EXECUTIVE SUMMARY After years and years of pursuing Sainsbury as the United Kingdom’s largest retailer, Tesco PLC broke through in 1995 and has become not only the largest retailer in the UK, but also the world’s 4th largest retailer, trailing only Wal-Mart, Carrefour and Germany’s Metro AG. Originally, Tesco’s soul focus was the retail grocery market. As of February 2010, the grocery market continues to be Tesco’s largest source of revenue and it has accounted for more than 50% of Tesco’s ? 59. 4 billion of sales. Further, Tesco does not limit its operation strictly to the United Kingdom.
Currently, Tesco resides in 13 countries worldwide and operates 1,911 stores across Europe and Asia. The company has also expanded in the United States and has plans for an additional 320 stores in 2010 across the world. Australia’s economic and political stability and skilled labour force, provides a welcoming environment for foreign investors. With respect to the retail industry, consumer goods expenditure of 183 billion US $ in 2009 and an expected 212 billion US $ in 2010 presents significant opportunity to foreign retailers. However, risk exists as there is a limited presence of related and supporting industries for non-food products.
As well, domestic rivalry remains strong in both grocery and non-food segments. The objective is to implement Tesco’s hypermarket store format in Australia while increasing the company’s global market share. Tesco’s main competitors include domestic retailers such as Woolworths and Wesfarmers Limited and as well, Costco from the United States. The entry strategy into Australia will be an International Joint Venture with Coles Supermarkets, owned by Wesfarmers. Many Coles supermarket stores will then be remodeled into Tesco branded hypermarkets.
In addition, Tesco will further employ its differentiation strategy by offering different departments and services to consumers. Since there may be hesitation in accepting a foreign retailer in this market, Marketing will be Tesco’s most important functional strategy. Lastly, Tesco will continue to explore other potential revenue streams in the Australian market through additional retailing services and new opportunities INTRODUCTION to TESCO and their INTERNATIONAL STRATEGY Tesco PLC, founded in 1919, continues to employ a business model that revolves around satisfying its customers and simplifying their shopping experience.
In the United Kingdom, Tesco has relied on a multiple format approach to succeed in the grocery market; the branding of different types of stores differentiated based on size and product diversification. From a small convenience store called Tesco Express, to a mid-size store called Tesco Metro, to a Tesco Supermarket, to a Tesco hypermarket called Tesco Extra and to online grocery delivery services, Tesco brings adds dimensions of value to the market and helps mitigate the potential risks of external factors (“Markets served and business model”, 2009).
In addition, The company has been very successful in following customers into expanding markets within the UK, such as financial services, non-food related goods, telecommunications and garden centres and has effectively implemented this same approach in new markets abroad (“Long Term Strategy”, 2009). Tesco’s primary strategy objective resides in becoming a successful international retailer. Tesco’s reasoning for becoming a multinational enterprise was to obtain sustainable long-term growth by alleviating reliance on its domestic market.
As a result of market saturation and limited growth potential in the UK throughout the 1990s and into the 2000s, Tesco has had to explore opportunities in foreign markets to not only build on but to maintain their position as one of the world’s largest retailers. In most countries, Tesco’s preferred entry strategy has been to acquire an existing retail chain or a significant portion of a chain’s stores and then have these stores remodeled into Tesco subsidiaries. Primarily, Tesco has focused on developing large hypermarket stores when entering into these markets.
By doing so, they have placed more of an emphasis on non-food products – clothing, photolabs, televisions, flowers, pharmaceutical products, etc. – which have higher profit margins than Tesco’s traditional source of revenue, groceries. From here, Tesco differentiates its subsidiaries from its previous owners by aggressively negotiating with local suppliers, implementing its customer loyalty program, adding gas stations to the property, opening its stores for 24 hours and by offering discount brands to go along with its “good, better, best” value pricing strategy (Corporate Watch Site).
Also, within the past two years Tesco has been outsmarted by Asda and Sainsbury in price-comparison initiatives and targeted marketing campaigns in UK. This has lead to trailing growth trends and stagnating market share for Tesco as displayed in Exhibit A (Tesco UK PDF). This is in turn, places more of an emphasis on the company’s growth and profitability in foreign markets. Generally speaking, Tesco targets emerging markets such as the Czech Republic while working to take advantage of the large consumer markets in both China and the United States.
In addition to company acquisitions such as its Fresh and Easy stores in the United States, Tesco looks to joint ventures to stimulate growth as exemplified by Samsung Group (Samsung and Tesco Home Plus) in South Korea and Tesco Lotus in Thailand. Despite the recession, Tesco showed 10. 1% profit growth in 2009 on $96 billion in sales and are looking to further increase its presence in emerging international markets (“International”, 2009). The biggest problem with Tesco’s international strategy is its accumulation of debt.
In light of a frustrated economy, Tesco has been forced to restrict its efforts in increasing store space in the United Kingdom and in continuing its growth into new markets. Meanwhile, Tesco has looked to grow its current markets while accelerating debt repayment schedules. Further, an on-going issue in its international business operation resides in its reliance on the supply of local farmers. Pressures imposed by its supermarkets with respect to standards of shape, size and quality of products and to demanding production and delivery schedules push farmers beyond capacity.
As a result, reports of supplier exploitation continue to be raised against Tesco and other retailers including Carrefour. In 2002, both retailers were found guilty of charging slotting fees to carry manufacturers’ products and charging additional fees for advertising and product display opportunities for suppliers (Corporate Watch Site). INTERNAL ENVIRONMENT ANALYSIS In evaluating Tesco’s success in international markets, Tesco understands that customers in China are different from those in Hungary. The company does not try and run its international operations out of their office in the UK.
Instead, they develop management groups filled with experienced business managers as well as knowledgeable local personnel in order to remain close to their customers and to adapt quickly as needs and want change. For example, in South Korea, only 6 members of a team of over 20,000 people work in the UK. Tesco thus displays characteristics of a geocentric predisposition by hiring the best available talent (both local and experience managers) and by empowering their management teams to share their knowledge and to make the right decisions for their customers.
Further, they promote national responsiveness by tailoring the company’s strategic plan to meet the needs of the local culture with the goal of achieving both profitability and public acceptance (“International”, 2009). Further, their organizational culture promotes a commitment to employee development. For example, during this economic downturn, Tesco has viewed extensive employee training as a significant opportunity for the company to strengthen its position in current and future markets.
Tesco has done so by offering apprenticeship programs and many different training modules that are tailored to personal development needs. As a result, these factors contributed to the fact that 80% of Tesco’s UK staff believes that they have the opportunity to build their career at Tesco” (“People and Customers”, 2009). In managing Tesco’s multiple format approach and as they continue to diversify their offering with a wide range of non-food products in their stores, efficient supply chain systems and distribution centres are invaluable to the company.
For example, in the United Kingdom alone, Tesco supports its 2,282 stores with more than 40 depots (“Core UK”, 2009). To ensure that its shelves are always stocked, Tesco continues to invest in a collaborative planning supply chain system designed to anticipate customer demand. Further, with the implementation of just-in-time inventory techniques, RFID technology and close collaboration with its many suppliers, lead times are reduced, inventory is monitored and cost savings are incurred. Also, with sales of non-food products rising 6% to ? 12. billion in total, and ? 3. 8 billion in international markets, Tesco has had to account for differences in lead times, seasonality and changing consumer demands in this segment in comparison to its traditional grocery market. Overall, Tesco continues to invest in its value chain as exemplified by significant expenditures before entering the US and Asian markets and this aspect will be equally important in their plans to enter the isolated market of Australia. EXTERNAL ENVIRONMENT ANALYSIS Country Specific Advantages (CSAs) and Factor Conditions
Australia, with a population of just over 21 million people, has the world’s 17th largest GDP of 752. 2 Billion US $ as reported in January of 2009. As the economy begins to improve, high rates of immigration, increases in disposable incomes and growth in the housing market will contribute to an increased demand for consumer goods from 2010-2013 (Economic Intelligence Unit, 2009a, p. 11). Meanwhile, the reduction of trade barriers and high tariffs in the 1980’s, along with floating the Australian dollar exchange improved the country’s competitiveness in international trade.
Also, despite the absence of direct federal tax incentives, incentive programs for multinational enterprises are available as long as foreign direct investment contributes to sustainable industry growth and future development (Economic Intelligence Unit, 2009b, p. 84). Overall, Australia’s political stability, skilled labour force, and society comprising many people of European ancestry, provides a welcoming environment for foreign investors (Economic Intelligence Unit, 2009b, p. 84).
Demand Conditions and Consumer Trends in the Retail Industry The Australian retail industry is a very large market with sales of 183 billion US $ in 2009 and expected sales of 212 billion US $ in 2010 as reflected in Exhibit B (Consumer Goods Report). However, increased financial pressure as a result of the Global Financial downturn has caused consumers to spend their money with caution, and to increase their propensity to save. As a result, brands and retailers are trying to better understand and to pinpoint the changing value equation and the shopping behaviour of their consumers.
However, Australians continue to display a positive outlook, as exemplified by an increase of 19 points in Nielsen’s Global Online Consumer Survey displayed in Exhibit C (Convenience Report, Nielsen, 2010). Despite this trend, Australians are still adapting to this newly imposed lifestyle by eating out less, entertaining more at home, switching to cheaper grocery brands and attempting to conserve more energy. In fact, Exhibit D reveals that 63% of Australian consumers have revealed that they have altered their spending in favour of saving on household expenditure.
Simultaneously, Exhibit E shows that there is growth within specific grocery categories that include fresh cream, chilled seafood, packaged cheese and coffee amongst other products used for cooking from scratch. This is aligned with the growing trends of dining and entertaining at home and cook-it-from-scratch cuisine. Also, it is reflective of the increased popularity of gourmet cooking in Australia, proving that a market for premium products still exists. Lastly, consumers will be more cognizant of value and they will not be reluctant to shop across a variety of stores in order to acquire the best value (Forces of Change, 2009).
Overall, with the decline in shopper penetration for specialty food outlets such as bakeries, butcher shops, etc. and the shift of consumer food expenditure towards supermarkets, opportunity lies in providing a “one-stop-shop” for consumers (See Exhibit F). This provides ample opportunity for Tesco to go above and beyond the popularity of supermarkets by establishing superior hypermarket stores that offer competitive prices and higher quality products in both food and non-food segments.
Within these stores, offering similar senses of quality and community conveyed by specialty shops, drawing attention to gourmet meal possibilities, and promoting Tesco’s own private label are all important areas of differentiation in the grocery sector. Exhibit G reveals the increase in private label spending (Forces of Change, Nielsen, 2009). As for non-food related goods, it will be important to focus strongly on products pertinent to the Australian lifestyle and to stress the integration of home improvement/decorations and new technology products (E. g.
BluRay players) with specific food options that promote an ideal home entertainment environment, as displayed in Exhibit H (Convenience Report, Nielsen, 2010). Related and Supporting Industries Further, one of Australia’s major industries is the food processing sector which will ease the process of entering their market. Australia is well-known for growing crops such wheat, barley, cotton and sugar, and is recognized for being a leader in fruit and vegetable processing and in the production of livestock and livestock products (Economic Intelligence Unit, 2009a, p. 4). On the other hand, Australia’s dispersed population and its geographical isolation from other large countries lead to difficulties for manufacturers in developing economies of scale for non-food consumer goods. Tesco’s superior network of global suppliers and distributors and the impact of a government legislation that significantly reduce tariffs on textiles, clothing and footwear (effective January 1st, 2010), will be able to lower such risk and improve affordability with respect to product procurement. Firm Strategy, Structure and Rivalry
With significant separation of urban centers, it is challenging for retailers to control the majority market share throughout the country’s national market. In this case, opportunity lies in targeting specific portions of the market, developing a presence within these communities and from there, expand further into the remaining markets. COMPETITION and TESCO’S ENTRY STRATEGY With this information in mind, there is an opportunity for Tesco to enter the Australian market. In determining the appropriate entry strategy for Tesco, we must evaluate its main competitors in this industry.
Woolworths is the country’s leading retail chain, with groceries accounting for more than 90% of the company’s sales. The company also owns Dick Smith and Tandy electronics stores, allows consumers to purchase goods online and include significant liquor sections in their supermarkets. Australia’s second largest retailer, formerly known as Coles group, was purchased by Wesfarmers in 2007. The group owns Coles Supermarkets, Kmart, Target and Officeworks and more but because of increased debt and competitive pressure from Woolworths, Wesfarmers has been looking to consider offers on some of its retail locations.
In terms of market share, Woolworths and Coles supermarkets are responsible for more than 60% of grocery sales in Australia. Since the end of 2009, the Australian Competition and Consumer Commission requires stores to display prices per unit measures, allowing consumers to compare prices across supermarkets and to minimize barriers to entry for other businesses (Economic Intelligence Unit, 2009a, p. 12). With respect to the non-food market, Kmart department stores and more recently, Costco and their bulk retailing strategy will pose as significant competition to Tesco hypermarkets.
Therefore, the entry strategy with the most potential is an International Joint Venture with Wesfarmers and more specifically, their Coles supermarket stores. Tesco will hold 51% of the venture while Wesfarmers will hold the remaining 49%. With the infusion of capital and the help of its brand recognition, management teams and global network of suppliers, Tesco will help restore the presence of these locations. Once accomplished, Tesco’s long-term objective will be to acquire Wesfarmers share of Coles and to establish Tesco as the premier retailer in Australia.
TESCO’S OVERALL STRATEGY Within the agreement of the International Joint Venture, a significant number of the 690 Coles supermarket stores in Australia will be remodeled into Tesco branded hypermarkets. By remodeling these stores into hypermarkets and by implementing different departments and services to their conventional retail format, Tesco will establish its first element of differentiation. Tesco stores will then be positioned as the ultimate “one-stop shop” for the widest variety of food and non-food goods and services in the marketplace.
Further, these Tesco hypermarkets will first be located in Australia’s two highly populated territories, New South Wales and Victoria, as shown in Exhibit I. More specifically, Tesco will focus on building a presence in high-traffic areas within the cities of Sydney and Melbourne. Tailoring Tesco to the Australian People Australians enjoy a warmer climate with less precipitation than in the United Kingdom. The United Kingdom averages 155 days with more than 1 mm of rain, whereas Australia is considered one of the driest countries in the world.
Beyond that, as more Australian homes include backyards and basements than those in the United Kingdom, opportunity exists in selling garden accessories, yard maintenance equipment and home decor/furniture. Also, the active lifestyle of many Australians provides an opportunity for Tesco with respect to outdoor sporting goods and equipment. Environmental conditions and a coastline spanning more than twenty five thousand kilometers allow Australians to enjoy a different variety of outdoor sports and activities than those in the United Kingdom.
Their cooler weather and considerable rainfall does not promote high participation rates in sports such as aerobics/fitness, cycling, golf, rowing, rugby, surfing and tennis like we see in Australia. Further, by integrating displays of potential gourmet meals and appropriate confectionery goods with new technology products such high definition televisions and a low-cost movie rental service, Tesco will be able to capitalize on an increasing market for home entertainment.
Tesco has yet to attempt a movie rental service and its purpose would be to increase the frequency of consumer visits, while fueling additional revenue. Lastly, it should be noted that food products such as cereal and bottles of wine and non-food products such as bathing suits, running shoes and beauty and body products are to be featured prominently in store. Another important area of focus for Tesco will be its involvement in the Australian community.
Despite variations in heritage, whether from Britain, Asia and even the United States, Australian people are highly patriotic and are willing to volunteer in social and community work without pay. 47 percent of the 6 million people over the age of 18 who volunteered did it because they wanted to be of service to the community, whereas the other 43% claimed personal satisfaction. Tesco’s ability to portray themselves positively in the community will have a significant effect on consumer perception and their sales.
Tesco can accomplish this by offering internships to university students, imposing career training programs for employees designed to develop career paths and by paying employees to take part in community involvement programs (Aus Lifestyle PDF). Marketing As a result of Tesco’s limited exposure to the Australian market and recent declines in market share of its partner, Coles, Marketing will be the company’s most important functional strategy. It is important for Tesco to differentiate their marketing plan in order to steal market share, to drive customer retention and to establish relationship management.
Woolworths, Tesco’s main competitor in the Australian market, uses a loyalty points program called the Everyday Money credit card to accomplish this. This card allows customers to earn rewards on everyday purchases with this credit card at a cost of $49 per year. This is exemplified by their slogan, “don’t change your spending habits, just change the way you pay”. In response, Tesco will implement their successful rewards program called Clubcard to further differentiate themselves from Woolworths.
This card does not include an annual fee and allows customers to earn rewards on all products and services offered. This way the customer can buy what they want and pay for it however they desire while earning rewards that promote a quicker return on investment. After implementation of the program, analysis of sales and card data will allow Tesco to better understand what is important to their Australian customers. This analysis will then direct future promotional campaigns towards products and services that are truly desired by its customers.
By doing so, reliance on deep price discounting, and product bundling is reduced and on the other hand, higher profit margins and levels of customer satisfaction are achieved. Distribution and Supply Chain Management As previously mentioned, product supply is an element of risk to consider when entering into Australia. A clear focus on tight inventory control and distribution systems is essential in remaining competitive. Shipments of supply from Europe and even Asia can take more than 48 hours to arrive by airplane, an expensive method.
Further, the constraints of ocean shipping in China and Japan will lower the feasibility of this method and thwart Tesco’s ability to fulfill weekly shipment demands of at least twice a week. In addition to the network of suppliers and distributors already possessed by Coles and Tesco respectively, outsourcing part of its supply may be needed to reduce shipping times and to keep costs low for the consumer. Further, Tesco will need to invest capital in further developing Coles’ integrated distribution system from Asia to Australia.
Tesco’s expansion into Australia is a long-term initiative for the company and developing a local supply chain may be necessary. Contingency Plan and Long-Term Growth Opportunities As a result of our joint venture with Coles, it is a possibility that Woolworths will adapt their strategy to prevent Tesco from cutting into their market share. For example, they may look to strengthen the value proposition of their loyalty program, to further cement their brand’s reputation in the market through tactical marketing campaigns and to employ a more aggressive cost leadership strategy; minimizing Tesco’s profit margins.
To combat this, Tesco must continue to emphasize its diversified product portfolio that ranges from discount brands to a Tesco private label brand and to higher quality brands promoted from good to better to best, as performed in the United Kingdom. Also, as Tesco is able to reach its goal of purchasing the remaining shares of Wesfarmers Limited in Coles, the next step is to explore additional revenue streams within the market. This involves targeting areas of expertise in which they have had success in the past such as gas stations, financial services, and telecommunications, just to name a few.
Above and beyond that, our contingency plan includes expansion into the home renovations market. Currently, Australia does not have specialized home renovation outlets like we have in North America. Tesco has to yet to explore this segment and we are forecasting that a major North American retailer such as Home Depot or Home Hardware would be interested in entering the Australian market through a partnership with Tesco. We believe that if this untapped market is utilized correctly through partnership, Tesco will strengthen their competitive advantage within the marketplace.
CONCLUSION The Australian market presents Tesco with a tremendous opportunity for entry and expansion. Factors conditions such as land and highly skilled labour and demand conditions that include strong market intensity, an urbanization rate of more than 75% and high disposable incomes help validate that statement (Aus Lifestyle PDF). However, risk is involved by way of limited supporting industries for non-food products. Finally, Tesco must alleviate the high degree of firm rivalry and competition within the industry by differentiating its new venture and its hypermarket stores.
Strong share positions of domestic retailers, Woolworths and Coles, will challenge Tesco in the grocery sector whereas Kmart department stores and the entry of Costco into Australia pose as stiff competition in the non-food sector. By creating an International Joint Venture with Coles supermarkets, Tesco will be able to utilize the firm’s local knowledge of the Australian market, their store presence throughout the country and their skilled employee base to their advantage, which will ultimately ease market acceptance.
Further, Tesco’s “one-stop-shop” and Clubcard loyalty program bring new dimensions to the market and will be at the forefront of the promotional plan. In conclusion, by following these steps and by consistently attending to the needs of their customers, Tesco will be able to capture significant market share, expand the scope of their operation and ultimately, execute a successful long-term business venture.