CASE STUDY

Tesco: from domestic operator to multinational giantMichelle Lowe and Neil Wrigley

This case considers the emergence of Tesco plc as one of the world’s leading multinational retailers. In a remark-able 10-year period, Tesco has transformed itself from a purely domestic operator to a multinational giant – with subsidiaries in Europe, Asia and North America – and in 2009 had 64 per cent of its operating space outside theUK. Examining market entry into Asia in more detail, the case compares ‘success’ in Thailand and South Koreawith ‘failure’ in Taiwan. It also considers ‘a high risk gamble’ in Tesco’s entry into the US market, long consideredto be a graveyard of overambitious expansion by UK retailers.

● ● ●

terms of sales density, turnover growth and profitability. Over the next decade itmanaged a remarkable transformation –repositioning itself from its discount rootsinto a mass market customer-focusedretailer serving all segments of the UKmarket. By judicious acquisition of somesmaller rivals, and by innovative and flexible store development programmeswhich by the mid-2000s had transformedit into a genuine multi-format operator

with 72 per cent of its UK stores in smaller convenience/supermarket formats of less than 15,000 square feet, it firstcaptured market leadership in the UK then progressivelyaccelerated its lead over closest rivals Sainsbury’s and Asda/Wal-Mart. By 2007, on a conservative definition of the UKgrocery market, its share was 27.6 per cent – almost twiceas large as Asda/Wal-Mart and Sainsbury’s with 14.1 percent and 13.8 per cent respectively. Simultaneously, asthat gap first emerged in the late 1990s and then widened,Tesco, as the increasingly dominant market leader, facedgrowing regulatory pressure relating to both market-competition conditions and land-use planning restrictions.It also experienced increasingly adverse media scrutiny and orchestrated campaigns to ‘rein in’ its visibly growingpower. In response to the latter it moved quickly to embraceagendas of community responsiveness, urban regeneration,sustainable development, and ethical/responsible sourcingto address what the UK Government’s Department forEnvironment, Food and Rural Affairs described as ‘risingconsumer expectations regarding the social responsibilities

Introduction

In April 2009, Tesco, the UK’s largestretailer and private sector employer oflabour, announced annual sales for2008/09 of almost £60 billion (x66bn or$90.2bn) together with profits of £3 billion(x3.3bn or $4.5bn). After a dramaticdecade-long transformation from purelydomestic operator to multinational giant,Tesco now had a remarkable 64 per cent of its operating space outside the UK,was developing increasingly strong businesses across 11Asian and European markets, had a rapidly expanding‘start-up’ subsidiary operating in the western USA, and hadannounced its entry into the Indian market. Moreover, as signalled in both the title of its Annual Report (ValueTravels) and the prominence given in that report to its international profile, the firm was publicly expressing itsconfidence that it had mastered the art of internationalexpansion, so long a weakness of UK retailing. Tesco’semergence as the world’s third largest retailer, operating2025 stores and employing 183,600 staff outside the UKby 2008/09, represents one of the most successful examplesof strategic diversification by any UK company and offersinsight into the role of the ‘corporate strategist’, the CEO.

International expansion – from the UK toCentral Europe, Asia and North America

In the early 1990s Tesco was the UK’s second largest foodretailer, lagging behind the market leader Sainsbury’s in

This case was prepared by Michelle Lowe, Professor of Retail Management, University of Survey and Lead Innovation Fellow AIMand Neil Wrigley, Professor of Geography, University of Southampton and Editor of Journal of Economic Geography. It is intendedas a basis for class discussion and not as an illustration of good or bad practice. © Michelle Lowe and Neil Wrigley. Not to bereproduced or quoted without permission.

Source: Getty Images.

Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 658

of supermarkets’. In response to regulatory pressures, Tescoprogressively refocused its operations and capital investmentin an attempt to secure long-term growth – diversifying intonon-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 diversificationsever attempted by a UK company.

After commencing the first stage of international expansion in Europe – entering the emerging post-Sovietconsumer markets of Central Europe in the mid-1990s (seeTable 1) – Tesco launched the next stage of its strategy in1998. Following Terry Leahy’s appointment as CEO in 1997,it committed to an Asian expansion programme, initiallyentering Thailand and South Korea. The growth potentialof the Asian markets had been extensively researched bythe firm for a number of years. However, the immediate catalysts for entry were the rapid liberalisation of previousrestrictions on retail FDI across East Asia, and opportunitiesto make strategic majority-share acquisitions of fledgling butpotentially market leading retail businesses at discountedprices, which resulted from the Asian economic crisis of1997/98. Tesco’s subsequent expansion in Asia was dramatic. Just 10 years later it had 1047 stores, accountingfor 33 per cent of the firm’s global operating space, in theregion (see Table 1). South Korea now provided Tesco withits second largest market by sales after the UK. Significantly,Tesco had signalled its commitment to develop businessesin two of the world’s key twenty-first century economies,China and India. In China it was rapidly building the scaleof its operation following entry in 2004, and in India it had successfully negotiated a partnership arrangement forentering a market in which ownership of retail businessesby international operators was still strictly regulated.

On the other side of the world, Tesco had taken thepotentially transformational, but high risk decision to enterthe USA – the world’s largest consumer market. Buildingon Leahy’s strategic vision of the market opportunity todevelop dense networks of a new breed of convenience-oriented, smaller-format stores served by a short-lead-timeintegrated 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, Arizonaand 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 2006/07there were 15 retailers generating sales outside their homemarkets 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 associatedsales densities) required in the tightly regulated UK market,and the relative ‘immaturity’ of a higher proportion of itsinternational space – Tesco’s international sales growthinevitably lagged behind the increase in its internationaloperating space. Nevertheless, at more than $20 billionthose sales were sufficient to rank the firm within the top10 multinational retailers (Table 2). By 2008/09 Tesco’sinternational 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 slowlybut progressively moving into closer alignment with the proportion of international operating space (Table 3). Inturn, 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 21,356Poland 1995 319 23,569Czech Rep 1996 113 12,677Slovakia 1996 70 8,286 30Rep Ireland 1997* 116 13,764Turkey 2003 96 7,025

Asia Thailand 1998 571 38,166S. Korea 1999 242 20,626Taiwan 2000 Exited market 2005Malaysia 2002 29 9,872 33Japan 2003 135 4,007China 2004 70 19,452India 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

subsidiaries which continued to exceed those achievable in Tesco’s ‘mature’ and highly regulated home market.

Success in Asia – Thailand and South KoreaAt the point of market entry into Thailand and South Koreain 1998/99, Tesco acquired majority stakes in two retailchains (Lotus in Thailand and Homeplus in South Korea)together having fewer than 20 stores or development sitesand operating in markets still dominated by traditionalforms of retailing. Whilst the growth potential for ‘modern’retail across Asia was considerable, that potential wassimultaneously attracting many of Tesco’s major Europeanand North American competitors – including Wal-Mart,Carrefour, Ahold, Casino and Delhaize. Nevertheless, a decadelater Tesco had successfully turned foothold acquisitionsinto positions of market leadership (Thailand) or potentialmarket leadership (South Korea), had developed extensivemulti-format store networks (exceeding 800 stores), andhad outperformed its multinational rivals to the extent thatWal-Mart and Carrefour had been forced to exit SouthKorea leaving Tesco as the dominant international retailerin 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 adaptiveresponses to growing pressures across East Asia for tighterregulation 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 businessesof the leading conglomerates: the CP Group in Thailandand Samsung in South Korea. Initially Tesco’s share of thepartnerships was 75 per cent in Thailand and 81 per centin 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 percent. Despite this rapid dilution of the local partners’ shareof the businesses, the partnerships offered Tesco knowledgeof 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 globaltotals

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 ofAmerica/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 22 142 Carrefour France 54,758 52 203 Ahold Netherlands 49,562 82 54 Metro Germany 45,125 56 305 Auchan France 24,204 50 116 Aldi Germany 23,476 47 147 Lidl & Schwarz Germany 23,103 46 228 IKEA Sweden 21,882 92 349 Tesco UK 21,678 26 12

10 Delhaize Belgium 19,914 77 811 Rewe Germany 17,445 32 1412 Tengelmann Germany 15,989 46 1513 Seven & I Japan 14,144 34 414 Pinault France 13,283 55 3015 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

In both countries, Tesco has made substantial and con-tinuous post-entry capital investment to build scale andaccrue market leadership advantages. In Thailand theinvestment 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 hypermarketsin 2005 – have been used to enhance its market positionand 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 whennecessary) and to sustain a substantial annual capitalexpenditure programme has rested on the firm’s steadilygrowing 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 atadvantageous rates which that profitability ensures.

Capital investment in both countries has occurredagainst a background of pressures (felt across many parts of East Asia) to tighten regulation and rein in expansion ofthe multinational retailers. Those pressures have rangedfrom attempts to re-impose restrictions on ownership andcontrol, through efforts to protect existing retail struc-tures via land-use zoning, to regulation of store-openinghours, retail formats, and ‘below cost’ selling. In Thailand,as development of large-format hypermarkets becamemore difficult, Tesco transferred its UK-developed small-store operating skills and began infilling its hypermarketframework 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 openinghours’ regulation introduced to limit trading hours oflarger-format stores. Additionally, it developed a novel low-build-cost ‘Value’ store format – essentially a stripped-down small hypermarket embedded within a local vendormarket – to provide an entry vehicle for development in low-income rural ‘up country’ towns where expansionusing conventional large-format hypermarkets was polit-ically unfeasible. Finally, it invested considerable effort in working with local communities to counter mountingregulatory pressures – explaining the value of the benefits(employment, supply chain modernisation, infrastructureinvestment, skills training, export gateway opportunities) it offered to the Thai economy, and stressing the potentialcoexistence of ‘traditional’ and ‘modern’ components of the retail system.

Failure in Asia – TaiwanTesco entered Taiwan in 2000, developed six stores, andexited the market in 2005. In simple terms, several of theelements 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, hadbeen operating for more than a decade and had built astrong and, in practice, unassailable market dominance.Moreover, unlike Thailand and South Korea and Tesco’ssubsequent 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 nuovoexpansion. 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 landownership system proved to be a difficult arena in which to transfer Tesco’s skills in market/site location analysisand property acquisition/development.

As a result, despite determined efforts, Tesco was neverable to develop the market scale necessary to support thesubstantial 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 thatthere was little realistic opportunity of achieving a market penetration level in Taiwan where the subsidiary wouldbecome self-reinforcing in terms of profits.

The asset swap market exit solutionIn late 2005 Tesco announced an innovative strategicdivestment solution to its problems in Taiwan. The solutioninvolved a cross-region swap of retail assets with its rivalCarrefour, whereby each firm would simultaneously securescale 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 EuropeCarrefour would transfer 11 stores in the Czech Republicand 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 eachcountry. Ultimately it was approved in Taiwan and theCzech Republic but in Slovakia was blocked by the Anti-Monopoly Office. Nevertheless, the Slovakian element ofthe swap was relatively small, and Tesco was able to exit itsonly unsuccessful Asian operation, learn valuable lessonsfor other Asian market entries, and simultaneously tostrengthen its market position in Central Europe. Relativefailure had been transformed into modest success by anagile and innovative strategic divestment.

A high risk gamble in the USAIn February 2006, after a year of intensive but closelyguarded market research by a CEO-selected team of

TESCO 661

Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 661

managers despatched to Los Angeles, and building on morethan a decade of in-depth investigation of the potential and characteristics of the market, Tesco announced itsintention to commit £1.25 billion over five years to enterthe western USA. The entry vehicle was to be a chain of‘convenience’ focused neighbourhood stores, later to becalled Fresh & Easy Neighborhood Markets. The decisionrepresented a significant shift in Tesco’s previous ‘emergingmarket’-focused internationalisation strategy. As the CEOof Fresh & Easy was to stress, the US represented: ‘the firstmature, well-served market, that we have opened into, soactually [Fresh & Easy] is not filling a vacuum and has toearn its place’.i It was also, very clearly, a high risk decisionas the US market had a long record of proving to be the‘graveyard’ of overambitious expansion by UK retailers. Asa result, the entry announcement generated widespreadscepticism 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. storeproductivity) 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 animportant reversal of its previous view of the likelihood ofsuccess in the market. Indeed, it had consistently resistedmany opportunities to enter the USA via acquisition ofregional food retailer chains of conventional large-formatsupermarkets – not least because of their track record of low profitability and the threat posed to them by thedecade-long supercentre-driven transformation of Wal-Martfrom purely general merchandise to US food retail marketleader. The change in Tesco’s assessment related to its grow-ing skills in small format store operation, its belief in thecompetitive potential of dense networks of ‘convenience’-focused neighbourhood stores providing an innovativeretail offer, and evidence that the Wal-Mart threat could becountered in the type of urban markets Tesco had targetedfor 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 andcompetition regulation which blocked large-scale acquisi-tions but offered an opportunity for growth by acquisitionin the convenience store market. In part, however, thoseskills had been developed proactively to gain competitiveadvantage in a rapidly expanding ‘convenience culture’market. By the mid-2000s, the result was that Tesco had700 Express convenience stores in the UK, supplementedby a range of other smaller format stores, e.g. 15,000-square-feet urban ‘Metro’ stores and, additionally, had begun toexport the Express format to its international subsidiaries.Growing confidence in its ability to operate small formats

profitably offered Tesco the opportunity to explore a USmarket entry focused around ‘convenience’. Additionally,it recognised that the model of dense networks of 10,000square feet of high visibility corner-location stores success-fully used by US drug retailers (chemists) such as Walgreenscould be used to structure a chain of smaller format foodstores 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 systemsrequired by those products. US food retailers, and in turnthe US food manufacturing industry, had traditionallyoffered few of these products to customers and the special-ist distribution/logistics and quality control/traceabilitysystems necessary to support extensive retail offers of thattype were underdeveloped. As a result opportunities existedto develop a chain focused on offering high quality butaffordable fresh and chilled prepared meal products, served by a short lead time responsive distribution system,supplying higher levels of own label products than typicalamongst 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 – drivingsignificant consolidation of those chains. Additionally, itrecognised the traditional supermarket sector was essen-tially being squeezed between the Wal-Mart-led supercentreoperators and a new group of discount retailers operatingsmaller format stores and achieving much higher levels of profitability than the supermarket chains. In particularthe stores of the Albrecht family – Aldi on the east coast andTrader Joe’s in the west – provided Tesco with evidence that the threat of Wal-Mart could be accommodated. Theinnovative Trader Joe’s in particular offered a model ofwhat was possible in the metro markets of the western USA, operating with exceptionally high sales densities andprofitability. Moreover, it was exactly those urban marketswhich, 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 expansionIn November 2007, Tesco opened its first Fresh & Easystores in Southern California. They averaged 10,000square 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 distinctproduct.

662 TESCO

Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 662

self-scanning checkouts. Described by Fresh & Easy’s CEO as ‘designed to be as fresh as Whole Foods, with the value ofWal-Mart, the convenience of Walgreens, and a productrange of Trader Joe’s’,iii the stores were rapidly rolled out in Southern California, Phoenix and Las Vegas, and a yearlater exactly 100 had opened.

Significant features of Tesco’s US experience include:

1 Attempts to engage with an online consumer culture. Incontrast to its previous international market entries,Tesco has proactively adopted digital/viral marketingtechniques to address the challenge of defining, launch-ing and embedding the Fresh & Easy brand. Determinedefforts have been made by the firm to use blog and text-messaging based communication with online commun-ities of customers and potential customers. Althoughoccasionally these efforts have rebounded on the firm,Tesco has continued to explore these methods and totransfer learning into its wider international operations.

2 Establishing brand visibility and maximising developmentopportunities via investment in underserved communities.An important component of Tesco’s entry into Los Angeleshas been its commitment to develop stores in lowincome/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 1990sin 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 andincreasing national recognition, leading to a more rapidestablishment of brand identity than might otherwisehave been expected. On the other hand it has provided arallying point for a variety of groups (notably retail labourunions strongly opposed to Tesco’s decision to operateits 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 highquality prepared food products critical to its vision of theFresh & Easy brand in a context where it had concernsabout prevailing quality/traceability standards of localthird-party production, Tesco has been obliged to takethe 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 toCalifornia of two of its leading UK suppliers – Nature’sWay Foods and 2 Sisters Food Group. These companies

have jointly invested $170 million in processing plantsadjacent 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 ingredientsused 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 citieshighly contested by leading US domestic operators,could be predicted to produce a fierce competitiveresponse. Given the inability to protect the ‘front region’innovations underlying its US chain, Tesco essentiallyhad to attempt to lay down store networks as rapidly aspossible before drawing that anticipated response.Within a year of Fresh & Easy’s launch Wal-Mart hadbegun 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 2009those ‘Marketside’ stores remained confined to just fourlocations in Phoenix. Although scaling up of the trialwas anticipated, Tesco had been given unexpected timeto continue developing its store network density and torespond to ‘front region’ innovations (ranging, signage,store atmospherics) in the prototype Marketside stores.

5 The reputational gamble of the CEO. One of the definingcharacteristics of Leahy’s strategic realignment of Tescoas a multinational operator had been his ability to engineer that transformation largely under the radar of hostile public scrutiny and retain financial marketsupport for the strategy. That was never likely to be pos-sible with an entry into the USA. Despite the relativelymodest scale of the £1.25 billion five-year US investment(compared to annual international capital expenditurein 2008/09 of £2.1 billion) the firm, and its CEO in particular, was acutely aware of both the reputationalrisks and potentially transformational consequences ofthe US venture in the case of either success or failure.

We’ve carefully balanced the risks. If it fails it’sembarrassing. It might show up in my career [but]it’ll cost an amount of money that is easily affordableby Tesco – call it £1 billion if you like. If it succeedsthen it’s transformational.iv

Leahy has, in effect, been required to publicly place his considerable ‘reputational equity’ on the line andhas found it necessary to repeatedly signal strategic‘commitment’ to the US venture.

Success or failure in the USA – the jury remains outBy late 2009 Tesco had opened more than 130 stores in theUSA. In the face of a global economic crisis with origins in the sub-prime US housing market, the growth of some

TESCO 663

Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 663

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 seekingopportunities to announce a rare lapse in Tesco’s seem-ingly unstoppable global expansion. Long term scepticsamongst the equity analysts continued to argue that Tescowas 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 Mexicoand 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 andSouth 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 (notablyTaiwan) and South America (Brazil and Argentina) achieving ‘first-mover’ advantages and substantial profits. By the late1990s, after its merger with French rival Promodes, it had operations in over 30 countries across Asia, South America andelsewhere in Europe. During the 2000s it has divested operations in several markets in which it had failed to achievescale, but remains a widely dispersed retail multinational operating both large-format hypermarkets, supermarkets, andalso 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 globaloperator. Its aggressive growth strategy and tolerance of high financial leverage lost the confidence of financial marketsand in 2003 Ahold was the focus of a major corporate financial scandal. Subsequently Ahold was forced to sell many ofits operations in Latin America, Asia and Europe to protect its ‘core’ retail chains (Stop & Shop, Giant and Albert Hein) inthe USA and the Netherlands.

Metro: Second largest European retailer, this German firm has stores in over 30 countries across Asia Central, Easternand 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 frequentlyallowed 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 whichprovided a model of the possibilities for Tesco’s US subsidiary.

future development sites with limited competition, the corepositioning 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 emergingAmerican consumer converge’ retained its logic, and whowould 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.)

664 TESCO

Z01_JOHN2020_09_SE_EM18.QXD 10/13/10 9:09 Page 664