due to less competitive retail industry landscape. Considering that the many challenges or risk in Asia are largely manageable, it is concluded that expansion to Asia could be favored. Such a decision is also reasonable and practical considering these issues: (a) the long term strategic intention of Tesco is to expand to fats growing region, (b) it is hard to gain market shares in a competitive industry landscape, and (c) the economy of Asia is expected to be improving, to the extent of surpassing the economy size of that from Europe and America in the long run.

Compilation of Key Scanning Criteria

From the section above, it is argued that Asia will be the best region for Tesco to venture into. However, there are many viable countries to be venture into in the Asia region. Thus, in this section, several scanning criteria to select the best nation for Tesco international expansion will be suggested.

  • Economic growth, i.e., increasing GDP for the past five years. (Reason: a trend of economic growth is critical for Tesco’s future profitability.)
  • Increasing GDP per Capital for the past five years. (Reason: rising standard of living means people have more disposable income, and higher purchasing power. It is important to see such a trend as Tesco is to venture into a fast growing market for higher growth prospect.)
  • Market Size (can be indirectly judge by the total population)
  • Proximity to current market already penetrated by Tesco
  • Political risk (e.g., possibility of terrorist attack; government’s attitudes toward foreign businesses, openness of local people to Western corporations)
  • Cultural/ Social/ Religion factors (e.g., cultural proximity and homogeneity)

Market Selection

In Asia, it is found that Tesco is already having operations in countries as follow: Japan, China, India, Malaysia, Thailand, and Korea. Obviously, Tesco had made accurate decisions to expand to these countries as all of these countries (except India) are located in the Indo-China Economic Region of Asia (starting from Japan, Korea, and China to South-East Asian countries, as shown in Figure 3). It is widely expected that growth of Asia will primarily come from that region in the next few decades. Thus, it is also suggested that the new nations to be explore or ventured into should lie within such a vibrant economic region of Asia. That leaves us with several countries, such as Singapore, Vietnam, Indonesia and Philippines.

 

Figure 3: Indo-China Economic Region of Asia

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Source: http://people.hofstra.edu/Jean-paul_Rodrigue/GESA/topic1/gdppercapita.html

[Please refer to Appendixes for more information]

 

As such, a comparison of these countries, namely: Singapore, Vietnam, Indonesia and Philippines will be presented in Table 2 below.

 

Table 2: Economic Statistics for Singapore, Vietnam, Indonesia and Philippines

 table-2

Source: http://data.worldbank.org/indicator/

 

In Table 3 below, other non-statistical issues on these countries are summarized. The discussion for the contents in the table below is shown in the next paragraphs.

 

Table 3: Comparisons of Singapore, Vietnam, Indonesia and Philippines

 table3

From the analysis above, it is found that all of the four countries are viable options for Tesco’s international expansion. Generally speaking, higher risks can come with higher reward. The highest risk can comes from expanding to countries such as Indonesia, Philippines and Vietnam. The risk of Indonesia is due to: different cultural setting, potentially anti-Westerner culture, existence of natural disasters such as earthquake, volcano and tsunami. For Philippines, risks mainly come from unstable political situation, and natural disasters. In fact, Philippines is the most unattractive country in the four options above, as that country is of high risks, as well as having lower economic growth, lower GDP (even when compared to a small Singapore ISLAND) and low purchasing power among the citizens. That will leave us with three countries – Singapore, Vietnam and Indonesia. However, considering that Indonesia is of an Islamic-oriented culture, conflicts between Tesco with the local Islamic activists may harm Tesco operations in the future. Unless there are already no better options for expansion purposes, Indonesia should not be considered as a viable country for expansion at this point of time. So we left with Singapore and Vietnam. Among the two countries, Singapore is preferred because (a) lower risks, (b) modern culture, (c) friendly business environment, (d) enable Tesco to further enhance its brand equity in Asia, (e) rich population, (f) almost everyone can speak English (i.e., actually an ex-commonwealth country), (g) highly stable political situation, and (h) no natural disaster. Vietnam indeed is a highly promising country, but at this point of time, it is still high risks to do business there. Tesco can wait and learn some lessons from others’ mistakes in this country. So, it can be concluded that Singapore is the best country for Tesco’s further expansion into the international context.

Conclusion

In this paper, a top down approach to country selection in the context of international retailing expansion was employed. It is found that Singapore is perhaps the best market to be tackled by Tesco. Although the population is relatively small, people from Singapore are relatively wealthy – and willing to spend. Besides, Singapore is also a wonderful country that encourages business activates. Expansion to Singapore will be a low risk strategy, and yet the expected reward is satisfactory. It is a low hanging fruits that should be picked by Tesco for the next expansion plan.

References & Bibliography

 

Annual Report. (2010). Tesco Plc.

Jeon, B. N., & Ahn, S. Y. (2004). Multinational Corporations and Host Country Receptivity: Perceptions from Three Asian Countries. Multinational Business Review, 12(2), 17-36.

Lowe, M., & Wrigley, N. (2009). Innovation in retail internationalisation: Tesco in the USA. The International Review of Retail, Distribution and Consumer Research, 19(4), 331.

Ma, Y., Ding, J., & Hong, W. (2010). Delivering Customer Value Based on Service Process: The Example of Tesco.com. International Business Research, 3(2), 131-135.

Mirza, H., & Giroud, A. (2004). Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam. Asian Development Review, 21(1), 66-98.

Palmer, M. (2005). Retail multinational learning: a case study of Tesco. International Journal of Retail & Distribution Management, 33(1), 23-48.

Plimmer, G. (2010). Scoring points: How Tesco continues to win customer loyalty. Journal of Revenue and Pricing Management: Special Issue: AGIFORS 2009 Conference, 9(4), 377-378.

Rogers, H., Ghauri, P. N., & George, K. L. (2005). The Impact of Market Orientation on the Internationalization of Retailing Firms: Tesco in Eastern Europe. The International Review of Retail, Distribution and Consumer Research, 15(1), 53-74.

Schmidt-Hebbel, K. (2010). A gloomy outlook. Organisation for Economic Cooperation and Development. The OECD Observer, (270/271), 56-57.

Shultz, C. J., &  Ardrey, W. J. (1997). Asia’s next tiger? Marketing Management, 5(4), 26-37.

SOUTHEAST ASIA’S ECONOMIC PERFORMANCE: Achievements and Challenges. (2004). Southeast Asian Affairs, 20-55.

Tesco leads the way in the loyalty program stakes :UK supermarket succeeds where so many others fall foul. (2007). Strategic Direction, 23(2), 18.

Tesco staff keep hands on the wheel :Objectives managed and steered to appraisal. (2009). Strategic Direction, 25(9), 5-8.

 

 

Appendixes

Further Explanation for Figure 3:

The main economic regions of Pacific Asia are:

  • JAKOTA: Japan / Korea / Taiwan, the most advanced segment with high standards of living and high levels of technological development. Those entities have a long tradition of innovation.
  • Coastal China: A fast growing segment with three major poles; Beijing, Shanghai and Pearl River Delta. Most of the interior provinces of China have not experienced substantial economic growth. If is mainly a factor of accessibility which is at play, since the export-oriented coastal regions can trade with the rest of the world from their major ports.
  • ASEAN Core: The most advanced segment of Southeast Asia. It includes an axis extending from southern Thailand, through Malaysia and unto Singapore.
  • ASEAN Periphery: Lesser advanced segments of Southeast Asia. Mainly articulated along three major poles, namely Vietnam, Luzon (Manila) and Java.
  • North Korea & Burma: Trade sanctions and economic isolation.

 

 

 

 

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