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Critically Evaluate Tesco's Performance as an International Retailer

Introduction

Tesco is a significant international food retailer and was the 7th largest international retailer in 2010 (Imap Retail Report 2010). However, the Annual Report from 2012 describes the year as a period of transition and that the company is willing to change and learn (Tesco 2012). This suggests that while there have been successes there have also been failures. The two particular elements of Tesco's international strategy, which will be discussed, provide sharp contrasts in performance.

The discussion will first examine Tesco’s expansion into Central and Eastern Europe. It will then examine the food retailer’s development on the Western Coast of America. The essay will uncover an interesting distinction between the two different strategies that Tesco has employed. There is a contrast between a roll-out of Tesco’s tried and tested UK approach to Central Europe; and the entry into America where it arguably tried to innovate too much.

Tesco in Continental Europe

Tesco made the sensible decision of expanding into the Czech Republic (IGD 2013, Euromonitor International 2012). It was able to exploit favourable factors in the Czech economy. It “is one of the wealthiest of the newer European Union members” (Berman and Evans 2013:64). Tesco expanded using the acquisition of K-Mart stores which were used for the European roll out of Tesco brands (IGD 2013, Euromonitor International 2012). Also, old hypermarkets were refitted into the Extra hypermarket format. This can be seen as a sensible adaptation of the British large-store model. It was applying what it had learnt in Britain to Central European markets. In Central and Eastern European markets Tesco was able to exploit fragmented food retail structures where there were a relatively large number of shops. With Tesco’s presence in Central and Eastern Europe there has been a “tendency towards concentration particularly in the food sector” (Doole and Lowe 2012:339). Tesco helped shape, and benefit from this concentration. Tesco made a well-thought out decision to invest in Central and Eastern Europe. This is because such European countries have “intermediary retailing structures” which are “attractive locations for retailers expanding internationally” given that they can be seen as “latent markets ripe for expansion” (Doole and Lowe 2012:340). Tesco was able to cleverly exploit a relatively low level of economic development. There were countries available for expansion which did not have large domestic retailers. This made entry into these markets “relatively easy” (Doole and Lowe 2012:340).

Another factor in Tesco’s success was that it was able to utilise “the concept of standardisation; Tesco’s ‘home market’ strategy was able to be standardised and directly applied to foreign markets” (Keegan and Green 2013:110). Tesco has implemented its European expansion through standardisation. The Tesco hypermarkets in say Hungary are comparable to the stores in the UK. Tesco’s success in Central Europe can be attributed to its confidence and determination. It wanted to achieve leadership in European countries. It wanted to achieve much more than just having a mere ‘presence’ (Reynolds and Cuthbertson 2004:324). Tesco has had an understandable identity and market positioning based on hypermarkets (Reynolds and Cuthbertson 2004:17). It has targeted itself against fragile competition (Reynolds and Cuthbertson 2004:105) and positioned itself against smaller retailers who have seen their competitive position weaken “relative to larger organised forms of retailing” (Burt 2010:3).

However, international retail strategy is complicated. “Retailers cannot just decide to go into a growing market; they need appropriate strategies consistent with the market” (Keegan and Green 2013:109). The next section will argue that Tesco’s strategy in America was not consistent with the business environment there.

The Fresh and Easy Supermarket Business in America

The Fresh and Easy supermarket operation was different to the hypermarkets that Tesco had learnt to operate in Central European markets. These American shops aimed to be comparable to Tesco’s British convenience model called Tesco Express. The mission was to sell fresh and healthy food more cheaply than competitors (Piercey 2009:520-523). However, Tesco tried to use money saving innovations such as self-scanning in food stores based on UK experience. But American consumers were not used to using such technology (Piercey 2009:520-523). .

The fundamental challenge was that it was difficult to start a retail concept in a mature market, such as in the United States. Companies, such as Tesco, can find it difficult to enter through the relatively slow construction of stores (Reynolds and Cuthbertson 2004:112). Also, Tesco faced strong competition from American companies such as Wal-Mart and Trader Joe’s, which is a market leader in health food (Piercey 2009:520). Perhaps it should have pursued a policy of acquisition whereby it bought an already existing chain such as it did in the Czech Republic. Tesco’s decision to try and divest itself, from the American business, suggests that its expansion into America was unsuccessful (Ruddick 2013).

Tesco’s failed in America for a number of reasons. It was not entering an attractive growing market. Its checkouts and self-scanning in Fresh and Easy did not pay sufficient attention to “local tastes” (Keegan and Green 2013:109). Also, arguably, it was not “prepared to invest on a large scale” as “a profitable enterprise will only come about with sufficient economies of scale” (Keegan and Green 2013:109). Arguably, Tesco was not willing to commit to the venture for a long enough duration. Ultimately, Tesco needed to consider fully the intense “level of competition” as this was perhaps too high for Tesco to compete with (Keegan and Green 2013:110). Tesco needed to recognise that the United States is an example of retailing at its most advanced “in terms of concentration and ‘cannibalisation’ of sales” (Doole and Lowe 2012:340).

The Possible Implications of the Internet on Tesco’s International Performance

The international expansion needs to be evaluated, in the context of the growth of internet retailing. Companies such as Amazon present a major challenge to Tesco internationally. This is because “the diffusion of the internet is increasingly challenging the traditional channels of distribution (Doole and Lowe 2012:343). If food and other items are increasingly sold by Tesco’s internet based rivals then Tesco’s profitability will suffer The company has invested in property across the world but now faces an international challenge of making sure that its stores remain relevant (Berman and Evans 2013:545). There is the possibility that Tesco’s successful expansion into Central and Eastern Europe could fail, if competition from online-only companies, such as Amazon, becomes too intense. If internet retailing based on delivery from warehouses becomes more popular, then Tesco’s investment in hypermarkets across Europe may appear misguided. There are already signs that Tesco is failing internationally as it was recently stated that “like-for-like sales are falling across its global businesses” (Thomas 2013).

Summary

Tesco has performed better internationally, in Europe, with large superstores. However, this success may need to be re-evaluated in the context of growing online competition. Tesco failed with its Fresh and Easy operation on the west coast of America.

A market attractiveness or competitiveness position matrix (see appendix 1) would have identified to Tesco that its chances of success were likely to be limited in the United States. This is because the intense competition in the American market was such that the market attractiveness was likely to be limited and that only cautious investment could be justified. In contrast, such a matrix would have shown that Tesco was in a much stronger position entering Central and Eastern Europe. The market attractiveness was likely to be high given the previous limited domestic competition. Moreover, Tesco could achieve a strong competitive position with strategically important acquisitions such as that in the Czech Republic; which granted Tesco a large and significant presence immediately in the country.

An examination of the usefulness of the sources used in this essay is in appendix 2.

Appendix 1

Appendix 2: Explanation of the Usefulness of the Sources Contained in the Text

Armstrong G. and Kotler P. - This is a useful introductory discussion on the subject. The discussion on internet marketing is relevant, but could be out-dated as the internet developed significantly since 2005.

Berman, B. and Evans J. – It has information on the Czech Republic. It fully recognizes the impact that the internet is having on retail as it was published in 2013.

Burt, S. – This academic discussion helps support the point made by Reynolds and Cuthbertson (editors), that Tesco has taken advantage of smaller retailers in Europe.

Doole, I. and Lowe, R. – The book provides a useful overview of the differing patterns of retailing around the world (see page 336).

Imap Retail Report – Provides an international ranking of retailers

Northcott, M., - This source is short but useful as it shows that Tesco has had to invest significantly in internet retailing.

Keegan, W. And Green, M., - This book provides a useful up-to-date checklist of some the areas which Tesco can be assessed against in terms of international expansion.

Piercey, N. - This book provides case studies, including one on Tesco which usefully criticises the company’s now failed expansion in America.

Reynolds, J. and Cuthbertson C. – This book is dated but is a significant textbook in terms of retail studies and helpfully outlines why Tesco’s expansion into central and Eastern Europe was successful.

References

Armstrong G. and Kotler P. (2005), marketing: an introduction: International edition, Seventh edition, Pearson Prentice Hall, New Jersey

Berman, B. and Evans J. (2013), Retail Management: A Strategic Approach, Twelfth Edition, Pearson, London

Burt, S. (2010), Retailing in Europe: 20 years on, International Review of Retail, Distribution and Consumer Research, Vol.20. , No 1, February 2010, p. 9-27

Doole, I. and Lowe, R., (2012), International Marketing Strategy: Analysis, Development and Implementation, Sixth Edition, Cengage Learning, Andover

IGD (2013), Euromonitor International (2012)

Imap Retail Report, (2010), Retail Industry Global Report

Keegan, W. And Green, M., (2013), Global Marketing, Pearson Education, Harlow

Northcott, M., (2012), Tesco to tackle Amazon online

Piercey, N., (2009), Market-Led Strategic Change, Fourth Edition, Oxford: Elsevier

Reynolds, J. and Cuthbertson C. editors (2004), Retail Strategy: The View from The Bridge, London, Butterworth-Heinemann