Entry strategy of tesco in USA

TESCO is the largest retail chain in Britain founded by Jack Cohen in 1919. Its headquarters is in Cheshunt, London. It is the largest retailer in terms of sales and domestic shares in Britain with profits exceeding 3 billion euro dollars. It is the third largest retailer in the world in terms of revenue behind Wal-Mart and Carrefour and second largest in terms of profit behind Wal-Mart.

The first retail store was opened in 1929 in Burnt Oak, Middlesex. Mr. Cohen opened its headquarters and the first warehouse in 1930 in North London. In 1932 it was made a private limited company. Over the next eight years, the company grew rapidly, as Cohen opened more than 100 small stores, mainly in London. TESCO was floated in the London Stock Exchange for the first time in 1947 under the name TESCO Stores Limited with a share price of 25 pound. In 1951, it opened its first self-service store in St. Albans and the first supermarket in 1956 in Maldon. Initially, it concentrated more on food and drinks sector but later expanded into other areas such as clothing, entertainment, electronics, etc. Currently TESCO is one of the largest retailers in the world, operating more than 2,300 supermarkets and convenience stores and employing 326,000 people. In continental Europe, Tesco operates in the Czech Republic, Hungary, Poland, the Republic of Ireland, Slovakia, and Turkey. In Asia, the company operates in Japan, Malaysia, South Korea, Taiwan, and Thailand. Through the website Tesco.com, the company ranks as the largest online supermarket in the world. The company also offers financial services through Tesco Financial Services, which controls 4.6 million customer accounts roughly divided between credit cards and car insurance policies. Through the more than 100-unit Tesco Express chain, the company ranks as the largest seller of gasoline in the United Kingdom.

Operations

TESCO stores can be divided into six divisions: –

TESCO EXTRA: These are large hypermarkets based out of town consisting of the entire range of products of TESCO. These stores are usually on 2 floors with the ground floor being taken by food items and the first floor for clothing, electronics and entertainment

TESCO superstores: These are large supermarkets that sell predominantly food items

TESCO Express: These are neighbourhood convenience shops, selling mainly food items with an emphasis on higher-margin products alongside everyday essentials. They are found in busy city centre districts, small shopping precincts in residential areas and small towns

TESCO Metros: These are medium sized stores which are larger than TESCO express and smaller than TESCO superstores. Metros are located in city centres and high streets of towns

ONE SHOP: One Stop stores are the only category which does not include the word Tesco in its name and include some of the smallest stores

Internet Operations: Tesco created a website namely Tesco.com, the company’s home shopping service providing consumer goods, telecommunications and financial services online. Tesco has operated on the internet since 1994 and was the first retailer in the world to offer a robust home shopping service in 1996

Growth Strategy

Tesco has a long term growth strategy, based on four key parts: –

1. Improving its non-food business

2. To provide customers with new retailing experience

3. Growth in the Core UK business

4. Expand by growing internationally

Improving non-food items

While its retailing services segment gathered steam, Tesco turned to developing its non-food business through its online website Tesco.com. The company began stocking electronic products, toys, sports equipment, cookware, and home furnishings in its stores. In September 2002, the company added the Cherokee clothing brand to its U.K. stores, giving a substantial boost to the company’s non-food business.

Providing Customers with retailing experience

Tesco is trying to improve the retailing experience of customers by offering new shopping experience through Tesco.com, Tesco telecom and Tesco Personal Finance.

Expansion in the UK market

Tesco showed its expansionary zeal early on by buying up rival shops. In the 1950s the retailer bought 70 Williams stores and 200 Harrow stores, followed by 97 Charles Philips stores and the Victor Value chain in the early 1960s. During the 60s supermarkets started to expand rapidly by selling more products in ever larger stores. In 1960, Tesco established a special department in its larger stores called Home ‘n’ Wear to carry higher-margin, non-food merchandise, including apparel and household items.

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In 1961 Tesco Leicester entered the Guinness Book of Records as the largest store in Europe and in 1968 Tesco opened its first ‘superstore’ in Crawley, West Sussex. By the 1970s Tesco was building a national store network to cover the whole of the UK, which it continues to expand to this day, while also diversifying into other products. In 1974 Tesco opened its first petrol stations, and then become the UK’s largest independent petrol retailer. By 1979 total sales topped £1bn, and by 1982 sales had doubled to more than £2bn.

In 1987 Tesco successfully completed a hostile takeover of supermarket rival Hilliard’s for £220m. By the beginning of the 1990s, Tesco had 371 stores in England, Scotland, and Wales–150 of which were superstores–and the company had become one of the United Kingdom’s top three food retailers. The early 1990s saw the culmination of Tesco’s fight for market share fuelled in part by a two-year £1 billion development program launched in 1990 which added about 60 new stores and more than 2.3 billion square feet of store space. By 1991, Tesco had become the largest independent gasoline retailer in Great Britain. Four years later, the company reached the number one spot among food retailers in terms of market share. In 1992, the company launched its slogan ‘every little helps’, followed by the Tesco Value range in 1993. This was followed by the launch of the Tesco Clubcard scheme in 1995. In 2008 the retail giant took its conquest of the UK one step further by buying up some rival Somerfield stores on remote islands in Scotland, giving Tesco a presence in every single postcode area in the country. As it stands there is only one postcode in the UK – in Harrogate in North Yorkshire – which does not have a Tesco. Today it reported that group sales were £51.8bn in the year to February 23, 2008. Pre-tax profit rose to £2.8bn.

Global Strategy

TESCO entered the international retailing arena rather late in the mid-1990s and since then it has expanded rapidly. With operations in 12 countries, its international segment already accounts for more than 55% of the retailer’s total selling space, although it generates only about 23% of total revenues.

Over the course of a decade’s experience it has evolved a strategy that incorporates the following six main elements [1] : –

Be flexible. Tesco believes each market is unique and requires a different approach.

Act local. Since not only customers but cultures, supply chains and regulations have to be dealt with on a local level, each market requires a customized offer best run by local staff. Less than 100 members of Tesco’s international team now are expatriates.

Maintain focus. The goal of becoming a leading player in a market requires decades, not years. Tesco believed that it takes 10 years to build an international store portfolio and another 10 to build a brand.

Use multiple formats: Tesco’s experience in the U.K. has demonstrated that no single format can entirely penetrate a market. That is why the company has developed a range of formats from convenience stores to hypermarkets that it deploys to meet the needs and opportunities it encounters in each country.

Develop capabilities: A critical part of Tesco’s culture is an intense focus on learning, developing skills, processes and systems, and then sharing them across international markets to increase the chances of success.

Build brands. Brands, Tesco believes, are the building blocks of lasting relationships with consumers.

Tesco typically looks for four key characteristics when considering entry into a new market.

Relatively underdeveloped retail sector

Consumer population with real spending power

Growth potential in the food retail market

Scope for Tesco to achieve a position of market leadership over the medium or long term

Global Expansion

France

In December 1992, Tesco entered France by acquiring an 85% equity holding in Catteau supermarkets, which operated under the Cedico brand with 72 superstores, 7 hypermarkets, and 24 small stores. However, Tesco failed to sustain itself in the market due to competition from French retailers like Carrefour and Promodèsesco.

Hungary

Tesco entered in Hungary in 1996 through acquisition of Kmart’s operation in that area. It launched its first supermarket in the same year. Now, it has 101 stores in Hungary with a wide range of products.

Ireland

Tesco entered the Irish market in the early 1980s but sold the operations in 1986. Tesco re-entered the Irish market in 1997 after the purchase of Power Supermarkets Ltd. It now operates from 101 stores across Ireland. Tesco is now the grocery market leader in the Republic of Ireland, with a reported November 2005 share of 26.3%.

Czech Republic

Tesco opened its first stores in the Czech Republic by buying US corporation Kmart’s operations in the country and converting them into Tesco stores in 1996. It now has 84 stores. Tesco is also keen to expand non-food items and has already opened petrol stations and offers personal finance services in the Czech Republic.

Poland

Tesco entered the Polish market in 1995. It currently operates from 334 stores.

South Korea

Tesco launched its South Korean operations in 1999 and partnered with Samsung, currently Tesco holds 94% of the shares in the venture. It operates hypermarkets and its express format as well as a home delivery shopping service. It is the second largest retailer in South Korea, just behind Shinsegae Group.

Thailand

Tesco entered Thailand in 1998 and operates through 380 stores as part of a joint venture with Charoen Pokphand and named the operation Tesco Lotus. This partnership was dissolved in 2003 when Charoen Pokphand sold its shares to Tesco. Tesco Lotus sells a diverse range of products from value food products to electronics to personal finance services.

Malaysia

Tesco opened its first store in Malaysia in May 2002 with the opening of its first hypermarket in Puchong, Selangor. Tesco Malaysia currently operates 34 Tesco and Tesco Extra stores. Tesco partnered with local conglomerate Sime Darby Berhad which holds 30% of the shares. Tesco also acquired Makro, a local wholesaler which was rebranded Tesco Extra and provides products for local retailers.

China

Tesco entered China, in September 2004, by acquiring a 50% stake in the Hymall chain, from Ting Hsin of Taiwan. In September 2005, Tesco sold its stores in Taiwan to Carrefour. In December 2006 it raised its stake to 90% in a £180 million deal.

Other countries

Tesco has also entered into Isle of Man, Japan, Pakistan and Turkey.

SWOT Analysis of Tesco

Strengths

Tesco Plc. by its sheer size and experience has an increased control in terms of procurement from its suppliers. Its experienced top management and talent pool provide the firm with proper strategic direction and thrust. It has an excellent nation-wide coverage which makes it really difficult for competitors to enter the market. By expanding rapidly Tesco can create the same environment in other countries. Tesco has a wider portfolio than many competitors and this becomes a differentiating factor. It also has an efficient distribution system thereby enabling the company to reduce its costs and offer greater discounts to customers and capturing market share.

Weakness

Tesco is present in a lot of countries and the top management faces increasing pressure in handling specific issues in specific markets. Lot of investment is required for business development in other countries. Reliance of Tesco on the domestic UK market is high. There is government restrictions imposed on Tesco because of its monopoly in the market. The company also has a poor image in terms of Corporate Social Responsibility and Community impact.

Opportunities

Tesco being a big player can be influential in building strategic alliances in other countries for expansion. The growth of non-food products is the general trend nowadays and Tesco can leverage that as it has high levels of non-food products in its portfolio. The Asian market organized retail segment is growing at an incredible rate of 25-30% and Tesco can consider entering these markets. The concept of hyper markets has been well received among the consumers and Tesco can focus on the same lines.

Threats

There are a number of global players who have propped up in recent years and posing a great threat to the market shares of big players like Tesco. The excessive focus in UK has resulted in the cannibalization of sales among its own units. The perception of Tesco as a discount retailer has made it difficult for Tesco to migrate to the premium products. There is also a lot of political pressure in many Asian countries because of protests by the local convenience stores.

Porter’s diamond

In the Porter’s Diamond model we will evaluate US retail market to find out if it has the advantage and attractiveness to enter. This will also help us evaluate the entry of Tesco.

Factor conditions

According to the U.S. Bureau of Labour Statistics, 14.4 million people were employed in the U.S. Retail Industry as of April, 2010. This is a huge boost to companies setting shop in the US there is ready availability of talent in the retail sector. United States as a developed nation has one of the best infrastructure available. The transportation and logistics network has seen exponential growth over the years and have one of the best reach of the market. One negative that can be associated with the retail industry is the high costs of setting up facilities in the cities.

Demand conditions

Even though the market is growing at a slower pace the sheer size of the market makes it attractive for retail giants to enter the market. According to the latest annual report from the U.S. Census Bureau (calendar year 2009), the total amount of sales for the U.S. Retail Industry (including food service and automotive) was $4.13 trillion. An estimated two-thirds of the U.S. gross domestic product (GDP) comes from retail consumption. The imported goods portion of the retail market is lesser than the local goods and this is good sign for the local industries. Retail chains like Tesco can focus on local procurement to reduce costs as the demand for local goods is higher.

Related and supporting industries

The retail market in US is huge and the entire supply chain is well established. There are a lot of established procurement methods available and there are many suppliers providing quality inputs. This makes it easy for retail chains to set up stores in US. The logistics and transportation industry which is very essential for the efficient functioning of the retail industry is also well developed. This is an important factor that the retail chains consider before entering a country and US in this aspect is a most sought after country.

Firm strategy, structure and rivalry

This is the fourth attribute. The firm’s strategy has been a main factor of success for Tesco. It has advanced technology for checkouts and stock control systems. The domestic rivalry also plays an important role for Tesco to gain competitive advantage.

Strategy

Tesco’s growth over the last two or three decades has involved a transformation of its strategy and image. Its initial success was based on the “Pile it high, sell it cheap” approach of the founder Jack Cohen. Tesco follows a strategy of appeal to all segments of the market. One plank of this strategy has been Tesco’s use of its own-brand products, including the upmarket “Finest”, mid-range Tesco brand and low-price “Value” encompassing several product categories such as food, beverage, home, clothing, Tesco Mobile and financial services. A core part of the Tesco expansion strategy has been its innovative use of technology.

Structure

Tesco’s UK stores are divided into 6 formats according to their structure, differentiated by size and the range of products sold.

Tesco Extra

Tesco Hypermarket

Tesco Metro

Tesco Express

One Stop

Tesco Home plus

Rivalry

Asda, Sainsbury’s and Safeway are the domestic rivals which compete with Tesco and this had allowed Tesco to become a better international competitor as it runs internationally as well. Most of Tesco’s competition is by means of lower prices.

Suggested Approach to US Market

The US market was markedly different from the various other markets that Tesco had targeted in its spate of increasing its international presence. USA was a saturated and a mature market with large players and intense competition in the urban as well as semi-urban/rural areas. The demography and infrastructure though supported an inflating retail sector business; survival would be difficult given the circumstances. A lot other players from Europe and especially from UK had failed to make an impact and were forced to fold up operations. Big players had already made inroads into areas less explored and didn’t leave any scope for another player to start operations in those markets without earning substantial losses in both short and long terms. It was purely a game of first mover advantage. Moreover, the buying practices of US customers were markedly inclined towards brands and they did not really care about proprietary products of the retail companies. Brand consciousness was a major hindrance in the price game for a new player in the turf of USA and would create obstacles to sustenance on an even level playing field. In such a scenario the following strategies could be considered: –

Strategic alliance

As Tesco was new to the USA market and was largely unaware of its buying practices, it would have been better for it to go for strategic alliances and partnerships with existing retail companies in USA. This would have given Tesco a necessary exposure to the market conditions prevalent at the time of entry and therefore give it time and resources and all the local help required to devise a suitable strategy for USA. Local expertise is a must in a mature market because the new player must now eat into the share of the existing players as there is not much scope for the overall growth of the market.

Differentiation through service and innovation

To survive in a mature market, a company can differentiate itself either on the basis of cost leadership strategy or product differentiation strategy. Cost leadership was not a feasible option because all the existing major retail companies were following the “Everyday Low Price” strategy and it was absolutely necessary for even Tesco to do so. The differentiation could now only result from product/service differentiation. Personalized approach to customers or giving customers more space and freedom in their shopping experience could be a few aspects of it. All the big retailers were having large amount of SKUs in their warehouse style stores, so differentiating on the basis of products would be difficult. The only are that remains to be explored is then the service level.

Focused market approach

Unmet needs and unexplored markets can be deciphered if Tesco decides on an appropriate target within the huge retail segment. A suggestion could be fresh foods or even exposure to low priced garments or exotic food items or products targeted at specific ethnic communities. A focused approach would lead to better convergence of ideas and increase the chances of success as the differentiation will become more obvious in that case.

Transnational strategy

Tesco is a UK company and brings with it ideas and practices that are successful in UK and in geographies and culture similar to it. For it to be successful in USA, it will need more than its global strategy driven by innovation. It will need to respond to local conditions in the way the people of USA want them to. Thus, local responsiveness is absolutely critical for Tesco. In such a scenario, transnational strategy is the most appropriate structure that Tesco should adopt in USA. Sourcing from local suppliers according to terms and conditions prevalent in USA or even outsourcing to expert companies present in the region could be an option. Localized procurement and distribution gives more legitimacy to foreign company in the eyes of the domestic consumer and should help increase the sales of an otherwise unknown company like Tesco.

Innovation – the key to success

Consumers in USA are well aware of the trade practices of the major retailers. They know the format of the stores, the service level offered by those stores, the type of products stored and even the layout of the stores because the retailers ensured that all these were standardized throughout the country. To create an identity for itself Tesco would have to bring in a new value to the customers altogether and redefine the relationships that the customers share with the retailers. This air of freshness driven by innovative approach to retailing that can be socially appealing as well intuitively distinct from the rest of the lot can make significant differences for Tesco as far as conversion of first customers to regular customers are concerned.

Tesco’s Strategy in USA

Tesco entered the US market in 2007 by opening a chain of grocery stores in West Coast namely Fresh and East. Tesco had carried out extensive research in the US market and came up with the fact that US shoppers looked for neighbourhood stores that stocked fresh, healthy and inexpensive food. Hence it was decided that Fresh & Easy would differentiate itself from other retailers on convenience, freshness, and affordability.

Fresh & Easy also took a number of initiatives to reduce the impact of its operations on the environment. Every Fresh & Easy store recycled or reused all its display and shipping materials. The stores partnered with the Resource Management Group in its waste reduction program. Also, it used only energy efficient light bulbs. The solar-power driven distribution centre at Riverside, California, was also part of its environment-friendly initiatives.

Tesco entered the U.S. market by applying new strategies for success and market entry compared to the ones that were used in the past.   In the past, Tesco’s strategies for global expansion were

(1) To aggressively enter markets in developing nations

(2) Focusing on markets that were less competitive

(3) Entering through acquisitions. Tesco used completely different strategies to enter the U.S. market.  

First, the company announced that they will grow softly by entering markets on the west coast.   The company entered the California, Nevada, and Arizona markets less aggressively compared to the growth seen in other markets.   Second, the U.S. market is a highly competitive market for grocers, and one of the major reasons for Tesco’s previous successes was due to the lack of competition.   By entering the U.S. market, Tesco was facing significant competition such as national competitors, local and regional grocers, and discounters.   In order to compete more effectively in the U.S. market, Tesco branded itself differently to the American consumers.   The grocer marketed itself as a convenient and express grocery retailer with hopes to set itself apart from national grocers such as Wal-Mart, Kroger, and Albertsons.   Finally, Tesco entered the U.S. market organically rather than through acquisitions. When Tesco made the decision to go global they did so by acquiring grocery chains in other countries and through joint ventures, therefore, growing organically was going to be a new venture for the retailer.   Although Tesco has seen successful returns through acquisitions in previous ventures, it decided to avoid this strategy for the U.S. market because of previous failures by other foreign retailers.

Current Status of Tesco in USA

As per the 2010 annual report published by Tesco, it has 145 stores in USA. Tesco’s U.S. operations (Fresh & Easy) reported a GBP 165 million loss on a sale of GBP 354 million. The sales have grown rapidly with estimated growth rate of more than 70%, though the profits have shown a decline of around 18%. This could be due to increasing operational costs as well as changing factor conditions in USA. As per the latest statement available on the Tesco Plc website, Fresh & Easy has been making good progress, despite prolonged weakness in the California, Nevada and Arizona economies. Customers are enthusiastic about their range, particularly the fresh food prepared in the Fresh & Easy kitchen, the store environment and the friendly service. They have also introduced a range of lower-priced house brands to help families on a budget [2] .

They are extremely focussed on how Fresh & Easy can offer both high quality and low prices – Simple and Affordable products. A combination of increased customer awareness and the improvements that have made in-store helped to drive stronger positive like-for-like sales growth. They expect to open new stores at a rate of around one per week this year with a focus on areas where the local economy has been less severely hit and where they are seeing substantially stronger sales performance. One of the benefits of the downturn is a slightly softer property market; so they are now able to buy more freehold properties and the overall cost of building a store has fallen by approximately 20%. A combination of new space and organic sales growth means that sales growth this year will be more than 50% [3] .

Although they do not expect losses to be much lower in 2010/11 they believe that the losses have now peaked. [4] 

Comparison of Suggested Approach and Actual Strategy Adopted

A first look at the strategies adopted by Tesco for entering into USA are almost similar to the ones suggested in this paper in one of the earlier sections. However, some key differences also arise from subsequent analysis. These points of similarity and differences are highlighted in the following sub-sections.

Points of Similarity

Transnational Strategy – Tesco did adopt a transnational strategy as suggested earlier and this helped it to gain local responsiveness while leveraging on its unique global experience and strategy. It bought its suppliers from UK to the US soil but asked them to source materials from local regions. They adopted a “Farm to Store” sort of an approach whereby local tastes were addressed by locally grown food that was provided fresh and healthy. This strategy has also helped them get substantial financial leverage to fund their international expansion via the capital investment route due to enhanced reputation

Importance to Innovation – Tesco gave a lot of importance to innovation so as to substantiate its presence in the United States of America. Before entering the market as a full-fledged retailer, the managers of Tesco undertook significant amount of market research to understand what the people wanted. They tried various new store formats and new kinds of products available from retail stores that the customers in USA were not used to. They checked the reaction of the customers towards such new things and understood what was acceptable and what was not. Innovation was driven by the need that still not met by existing players

Localization of Suppliers – Tesco brought its two most trusted and largest suppliers with which it had cordial relationships and immense business understanding to USA. Yet the suppliers were asked to procure raw materials from local sources to produce finished goods for Tesco. It had developed a distribution strategy that reflected the values created by Tesco’s experience in various parts of the world but it adapted the supply chain to reflect local aspirations and interest. This was also done to avoid hostility and reduce competition to its network from other larger players.

Focussed Consumer Group – Tesco strategically chose the location and format of its stores in such a way that it catered to almost all types of consumer groups that stayed in clustered residential areas. Through small but adequate neighbourhood stores that supplied fresh food of great quality at affordable prices, it was able to pitch itself to the customers who were increasingly getting health conscious. By tying up with local schools to promote healthy food through its stores, Tesco was able to clearly set itself apart from other big retailers. Consumers now did not have to travel long distances to purchase farm-fresh food at low prices. Tesco also focused providing specific store formats in Hispanic dominated areas that catered to their income levels and tastes. Thus, it was able to create the need in locations that had not been looked into previously by the other retailers.

Service Innovation – Tesco gave more freedom to consumers during their shopping experience at the stores and allowed self check-outs, assisted check-outs or employee driven check-outs at the customer’s choice. This catered to the likes of different kinds of customers and was a change for them as they were used to being continually assisted by employees in retail shops.

Points of Difference

No Strategic Alliance – Tesco chose not to enter into any strategic alliance of partnership with an existing player in USA. It went alone though after a lot of market research and study of consumer behavior and their tastes and dislikes. This strategy has proved well so far for them. It developed its own unique marketing strategies to engage customers using the internet through its dedicated website. In fact, it started off its campaign through the internet and via another company’s website where it studied the market behavior. This possibly is the only point of difference between the strategies recommended in this paper and the ones adopted by Tesco for its entry into USA

Conclusion and Future Outlook

Thus, we can conclude that a majority of the strategies expected by us as per the theories of International Business were adopted by Tesco in its endeavour in USA. The future outlook is positive for the retail giant as pointed out by the company sources and mentioned in an earlier section of this paper.