TESCO in China 10 January 2008

Supervisor Susan Vonsild

Group 3

Sascha Christensen

Christelle Dal Molin

Dong Wei Yao

Lukas Krenovsky

Niels-Christian Aaen Hegelund

How to brand in China?

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Abstract The project is focusing on branding and how branding must be adjusted while moving into new

markets encompassing a new and significantly different culture. The group has interest in

conditions and development in Asia and of that reason China was selected as the study area. China

posses a very diverse culture compared to European countries thus it will be possible to discover

and work on numerous controversies. A fast growing and newly occurred market is the retail

industry. Because of the political situation the first supermarkets arose in the start of the 90s and not

before 2004 the industry was totally opened. Consequently Chinese consumers have not grown

accustomed to this new kind of shopping and still have some different habits and preferences

influenced by the old Chinese system. To use an example of a typical European retailer entering

China Tesco was chosen. This company has only recently entered the market and has still not

managed to become an absolute success on the market. Furthermore Tesco has entered China

without using its own brand name and products, and they recognise that the company does not fully

understand the Chinese culture. However, recently Tesco has chosen to start applying its own

branding activities on the market, including name, services, advertising and so on.

The situation accounted for, makes up an interesting study area with several issues to be aware of

and possibilities for combining the terms of branding and culture. To have background knowledge

of China and what issues to have in mind, the macro environment of the Chinese market will be

explored and afterwards the micro environment of the retail industry is examined. Then this

knowledge is combined with theoretical models of branding and applied to create suggestions of

how to brand Tesco in China.

In this project the specific situation for Tesco and the retail industry is analysed. However, some

findings can be transferred and used more generally in other industries and by other companies. The

characteristics found about Chinese culture and society is generally applicable and applies to other

branding campaigns. Thus the project in some degree can be used as a manual or inspiration to

consider when developing a branding approach in China.

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Table of contents ABSTRACT ...................................................................................................................................................................... 1 

1. INTRODUCTION ........................................................................................................................................................ 4 

1.2 PROBLEM FORMULATION .......................................................................................................................................... 6 

2. METHODOLOGY ....................................................................................................................................................... 8 

2.1 COURSE OF ACTION ................................................................................................................................................... 8 2.2 METHODOLOGICAL VIEW .......................................................................................................................................... 9 

2.2.1 The objective view ............................................................................................................................................ 9 2.2.2 The subjective view ........................................................................................................................................ 11 2.2.3 The project’s methodological view ................................................................................................................. 12 

2.3 METHODOLOGICAL PROCEDURE/METHODICS ......................................................................................................... 13 2.3.1 Analysis and ambition level ............................................................................................................................ 13 2.3.2 Research Design ............................................................................................................................................. 15 2.3.3 Scope and limitations of the study .................................................................................................................. 16 

3. COMPANY DESCRIPTION OF TESCO ................................................................................................................ 17 

3.1 HISTORY OF TESCO ................................................................................................................................................. 17 3.2 TESCO IN NUMBERS ................................................................................................................................................. 17 3.3 TESCO’S CORPORATE STRATEGY ............................................................................................................................. 19 3.4 TESCO’S ENTRANCE AND PRESENT SITUATION IN CHINA ......................................................................................... 21 

3.4.1 The joint venture and the brand name Le Gou ............................................................................................... 22 

4. CULTURE AND BRANDING .................................................................................................................................. 24 

4.1 CULTURE ................................................................................................................................................................ 24 4.2 BRANDING .............................................................................................................................................................. 25 

4.2.1 Branding and communication ........................................................................................................................ 26 4.2.2 Branding in a global context .......................................................................................................................... 27 

4.3 COMBINING CULTURE AND BRANDING .................................................................................................................... 28 

5. RETAILING MARKET ANALYSIS ....................................................................................................................... 31 

5.1 THE PESTEL ANALYSIS ......................................................................................................................................... 31 5.1.1 Political .......................................................................................................................................................... 31 5.1.2 Economical ..................................................................................................................................................... 32 5.1.3 Socio-cultural ................................................................................................................................................. 34 5.1.5 Technological ................................................................................................................................................. 35 5.1.6 Environmental ................................................................................................................................................ 37 5.1.7 Legal............................................................................................................................................................... 37 5.1.8 Macro environment of the Chinese market .................................................................................................... 38 

5.2 PORTER’S FIVE FORCES ........................................................................................................................................... 40 5.2.1 Threats of substitute concepts ........................................................................................................................ 40 5.2.2 Threats of new entrants .................................................................................................................................. 41 5.2.3 Intensity of industry rivalry ............................................................................................................................ 42 5.2.4 Bargaining power of customers ..................................................................................................................... 44 5.2.5 Environment of the retail industry .................................................................................................................. 45 

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6. BRANDING ANALYSIS ........................................................................................................................................... 48 

6.2 BRANDING IN TESCO AND THE RETAIL INDUSTRY ................................................................................................... 48 6.2.1 Private labels ................................................................................................................................................. 48 6.2.2 Corporate branding ....................................................................................................................................... 50 6.2.3 Corporate branding and internationalisation ................................................................................................ 54 6.2.4 Customer thinking and motivation ................................................................................................................. 55 6.2.5 Culture of Chinese consumers ........................................................................................................................ 57 

6.3 HOW TESCO SHOULD BE BRANDED ON THE CHINESE MARKET ................................................................................ 60 6.3.1 Tesco Products and services .......................................................................................................................... 62 6.3.2 Tesco name ..................................................................................................................................................... 64 6.3.3 Tesco communication and advertising ........................................................................................................... 66 

7. CONCLUSION ........................................................................................................................................................... 68 

8. REFLECTIONS AND PERSPECTIVES ................................................................................................................. 71 

9. LIST OF REFERENCES ........................................................................................................................................... 72 

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Wholesale and retail tradeGDP

1. Introduction This project is about the UK retailer Tesco and the company’s branding on the Chinese market.

China’s position as “the factory of the world” has been known for years and the country is often the

number one choice for production outsourcing due to competitive pricing, reliability and efficiency.

However, China is becoming much more than a “factory”. A stabile and strong growth in consumer

buying power has made it an interesting market for selling products. As a result the consumer

market, including the retail industry, has developed a lot over the last years and attracted growing

attention from world players. Multinational retailers look upon the Chinese market as a key factor in

the enlargement of their companies, resulting in aggressive expansion plans in this fast developing

market.1

This development is started by the economical and political changes in the Chinese society. China

has become a more open market to foreign companies by for example joining the World Trade

Organization (WTO) in 2001. At the same time China’s economy has undergone an incredibly

strong and continuing growth over several years resulting in an increase in Gross Domestic Product

(GDP) of several hundred percent over a relatively short period of time.

Figure 1 Development in China’s economy

Source: http://www.stats.gov.cn/tjsj/ndsj/2006/indexeh.htm – Statistical yearbook of China table 3.4

It is obvious that the Chinese population has become richer, which is also reflected in an increase in

wholesale and retail trade. An increasing part of the population lives in cities and this leads to a

change from buying goods on traditional markets, to buying in supermarkets. This reflects an

1 KPMG (2005), page 2

5

escalating demand for goods of a guaranteed high quality and consumers are buying more

expensive and processed goods. Yet, China is a culturally diverse market for European retailers and

it will be a key determinant for a foreign retail investor to offer the right range of products and

services to the market.2

Tesco is the largest UK retailer and a global player operating in both Europe and Asia. It sells a vast

amount of food products as well as non-food products of several kinds. The company uses

economies of scale that is closely connected with mass production and sales. As an advantage of

this, Tesco is able to cut the prices and be highly competitive on world markets.

Tesco finally moved to China in 2004 by entering a joint venture (JV) with a Chinese business

partner. At that time the stores kept their original Chinese name Le Gou and the Tesco brand was

not used. Tesco just owned 50% of shares but apart from that not much changed. However, recently

Tesco has bought more shares and started changing the stores toward a Tesco concept.3

By entering the market Tesco is squaring up to both global competitors such as Wall-Mart and

Carrefour, but also to local competitors as Bailian. Even though the global competitors are

accounting for tough competition the local companies should not be underestimated. Local retailers

are fast at picking up successful retail strategies and have knowledge about norms, rules and culture

in China.4

Tesco ranks in a top position in all its overseas markets apart from China. Whereas in China Tesco

has still got a long way to go before even closing in on a top position. Furthermore Tesco

acknowledges that in spite of all the investigations and being an expert at retail operations they

cannot understand this market.5

With this in mind it is a challenge for Tesco to improve its position on the Chinese market. It is

certain that the market possesses some great opportunities but also threats are visible. The correct

understanding of the market and its development is essential to be successful. The ability to target

the consumers in the right way is essential to reach the goals of fast expansion, cover consumer

needs and thereby reach leadership in this attractive market. As multinational giant retail companies

have the economic potential to make big scale investments, it is still important to consider the

differences from the Chinese market to western markets. Due to issues mentioned above the

problem formulation is presented in the following part.

2 Landbrugsrådet (2006), page 3-7 3miranda.hemscott.com 4 KPMG (2005), page 35 5 ce.cn

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1.2 Problem formulation

“Considering that the Tesco brand did not play a significant role in the initial entry of the company

into China, how can branding and the adaptation of the brand to the Chinese market help Tesco to

extend its market penetration in China?”

This study both has a describing and exploring aim. First it will describe the past situation of Tesco

and the Chinese market in order to get background information. In this part it will be attempted to

understand why Tesco entered China and why it happened as it did. The initial entry of Tesco was

its first move into the Chinese market and covers the JV with the Chinese partner. It is argued that

Tesco brand did not play a significant role in the initial entry. By “significant” it is meant that the

brand was not an important factor in the entrance of China and it will be discussed why this was the

case.

The initial part of the project will also explore the connection between culture and branding. This

connection is a key assumption in the project.

“A brand is a name, term, design, symbol or any other feature that identifies one seller's good or

service as distinct from those of other sellers”.6A brand carries many associations in the mind of

people and these make up brand image. By branding it is possible to create or change the

associations about the brand thereby generating the brand image wanted by the company. Branding

as a term means the promotion of a brand or can be seen as a synonym for advertising strategy and

it is closely connected with marketing.7 In this way branding can be seen as a vehicle of placement

in the consumer mind, and it is in this connection adaptation can be reached. By adaptation is meant

to fit the brand to the new conditions. It is assumed that a new country make up a new brand

situation.

6 Wood (2000), page 662 7 Bunn (2006)

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Figure 1.2 Brand model

Source: http://www.studioriley.com/BrandM.html

The figure describes the interaction between company and customer. Each part has its culture which

when talking about Tesco and China is assumed to be very different. On the company side culture

can be seen as organisational culture or corporate strategy which might have influence on all

stakeholders. The company has some competencies, which is used to fulfil its goals and visions. On

the opposite side customers has individual needs. This leads to the interaction which creates supply

and demand. However, because of two different cultures it is not so simple to fit competencies and

needs. Customer culture is usually connected with nationality or environment where an individual

lives. Branding and adaptation is meant to make this fit better. However this will require an

understanding of the concept of culture and the specific cultures in respectively Tesco and China.

From this follows that if Tesco is able to make its branding fit the Chinese environment, it is able to

target consumers better, thereby attracting more customers. That is what “extend its market

penetration” refers to. Thus brand and branding is seen as a critical issue for achieving success on

the Chinese market and in the attempt to produce good relations with the Chinese consumers.

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2. Methodology The purpose of a methodology chapter is to discuss the overall choice of methodological view and

the accordance between the view and the methodological procedure and methodics. Together these

make the group’s working paradigm that defines how the project will be made. The choice of

methodological view is therefore essential for the project’s structure and how it is conducted.8

2.1 Course of action The aim of this part is to explain how the methodology chapter is structured. An attempt to illustrate

this has been made in following model.

Figure 2.1 Methodological course of action

Source: Own creation

The present part can be seen as an overview of the coming chapters and a description of the course

of action taken in the methodology chapter.

The methodological view part is an investigation of the possible approaches to our methodology

and the project’s choice of approach will be examined. The methodological view is chosen

primarily from:9

Ontology: How we perceive the construction of the world.

8 Arbnor & Bjerke (1997), page 1-20 9 Olsen & Pedersen (2003), page 150-151

Course of action

Methodological view

Methodological Procedure/ Methodics

Ambition level &

Scope

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Epistemology: How knowledge is created and on the subject if true/scientific knowledge can exist.

These are compared to the project’s character and the group’s point of view. After this the

techniques and theories used in the project will be compared to the methodological approach in the

methodological procedure and methodics part. At last ambitions and goals of this project are

explained and the limits of the study are set up by accounting for its scope.

2.2 Methodological view The projects work with methodological views, are based on Arbnor & Bjerke and their separation of

the theories of science into different approaches. Consequently we work with three superior

approaches: The analytical approach, the systems approach and the actor approach.10

It is the aim to make an understanding for these approaches and on that behalf be able to compose a

well argued selection between the possible approaches.

First of all it is possible to select between the objective and subjective viewpoint.

2.2.1 The objective view

The foundation of the objective view is made of the positivistic paradigm. In social sciences it

means that everything must be quantified in order to make it measurable. The world is an objective

reality, it exists independently of the individuals and they are determined by it. The whole

dominates the parts, and consequently the values in this system become over-individual. The

perception of reality is built on the assumption that reality has a summative character and is static.

Both the analytical and systems approach are built on objective ontologies. Thus reality due to the

analytical approach is viewed as well-defined divided parts, where the whole equals the sum of the

parts. Focus is therefore on the study of each part as the whole simply consists of the summarising

of these.11 Contrary to this the system approach is working with wholes or systems. A system is

defined as:

“A set of components and the relations between them” 12

This means that focus is not just on the single components but also the relations and synergy effects

that might occur and makes the system approach more overall-oriented. It is emphasised that the

10 Arbnor & Bjerke (1997) 11 Arbnor & Bjerke (1997), page 86 12 Arbnor & Bjerke (1997), page 111

10

parts are explained based on the characteristics of the whole. As a result a project built on system

approach will have the purpose to create knowledge about the nature of the whole system.13

The epistemology is also objective for both the analytical and systems approach. This means that

the knowledge created can be used universally. However, in the systems approach a purpose may

also be to reproduce individuals’ subjective ideas and conceptions, but these are treated as if they

were objective. As the analytical approach demands a high level of formalism this is not required in

the systems approach. Using the different techniques correctly is not necessarily coupled with

success in the systems approach. On the other hand success is associated with imagination, alertness

and awareness when facing the complex reality postulated by this approach. Consequently it is

more difficult to choose the correct technique for the study area. The study is very much a matter of

trial and error which means having to modify techniques as the study progresses.14

The system approach has two different plans or perspectives on a guiding study:

Goal-means orientation sees the system as a mechanism making the goals and means structural or

processual concepts. Goals for both the study and the system, is stated at an early stage and the

researchers can seek the means that will permit to reach the goals. This orientation is often

concerned about elimination of system powers that contributes lack of fulfilment of the goals.15

Trial and error orientation usually stress the process aspects of the system. The possibility of even

broad planning of the study is denied and instead the course of the study provides material for

successive continuations. Therefore the study does not focus on a goal and the problem is not

defined as lack of fulfilment.16

The design of a project in system approach starts out with a system model 1 which is made up by a

general study of the system and its situation. In goal-means orientation this will refer to the problem

formulation and the description and explanation of this. By now a problem will have been

discovered and the general state of affairs be known. Following a diagnosis and analysis of the

problem area is conducted and on this basis a system model 2 is created. In the new system the

original problem is solved and, in terms of the project, a conclusion can be written.

The system approach acknowledges that reality is complex and that techniques need to be adapted

in order to fit the specific study area. Additionally it believes in relations and synergy effects and

tries to describe the study area as a coherent system and this is seen as an appealing view in our

project.

13 Arbnor & Bjerke (1997), page 109-155 14 Arbnor & Bjerke (1997), page 294 15 Arbnor & Bjerke (1997), page 299-302 16 Arbnor & Bjerke (1997), page 299-305

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2.2.2 The subjective view

In the subjective view the actor approach is applied. The ontology states, that not every individual

see the same reality. The picture of the world is made inside each person’s head and is consequently

individual. All individuals act upon their own picture of the world and is thereby realising it to

something external.

When it comes to the view of human nature the individual is playing an important role as he/she

becomes a constructor of the world. The individual is given creating powers and can change the

world that is perceived.17 However they are still actors and are therefore still affected by the world

around them. The actor approach does not deny that humans are influenced by external factors but it

is denied that human nature is to be determined.

The epistemology in actors approach is that objective knowledge is impossible. On the other hand

subjective knowledge is created. This is caused by the researcher being unable to withdraw from the

world he/she is researching. As a result it is impossible to avoid bias. The researcher will always

have a pre-understanding of the research area because of society, history, culture and his/ her

personal life. Afterwards it can be tried to make a critical self reflection where some faults can be

corrected.18

All knowledge will be created in an interaction between own experiences and the total experiences

collected together with others. This knowledge is called a social construction. It is created in a

dialectic process where all actors represent both a subjective and objective world. Actors will at the

same time enter into several different social constructions and hence both influence and be

influenced by these constructions.19

In this project the actors approach is not used. The group is not interacting in a dialectic process

with actors from Tesco or the Chinese market and consequently we are not able to produce a

legitimate social construction according to the actors approach. Neither is it possible to make valid

knowledge on the background of a hermeneutical circle as it takes two interacting parts. In this

project we have tried to contact Tesco but they have not wanted to participate. As a result the

hermeneutical circle has only one part and no interaction can take place. Furthermore we are only

using secondary sources whereas in actors approach the importance of primary sources is stressed.

17 Arbnor & Bjerke (1997), page 159 18 Arbnor & Bjerke (1997), page 176-181 19 Arbnor & Bjerke (1997), page 181

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Actor approach

Systems approach

Analytical approach

The objective view The subjective view

2.2.3 The project’s methodological view

The final choice of methodological view is the systems approach. It can be illustrated by following

figure:

Figure 2.2.3 Methodological view

Source:Inspired by Arbnor & Bjerke (1997), pages 44-46

As the model shows the project’s methodological viewpoint is system approach.

Our use of data and view of the research area is much characterised by the system approach. It is

mainly a theoretical project that is only implementing a practical orientation through secondary

data. Subsequently the project is built on data as research, analysis and theories made and

conducted by others. The systems approach is emphasising the use of secondary data and as a result

documentary and theoretical data are mainly used as primary sources.20 More over the overall-

orientation and focus on relations and synergy effects in the system approach will be a useful tool to

analyse and understand a big and coherent organism as Tesco and the Chinese market.

In the systems approach the goal-means orientation is used. Goals that steer the projects’ focus are

set up at an early stage and goal fulfilment is the aim of the project. It is firstly attempted to get an

understanding of the system and second means to solve the problem in the system is found.

The Chinese market and company of Tesco is seen as a coherent system. They have their own

characteristics, but in order to understand the results of these, it is essential to see the two systems

interplaying. When put together these characteristics can result in synergy effects and make Tesco’s

market penetration better. However, if the company and market characteristics are not fitting

20 Heldberg (2003), page 62

13

together they can also result in a decrease in market acceptance which can be catastrophic for

Tesco. Thus the construction of a system model of respectively the Chinese retail market and Tesco

is needed in order to reach a valid respond to our problem formulation.

The basic problem in this project is use of branding on a culturally diverse market. The project will

seek to provide knowledge about this specific situation but also try to create objective knowledge

which can be used in a later similar situation. In this sense the project can be a guidance to later

studies in a brand-culture perspective.

2.3 Methodological procedure/Methodics

The methodological procedure and methodics are about 1) finding relevant techniques applied in

the methodological view and 2) how these are assessed and used in relation to the methodological

approach and research area. This part is thereby combining the theoretical view and practical use of

methodology in the project.

Many of the theories used in this project are focusing on describing structures and organisms in the

system. As an example market analysis such as PESTEL is used and other theories for company and

industry analysis are also utilised. Generally they can be characterised as inspired by the system

approach and is therefore encompassed in the projects methodological view.

2.3.1 Analysis and ambition level

The project is built on three levels of ambition, which in this part will be discussed from the basis of

analysis- and ambition levels.

- System analysis

- Systems construction

- System theory

In the system analysis the actual system is described without constructing any changes. The focus is

to describe and explain the system and cover the field of problems included in the system. With the

systems construction the aim is to construct changes. The field of problems is found and the

changes are made in order to improve the system and erase the problems. The purpose of the system

theory is to generalise. It is strived to use and generate system models of common validity. The

system theory is based on both the system analysis and the systems construction and is a

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development of new system theories. In later studies the created system theory is background for

the system analysis and the system construction.21

The three levels of ambitions are used in the project, where firstly an illustration of the real existing

system is made – Tesco and the Chinese retail market. The system analysis consists of a description

of the company Tesco and its environment, the Chinese retail market. This description of the

company and the environment is done from secondary material and describes why branding is

relevant and how culture has an effect on it. Then the basis is taken from the illustration and focus is

on changing the system. At last system theory is made on the basis of the first two levels. In such

way both the system analysis, system construction and system theory are used in the project.

Figur 2.3.1 General plan for the process of research – ”Goal-means” orientation

Source: Arbnor & Bjerke(1997), Methodology for creating business knowledge, page302

Source: Arbnor & Bjerke(1997), Methodology for creating business knowledge, page 302

As explained in the figure beneath the problems exist in practice, but are found through the

theoretical work conducted in the study. The changes that are able to solve the problems are also

found by using theories and a new system model is created. This is meant to be implemented in

practice in order to see if the theory has been useful. The implementing of new proposal remains on

the level of practice, sustained by the fact that the group has no chance of implementing the

proposals.22

21 Arbnor & Bjerke (1997), page 283-306 22 Arbnor & Bjerke (1997), page 283-306

Theory

System theory

System analysis Systems construction

Problems

Practice Implementing new proposal

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2.3.2 Research Design

This section is made to give an overview of how the project is built up and the thoughts behind the

structure. The structure of project is inspired by the system research design. It is made up by a

system model 1 and 2 where the problem field is diagnosed and a solution to the problem is

proposed.

Figure 2.3.2 Project design

Source: Own creation

The project design illustrates how the project is build up and how the choice of methodology affects

its structure. First part, the problem field, is described in the introduction ending up with the

problem formulation. Then the system model 1 is created through a description of Tesco, an

explanation of the importance and relation of branding and culture and at last a description of

Tesco’s environment consisting of the Chinese retail industry. The last element is explained through

Creation of System model 1

Diagnosis of system problem

Retailing market analysis

How culture affects branding

New system model 2

Branding analysis

Company description of

Tesco

Field of Problem

Introduction

Problem formulation

Conclusion

M E T H O D O L O G Y

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PESTEL analysis and Porter’s five forces. In this part a diagnosis of the system problem is made.

These first chapters results in a wide knowledge about the system, and leads to a creation of a new

system model 2 throughout the chapter of branding analysis which contains the branding process of

Tesco in China. In this chapter Tesco is looked upon in a future perspective and solutions of how to

brand the company are developed. Finally the project ends up with a conclusion, where

recommendations or forecasts are made of how Tesco should brand itself in China in the future.

Behind it all lays the methodology, which is helping the project to keep the focus and structure.

2.3.3 Scope and limitations of the study

In this part it is intended to explain where the focus of this project is. The aim is to offer insights in

the Chinese retail industry but the study itself imposes constraints on insights. As explained in the

problem formulation part, the focus is on branding and how cultural aspects influence this.

However, each selection means a corresponding sacrifice of what remains unselected. Theories used

in the start of the project, PESTEL and Porter’s five forces, are though covering a broad area of the

Chinese market. Still its content is focused on relevance for Tesco, the retail industry and branding.

Thus economy, politics, competitors and so on are discussed but only to the extent that the group

find it relevant for answering the problem formulation. This is also the reason why bargaining

power of suppliers is left out in Porter’s five forces.

The reason for choosing the problem in question is that branding communication to an increasing

extent is crossing borders and cultures due to globalisation of the economy. This implies that culture

of the marketers and consumers are different and the implications of this demand a detailed study.

The reason for selecting China is that the country is a highly distinctive market compared to Europe

when it comes to culture, language and so on. Furthermore it is a big, attractive and interesting

market. Tesco was Chosen because it is a big international company with good possibilities for

finding relevant secondary material. In addition, the retail industry is seen as very interesting for

China. It is growing explosively and deals with ordinary Chinese people. As a result culture of the

population and consumers is of high relevance.

In general our branding theories are the heart of the project. They are focused on respectively

culture and the communication between Tesco and Chinese consumers. The chapters 3, 4 and 5 are

applied as background knowledge for constructing a system model and being able to create an

understanding of culture and communication between the two parties. Chapter 6 is constructing the

new system model and providing concrete suggestions of how to improve Tesco’s branding and

communication.

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3. Company description of Tesco This part of study presents the chosen company Tesco. The chapter is providing a background view

of the company in accordance to history, strategy and financial situation.

The chapter also covers Tesco’s activities on the Chinese market and how it has performed since its

entrance. Tesco’s entrance in China will be regarding, how it happened and which consequences it

has had to following business performances. Last the present company situation in China is

presented, which includes the location and spread of recent business activities and choices of

branding activities till now.

3.1 History of Tesco Tesco as a company was established in 1932 by Jack Cohen in the United Kingdom (UK) which is

the home market. In 1947 Tesco shares started to be sold on the public stock exchange. The key

and first big acquisition was made in 1959 when Tesco took over more than 350 stores in the UK.

In 1961 Tesco built up the largest store in Europe and entered the Guinness Book of Records. Tesco

started opening several petrol stations in 1974 and in 1991 it became the biggest petrol retailer in

the UK. The first entered market abroad was Hungary in 1995.23

In 1990’s Tesco started to provide several additional services to its customers such as Internet

connection, insurance, mobile services and Tesco.com. These services are Tesco’s advantage that

helps to retain customers and persuade new ones to buy in Tesco stores. Tesco.com is the UK most

famous online store with food and non-food Tesco assortment.24

3.2 Tesco in numbers According to the figure below Tesco has achieved fast economical growth through the last decades.

The company’s turnover increased more than seven times in the last 15 years.25 The company

performance was caused by several acquisitions and entering several markets with Foreign Direct

Investments (FDIs) and Joint Ventures (JVs).26

23 www.tescocorporate.com – A 24 www.tescocorporate.com – B 25 Coriolis Research (2004), page 4 26 Tesco Annual Report 2007, page 6

18

Figure 3.2.1 Tesco’s turnover in the last 15 years

Source: Coriolis Research, 2004, TESCO: A case study in supermarket excellence, page 4

The economic growth is also reflected in the number of Tesco stores and the level of

internationalisation in the company. Tesco has spread to several countries in this period creating a

global company and brand.

Figure 3.2.2 Tesco presence in market stores

Year of entry

No. of stores

Sales area (million sq

fts)

Planned store openings

2007/08 (incl. Acquisitions)

UK 1988 27,8 142 Hungary 1994 101 4,8 14 Poland 1995 280 6,5 54 Czech Republic 1996 84 4,1 24 Slovakia 1996 48 2,5 17 Rep. of Ireland 1997 95 2,3 9 Thailand 1998 370 7,5 162 South Korea 1999 91 5,1 51 Malaysia 2001 19 1,9 7 Turkey 2003 30 1,1 49 Japan 2003 109 0,3 35 China 2004 47 4,2 10 TOTAL 3262 68,1 574

Source: www.tesco.cz -Tesco plc, 2007, Inside Tesco: Tesco at a glance

As seen in figure 3.2.2 Tesco focuses in few regions. The first operation was set up in the UK. In

the mid 90’s Tesco showed its interest in Central Europe and in 2003 also in Turkey. In the

19

beginning of the millennium Tesco entered several markets in Asia. As it is obvious, according to

planned numbers of new stores that will be opened in 2007/08, Tesco’s main interest is in Central

Europe and Asia. Tesco wants to retain the leading position on the home market with more than 140

store openings in the UK in 2007/08.

Tesco has more than 400.000 employees in 13 countries. It includes 12 countries with Tesco stores

and one country, India, where the service organisation for the stores is placed. The service

organisation called Tesco Hindustan Service Centre (HSC), consists of call centre and IT support

department.

3.3 Tesco’s corporate strategy A company of Tesco’s size should have a clear corporate strategy. The figure 3.3.1 shows the first

of two strategy models adapted from a Tesco case study.

Figure 3.3.1 How Tesco sells for less

Source: Coriolis Research, 2004, TESCO: A case study in supermarket excellence, page 9

Tesco tries to sell more volume which means that the assortment is wide and the scale of products

still increases. The company uses the economies of scale and it helps to fulfil the two next steps in

Tesco’s circle.27 Tesco tries to take an advantage of economies of scale and to become

extraordinary big. The massive size of the company can help to cut the prices of offered items and

27 Guy, Bennison & Clarke (2005)

20

helps to sell more volume. After this corporate strategy description it is obvious that it is

advantageous for Tesco as well as for its customers.

Figure 3.3.2 Tesco key objectives

Source: Coriolis Research, 2004, TESCO: A case study in supermarket excellence, page 9

The second strategy is connected with Tesco’s main interests areas which are people, customers,

operations and financial. The content of each area are defined in the figure above.

The customer part is about relationship between Tesco as a company, its employees and customer.

It defines what must be provided to customers in terms of price of Tesco products and staff

behaviour. This part also covers how the company wants to retain customers and their loyalty.

Another part of the strategy is dealing with people - its employees. Tesco is interested in motivating

its staff and that is why it tries to create a friendly and team working environment and add these

values to the corporate strategy.

The third part of strategy is called operations and describes how processes inside Tesco are

performed. The operations conducted by Tesco employees should be as simple as possible in order

to make the work easy and faster. This result in advantages for the customers, as the employees can

give a better service. Last point of operations is called “cheaper for Tesco” and it means that all

processes have to be done in the most effective way, however without any loss of additional value

or friendly environment for customers and staff.

21

The last part of Tesco corporate strategy is financial features and goals. As most companies, Tesco

wants to maximise its profit and increase sales. As mentioned before economies of scale help to

fulfil these tasks. The last point is managing of Tesco investments, which is important to decide

what to acquire, where to invest and what market to enter.

3.4 Tesco’s entrance and present situation in China

Tesco entered China quite recently, in 2004, when it created a JV with a Chinese business partner

called Ting Hsin after a three year search for a partner. Tesco signed for a 50-50 JV agreement with

Ting Hsin for its wholly owned subsidiary called Ting Cao. Ting Cao owns the Hymall chain of

stores in China. Consequently Tesco acquired 50% of Ting Cao’s equity in Hymall for US$260

millions. When it was bought in 2004, Hymall supermarkets served around 2 million customers

every week and the 25 supermarkets were mainly situated in the east, north and northeast of China

(Shanghai, Hangzhou and Ningbo in the east; Tianjin, Shenyang and Dalian in the north). It was

already a leading retailer in Shanghai with 10 hypermarkets. A hypermarket is defined as a gigantic

discount retail complex that combines the features of supermarkets, department stores, and specialty

stores under one roof.28

Then in December 2006, Tesco acquired a further 40% of the share capital of the JV, giving the

group control of the entity and making it a subsidiary. The minority shareholders of Hymall also

entered into an agreement that by 2009 they will sell their parts to Tesco to have the 100% Tesco

ownership of Hymall chain.29

At present time Tesco has its biggest presence in Shanghai as the Hymall chain has a major part of

its supermarkets in Shanghai with 14 stores. Now, the plan is to focus on the north (including

Beijing and Tianjin) and the south (including Guangzhou).30 Regarding Beijing, the first store

opened in February 2007 and was the first in China to feature the Tesco name, alongside the

existing Hymall brand. Located in the central business district, the stores cover 8,000 square meters

and receive around 8000 customer a day.31

28 Credit Research Foundation 29 miranda.hemscott.com 30 www.guardian.co.uk 31 www.chinadaily.com.cn - A

22

Tesco wants to be present in the areas where the middle-class population is the most important, and

where economy is dynamic enough to give customers an interesting purchasing power.

Tesco has today 47 hypermarkets in China, with a total of 4.2 million square feet and planned to

open 10 stores in 2007-2008.32 That means that they are big size supermarkets, as for instance in

Hungary Tesco has the double of numbers of supermarkets but with the same total size.

3.4.1 The joint venture and the brand name Le Gou

As mentioned in the chapter of the retailing market, JV was the only possible way to enter the

Chinese market for foreign investors before 2004.33

It is an interesting way to enter foreign markets as both companies bring some skills and knowledge

into the organisation. Usually the foreign firm brings its business knowledge and technological

skills while the domestic partner has already a relationship network and the knowledge of the

market.

Concerning Tesco and Ting Hsin, both companies have brought competencies in the JV. Ting Hsin

brought its local knowledge and operating expertise gained from Hymall but also from its other

business interests in China. Tesco has brought its finances, supply chain, product development and

32 www.tescocorporate.com – C 33 Kinsey and Xue (2005), page 11

23

store operation expertise to improve the shopping experience of the customer, giving them even

more choices and quality products.34 Competition in China is fierce, and Hymall needed this JV to

remain a competitive and leading player.35

In December 2006 Tesco increased its shares in the business from 50 to 90%, the aim was to permit

Tesco to accelerate its growth in China. This acquisition of the JV gives Tesco nearly the total

ownership and control of Hymall chain, which is a determinant to expand its activities on the

Chinese market.

Regarding the branding strategy in China, Tesco chose to operate through its partner brand name:

Hymall/Le Gou (which means Happy Shopping). This choice has probably been made by Tesco in

order to facilitate its entry on the Chinese market, to gain knowledge of the market before imposing

itself as a western retailer. However, it is assumed that during two years Tesco was unknown by the

customers as the name of the store was still Le Gou. Then at the beginning of 2007, Tesco opened

its first Tesco-fascia store in Beijing, which means under its own brand name. It was currently

branded as a Hymall store and Tesco decided to re-brand it with its own name, making it the first

Tesco store in China. On February 2007, China's Ministry of Commerce reports that Tesco asked

the Chinese government to authorise the use of the Tesco logo across its stores. Tesco is thinking of

re-branding its 46 supermarkets in China, including its hypermarkets in Shanghai, to the Tesco

brand.36 It shows that after opening the first Tesco-fascia store, Tesco’s name is recognized and

accepted by the customers and that it is conceivable to make the Tesco brand progressively the main

brand on the stores. Tesco has already introduced Tesco branded products in the stores and

according to Tesco, the range of 1000 Tesco labelled products have been well received by the

customers.37 However, Tesco may want to keep Hymall’s chain name, Le Gou, on its shop fronts to

differentiate itself from its western competitors, to keep a local image and to give customers a sense

of continuity.

34 miranda.hemscott.com 35 Decision News Media SAS 36 www.tescocorporate.com – D 37 www.chinaretailnews.com

24

4. Culture and branding This chapter aims to define and discuss the terms of culture and branding. The assumption in this

project is that the branding of a company has to take the culture of the surrounding society into

account. This assumption needs to be explained in order to verify the connection between the two

terms.

This chapter consists of three parts. The first will discuss culture, the second branding and the third

is a combination of the two concepts describing how they interact. It is the intention to validate later

chapters as relevant for the project and confirm that the Chinese culture can have a crucial

importance for branding in the country.

4.1 Culture Culture has been defined in a vast number of ways but generally the definitions can be divided into

two groups. Either they define the content of culture, what culture is, or they define how culture

functions, what culture does. A classic definition of the content of culture is.

“Culture consists of patterned ways of thinking, feeling and reacting, acquired mainly by symbols,

constituting the distinctive achievements of human groups, including their embodiments in

artifacts; the essential core of culture consists of traditional (i.e., historical derived and selected)

ideas and especially their attached values”.38

As it is important to know what culture is, it is maybe even more important in terms of branding to

know what culture does and how it functions. Most argue that culture, no matter how you define it,

means shared symbols for convenient and easy communication. It is shared aspects, which enable

easy and understandable communication between individuals sharing the same culture. This

definition implies that cross-cultural communication is problematic. Even though the definitions are

stressing different issues of culture they are two sides of the same case. In all, culture is a complex

whole of values, beliefs and behaviours of a group of interacting people. It can be defined as

containing different components but in the end it has the same functions as serving as a framework

for communicating.39

The finding of culture as a framework for communicating is essential for this project. It makes us

understand the reasons for cross-cultural misunderstanding. It is impossible to communicate

without an understanding of the cultural meaning. That is without sharing the same content of

38 Li (2001), page 11 39 Li (2001), page 12

25

culture. In branding this emphasize that it is problematic to communicate an understandable and

suitable branding to a market you do not share cultural content with. The brand message may be

misunderstood by the receiver who does not share the sender’s terminology. It can be explained as:

“when developing messages, our automatic pilot takes over: We produce, create, and send what fits

our own patterns of learning and our own pictorial conventions, our own language, our own

vocabulary. This is often done irrespective of the vocabulary of the receivers of our messages, who

do not belong to our own culture”40

It can be helpful to classify different cultures such as business culture, industry culture and so on in

order to make useful knowledge about them. However these classifications do have limitations and

are relative. In this project the study area is the Chinese culture but it can be hard to characterize the

limits of this. Normally a nation is defined from geographical, linguistic, ethnic and political

criteria. In the case of China the language is not just spoken in China but also by millions of

foreigners. Furthermore there are several dialects of the language. To argue that people living inside

Chinese borders share the same culture is not safe, as geographical borders has changed and many

Chinese living outside China feel they share Chinese culture. At the same time some members of a

society may not agree to its dominants cultural values. The difficulty in answering this question of

the Chinese market reveals the complexity of classifying cultures. However it will be necessary to

classify a culture in the project and everyone agrees that a Chinese culture does exist. It is not easy

to define it by geography, politics and so on. However, it will be possible to find some common

values, symbols and behaviours which make it possible to differentiate a Chinese culture from other

cultures.41

In this project it will be crucial to find these values, symbols and behaviours influencing how

retailing is conducted in China and how Chinese consumers perceive and act in this industry.

4.2 Branding As for culture branding can also be defined in a variety of ways. Branding used in this project has

an intercultural communication perspective. It is defined and described in the chapter of the

problem formulation how branding should be understood and used in this particular project.

However, the term of branding will be discussed further in this part. First of all it will be needed to

give a more exhaustive and profound explanation of branding and how it can be understood.

40 Li (2001), page 13 41 Li (2001), page 14-16

26

A brand is an entity of name, term, sign, symbol, trademark, logo, sound, colour, or package and

product design.42 A brand is used to identify the goods or services of either one seller or a group of

sellers, and to differentiate the goods or services of one seller from another. In the modern age a

brand is also used to reduce the primacy of price on the purchase decision and to change the basis of

differentiation. A brand includes both tangible substance such as quality, function and features and

intangible substance such as reputation and image. As branding increases consumer awareness and

loyalty it can be thought of as an economic shortcut but essentially it is a way of communicating

between company and consumer and plays an important role in the exchange process between the

two parties. A brand is no longer just a mark to differentiate sellers, but a trigger to win the

market.43

The market is won primarily of three reasons. First a successful brand enables a company to

maintain a competitive advantage hard to match by competitors. Second a brand is a shortcut in

information search as the purchasing risk experienced by a consumer is reduced due to the amount

of trust the consumer has in a brand. Through seeing a known brand name the consumer can use

this to examine the memory and if enough relevant and positive information is remembered use it to

make a fast purchasing decision. Third brands enable consumers to show something about

themselves. The decision to buy a product is connected with the image a consumer wants to

express.44

4.2.1 Branding and communication

Branding which aim to build up a brand is a category of marketing communication. It is possible to

view marketing in different ways. Orientation can be on respectively the product, consumer or

brand. Product-oriented marketing aims at pushing products onto the market, consumer-oriented

marketing aims at pulling buyers into the market and brand-oriented marketing aims at pushing

goods and pull buyers by branding. In this project consumer- and brand-oriented marketing is

discussed as our focus is on consumers and how branding can help satisfy these. Consumer-

orientation intends to add value to goods to differentiate it from competitors. Brand-orientation

focuses on the communicative processes of message development, message transmission and

message reception. Together these two orientations can allow us to adapt the brand to fit the

consumer wants by utilization of culturally appropriate branding contents.45

42 Li (2001), page 17-19 43 Li (2001), page 17-19 44 Li (2001), page 20-21 45 Li (2001), page 21-22

27

As described branding crosses the cultural border between the company and consumer. Like shown

in figure 4.2.1, all communication branding has a sender, channel, message and receiver. Company,

as a sender, codes the messages and chooses the channel. Consumers, as the receivers, perceive,

decode and react to the messages. Due to different cultural backgrounds, misunderstandings easily

occur in branding. Following figure explains how it happens. The marketer is sending a message

through a media to a receiver. By feedback it is checked if the receiver decodes the message in the

right way. In the figure the receiver perceives a triangle as meant to but it is totally different from

the one the marketer perceives. In accordance to the project this imply that without a deep and

thorough cultural understanding and exploration the marketer cannot know if there is

misunderstandings and if the branding is correct and beneficial.

Figure 4.2.1 Branding as communication

Source: Report: Li, Z., Cultural impact on international branding, page 25

Although the message can be difficult to deliver correct branding can add value to a brand. A

positive perception creates a strong brand and increase brand awareness and loyalty. As a result

branding must happen but as the model shows it is crucial to do it properly.

4.2.2 Branding in a global context

Globally there are two adversary views of global branding. Advocates of globalisation argue a

standardisation of branding where meanings and strategies are the same. Advocates of localisation

argue specifically tailored branding with different meanings and strategies in different areas. From

an intercultural communication perspective culture must of course be considered in global branding.

Findings have shown that global branding with the same cultural values might be differently

interpreted by consumers from different cultures. Therefore global branding meets perceptions

28

different from the original intention. In global branding a brand extended into markets which have

different wants and behaviours will experience cultural barriers. These barriers occur from five

cultural aspects: Values, symbols, nonverbal communication, life style and country-of-origin. Every

element should be taken into consideration while performing global branding. In the project these

aspects can be a help to remember all angles while working with the cultural influence on

branding.46

To sum up branding is seen as value-adding communication and it is argued that values are

culturally bound. The impact of culture is discussed due to globalisation and even though different

views of effective branding exist they all agree that culture is an inevitable factor in international

branding.

4.3 Combining culture and branding As described in the problem formulation this project works with how branding and the adaptation of

this to the Chinese market, can help Tesco become more competitive. The former parts of this

chapter have explained how culture affects branding on a global market, but it still needs to be

discussed how branding should be approached. As described in the last part branding can be seen as

marketing communication and messages are sent through various channels. Furthermore the

communication between marketer and consumer is interactive.

Figure 4.3 Branding as communication

Source: Report: Li, Z., Cultural impact on international branding, page 37

46 Li (2001), page 25-28

29

As the model shows branding consists of three layers. The first is the product or service itself and

the branding is its attributes, features, design, colour and so on. Second layer is brand name and

comprise for example match to product/company philosophy and translation to other languages.

Third layer is values of the brand and includes what associations are desired and how value can be

added. The three layers moving from inner to outer becomes more and more uncontrollable for

marketers. It is especially difficult to ensure that consumers view and perceive favourable on the

value added by marketers. This is due to the cultural barriers. Therefore emphasis must be put on

this layer but it does not mean that layers one and two should be forgotten. These inner layers are

the core and the starting point of all branding. Consequently this project will need to consider all

three layers in order to make a successful branding approach.47 All three layers are needed to gain a

comprehensive view of the cultures influence on branding.

Furthermore the model states that branding is a two-way process – it is interactive. It requires that

both the company and the consumers are considered while finding the right branding. It is

impossible to find the points of match or mismatch and the reasons behind them if not both parties

are investigated. As a result knowledge about both the company and market in question will be

made in this project.

From the consumers view a branded product also embrace three layers. The core is the product or

service but the surrounding less tangible layers of name and value can be as important. This implies

that the value branding is adding can be very hard to measure and recognize. However, it is

important to view how the terms of value and culture are connected with the purpose of

investigating the projects problem formulation. First value can be defined as:

“A value system is a learned organization of principles and rules to help one choose between

alternatives, resolve conflicts, and make decisions.”48

This definition both point to the function of a value system, that they are learned from he

surroundings and that they are abstract beliefs centrally located within a person. A value does not

have an explicit expression but are broad tendencies to prefer a certain state of affairs to others.

Further values are learned implicitly but not consciously which means that people are not aware of

the values they hold. Thus value is deep inside culture but is also enduring stable and limited by

culture. They do not change a lot and as a consequence they bring stability to an individual’s and a

market’s attitudes and behaviour. This makes them essential in segmenting and targeting consumers

47 Li (2001), page 38 48 Li (2001), page 42

30

but an understanding of consumer values are also important when a company is choosing values to

add to their brand.49

As for the project, this chapter has implied that branding can be seen as a communication process

and culture is a key determinant in communicating in a meaningful and productive way. In addition

to this branding should encompass both tangible and intangible assets of the brand and all should be

adapted to consumer values. As for the discussion of global branding it is believed that a global

company has to mix the beliefs of Globalists and Localists. The company can have a generally

consistent brand across culturally diverse markets, but it has to diverge in its substance and the

branding should be convergent with local conditions and culture. As an example the local Chinese

brand should diverge in its contents from the brand of European countries. However the diverging

from the general global brand should be considered at each market and it should only diverge to the

extent that it is relevant.

This implies that a Chinese branch of a global company should consider its branding on this market

compared to its branding on other markets. In order to do this it has to have knowledge about

culture and situation on the Chinese market but also in the company and about the companies brand

in other markets. In this project this is the aim of coming chapters.

49 Li (2001), page 42-43

31

5. Retailing market analysis This chapter provides a picture of the conditions surrounding the Chinese market. The structure of

the chapter consists of two parts. First a broad macro environment view of China is made through

the use of PESTEL analysis. Then a micro analysis of the retail industry is discussed through

Porter’s five forces model. The aim of this chapter is to provide knowledge about issues influencing

the branding process in China. Chinese culture and business behaviour are hard to understand for

European companies and as a consequence they need to have an overview of the market in order to

be successful. Therefore this chapter is meant to provide the fundamental basis for the analysis of

Tesco and its past and future actions on the Chinese market.

5.1 The PESTEL analysis The PESTEL analysis stands for political, economic, socio-cultural, technological, environmental

and legal analysis of forces that impact the business environment. It will be utilized to find the

circumstances surrounding the market and as an instrument for understanding the market situation

such as market growth/decline, business position, market potential and the direction of a company’s

operations. It is very important for a company to consider its environment before starting to perform

activities. As a first step on the way to enter and perform successfully on the Chinese market,

knowledge about the macro environment will have to be created.50

In the following the six parts of the PESTEL analysis will be presented with reference to the

conditions on the Chinese market effecting branding.

5.1.1 Political

The political situation has a huge influence upon the regulation of the economy, and the spending

power of consumers and companies. Consequently areas such as political stability and trading

agreements must be considered.51

Through the last decades China has evolved from being a totalitarian communistic regime with a

centrally governed economical system to a more open market economy with wider economic and

social freedom for its citizens. The Communist Party of China (CPC) still has an absolute power

monopoly and an actual liberalization of the political area is not taking place.52

50 Marketing Teacher Ltd - www.marketingteacher.com 51 Value Based Management.net 52 Ministry of Foreign Affairs of Denmark - A – www.um.dk

32

The Chinese administration has also shown signs of more openness and transparency and the

judicial system and legislation is starting to build a constitutional state founded on the rule of law. It

has for example been decided to implement the right to private property in the constitution. As a

consequence private initiative has become more important in the Chinese society.53

Following the rapid economic development and inequality corruption has become a big and

growing problem. China is number 72 of 179 countries on Transparency Internationals Corruption

Perception Index, and is given 3.5 points on a scale from 0-10, where 0 represents the most corrupt

country.54 The government is trying to solve it by issuing severe punishments for committing the

crime.

The political development has been positive, especially concerning individual rights, but still

problems needs to be addressed when it comes to human rights. Death penalty, torture and detention

without charges or conviction are still widely applied, and in spite of more openness in many areas

freedom of speech is still reduced and censorship is used.55

From this it can be said that China has a stabile political situation with the one-party system. The

system is opening up and there is no opposition trying to destabilize the country thus the

development can be expected to continue in the coming years.

The government’s policy on the economy is favourable for the business life. First of all China has

been made a market economy and there is a strong political will to make China an important player

in the world economy. The membership of World Trade Organization (WTO) in 2001 had huge

consequences, opening China’s economy to the world, and making the country a very active player

in foreign trade.

5.1.2 Economical

The Chinese economy has gone through an intense restructuring from being a state governed

planned economy to an economy more or less controlled by market forces. Parallel with the

economical reform process, China has experienced exceptionally high growth rates on

approximately 9% a year.56 This has had an immense effect on the Gross Domestic Product. As

shown in figure 1 in the introduction, it has been raised to a level 12 times higher from 1978-2005.

53 Ministry of Foreign Affairs of Denmark - A – www.um.dk 54 Transparency International – www.transparency.dk 55 Ministry of Foreign Affairs of Denmark - A – www.um.dk 56 Ministry of Foreign Affairs of Denmark - B – www.um.dk

33

With reference to the same figure, GDP per capita has moved up in a little lower pace but has still

been increased nine fold. Hence China has an incredibly big population and people have got more

money. This development has led China to be one of the most important economical powers

worldwide, with a big potential due to the large population and the high growth rates. An interesting

forecast is made on China, saying that China in 2015 is expected to surpass the United States as the

largest economy in the world.57

The purchasing power of the Chinese population is an important measure, when looking at the

attractiveness of the market for foreign companies. An attempted determination of this can be made

by comparing the development in GDP with the development in the consumer price index (CPI)

which reveals the changes in consumer prices over a period. For making the comparison possible

the same period of time is used.

Figure 5.1.2 Consumer buying Power

100,0200,0300,0400,0500,0600,0700,0800,0900,0

1000,0

1978

1985

1990

1992

1994

1996

1998

2000

2002

2004

Year

Inde

x(19

78=1

00

Consumer price indexGDP per capita

sd

Source: http://www.stats.gov.cn/tjsj/ndsj/2006/indexeh.htm - Statistical yearbook of China table 9.2

As shown the consumer prices have increased approximately 4.5 times since 1978. Compared to a

GDP per capita increased 9 times and a GDP total increased 12 times, it is giving a picture of

improved purchasing power in China. This makes China an interesting market for foreign

companies, as it has a growing purchasing power in the vast population. Especially when the high

growth rate is considered, this gives even more positive promises for the future.

57 KPMG (2005), page 4

34

China is the country receiving most foreign direct investments in the world. Through the nineties a

growing part of foreign trade was handled by foreign owned production companies and in 2003

more than half of the foreign trade was coming from this source. This reflects that China’s major

international competitive advantage is a practically inexhaustible resource of cheap labour which

takes care of production activities with an increasing degree of specialization.58

The membership of WTO has meant that China has agreed to bind and gradually reduce all tariffs.

Even though the general tariff level is decreasing, it is still high. On top of the tariffs both foreign

and domestic companies pay value-added taxes (VAT) and business taxes. China is now bound by

WTO to offer identical tax treatment for domestic and imported products. The general VAT rate is

17 % but a variety of tax incentives are offered.

China intends to phase out this two-tier income tax system for domestic and foreign enterprises and

move towards national treatment that will mean a gradual elimination of special tax breaks for

foreign investors.59 The income tax rate for foreign companies will rise in stages ending in 5 years

at the same level as for domestic companies, which is a tax rate of 25 %.60 To comparison the main

rate for company taxes in UK is 30 %.61

5.1.3 Socio-cultural

Socio-cultural factors are a combination of cultural aspects, such as traditions and values, and social

aspects, such as population growth rate and age distribution.62

Socio-cultural values are unique in each country. Typically, Chinese socio-culture is hard to

understand for foreigners. China has the biggest population in the world with 1.3 billion people,

which is about 22% of the world’s total. The population density is strongest in the coastal regions

while the hinterland and western parts are more sparsely populated.63 From being a relatively poor

country, China is becoming one of the world largest luxury goods markets. People are purchasing

well known brands instead of the fake brands.64

Through the last two decades the political and economical changes has made a significant influence

on the society and consequently changed the Chinese lifestyle. For much of the population, the life

quality and living standards have improved dramatically leading to an increase in consumption.

58 Ministry of Foreign Affairs of Denmark - B – www.um.dk 59 Ministry of Foreign Affairs of Denmark - C – www.um.dk 60 China.org.cn 61 www.companies-limited.co.uk 62 Kotler & Keller (2006), page 87-91 63 CIA - The World Factbook – China 64 National Bureau of Statistics of China – www.stats.gov.cn

35

The life attitudes in China varies, but are mainly diversified by religion and education. The most

common religions are Daoist (Taoist), Buddhist, Christian, Muslim and atheist. Confucianism is an

ancient but still influential social philosophy. Confucianism gives concrete suggestions to how to

live your life. It emphasise four moral views: loyalty, respect for age, good will (kindness) and

justice. Confucianism is still a basic starting point for Chinese thinking.65

For doing business in China, there are some business cultures that companies have to be aware of.

Guanxi is a term used everywhere in everyday China, but in the business world it refers to a kind of

network between individuals. It appears between people having common motives and interests. It

can be understood as an act of friendship but from a western perspective it might border on bribery.

It involves gifts or services given or conducted for the other part. Thus money is not directly

involved in the matter rather it is concealed as a dinner offer or the like.66

Another essential term is “face”. Face means social capital and is widely used in various social

relations, like comparing how deep the relationship is between the two company representatives,

and in order to gain respect. Face can be divided in two kinds “mianzi” and “Lian”. In Lian the

individual itself is the reason to the change in face when in mianzi the change in face is caused by

other persons. Both are as weighty to a Chinese. In business terms these concepts are important, as

due to mianzi it is possible to strengthen or weaken another person’s face. If a Chinese person’s

face is weakened, due to for example a negotiating situation, it will ruin the negotiating process.

Respect between the two parts will be lost and it takes a long time to recreate it.67 The rules of face

are to a large extent set by the concepts of Confucianism and Guanxi.

5.1.5 Technological

The aim of this part is to know more about the advancement of technology in China. This part will

particularly focus on the spread of internet on the market, as it seems to be the more relevant

technological subject to deal with the retailing market. In fact, a recent development of retailing is

made through internet and online shopping and it is interesting to know at what stage China is in its

technology development.

China became online in 1994 and now has become the second world largest online population after

The United States68. From the end of 2002 to April 2006, the number of internet-connected

65 Worm (1997), page 34-36 66 Worm (1997), page 124-129 67 Worm (1997), page 158-163 68 BBC News – news.bbc.co.uk

36

computers has more than doubled, reaching 45.6 millions. In the same period the number of internet

users has risen by 75% with about 111 millions internet users.69

The great economic growth of the past years has permitted the development of the middle-class

population, which see internet as an aid to inform themselves and communicate. A lot of students

can now afford laptops. Internet cafés are spread and cheap even in remote towns, but it is still

unusual to have internet access in rural homes.70

However, the use of internet in China is not similar to the use in Western countries because of

censure and of the so-called Great Firewall of China which controls what people can see on the

internet. In fact China’s government tries to sanitise what people see online, but many reports

shows that China’s net users know how to get around these restrictions.71

Concerning the online shopping, it is increasing each year. All the 100 millions internet users are

potential online customers and they would probably enjoy the advantages which online shopping

provides in term of time-saving and efficiency.

Online payment, which is considered to be a factor hindering e-shopping development, has been

improved and online payment are now considered by Chinese banks including the main ones like

Bank of China and Merchants Bank. However people feel still unsecured regarding to this issue. A

survey made by Computer and Microelectronics Industry Development Research Centre and

CCIDNET Consulting shows that only 20.3% of Internet users have on-line shopping experience,

and only 40% of them are satisfied with on-line transactions. Moreover, more than 80% of Chinese

Internet users worry about the security of on-line transactions.72

As a consequence, making e-retailing in China seems to be a great challenge and the success

difficult to achieve. But the situation is improving, for instance the Ministry of Information Industry

is working at promulgating the basic framework for the development of e-commerce and related

laws and regulations. Hence, internet has a great potential for a company which wants to extend its

business on the Chinese market, because even if at the moment e-shopping is not broadly diffused,

in the next years and after improving of the e-shopping legal and technical environment, it will

become a gold-mine.

69 Economist.com, China and the internet 70 Economist.com, China and the internet 71 BBC News – news.bbc.co.uk 72 People’s Daily – www.peopledaily.com.cn

37

5.1.6 Environmental

The short-term priority of China for many years has been the economic growth. In June 2007 the

Organisation for Economic Co-operation and Development (OECD) warned China about the

pollution of the country. In fact China has become the third economic leader in the world but also

the most polluted country in the world. China's spectacular economic growth of the last three

decades has come at a heavy price to its environment. 73

China’s problem is that economic issues are of utmost importance compared to environmental

issues. There are environmental laws, but the level of local application of them is missing, due to

local governments being judged only regarding to their economic performances.74

However, recently China has begun to worry about the environment. In fact China's environmental

law stipulates that companies must design, build, and use pollution control facilities.75 Government

has also adopted the “green credit policy” in cooperation with the Central Bank, to cut loans to the

companies, which are not respecting environmental rules. Moreover the authorities plan to increase

financial penalties for rule breakers and force firms to pay more towards the cost of emissions.76 By

June 2007, the environmental behaviour of 220,000 firms has been inspected and more than 8,000

companies and 170 people punished for illegal practices.77

In China, the environment is a very sensitive topic. However, under international pressure from

governmental and non-governmental organisations, environmental preoccupations in China began

to occur.

A company entering China must be very careful to its environmental policy, because one of China’s

aims is actually to fight pollution emission of companies, and the controls regarding environmental

practices of companies become more and more regular.

5.1.7 Legal

In China, foreign firms investing must be aware of China’s general lack of codified laws and the

regional diversity of “legal systems” and practices.78

An anti-monopoly law will become effective in August 2008. This law stipulates that foreign

mergers and acquisitions of Chinese companies should go through national security checks.

73 China Trade Winds - www.leventdelachine.com 74 radio86 – Tout Sur La Chine 75 China.org.cn – B 76 BBC News B – news.bbc.co.uk 77 China.org.cn – B 78 Goliath – goliath.ecnext.com

38

Moreover a special anti-monopoly commission will be set up to deal with anti-monopoly issues. 79

These anti-monopoly laws exclusively concerns foreign investments and non local businesses.

Chinese authorities classify the foreign investments in four categories: encouraged, permitted,

restricted and prohibited regarding to the sector in question. In key sectors, such as energy, or if

foreign investments can affect national economic security, the Ministry Of Commerce will have to

give foreign companies an approval.80

There are also laws which regulates the entry of the foreign companies, as for example the one

concerning JV which stipulated that the Chinese partner had to own the majority of the JV.

However from 2004 this law is no more in application and as a consequence the entry of the market

is still easier.81

In China, the Law of the People's Republic of China on Protection of the Rights and Interests of the

Consumers of 1994 enumerates consumer rights and the obligations of business dealers.82

To protect consumers there are government agencies involved in food and product safety, including

work on new laws and regulations. The SAIC (State Administration of Industry and Commerce) for

instance, regulates and inspects “market circulation” which means the entire process of food from

the producer to the consumer. This includes logistic, distribution and retail.83

Piracy of intellectual property is everywhere in China and it has been a major source of contention

between China and foreign investors. However, its protection has been one of the priority of the

Chinese government since it adhesion to the WTO in 2001. In the past years China has taken great

strides to develop the intellectual property rights but there is still a lack of local enforcement.84 In

consequence, companies doing business in China have to prevent themselves from having their

intellectual property stolen. The best way of preventing this is to have a limited number of

employees with access to confidential information and to visit trade fairs to make sure that products

are not copied.85

5.1.8 Macro environment of the Chinese market

The below figure is aiming to summarize the main findings of the PESTEL analysis highlighting

the opportunities and threats which can affect retailing in China.

79 www.chinadaily.com.cn – B, www.chinaview.cn 80 www.missioneco.org 81 Kinsey and Xue (2005), page 2 82 Consumers International – www.ciroap.org 83 The US-China Business Council – www.uschina.org 84 www.oecd.org 85 www.kiplinger.com

39

Figure 5.1.8 PESTEL

Source: Own creation

Concerning retailing in China the PESTEL model highlights some interesting opportunities. The

political situation reveals a positive development with more open markets, a stable political

situation and not least the adhesion to WTO. This is underlining an explosive and stabile economic

growth in the last decades which seems to continue in future years. Combined with large population

size and growing purchasing power it provides great possibilities for the retail industry. The

increasing use of internet is a matter of interest in the future but difficulties are still present. Also

the socio-cultural environment accounts for obstacles that need to be addressed. The environmental

area has long been almost forgotten but is of increasing interest to Chinese consumers. Overall it

has become easier to enter and do business in China as a foreign retailer, but in order to be

successful many issues needs to be considered.

40

5.2 Porter’s five forces This part analyses the retail market and specifically the supermarket industry in China. The purpose

is to create knowledge about the supermarket industry, which is used later in the project as a

background for making a beneficial branding strategy for Tesco in China.

The analysis is made from the basis of Porters five forces, wherein threats of substitute concepts,

threats of new entrants, intensity of industry rivalry, bargaining power of suppliers and bargaining

power of customers are included. However, not all forces will be discussed due to relevance for the

problem formulation. Bargaining power of suppliers will not be discussed as this has very little

influence on the branding strategy directed at customers.

5.2.1 Threats of substitute concepts

When supermarkets were introduced in the beginning of the 90’s the concept was totally different to

the Chinese population from the traditional retail stores and obviously from the roadside markets.

Traditional retail stores can be considered as a substitute concept. If the consumer appreciate the

human contact that he can have while choosing its products, together with the advices he can get

from the owner of the store or employees they can be competitive. However, many Chinese

customers like and prefer the supermarket style, substantiated by enough time for reading labels on

groceries and enough time to make the buying decisions. The supermarkets provide a self-service

shopping style while in a traditional retail stores, the customers have to ask the sales person to pick

the merchandise.

Another substitute concept is the roadside markets, which are still preferred among most of the

population, because customers are able to see exactly what they are buying, which is of high

preference of Chinese customers. Therefore foreign supermarkets for example have to adjust their

packaging if they want to succeed on that market, because closed packaging simply is not saleable

in China.86 However local government’s structure plans for the cities has helped the development

for foreign supermarkets and urged closure of local markets.87

E-shopping can be seen as a third substitute. As seen in the previous part about Technology in the

PESTEL analysis, internet spread is high in China like in a lot of Western countries and so e-

shopping is. Online shopping has some advantages as efficiency, but also drawbacks as the security

of payment. Moreover the fact that the consumer cannot touch the product can prevent internet from

86 Landbrugsrådet (2006), Page 23 87 Landbrugsrådet (2006), Page 21-23

41

being a big threat for retailers in China. However habits are evolving and Chinese people may soon

be used to this kind of shopping.

The Chinese customers still buy Chinese food when they shop, but the foreign goods are becoming

more and more accepted with the growth of foreign retailers’ knowledge of the specific needs of

Chinese customers.88 Moreover, a survey completed in 2005 covering respondents in the age

between 25-65 years in seven major cities (Beijing, Chengdu, Guangzhou, Harbin, Shanghai,

Shenzhen, and Wuhan), showed a changed behaviour pattern among the Chinese customers. The

survey showed that they were getting even more used to shop in supermarkets, given that they

spend even more time and money in it.89 This survey confirms that the Chinese population is ready

for the concept of supermarkets. Chinese customers are aware of supermarkets’ advantages as the

sanitation which is better, a guarantee is provided, customer service is always available, there is a

return service if the customer is not satisfied, and products from foreign countries are always first

introduced in supermarkets.90

Even though roadside markets and traditional stores are considered as substitutes and threats to

supermarkets, the competition between them is no longer as fierce as earlier. Concerning e-

shopping, retailers have to be aware consumer habits, which can evolve and adapt their branding to

that.

5.2.2 Threats of new entrants

The number of supermarkets has grown rapidly during the last 20 years in China. In 1990 there was

only one supermarket and in 2003 there were over 60,000 stores. Ownership of retail food sales has

also changed a lot. Until the economic revolution in 1979 the industry was owned by the Chinese

Government, but changed to Chinese owned supermarkets in the early nineties and to partially

foreign owned supermarkets in 1995, finally in 2004 it was possible to have a wholly foreign owned

supermarket.91

In China the supermarket sales went from zero to billions of dollars from 1990 to 1995. The annual

sales growth in 1995 reached 167 percent and the year after 275 percent. However between 1999

and 2002 the annual sales growth fell and became stabilized around 40 to 50 percent.92 The

following table 5.2.2 shows the development of supermarkets in China from 1994 to 2002.

88 Landbrugsrådet (2006), Page 23 89 KPMG (2005), page 20 90 Kinsey and Xue (2005), page 4 91 Kinsey and Xue (2005), page 2 92 Kinsey and Xue (2005), page 5

42

Table 5.2.2 The development of supermarkets in China between 1994-2002

Stores Sales

Year Number Annual increase (%)

Billion of US Dollars

Annual increase (%)

1994 2500 - 0.38 - 1995 6000 140 0.96 167 1996 10000 66.7 3.61 275 1997 15000 50 5.06 40 1998 21000 40 12.05 138 1999 26000 23.8 18.07 50 2000 32000 23.1 26.51 47 2001 40500 26.6 37.11 40 2002 53100 31.1 55.13 49

Source: Report: Jean Kinsey and Min Xue(2005), Supermarket Development in China, page 5

However, foreign-invest enterprises now cover more than 50% of the total business volume of

emerging business mode in Beijing, Guangzhou, Shanghai, and Shenzhen.

The political situation in China means that it is possible for foreign or new local companies to enter

the market and the economic situation and development in the supermarket industry makes it very

interesting to invest in this market. However, the competitive situation including big and aggressive

local and foreign companies creates a hostile environment for newcomers making it hard to achieve

a good and competitive market position. In spite of the rapid increase in the number of supermarket

stores, the market is not covered. Mainly the coastal regions have supermarkets while the

hinterlands and western regions are left open. Moreover the explosive growth in supermarket sales

makes it easier for newcomers to achieve a share of the market. In all, the Chinese retail market is

ready to accept and absorb newcomers, but they will have to find a gap in the market in order to

avoid the tough competition from existing companies.

5.2.3 Intensity of industry rivalry

The competitors are divided into two groups, one with the Chinese supermarkets and the other

including the foreign supermarkets in China. The supermarkets discussed below are considered as

Tesco’s largest competitors in China because their considerable size and concepts similar to

Tesco’s.

43

5.2.3.1 Chinese supermarkets

In 1990’s LianHua, Hualian and Nong-Gong-Shang emerged in the larger cities in the east,

Shanghai, Beijing and Guangzhou.93 Among these three supermarkets, Shanghai-based Hualian

Group Co Ltd had the largest sales in 2002. In the same year, LianHua Supermarket Shareholding

Co Ltd had the largest number of chain stores. From 2001 to 2002 LianHua’s number of stores went

up by 57% and reached a number of 1921 stores, compared to Shanghai Hualian’s 1541 stores,

which had increased with 48% in the same period.94

There is a tendency that domestic supermarkets’ are moving from the urban areas on the east coast

to more rural areas in the middle and western parts of the country. Furthermore the domestic

supermarkets are growing rapidly. The number of supermarkets increased 293% between 2002 and

2003 and total sales increased 562%.95

The local competition in the retail industry among supermarkets is fierce, and is growing rapidly.

Especially the local competition is strong on the market and is not to be underestimated, which also

is known by foreign supermarkets already in China. The locals are very fast to pick up successful

strategies from other companies and conduct them.96

5.2.3.2 Foreign Supermarkets in China

China started to allow foreign retail companies to do business in Shanghai, Beijing, Tianjing,

GuangZhou, DaLian, QinDao, ShenZhen and XiaMen. However, the number of supermarkets in

each city was limited to only two. Furthermore the foreign companies had to find a Chinese partner,

who at least should own a 51% share of the foreign company in China, meaning the only way to

enter the Chinese market was through JVs. In 1990 almost all Chinese cities were opened to foreign

retail supermarkets. At the same time, the rule of ownership changed and allowed a foreign

company to own up to 65% shares of the retail supermarket. Finally, in 2004 the law was totally

abandoned and foreign retailers could have wholly owned operations in China.97

Tesco’s largest foreign competitors, the Western supermarkets, Wal-Mart, Carrefour and Metro

moved to China in 1995 and 1996.

In 2007 Wal-Mart had 86 stores in China and is the largest retailer in the world.98 However,

Carrefour, the second largest retailer in the world, holds the leading position of foreign

93 Kinsey and Xue (2005), page 2 94 Kinsey and Xue (2005), page 10 95 Kinsey and Xue (2005), page 10 96 KPMG (2005), page 3 97 Kinsey and Xue (2005), page 11 98 Wal-Mart – www.wal-martchina.com

44

supermarkets in China with a number of 345 shops. Metro was the first joint-venture to gain

permission from the Chinese government to set up chain stores in all major cities in China. In 2007

Metro has 34 stores in China, but plans to open 40 more in the next three to five years.99

All three supermarket chains are placed in separate territories in China, and do so far not compete

directly for market shares.100

Carrefour is known as providing customers with large shopping areas, low prices and efficient

commodity flow. Carrefour has a business of localization, meaning they believe their retail store is

the microcosm of its local environment and therefore should complement the local cultural

atmosphere.101

Wal-Mart has a strategy of “every day low price” and “satisfactory service”, but compared to

Carrefour they seem to have been more conservative, by not opening a large number of stores.102

Metro tries to avoid fierce competition with Wal-Mart and Carrefour and mainly focus its sales

strategy on small- and medium-sized stores.103

Foreign supermarkets need to adapt to Chinese culture in many ways in order to have success. The

Chinese people like to eat fresh, therefore as an example Carrefour in their daily counter has

hundreds of different ready-to-eat fresh cooked foods in Chinese style. Further on, Carrefour is

selling street style food like little dumplings and rice cakes.104 Carrefour also does a lot to make

their customers feel comfortable while shopping. On the first floor rent out space is available for a

known brand such as a furniture company or a food corner like McDonalds. This gives customers,

who have preferences for one brand in particular, the opportunity to find their brand in only one

shop. A large bag check is also available for customers to store their shopping bags.105

Tesco therefore has some very tough competitors to deal with in China, which already are doing

very well and are highly respected both by the Chinese population and the government.

5.2.4 Bargaining power of customers

The customers of the retail industry are a big and rapidly growing group with increasing buying

power. The recent change in the political and economic situation has lead to an increase in living

standards for the Chinese people, and this has also affected their demands towards the products and 99 Metro - A – www.metro.com.cn & Metro - B – www.metro.com.cn 100 Kinsey and Xue (2005), page 11 101 Kinsey and Xue (2005), page 12 102 Kinsey and Xue (2005), page 13 103 Kinsey and Xue (2005), page 13 104 Kinsey and Xue (2005), page 14 105 Kinsey and Xue (2005), page 14

45

goods that they buy. The customers have become a group with high aspirations. They have become

more demanding and expect to receive a quality product.106 This is actually the same development

that has changed the customer behaviour from buying on traditional market places to buy in

supermarkets. With the increase in living standard and wealth customers have become more

conscious consumers. Now they do not just want only their basic needs to be fulfilled. They want

the products to have some added value giving it some extra quality. The Chinese consumers are

though also willing to pay for the quality. They are increasingly buying big and luxury products

such as cars and private schooling. This also indicates that the market for luxury products in the

supermarket industry is attractive. In spite of the alteration on the market many Chinese consumers

mainly focus on price. They largely emphasize the economic part of the buying situation and are

very much interested in saving money. However as it is hard to compete with Chinese competitors

on price foreign companies, in the past, have had success, focusing on quality and innovation. 107

Apart from the customers’ own development, the situation in the supermarket industry is also

empowering the customers. There is a fierce competition between players in the market, big

multinational companies trying to enter and local companies striving to retain their leading position.

This puts the customers into an ideal position where several players are fighting to win their favour.

Carrefour has for example made several services to satisfy customers. As an example Carrefour has

a bus set in to pick up customers and drive them home after doing their shopping.108 This is an

extreme focus on customer satisfaction showing a high level of customer bargaining power.

5.2.5 Environment of the retail industry

The following model will be an illustration of the findings in the Porter’s five forces. The most

relevant issues concerning Tesco’s situation on the Chinese market are highlighted.

106 KPMG (2005), page 11 107 KPMG (2005), page 12 108 Kinsey and Xue (2005), page 14

46

Figure 5.2.5 Porter’s five forces

Source: Own creation

In general the competition is fierce in the retail industry. This is underlined by both threat of new

entrants, threat of substitute concepts and not least the intensity of rivalry in the industry. A lot of

strong competitors are present at the market and they seem to have advantages compared to Tesco.

Foreign competitors have more experience at the market and local competitors have more local

knowledge. Moreover Chinese consumers seem to have other preferences than the European

consumers that Tesco normally is dealing with. They come from a market where traditional

marketplaces and roadside markets has been the normal place for shopping but they increasingly

prefer supermarkets. The consumers bargaining power is high but their preferences are split. They

are price sensitive but they also value convenience and quality.

When the PESTEL and Porter’s five forces are combined it describes a very attractive but also

challenging market to enter and act in. It is easy to understand why Tesco chose to enter due to the

Intensity of industry rivalry

Local competitors: • Aggressive • Knowledge Foreign competitors: • 10years experience in China • Skills

Threat of substitute concepts • Traditional retail stores • Roadside markets • E-shopping

Bargaining power of customers

• Exigent toward quality

• Price sensitive • Low switching costs

Bargaining power of suppliers

Threat of new entrants • Low barriers to enter, political incentives • High attractiveness and potential of Chinese market

47

vast potential and the fact that it is still not saturated. A newcomer still has the possibility to

conquer a big market share and even gain market leadership. However, to reach this will claim a

significant investment and not least a comprehensive understanding of the market and Chinese

consumers. The coming chapter will look deeper into how the knowledge made in this chapter can

be used in the attempt to fit a branding campaign to the Chinese retail sector.

48

6. Branding analysis This chapter aims to discuss the terms of brand and branding, how they can be used in the retail

industry in general and by Tesco in specific. It is assumed that branding of Tesco can help the

company to become accepted and thus successful on the Chinese market. This chapter also intends

to explore how this can come to pass in practice, what tools and activities Tesco needs to apply and

perform. The structure of the chapter is an interplay between theories found practical and beneficial

in order to work with the branding issues and the knowledge and practical information that have

been found and created in the first parts of the project. By combining these two factors it is believed

that a productive and true picture of the branding system covering Tesco and the Chinese market

can be completed.

6.2 Branding in Tesco and the retail Industry This part is aiming at providing knowledge about issues related to the branding situation in the retail

industry. It differs from other industries as the challenge is that the company’s customers

experience the products directly. What is experienced in the store is the brand thus branding has to

be internally and externally coherent. The way a brand is advertised externally should reflect the

way it works internally. This is a main issue in retailing and it is underlining some branding topics

in the industry. These will be described in the following parts.

6.2.1 Private labels

Private labelling is well diffused in Northern Europe, especially in the UK. For instance Marks &

Spencer sells only own-labelled products and other retailers as Sainsbury have their own label on

some products, but they represent the main part of their turnover.109

The advantage for retailers to have their own label is to gain customer loyalty to their chain of shops

through their own quality products.

Tesco has several product brands to cover several segments on the retail market. Every brand has

different specifics such as price, quality and packaging design.

109 Kotler & Keller (2006), page 470

49

Figure 6.2.1 Types of Tesco product lines

Source: Coriolis Research, 2004, TESCO: A case study in supermarket excellence, page 15

As it is visible from the figure above, Tesco is using six different brands. Four of them are

differentiated according to price and quality and the other two in terms of interest or age.

The most expensive and best quality products are branded as Tesco Finest. It contains around 1.200

items which are produced for the segment of customers who want to buy the best possible products

on the market.

Tesco organic includes products produced environmentally friendly and are more healthy

substitutes offered to upper market customers.

The middle class brand is called Tesco and provides 8.000 products. The main aim is to offer fully

branded Tesco products for all market segments. The quality of Tesco products has to be middle or

high quality products in order not to damage Tesco’s corporate brand.

The last brand is named Tesco value and as the brand expresses, products branded with this mark

provides value for very low prices. It covers around 1.200 items.

As mentioned there are two brands not segmenting customers in terms of quality and price, but in

terms of interest and age. Tesco Healthy is for customers with healthy life style and sport

preference. The second is Tesco Kids and consists of products for children such as toys, sweets and

fruits in nice child packages.

50

These product lines had an important role in changing Tesco from just being a retailer to becoming

a brand. In the UK market and other markets where Tesco has existed for years, the brand is

accepted by customers and they understand the different value offer of each product line. However,

in the Chinese market only parts of the product lines has been introduced and it has only happened

recently. As a consequence Tesco will have to make Chinese consumers aware of the value offer of

the product lines and it will be a challenge to adapt the products offered in each line to the Chinese

market and taste.

Private labels offer a big potential to retail branding, both in terms of name recognition and

retention of customers. If consumers prefer a Tesco product they will have to shop in a Tesco store

as the product will not be available in any other store. Furthermore this will increase the consumers

liking of that specific brand and thereby make the customer more loyal to the brand. That will have

a spill-over effect to other products as customers will have a generally better feeling about the

brand.

6.2.2 Corporate branding

Retailers are more and more searching to perform in a “bundle” of activities and services to add

value to their brand in the eyes of the customers. Thus, private labelling has evolved and has

become just one of the components making up a corporate brand.

Table 6.2.2.1 From Private label to corporate brand

1st generation 2nd generation 3rd generation Branding form

Private-label Unsupported own brand

Segmented retail brands Corporate brand

Strategy Low price copy Value-added Corporate positioning Objective Increase margin, reduce

manufacturers’ power, provide better value product (quality/price)

Increase and retain the customer base, improve image, differentiation

Produce strong positive identity, first choice for consumer, satisfy stakeholders

Product Basic lines with a large volume

Image-forming products groups

The corporation and its tangible and intangible attributes

Quality/image Medium quality perceived as lower than leading manufacturers’ brands

Same or better than brand leader, innovative and different

Quality and consistency throughout the organization

Price position 10-20% below Equal or higher than known brands

Focus on delivering value

Consumer’s motivation to buy

Price is still important Better and unique products

Trust

Source: Inspired by Burt and Sparks(2002), Corporate Branding, Retailing, and Retail Internationalization, page 198

51

Private labelling started as a mean of differentiating one tangible good from another on the market

place, and has now evolved into a reduced number of extremely dominant corporate brands. The

private labelling described in the previous part is 1st generation branding. Today the most successful

retailers take much more advanced techniques in use while branding their company. Tesco is a 3rd

generation company thus private labelling is only one component, although an important one, of the

corporate branding strategy. Retailers are also increasingly investing in activities allowing them to

become corporate brands. An overall brand identity is made, which provides a degree of

differentiation in the marketplace. Instead of just selling one products they aim to deliver a service

which provide added value in the eyes of customers.110

The corporate brand is the company name, strategy, mission, image and activities and this allows it

to distinguish itself from the competitors. Corporate branding is an alignment of vision, culture and

image of the company. Vision is the managers’ aspirations for the company. Culture is referring to

the organisation’s value and the attitudes of the employees. Finally image is how the firm is

perceived by all stakeholders including customers, shareholders, media and public. 111

Corporate brand for a retailer is different from a manufacturer’s and is not raising the same issues.

Retailing differs in its regular interaction between staff and consumers and in its selling of other

manufacturer’s brands. The nature of retailing is different, as the company has to manage a mixture

of store, products and corporate loyalty.

Thus, as retailers are between production and consumption, they have a key role in the relationship

with consumers to deliver the right message through their activities and services and through the

employees of the store. Concerning the employees of the store, they have a key role and their values

and behaviours have to be coherent with the corporate identity.

The retailer has to maintain coherence of the brand inside and outside of the store. Internally it is

related to culture management, and externally to customer relationship management.112

In the case of Tesco, the company has been transformed in the last decades into a 3rd generation

company using several and sophisticated branding tools. It can be looked upon as a corporate brand

due to its distinct positioning with the brand providing meaning and values internally and

externally. The overall aim is to create value for the customer in order to earn their lifetime loyalty.

The tool for reaching this goal is a coherent branding strategy. The components in this strategy are

first of all the private labels discussed in the last part. These private labels are sold in corporately

110 Burt and Sparks (2002), page 199 111 Burt and Sparks (2002), page 196 112 Burt and Sparks (2002), page 196

52

branded and appropriate store formats.113 Tesco uses four types of stores of differentiated size and

product mix.

Figure 6.2.2.2 Types of Tesco stores

Source: Coriolis Research, 2004, TESCO: A case study in supermarket excellence, page 33

The first type of store is called Tesco Express and its purpose is to make shopping as fast as

possible. It consists of a petrol station and small sized store full of Tesco branded products. The

average sales area is around 200 square meters.114

Tesco Metro is a type of store which is situated in centres of large cities and provides an opportunity

to buy Tesco products for good prices, just a bit higher than in the next two types of stores. It is

caused by the location of the stores which is convenient for many people working and living in

surrounding areas. The average sales area is more than 1.000 square meters.115

Tesco Superstore is the first store fully taking advantage of Tesco corporate strategy which is

connected with economies of scale. The purpose of this store size is to make big shopping, to save

people’s time. The average sales area is more than 3.600 square meters.116

The last and biggest store is called Tesco Extra. This type of store provides every item sold by

Tesco such as food and non-food Tesco branded products. The average sales area is more than

113 Burt and Sparks (2002), page 203 114 Coriolis Research (2004), pages 36&37 115 Coriolis Research (2004), pages 35&37 116 Coriolis Research (2004), page 37

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7.500 square meters which is twice as big as the previous type.117 Together the private labels and

store formats make a consistent view of the company but a crucial component of the corporate

branding is the customer relationship developments Tesco have undertaken. Many of these depend

on staff projecting corporate values consistently and they have proven successful for creating

customer loyalty and trust across product and service categories. Tesco has a variety of activities in

customer relations.

Table 6.2.2.3 Corporate brand consumer relationship extension

Activity Tesco example Building transaction and information linkages

Tesco clubcard, location maps

Personal / face to face links Service areas as butchers, customer service desk Service and expertise links Baby club, wine club, pharmacy, recipe cards Cementing financial links Tesco personal finance, including insurance,

pensions, credit cards and Tesco banking Building emotional links Television advertising, computers for schools, Event links For sale wall, local event details in store,

sponsorships Media communication links Tesco.com, active media management Distribution and availability links Tesco catalogues, Tesco specialist magazines,

internet cafes in store

Source: Inspired by Burt and Sparks(2002), Corporate Branding, Retailing, and Retail Internationalization, page 200.

Through these activities Tesco is creating a unique brand and relationship to its customers. The

activities are benefiting both parties as the customers receive some added value and Tesco retain the

customer. In general Tesco can be described as having a very active approach to its corporate

branding. Their performance embraces a lot of stakeholders ranging from the press, commercials

and academic reports to the single individual customer. In all, it shapes the outside world’s view of

Tesco and it has been a significant factor in the success experienced by the company in recent

years.118

117 Coriolis Research (2004), pages 34&37 118 Burt and Sparks (2002), page 203

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6.2.3 Corporate branding and internationalisation Many retailers internationalized their activities and so should consider how it can affect their

corporate branding.

It is assumed that internationalization complicates corporate branding, as there are barriers on the

foreign markets which can add difficulties in transferring the retail brand identity. These barriers

exist by means of the macro-environment, which can be different due to consumers’ characteristics

and way of behaving but also through the local competition or the legislative infrastructure. The

organizational environment can also represent a barrier as for instance the management styles and

cultures.119

Entering a foreign market with a different culture and perceptions may influence the strategy of the

company to give the desired corporate brand identity. A standardized approach may not be

successful on certain markets. Consequently a strategy to get the right store identity and image has

to be developed before market entry. It should take into account the particularities of the foreign

market and of the non-domestic consumers.

An international retailer trying to understand how to act in a foreign market would seem to require a

clear view of the main characteristics of the company. The true source of the company’s

competitive advantage and added value should be known but this is not necessarily enough. The

private labels and corporate brand of a company can both be a facilitator and a constraint in

internationalisation. It depends on how the new market perceives the brands and this can necessitate

a new branding strategy adapted to this market. Such differences can complicate corporate branding

as it is made difficult to maintain consistency and coherence of the brand.120

In the case of retailing, brand identity is derived from a vast number of aspects meaning that a

standard identity on international markets is hard to achieve. Furthermore customers attribute a

range of meanings to tangible and intangible characteristics of the service depending on their

values, culture and frame of mind. If marketer and consumer do not have the same frame of

understanding, misunderstandings and conflicts can occur. This means that the corporate and

product branding may fail if tried implemented in diverse international markets.121

The internationalization of Tesco has not been uncomplicated and especially in the early years of

the process a lot of problems occurred. However, as it has been shown in this project, that Tesco has

got it right and has spread to a variety of markets in both Europe and Asia. In each case Tesco has

119 Burt and Sparks (2002), Page 201 120 Burt and Sparks (2002), Page 197 121 Burt and Sparks (2002), Page 202

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exported its core corporate brand position and values, and visually the stores are strongly branded as

Tesco.122 However, this is still not the case in China. Here Tesco entered as a JV and most stores are

still branded as Le Gou stores. Recently the company has tried to introduce the Tesco name and

product brands to the stores, but it is a newly started process. It makes up one of the greatest

challenges for Tesco on the Chinese market in the future as the vision, culture and image must be

made consistent.

Fundamentally, Tesco is internationalizing its brand by selecting appropriate components of the

overall corporate brand and adding some country specific brand components.

6.2.4 Customer thinking and motivation

The concept of branding is linked to the one of identification. Branding permits the customer to

recognise the company’s product and to link it to the producer. For that reason, brand names are

usually the owner’s brand name. Concerning identification of the brand in retailing sector, the shop

names and signage are the identifier of the brand.

As competition grew harder, companies and brand owners began to create brand portfolio. That

means differentiation of brand names for different ranges of products. Because of the tough

competition, the brand needed to differentiate itself from the others. Differentiation was first

functional or rational, like price, quality, and packaging. Then, increasingly, the conception of

brand included also intangible aspects like service. In retailing industry a lot of factors tangible or

not can differentiate a brand from another, for instance the product quality, but also the service, the

personality of the owner or the atmosphere of the store can provide the differentiation.

The differentiation through the price is specific to the big retailing companies which can compete

on the price because of their economies of scale.

The differentiation through service is becoming an important aspect of branding. In fact the

retailers, and especially the small ones which cannot compete on price, can use service as a mean of

brand success.

Branding is not only differentiation but also personification. Branding can be described as the

“attribution of social and symbolic meaning to a product”. Therefore, a clear understanding of the

consumers and their thinking is absolutely necessary to develop and maintain a successful brand. As

a consequence, the company’s image as perceived by the consumer is really important and so is the

122 Burt and Sparks (2002), Page 204

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brand personality. The personification metaphor can be applied to brands, by attributing dimensions

of personality. Another researcher suggested that consumers choose their retail store in accordance

to their own personality. Hence, in order to be positioned in the consumer’s mind, the company

must have a clear brand personality. This ends up with a question of how to influence the

personality of a brand. It can be in a voluntary way or not. The personality of the CEO can often

influence a corporate personality.123 Another technique can be to have a whole brand strategy

management in order to give the brand the wanted personality, and find tools to manage it. For

instance the retail company can use public relations and set up social responsibility programs to

promote the corporate brand and give it a specific image.

Personification leads to brand equity which is the value that consumers and prospects perceive in a

brand beyond the physical assets associated with it manufacture.124 A definition of brand equity is:

“A set of brand assets and liabilities linked to a brand, its name and symbol, that add to or subtract

from the value provided by a product or service to a firm’s customers.”125 This is made up from

elements such as brand name, awareness, brand loyalty, perceived quality and brand associations.

They are part of what is called brand knowledge, which is the source of brand equity.126 Different

kind of information is perceived by consumers and leads to a different brand knowledge for each

one.

The three terms of differentiation, identification and personification are applied later in the project

for concrete recommendations to Tesco. These proposals are making a more suitable branding

campaign and thereby creating brand equity for Tesco.

Tesco is making use of customer thinking and motivation both by tangible and intangible

components. Examples of tangible tools are differentiating and personalizing Tesco’s products,

stores and services. As shown in the previous parts Tesco offers a diversity of different product

brands each targeting a certain costumer group. Tesco finest is directed at luxury consumers who

want a supreme product of high quality while Tesco value is for consumers who want to save

money. The products in Tesco stores are strongly branded as Tesco products127 and consumers

buying these will have a relationship to the company through experiences with the product. This

will make up feelings and an attitude towards the company. The product differentiation will divide

123 Roper, S. & Parker, C. (2006) 124 Hollensen (2004), page 468 125 Li (2001), page 32 126 Keller (2003), page 595-600 127 Burt and Sparks (2002), Page 204

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consumers into segments and in that way create meaning for the single consumer. It gives Tesco a

logical and consistent product range and individual persons will personalize with a product brand.

Intangible tools for delivering added value to customers could be illustrated by Tesco’s corporate

responsibility policy. Tesco has plans for several areas important to consumers such as waste,

packaging and recycling where they for instance try to reuse more of their waste and make

costumers bring back carrier bags. They have a policy about the climate changes as they try to

reduce their energy consumption by making “green” environment friendly supermarkets. Also

ethical trade and developing countries are considered. The overriding principals are fair trade with

suppliers in Tesco’s supply chain and sustainable environmental impact in regions where Tesco buy

from.128 Tesco has a lot of examples of this and they make up a good perception of the company in

consumer’s mind. Subsequently consumers trust Tesco to be an ethically acceptable company

thereby motivating them to shop in these stores.

The final brand equity which adds value to Tesco’s products is made up by both tangible and

intangible components which provide specific brand knowledge to the consumer. Therefore the

amount of brand equity Tesco is able to add is a key determinant in attracting and retaining

customers.

6.2.5 Culture of Chinese consumers

The term of culture has been defined and discussed earlier in the project and so has its influence on

the branding activities of a company. In this chapter it is aimed to provide an overview of the

Chinese consumers’ culture in a buying context. It will be a discussion of what parts of the Chinese

culture that the company has to take into consideration while creating a branding campaign. Thus

this chapter should provide the knowledge needed to understand the culture of Chinese consumers.

6.2.5.1 Consumer culture and branding

The overall theme in Chinese culture is collectivism which generally means that individual interests

are subordinated to the interest and will of a group. However collectivism has several aspects and

can be divided into some subgroups influencing branding and consumer behaviour in related but

different ways. These subgroups are examined in the following.

First of all, collectivism means minimizing self. This involves not to reveal personal interests, will or

passions and advises everyone not to go their own way but to be supported by others. This include

128 www.tescocorporate.com – E

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not to express own meaning if it is not agreed to or accepted by others, not expecting to be accepted

by a group unless being a senior member and being sensitive to codes of behaviour in order to adapt

own conduct. This minimizing of self is rooted in ancient Chinese history but is still dominant in

today’s China.129

In consumer behaviour this means that customers are not expected to express individual ideas,

attitudes and likings while in public. This makes for a collective buying behaviour and when

choosing brands Chinese are used to think about what their leaders, parents or friends use.

Marketers can exploit this trend to invest in advertisements demonstrating product usage. The

minimizing of self leads to two other issues. First, Chinese are used to making collective decisions

and second Chinese are often reluctant to bear responsibility. This means that consumers wait for a

collective decision or a leader’s conclusion.130 In terms of branding this suggest that products used

by the majority of people will be the number one choice or that using persons thought of as a

pioneer, leader or famous person in branding will lead to liking and use of the brand. In this relation

the family is still a very useful symbol in China. The family is crucial, active and influential in

Chinese social life. It is an important building block in the society as “the Chinese society is

hierarchical, and its model is the Chinese extended family.”131 Thus this is underlining the concept

of the hierarchy. Chinese people accept and respect power distance and people of power is seen as

examples to follow. In the family not all members have the same status and the hierarchy influences

the consumer behaviour this will be discussed deeper later in this chapter.

Collectivism means following others. To be an insider is significant in a collectivist culture and once

you have joined a group you must follow its rules and orders. When no clear rules are stated the

thing to do is to follow the other members’ behaviour. This influences buying behaviour as Chinese

follow the phrase the more famous the better. Therefore being well-known means leading the main

stream and guaranties market leadership. Chinese are very concerned about company image. They

pay attention to company size, industrial ranking and visibility. They choose the company with the

best image in order to earn “face” among family, friends and surrounding society.132 This means

that the concept of fashion is different in China than in Europe. In China fashion is “what you can

see in the streets, what is realized among others and what is different from last year.”133 Chinese

people are very unwilling to have anything different from the fashion. In terms of fashion it is

important to consider the conflict between country and city. Along with urbanization, city residents

have started to look down upon country people and their habits. Country people on the other hand

129 Li (2001), page 81-84 130 Li (2001), page 81-84 131 Worm (1997), page 91 132 Li (2001), page 86 133 Li (2001), page 87

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have started to attempt being urbanized but have little self-confidence. As a result, when making

purchase decisions urban people will consider whether country people will buy it as well and avoid

doing it if that is the case. Furthermore Chinese do not like to be alone. Family and the group are

more valued than individuality. Consumers are observing others and trying to be like them.

Consequently millions of consumers can be seen buying the same goods and giving up last year’s

fashion together. 134

Collectivism means respect. As mentioned before the group is hierarchical with big power distance

and respect for the leaders. This makes status symbols very important because everyone should

know his/her position, the position of others and the organization hierarchy. This makes country-of-

origin important in branding. This states the identity of a brand and it is vital to introduce and

emphasize. Western countries are viewed as more advanced than China and consequently

everything from the West is better.

The hierarchical construction of the Chinese society reflects the consumers’ mind. The life goal of a

Chinese is to reach the top or at least get as high as possible. This forms a want for status symbols

by Chinese costumers. Some products are bought primarily for their symbolic value. They can

symbolize a specific class, position or status. To a Chinese it is important to consider what other

people might think of the brand. The considerations are also including the situation of use. Publicly

consumed products are seen by others while privately consumed are not. The exposition of the

brand should therefore influence a marketer’s branding choice. As mentioned, the people setting the

main trends are authorities and powerful celebrities, in other words, the ones in top of the hierarchy.

A study concerning people who influence consumer behaviour and buying patterns came up with

four types: Elders, the modern tycoon, the athlete and Chinese children without siblings. While the

three first can be seen in accordance with the traditional Chinese hierarchy, the child must be

viewed as a consequence of the one child policy. In China, an only child is known as a “little

emperor”, and as the word insinuates, these are given a lot of attention and power by family

members. Apart from this the elders and children point to the Chinese family orientation while the

rich tycoon and strong athlete point to the respect for power. Chinese hierarchical collectivism

means that Chinese are used to respect everything more advanced, developed and higher than

them.135

The collective thinking also means that Chinese assumes that every product and brand must be from

some kind of family and place. Only when knowing this and the values of these Chinese believe and

trust the brand and can then become loyal to it. A brand without place-of-origin and family name is

134 Li (2001), page 87 135 Li (2001), page 91

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suspicious and does not seem trustworthy. This is a vital fact in branding directed at Chinese

consumers.

Collectivism means harmonizing. As Chinese are subordinated to the overall interests of the group,

harmony is a collective value. This means that people avoid conflicts, critiques and insults, and

harmony both inside and between groups are stressed. The concept of Guanxi, which is described

earlier, is the Chinese culture of relationships and the reason for emphasizing harmony. In relation

to consumer behaviour Guanxi result that consumers think of the relation between their purchase

and the choice of their immediate group. In this context they prefer to buy the favourite brand of the

group in order to maintain in-group harmony and Guanxi.

In summary Chinese culture can be described as hierarchically harmonious collectivism with big

power distance.136 Furthermore it has been discussed and proven that the culture has an important

influence on consumer buying behaviour and that it is vital for all branding to consider this effect in

order to target customers’ in the right manner. Cultures influence is mainly in three aspects: Chinese

consume brands for the social status they present, the Chinese admire symbols, brands and signs of

authority and Chinese consumers’ follow the mainstream.137 These are the three central aspects one

has to consider while working with Chinese consumers and their brand behaviour.

6.3 How Tesco should be branded on the Chinese market In part 6.2 branding in general and specific issues for branding in the retail sector were discussed.

Now it is the aim to focus the subject even deeper and discuss the issues for Tesco’s branding on

the Chinese market. For that a model of own creation is made. The model contains techniques to

use in the development of brand equity and issues to be aware of. The model is focusing on specific

characteristics of both country and company that influence the process of branding. It is formed by

the theory discussed in the last chapter and is therefore contains key terms from this part.

136 Li (2001), page 80 137 Li (2001), page 98

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Figure 6.3 Creation of Brand equity

Source: Own creation

The starting point of the model is the brand and the overall purpose of the model is to make the

brand stronger and extend its penetration of the market. It is assumed that this is done through brand

equity which is the value that consumers and prospects perceive in a brand beyond the physical

assets associated with its manufacture. In other words brand equity is the value that a company is

able to create through its branding.

The middle part of the model represents different ways of creating brand equity. This is the actual

branding tools of the model. Through identification, personification and differentiation of for

example products, services or brand name, it is possible to ascribe certain meanings to these,

thereby adding value to their worth. In the consumer’s mind identification, personification and

differentiation should make the company’s brand more attractive and increase the demand.

To attain a meaningful differentiation, the company has to take both the company situation and

market situation into account. It has to have knowledge about these situations in order to understand

them and be able to relate to them in the right manner. The situation in respectively the company

and the market is made up of their culture, values, image and vision. These four parameters

constitute the characteristics of this specific system and tell us about what its members appreciate,

like and perceive as desirable. Culture and values are both present inside the company and the

market, and they strongly influence the nature of the system and thereby how it is functioning.

Culture Vision Image Values

Brand Brand Equity

Company

Market

Differentiation

Personifi

cation

Identifi cation

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Vision is how the system is supposed to develop in the future. In the company it is defined by

company management. It can be argued that vision is best and most consequential practiced in

companies as it is hard to put up a vision for a state. However, a market can also be controlled by

government thoughts and plans for the future development. Image is the picture that the two

interacting parties have of each other. Since the market will view the company in a specific way the

company will also imbue the market with certain characteristics. In a branding context the four

parameters need to be convergent with each other. The company’s task is to get a correct

understanding of the market and use this understanding to create a beneficial branding campaign to

generate brand equity. It requires an interacting process between the company and the market where

a system model is created. If the interaction is successful, an understandable and productive new

system model is made, which means that the company has the basis for creating an effective

branding campaign fitted for that market.

In the coming part a branding campaign for Tesco is made according to this model. The purpose is

to create brand equity in Chinese consumers’ minds thereby attracting and retaining more customers

to Tesco stores. The key areas in creating brand equity are found on the basis of figure 4.3 in

chapter 4 and our branding theory. The figure shows that the product and in Tesco’s case also the

services, are the core in branding. Hereafter company/product name and the creation of values are

important elements. Values are developed through communication from the company to consumers

and occur primarily in shape of advertising. In coming parts these three areas will be discussed.

6.3.1 Tesco Products and services

With reference to figure 4.3 the product is the core and start of all branding. The sale of products is

the central aim of the retail industry and consequently it is essential to fit the product for the market

in which they are sold. In the retail industry it can be difficult to differentiate on products. The

product range will be very similar to the competitors yet, it is possible to have a broad or narrower

selection in terms of price, quality and product mix. However, in China, Tesco only has very large

stores like the concept of Tesco Extra and as a result Tesco sells more or less all normal daily

products in various qualities and prices. The same holds for its competitors. Thus the main

parameter of differentiation will be the service which is described later in this part.

Tesco uses private labels, and as described they have six product lines containing several thousand

different products. In China only a little more than thousand has been taken into use, but more are to

be added. The product lines apply to the Chinese preference for hierarchical status as every

customer can buy products fitted for the individual hierarchical position. This can have several

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positive effects since the product lines add meaning to the products. Tesco finest will express luxury

and in that sense it can address the Chinese fondness of status symbols in material goods. Tesco

organic will address the growing Chinese awareness of environmental issues and the customer will

experience a better conscience in relation to pollution. In this way a product name can be an added

value.

Even though Tesco is using its own branded products, the products have to be adjusted to fit into

the Chinese food culture. The roadside market has been a very popular way to purchase in China

and even though Tesco has gotten recognition from the customers and sales are growing, it is still

important to develop products fit to the Chinese customer.

Tesco therefore has to consider Chinese needs. As found out in the chapter of retailing market

analysis, Chinese people like to eat fresh foods, therefore ready-to-eat fresh cooked foods in

Chinese style should be available in Tesco stores. Another thing to be aware of is, that the Chinese

customer likes to see what they are buying and they are not satisfied by only a picture of the product

on the outside of the packaging. Tesco’s lines of branded product help to fulfil the different needs of

the Chinese customers, but even more adjustment of the products to the Chinese food culture, could

provide Tesco with even more customers. In 2006 Tesco made a clever advertisement campaign

that aligns bargain-hunting with customers’ desire for quality.138 This could be a good way of

combining culture of the Western supermarket with the Chinese consumers.

Tesco wants to fulfil its corporate strategy which is “Better for customers, Simpler for staff and

Cheaper for Tesco”.139 That is why the company uses Every-Little-Helps service which is based on

feedback from customers and staff. This feedback helps Tesco managers to react to market needs.

Tesco’s Clubcard program is another service which is provided by the company to retain customers.

The aim of it is to persuade customers that the Tesco store is the best brand. Every customer club

member gets club points whenever they buy anything from Tesco. After gaining enough club points

a voucher for discount in Tesco is given.140 Even several relatives or members of family can collect

club points on one account. This will appeal to the Chinese valuation of the extended and close

family structure.

Another company advantage is the online store of Tesco where customers can buy what they want

from home. The additional cost depends on number of items. However, the total price is very

convenient, because Tesco uses the low price level and economies of scale. The opportunity of

138 International Herald Tribune 139 www.tescocorporate.com – F 140 www.tesco.com

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online shopping is a potentially essential competitive advantage for Tesco. As explained in the retail

analysis China is the second largest online population in the world and the number of users is

growing explosively. However Tesco should be aware of censure and “The great firewall” that

occur on the Chinese internet. Tesco needs to avoid being limited by this and therefore should have

a constructive dialogue with Chinese authorities. Furthermore people feel uncertain using the

internet for payment of online transactions and solutions to this problem need to be found. It could

be an information campaign giving Chinese consumers knowledge of the safety of using the

internet. Herein the use of authorities such as banks and government certification can be a vital

component due to the Chinese respect for these. It will make Chinese consumers trust the online

transaction used by Tesco. The government is encouraging the use of internet means in the

population, so a co-operation between Tesco and the government is considered to be possible. In all,

the potential in internet shopping is so big that it cannot be overlooked and when considering

Tesco’s competencies in this field, build up in the UK home market, this area holds great

possibilities. Consequently Tesco is advised to invest further in internet shopping even though it can

contain some difficulties and possibly deficits on the short run.

6.3.2 Tesco name

Until now we have described the situation about Tesco’s brand name. The company has recently

started to introduce “Tesco” to its stores but is still using the Chinese name Le Gou. This part will

aim to highlight which issues Tesco should be aware of while introducing the new name and

analyse if the recent name activities have been positive in terms of branding. It will be done due to

the knowledge generated in relation to Chinese culture, market, consumers and Tesco.

First of all a Western brand name needs to be translated. Chinese are not used to pure foreign brand

names in Latin letters and do not read the alphabet. Some very famous brand names can be used in

Latin letters but normally it is done together with a Chinese translation. To translate a name into

Chinese letters you need to know about the Chinese written language. It is very complex and

consists of about 100.000 characters and it is possible to translate in several ways. For instance the

goal can be to achieve the same pronunciation or give the name a specific meaning.141 It is a

complex process where many factors need to be considered. First of all the meaning should be

reflected. Chinese names, both person and company names, normally have a specific meaning and

they like to include cherished desires in the given names. Many names include words as “lucky” or

“good” and most companies have tried to do this. As an example Coca-Cola changed its name into

141 Li(2001), page 104-106

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four characters, ke kou ke le, which mean tasty and happy. In this way Chinese consumers prefer

the name to say something about the object it is linked to. They want the name to be able to identify

the commodity, function or tell what kind of value it is offering. Some Chinese even believe that a

name bearing positive meanings can add positive effects for the object it is connected to.

Furthermore as Chinese are sensitive to hierarchy and power distance they will select a brand that

expresses their social status. Of this reason it will be critical for branding to choose Chinese

characters carrying positive or at least neutral meanings.142

In relation to Tesco they have chosen to follow a multiple name strategy. As many Chinese have

difficulties understanding Latin letters it was a favourable decision to keep the Chinese name Le

Gou in the initial stage of penetrating the market. The name’s meaning “Happy Shopping” fulfils

the Chinese wants for positive meanings connected with the name. It gives concrete information of

what the store is providing and can help adding positive associations to the brand. As we have

discovered in the retail market analysis, it is mainly middleclass urban people who are using

supermarkets and one of the main reasons, are its better quality and convenience. The name “Happy

Shopping” has a good fit for these associations as it will lead customers’ thoughts to have a good

experience in a relaxed and comfortable milieu compared to the traditional roadside markets. Done

in the right way the introduction of the global brand name Tesco to the market can be an advantage.

As explained in previous chapters, Chinese perceive Western brands as superior to Chinese. They

perceive goods and brands coming from the West as better, and Tesco should use this as an

advantage by presenting the brand name. Furthermore Tesco is one of the biggest retail companies

in the world and enjoys success these years as the chain is spreading into new markets. This will

appeal to the Chinese consumers’ liking for authorities and respect for the ones being in top of the

hierarchy. Additionally the introduction of the Tesco name enables the company to introduce the

company’s country and place of origin. Chinese consumers cannot trust a company, which they do

not know where is coming from. They perceive it to be suspicious. Since Tesco is a company with a

long history, this should be taken as an advantage to make consumers trust the company. As for the

UK, it is a country widely known in the world, but as we do not know what associations the

Chinese consumers have about this country, it should be examined deeper before using this to add

value for the brand name. It is believed that the UK is viewed positively by Chinese, but since in the

past Great Britain was a colonial power and has had activities and possessions in many regions of

the world, the image can be damaged. Therefore for safety reasons and in order to avoid brand

damage, a study of this issue should be conducted before using this fact.

142 Li (2001), page 100-107

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It is therefore seen as a strengthening of the brand name to combine the two names. It will provide

the opportunity to take advantage of using a Chinese name, which has imprinted meanings and is

easy to read and understand for Chinese consumers. Yet it will also be possible to use a Western

name and imbue the brand with the strengths of this. However, Tesco must be alert to difficulties in

combining the two names. Consumers will have values connected to the existing name Le Gou and

new values stated by the Tesco name should be coherent with these. Otherwise consumers will be

confused by the mix of Chinese and Western names.

In all, however, it is viewed as a good idea to change the name into the global Tesco brand. As we

found in our retail industry analysis China is changing fast and becoming a modern society.

Additionally, the consumers of the retail industry is the educated and modern people in larger cities

and in the developed areas of the country and most of these will be able to read Latin letters and

then understand the Tesco name. The change from traditional roadside markets to supermarkets is

connected with a liking for everything Western and modern, and a change in brand name to a well

known global brand can underline this. Furthermore it will be easier for Tesco to make a consistent

global brand by having the same name in all markets. The evaluation of the Chinese market and

Tesco company come to that China is ready to accept and perceive a Western brand name in the

retail industry and Tesco will be able to take advantage of this in its corporate strategy.

6.3.3 Tesco communication and advertising

In this part Tesco’s communication towards Chinese consumers will be discussed. The overall

question is how Tesco can communicate the right values to the consumers. Connected to this, the

communication model in figure 4.2.1 described in chapter 4 will be used in order to understand the

communication process and how the message can be delivered fittingly. However also which values

that should be communicated will be discussed. In finding these values both Tesco and Chinese

culture will be analysed in order to find a suitable combination of these.

In terms of channels China is still under the category of an “old media” market, which means the

market is dominated by television and it is predicted to be like this for the next many years.143

Generally TV advertisement is seen as guiding the consumption in China due to following logic:

TV advertising is a very expensive media and only the strongest companies can afford this

branding. Chinese consumers perceive strong companies as being the most trustworthy and reliable

ones and will therefore buy their brands. The strength of TV is therefore connected with the

Chinese consumer culture of respect for power. In this logic high cost channels must be used if

143 International Herald Tribune

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market leadership is wanted. Furthermore this fact means that Chinese do not like to read printed

advertisements since most of them have a high admiration of TV.144

The content of the advertisements should also be adapted to Chinese consumer culture. Certainly

there are several possibilities for creating positive brand value by the use of advertisement but a

company needs to be very careful in choosing suitable symbols and characters presented in the

advertisements. In the following characteristics creating positive value will be suggested.

First of all the key substance in Chinese retailing should be found. The project has found that

convenience, quality and modern trade are important issues pulling customers from traditional

markets to modern supermarkets. Tesco can use these terms in advertisement by letting these

principles dominates their advertising activities. Furthermore it will be possible to address the

Chinese fancy for authorities and hierarchy. It will be an obvious choice to let famous and respected

athletes, business people, politicians or the like advertise for Tesco’s products. In the chapter of

Chinese consumer culture, it was explained that consumers are minimizing their self and they will

choose what their leaders or “heroes” are using. Consumers do not like to make own choices but are

following others seen as more knowing and wise. In that sense it would be of great value to have

these “heroes” to speak positively about Tesco. Another possibility is to use the Chinese high

opinion of family and seeking of harmony. The content in the advertisement could reflect family

values and let consumers perceive Tesco as a supermarket fitted for family shopping. Basically this

reflects a conflict between convenience/harmony and prestige. Chinese consumers have a liking of

both but it depends on how the company wants to be positioned.

The collectivistic culture of following others might also be a key characteristic to consider in an

advertising campaign. If the notion that everybody is using Tesco could be given, the company

could be extremely respected and accepted by Chinese consumers. The thought, that everybody

really should be using Tesco, is of course not realistic in the retail industry, but the advertisements

could still give the impression that it was something everyone does.

The Chinese consumer culture of collectivism and following others is an advantage to big

companies, which have the possibility of making big and expensive advertising campaigns. Tesco

as the third largest retailer in the world has that chance, and consequently the company should make

use of these culture references to reach a top position in the Chinese retail industry.

144 Li (2001), page 70

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7. Conclusion On the basis of the retail market analysis it can be concluded that the supermarket development in

China is highly correlated with political and economical development in the country. The

government is making China more open to foreign entering companies and wants to spread modern

food retailing across the country. Recently this has ended up with retail companies getting more or

less free entrance to the Chinese markets.

The general development in the society is also providing the retail industry with continuously better

conditions. Growing urbanization means more potential customers for supermarkets. People are

increasingly employed in the private sector and earn more money. This results in poor people

moving to the middle class, and cause an increased buying power among consumers.

It can also be concluded that the Chinese culture is severely different from the Western culture. In

the project key customs as Guanxi, Face and Confucianism were found to influence business and

branding conditions in China. Furthermore a strong connection was found between culture and

branding. Branding is seen as communication and culture is an essential part of how communication

is send and received by the participating parts. Therefore understanding culture is necessary for

creating the right brand message and to create brand equity.

Tesco can create brand equity on the basis of product/services, name and communication as

explained in the branding analysis. As shown there are several possibilities but the essential thing is

to find the right combination of Tesco competencies and Chinese consumer wants. In this manner

we take a combined view of Globalists and Localists in international branding. It is obvious that

you cannot just transfer a branding campaign from one country and culture to another. It has to be

adapted. Yet it is also crucial for a global company to take advantage of its key competencies.

These should not be forgotten just because the company moves abroad. Tesco should take

advantage of performing high quality activities in other countries and transfer these to the Chinese

market. However, the activities need to be adapted to China, and this is the real challenge. In this

process Tesco should first of all remember the project’s findings of why Chinese consumers have

started to like supermarkets compared to the traditional shopping places. Convenience, quality and

modern trade are stressed and should clearly be a significant part of Tesco’s branding. In

accordance with figure 6.3 identification, differentiation and personification are used for attaining

brand equity.

Identification is making the consumer know and remember the product and producer. This is

essential because Chinese consumers are collective and follow the main trends. This states that if

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Tesco is not well known in China, the company will not be successful. Therefore a massive

marketing campaign must be launched in the areas Tesco want to target. This should primarily

happen through television as this is the preferred media of Chinese consumers but of course other

media should also be used.

Differentiation from other retail companies is of course a critical element. It should be pointed out

that convenience and quality is guaranteed in Tesco stores however this will not really differentiate

Tesco as other companies are doing the same. Nevertheless these are critical points of parity and

activities performed in creating this service and quality can differentiate the company. Tesco is

already issuing several kinds of convenience services such as clubcards and service areas as

butchers and so on but it is essential that it is imbued throughout the entire company. Staff and

employees must be advised and taught how to handle customers correctly in order to represent

Tesco in the right manner. The private labels are also giving Tesco an opportunity to differentiate

from other retail companies. This is products only available in Tesco stores, thus if customers prefer

these products, a unique advantage is made. In this matter the different product categories can

benefit Tesco. Different customer segments can be targeted by different product groups. In this

question personalisation comes in. It has been shown that costumers choose retailer and product in

accordance to their own personality. As a consequence it is important to give the Tesco brand and

the single product categories a clear and distinctive expression and provide value to the customer. In

this process the social and symbolic values the brands express should be considered. The product

categories should be fitted for the single segment they are targeting while the Tesco brand should be

more widely recognized.

The specific contents of the Tesco brand can be multifarious. However, ideas can be given on the

background of this project. First of all convenience, quality and modern trade must be stressed.

Hereafter the findings in Chinese consumer culture can be applied. Examples to make use of could

be the Chinese respect for the family, for authorities such as athletes, politicians or tycoons and for

everything Western. Moreover the collective buying behaviour should not be underestimated.

Entering China Tesco chose to keep the old brand name Le Gou. This was assumed to indicate that

branding and the brand name Tesco did not play a significant role in entering China. However, on

the basis of this project it can now be concluded that it happened as a consequence of lack of

knowledge about the Chinese market and culture. Tesco realised that it did not possess the needed

insights and chose the safe solution in keeping the name Le Gou. This proves how much respect

there is about cultural diversities and its immense effect on branding activities.

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In all, it can be concluded that culture and branding is two inseparable terms and it is certain that

Tesco should pay close attention to the Chinese consumer culture in creating and carrying out the

branding activities. However, if Tesco manage to adapt and fit the branding correctly it has great

potential and will be an immense advantage making the acceptance and liking of Tesco much more

prevalent and expand its market penetration.

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8. Reflections and perspectives In this project system approach was used to get an understanding of the Chinese market and culture.

For that purpose the theories of PESTEL and Porter’s five forces are applied. It is believed that

these theories have provided a good and comprehensive picture and have proved to be very helpful

in creating the system model 1. The applied models about culture and branding have been well

suited to each other and to the project. The models’ focus on patterns and groups were well fitted

for finding synergy effects between the two parts Tesco and Chinese consumers, and has in that

way been useful in constructing the new system model 2. However, it could have been an

interesting perspective to have included a more interactive communication with the studied parts

and have been able to apply actors approach. This could have implied subjective opinions to the

project making the created knowledge about this single study of Tesco and the Chinese retail

market more specific. Conversely this would have made the created knowledge harder to use in

general and transfer to other similar situations.

Focus in the project has been on branding and culture, mainly in a consumer perspective. An

interesting reflection could also have been to turn the use of culture from consumers to employees

and a human resource perspective. It could include how to attract potential employees and handle

present staff. Culture is influencing all parts of the company organisation and to hire and work with

Chinese employees will require a restructuring of the internal handling of employment practices.

Company management must consider Chinese culture in accordance to fit company politics to

employee culture. The Chinese respect for age and seniority might influence for example

advancement and salary system.

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