Chapter 13 – Activity Management Focus: Tesco’s International Growth Strategy

Tesco’s International Growth Strategy Tesco, founded in 1919 by Jack Cohen, is a British multinational grocery and merchandise retailer. It is the largest grocery retailer in the United Kingdom, with a 28 percent share of the local market, and the second-largest retailer in the world after Walmart measured by revenue. In 2015, Tesco had sales of more than $71 billion, more than 500,000 employees, and 6,814 stores. In its home market of the United Kingdom (with a headquarters in Chestnut, Hertfordshire, England), the company’s strengths are reputed to come from strong competencies in marketing and store site selection, logistics and inventory management, and its own label product offerings. By the early 1990s, these competencies had already given the company a leading position in the United Kingdom. The company was generating strong free cash fows, and senior managers had to decide how to use that cash. One strategy they settled on was overseas expansion. As they looked at international markets, they soon concluded the best opportunities were not in established markets, such as those in North America and western Europe, where strong local competitors already existed, but in the emerging markets of eastern Europe and Asia, where there were few capable competitors but strong underlying growth trends. Tesco’s frst international foray was into Hungary in 1994, when it acquired an initial 51 percent stake in Global, a 43-store, state-owned grocery chain. By 2015, Tesco was the market leader in Hungary, with more than 200 stores and additional openings planned. In 1995, Tesco acquired 31 stores in Poland from Stavia; a year later, it added 13 stores purchased from Kmart in the Czech Republic and Slovakia; and the following ye… … food retailer with 13 stores. Building on that base, Tesco had more than 380 stores in Thailand by 2015. In 1999, the company entered South Korea when it partnered with Samsung to develop a chain of hypermarkets. This was followed by entry into Taiwan in 2000, Malaysia in 2002, Japan in 2003, and China in 2004. The move into China came after three years of careful research and discussions with potential partners. Like many other Western companies, Tesco was attracted to the Chinese market by its large size and rapid growth. In the end, Tesco settled on a 50–50 joint venture with Hymall, a hypermarket chain that is controlled by Ting Hsin, a Taiwanese group, which had been operating in China for six years. In 2014, Tesco combined its 131 stores in China in a joint venture with the state-run China Resources Enterprise (CRE) and its nearly 3,000 stores. Tesco owns 20 percent of the joint venture. Tesco is the largest grocery retailer in the United Kingdom and the second-largest retailer worldwide after Walmart. Source: © Guang Niu/Getty Images As a result of these moves, by 2015 Tesco generated sales of $25 billion outside the United Kingdom (its UK annual revenues were $46 billion). The addition of international stores has helped make Tesco the second-largest company in the global grocery market behind only Walmart (Tesco is also behind Carrefour of France if profts are used). Of the three, however, Tesco may be the most successful internationally. By 2015, all its foreign ventures were making money. In explaining the company’s success, Tesco’s managers have detailed a number of important factors. First, the company devotes considerable attention to transferring its core capabilities in retailing to its new ventures. At the same time, it does not send in an army of expatriate managers to run local operations, preferring to hire local managers and support them with a few operational experts from the United Kingdom. Second, the company believes that its partnering strategy in Asia has been a great asset. Tesco has teamed up with good companies that have a deep understanding of the markets in which they are participating but that lack Tesco’s fnancial strength and retailing capabilities. Consequently, both Tesco and its partners have brought useful assets to the venture, increasing the probability of success. As the venture becomes established, Tesco has typically increased its ownership stake in its partner. For example, by 2015 Tesco owned 100 percent of Homeplus, its South Korean hypermarket chain, but when the venture was established, Tesco owned 51 percent. Third, the company has focused on markets with good growth potential but that lack strong indigenous competitors, which provides Tesco with ripe ground for expansion.

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This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise. Discussion of the feature can revolve around the following questions:

1. Reflect on Tesco’s decision to expand internationally primarily through establishing operations in developing countries. What makes these countries attractive to Tesco?

2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How have the company’s partners helped it find success in foreign locations?