Challenges to TESCO's Expansion into Malaysia

Executive Summary

For any company to enter into the international market for the first time, a proper research and analysis regarding the challenges and current marketing conditions prevailing in the targeted country must be undertaken. The project has been undertaken to analyse, understand and highlight the major challenges that TESCO can face while entering into Malaysia for the first time. The report focuses on the Political and Legal, Economical, Socio cultural & Technological and environmental challenges that may create a difficulties for TESCO to start its business in Malaysia.

Introduction to TESCO

Tesco PLC is a UK based supermarket chain. It is the largest British retailer, both by global sales and domestic market share, and the fourth largest retailer in the world behind Wal-Mart of the USA, Carrefour of France, and The Home Depot of the USA.

Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK business, expand by growing internationally, be as strong in non-food as in food and to follow customers into new retailing services.

Environmental Analysis of Malaysia

Political & Legal Environment

Rising Political instability

Data

In recent months, The political ruling party ‘Barisan Nasional’ is facing the problem of fall in its strength in ruling the country. The opposition Party ‘Pakatan Rakyat’ power & influence on the Malaysians is increasing which has resulted into possibilities of undertaking of elections in the coming months.

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Analysis

It is predicted that the opposition party may emerge as victorious which lead to increased political uncertainty & lower economic growth for 1-2 years. Sales may slow down in the initial years which may be due to increased political uncertainty and disturbance on spending of public during the handover process. The handover process is generally a time consuming & lengthy process. it may result into impaired business for the company. lower economic growth in the beginning years may affect the purchasing power of consumers. The company may have to reduce its cost to overcome lower sales in initial years. TESCO may have to reduce its cost on marketing and advertising . The consumers may prefer price and value over quality & brand.

Political war between the two parties may also result in the outcome of riots which may also result into physical damage of Tesco’s Property and buildings.

Challenge

Slow economic growth at the time of change in government which may lead to slow business in the beginning of setting its business in Malaysia.

The consumers may prefer price over quality.

TESCO may need to have strong control over its expenses.

Riots may cause physical damage to TESCO’s property if the Political war emerges.

Restrictions on Press & Advertising

Data

The Malaysian Government has a very tight control on media like TV, radio, newspapers, outdoor advertising etc for broadcasting of commercials and advertisements. The advertising code & code of ethics are to be followed by all the companies & business in Malaysia.

Analysis

The government has kept ban on advertisement of products like alcohol, pork, products with unacceptable images etc. Also, advertisement related to exposure of body parts & anti social content like foul language, uncompetitive practices, religious comparisons etc are strictly prohibited. The advertisement must be shot in Malaysia with Malaysian models in the advertisements. No international models from other countries are allowed. Also, the musicals of the ad must be done in Malaysia. Advertisements related to food & drink products must highlight the importance & necessity of balanced diet to the viewers. Powerful emphasis on the speciality & lifestyle of the country of origin of an imported product is not allowed in the advertisements.

Challenges

TESCO will have to change its marketing and advertising strategy in Malaysia.

The government control on advertising & media may disallow advertisement & commercials of many products of TESCO UK.

The company may also have to undergo the process of repackaging & re labeling on their products.

TESCO will have to create new ideas to advertise its product which could be expensive and time consuming.

Focus on many cultural groups

Data

Malay, Chinese & Indian community are the 3 major cultural groups in Malaysia. Chinese & Indian community are the minority communities in the country. The recent attacks against the Christian church has created political instability & social unrest among the people.

Analysis

The wealth gap between less richer Malays & very rich Chinese and Indian ethinic group in Malaysia has always been a point of concern in Malaysian politics. There has been many issues regarding this issue in the past which created a tension in the Malaysian political environment. But currently, the government is taking efficient measures to reduce the tension between the cultural groups.

Christianity is also a minority religion in Malaysia on which government has to keep its attention. However, in the beginning of 2010, there were a series of attacks against Christian church because of some high court decisions. All these factors may lead to political instability in the near future. Political instability may result into the change in government. Christianity is the major religion in UK. Malaysians may tend to emotionally link the products of TESCO with Christianity as TESCO is a UK based company. This may initially led to the unacceptance of the products by Malaysians due current social unrest which may affect the sales and brand image of TESCO in Malaysian market.

This may also affect the marketing and advertising strategy of TESCO. The company may have to frequently and carefully advertise its product to the consumers to change their perception about the link between Christianity and the Company’s product offering. This may result into heavy expenditures resulting into the rise in cost of the company.

Challenges

Recent attack on churches may create the perception of link between UK TESCO products and Christianity religion which may affect the sales of TESCO.

TESCO will need to advertise more frequently to change the consumers perception about the Christian religion and the local products it sells to Malaysians.

Impact of terrorism

Data & Analysis

Rising tension between Malay, Chinese & Indian cultural groups in Malaysia in last few years have created a threat of internal terrorism in Malaysia. The war between the ethnic Chinese terrorists & Malaysian government came to end after 42 years. However, in the beginning of 2010, there were a series of attacks against Christian church because the court said that the Christians can refer “GOD” as “ALLAH”.

Challenge

Sales may become difficult due to religious unrest.

TESCO many have to opt for an option of Public relations on a regular basis which may increase the expenses of the company.

Economical Environment

Low Purchasing Power

Data

The GDP per capita income of Malaysia and UK for 2008 was $14,215 & $35,468 respectively.

Malaysia can be classified as the country of people having upper middle income level whereas UK population can be classified under high income level.

Analysis

The purchasing power of UK is more the purchasing power of Malaysia. It clearly reflects that the disposable income of Malaysia is comparative low to that of Uk. The per capita income & disposable income of Britishers is very high thereby increasing their purchasing power. Due to high purchasing power, normally people in UK prefer brands and are brand loyal & are willing to spend extra on the products. The per capita income of Malaysians is comparatively very low to that compared with Britishers. Lesser income signifies that the disposable income will be lower thereby reducing purchasing power. This will directly result in the emergence of price sensitive market condition in Malaysia where brand loyalty could be given less priority by Malaysians.

Lower per capita income of Malaysians will result into low purchasing power making Malaysia a price sensitive market where buyers may be ready to buy any product with less or no brand importance. So the company sales might get affected due to this. TESCO may have to change its products, lower the quality & lower the price so that the products can be produced cost effectively & consumers can afford to buy. TESCO may have to start its own manufacturing unit along with its own new supply chain management and search for local suppliers in Malaysia who can provide products of good quality at a lower price. This may help in producing products at lower cost which the Malaysians can intend to buy. TESCO will have to search the place to set up their business to get proximity to the market which may help in lowering the distribution cost of its product.

Challenges

Lower consumer income will affect sales of the company.

Uk products have high quality with high price. The company may have to rechange its quality of the products as per the price.

TESCO will have to start its new supply chain management & distribution system to make the local products for cost efficiency.

TESCO will need to find their place of setting business where Distribution cost is very low.

The company will have to look for local supply chain who can meet all above requirements.

Foreign Currency Fluctuation Risk

Data

The foreign exchange of 1GBP to 1Malaysian Ringett in recent months has fallen from 5.8RM to 4.7RM. The interest rate of Malaysia & UK in the beginning of the year 2010 were 2.25% & 0.5% respectively.

Analysis

The key factor for fluctuations in currency exchange rates is the interest rate in different countries. Malaysia offers significantly higher interest rates than UK. Then investors will want to put money into Malaysia, thus increasing demand for the currency. The increase in currency demand may result into lowering value of Pound thus creating Foreign currency fluctuation risk.Exchange Rates are very important for any country as they determine the level of imports and exports.

Challenge

Importing products may become a costly option due to fluctuation in currency risk.

The company may have to look for local suppliers and also may have to start new supply chain management to reduce the cost.

Unemployment Level

Data

The recent Global financial crisis is still having a major impact on employment level in all the countries of the world. The unemployment rate in UK has reached to 8% in march 2010. The unemployment rate has increased from 3.2% in 2007 and has reached to 3.7% in march 2010.

Analysis

Increase in unemployment of Skilled, Semiskilled & Labourers has been a major concern for Malaysian government in last few years. The Malaysian Government may put some employment restrictions on all the Multinational companies in Malaysia to hire the local Malaysians for employment. The restrictions may include more hiring of Malaysians in comparison to foreign employees irrelevant of their level of skills. Even though the higher unemployment in their home country, TESCO may undergo the pressure of hiring more Malaysians in comparison of foreign employees and provide training to them to meet the required skills for employment which may increase the overall expenses of the company. Also, employing foreign workers in Malaysia will be an expensive cost incurring idea thus increasing the operational cost of the firm affecting the product pricing.

Challenge

Employing foreign talent may not be possible to run the business.

Providing training for Local staff would be expensive and time consuming process.

Creating new supply chain management

Data

Low purchasing power of Malaysians, high foreign currency fluctuation and price sensitive market in the country are becoming major factors for the companies to reduce their prices of the product.

Analysis

Low Purchasing power of Malaysians in comparison with those of UK will create a price sensitiveness in the country where people may prefer Price over quality. Foreign currency fluctuation between Malaysian Ringett and UK Pound has been unstable in recent times. In importing goods, TESCO may end up in paying more than their usual price thus increasing the overall cost of the product. TESCO will have to reduce the price to meet the market price with its competitors product. The company will have to look for new supply chain management along with new suppliers who can provide the required quality at lesser price to meet the comsumers expectation. Setting up the new supply chain along with new local suppliers will be a big challenge as TESCO is an International Company.

Challenges

Importing goods from UK will be expensive for TESCO.

Tesco may have to compromise on the quality of the product in case of price sensitive market.

TESCO will have to set up new supply chain management along with new local suppliers to meet both the price and quality requirement of the consumers.

Socio Cultural Environment

Labeling & Packaging Requirements

Data & Analysis

The Malaysian government is very strict about the labeling & language used on the products sold in the country. The language on all the products saleable, whether local or imported, must be written in Bahasa Malaysia or English. And in case of imported goods, the language used in either case may also include translation in any other languages.

Since the Government rules & regulations is very strict in Malaysia, TESCO would have to Change its labeling & repack the products with descriptions in both English & bahasa Malaysia Language. Also, the company will have to give more information on the product about its HALAL Certification, ingredients, Date marking, Nutrition Labeling etc.

The company will have to change its packaging strategy for its products due to hot & humid climatic conditions prevailing in Malaysia This will increase the cost of packaging & labeling of all the products to be sold. So to gain economies of scale, TESCO may have to increase its sales volume to cover up the cost of change in labeling & packaging.

Challenge

Relabeling and repackaging the products due to language barrier will be costly and time consuming.

TESCO may have to keep on advertising its product on a regular basis to overcome the language barrier.

Halal certification

Data & Analysis

The concept of Halal on food & non food category of product consumption is a vital issue in any muslim country. Islam is the official religion followed in Malaysia. The religion of Islam demands that the product to be consumed must be HALAL. In Malaysia, The Muslim consumers look for the HALAL certification on the products which is issue by Malaysia’s Department Of Islamic Development (JAKIM).

In recent years, the Muslim consumers in Malaysia are faced with broad selection of products & services which are either locally named or are international products certified as HALAL. The Competition is intense in the Malaysian market where local retailers have an upper hand for the sale of products by projecting their products as Islamic brands with the help of creative packaging & labeling on their products.

TESCO will have to certify HALAL certification on all it products & will have to show the logo on each HALAL certified product. This will result into rising of its operating cost. Also, The HALAL certificate is valid for only 1year. So, the company may have to incur these cost every year.

Challenge

Certification of Halal on all products is costly and time consuming.

The validity of certification is very less which results into occurrence of repetitive expenses every year.

Advertising, packaging and labeling strategy would change which may increase the cost of the firm.

Intense competition from local retailers will be a challenge.

Technological & Environmental Factors

Accessibility & Updation of Information

Data and Analysis

The percentage of urban population to total population in the year 2008 was 70.4%. Most of the hypermarkets are located in the urban areas. Rural consumers may have little access to either buy the product online or going to the nearest hypermarket in their area. So, setting the business in urban market will be a challenge to TESCO to meet & capture the market share & the requirements of both rural & urban population.

In recent years, in Malaysia, Online purchasing has become an easy, time, cost & energy saving way to buy the products. This method is more followed by the urban consumers to book an order. So, TESCO will have to keep a regular update on timely basis about the availability of its products on its online purchasing website for its consumers.

Challenge

Target market may get narrow down due to low internet access in rural areas.

Starting a business in rural area may increase the transportation cost to the urban consumers.

Regular update on timely basis about the availability of its products on its online purchasing website for its consumers will be a challenge.

Impact of global warming, deforestation & environmental factors

Data & Analysis

Water & air pollution, impact of global warming has affected the health of the people in Malaysia. Deforestation due to regional development is also another factor affecting the country. The Malaysian government is now becoming very strict for control over these environmental problems. Any business, whether local or multinational business, has to comply with all the set of rules and regulations related to the environmental issues laid by the Malaysian government. Government may also disallow the companies in setting up of warehouses in the certain selected parts of the country. TESCO, being an multinational brand, will have to follow the strict prescribed rules laid by the Malaysian Government and may have to submit regular reports to the government regularly regarding the working of the company.

Challenge

Setting up of warehouses near TESCO’s hypermart can be a big challenge.

Transportation cost may get increased due to problem in selecting area for warehouses.

Restriction on certain products can affect the business of TESCO.