TESCO market entry to the USA

Tesco Plc is the leading food and grocery retailer in the United Kingdom and 4th biggest retailer worldwide after Wal-Mart, Carrefour and Metro. It was founded by Jack Cohen in 1919. In the financial year of 2010 Tesco Plc generated revenues of £56,910 Million. In 1995 the company started expanding its business to other countries in Europe, Asia and the United States. It now has 4,811 stores in 14 countries worldwide. Moreover, Tesco opened its first zero-carbon store in the UK in 2010 and wants to become a zero-carbon business by 2050. The firm also supports employing women in senior level positions. There are three women on the board of directors in the UK.

The British food retail industry is a saturated industry with many big food retailers. Tesco has three big competitors named Sainsbury’s, ASDA and William Morrisons. Therefore the rivalry is quite strong in the UK. The buyer and supplier power is moderate whereas substitutes of supermarkets are weak. Because of the sated market it is hard for other food retailers to enter the British market. Furthermore, it is smart to expand businesses abroad instead of trying to expand in a saturated industry.

The United States have been the most powerful and successful country worldwide for the last 60 years. They had a Gross Domestic Product of $ 14,120 trillion in 2010 and are the second biggest economy worldwide behind the European Union. Nevertheless, the US have the highest poverty rates of all developed countries. One per cent of the population belongs to the upper class and these people owned 37.1 per cent of the entire property of the US. The gap between the poor and rich is getting bigger and bigger.

The SWOT analysis showed that the strengths of Tesco and its opportunities for the North American market prevail and therefore it was the right choice to enter this market.

However, after evaluating the mode of entry it was obvious that the choice of expanding with the greenfield strategy wasn’t the best suitable for the US food retail market. Tesco should have ventured abroad with an acquisition of an already established firm so it could have maybe become successful in the United States.

1. Introduction

During the last few decades many companies expanded their businesses to other countries worldwide. The most common reason for expansion is to keep up with the competition in each industry sector. The firms have to look out for possible new markets and opportunities to enlarge their business. By venturing abroad to a new market there might occur some difficulties like a different culture or a different buying behaviour of the customers. If companies want to be successful in entering a new market they need the right method to do so.

The following assignment points out whether Tesco Plc chose the right method for entering the North American market or not. First I want to give some background information of Tesco Plc. Then I will describe the food retail industry of the United Kingdom. After that I intend to analyse the political, economical, social and technological factors for the United States. Furthermore, I want to outline the strengths, weaknesses, opportunities and risks for Tesco Plc. My sixth point includes the theory of strategies to enter a new market and my evaluation of Tesco’s strategy entering the United States. For the conclusion I want to state whether Tesco chose the right strategy and if it was effective in entering the new market.

2. Background Information of Tesco Plc

2.1 Company Overview

Tesco Plc is Britain’s leading food and grocery retailer (Apendix 1) and 4th biggest retailer worldwide after Wal-Mart, Carrefour and Metro. It was founded by Jack Cohen in 1919. The headquarter is in Hertfordshire, United Kingdom. From 1995 Tesco began to expand its business into the rest of Europe and the world. It started with entering Hungary, followed by Poland, the Czech Republic and Slovakia in 1996. Now Tesco operates in several countries in Asia, in Europe and in the United States. It has 4,811 stores in 14 countries worldwide. Tesco has five different types of stores namely “Express”, “Metro”, “Superstore”, “Extra” and “Homeplus”. (Marketline, Datamonitor 2010, Wikipedia, Tesco Homepage)

During the financial year 2010 Tesco Plc generated revenues of £56,910 Million. The main competitors nationally and internationally are ASDA Group Ltd, J Sainsbury Plc, Wm Morrison Supermarkets Plc, Marks and Spencer Group Plc, Wal-Mart Stores, Inc. and Seven-Eleven Japan Co., Ltd. (Datamonitor)

2.2 Tesco’s Corporate Social Responsibility

In the past years Corporate Social Responsibility (CSR) has become an important factor for many businesses worldwide.

Tesco Plc is highly involved in reducing CO2 emissions, helping communities and treating their suppliers and employees fairly. During the last year the company reduced the absolute CO2 emission in the United Kingdom by two per cent. Furthermore, Tesco Plc opened the world’s first zero-carbon store in the UK and wants to become a zero-carbon business by 2050.

In addition, Tesco Plc donated £61.6 million to charities and good causes. The company created 358 new jobs with its “UK Regeneration Partnerships”. Moreover, Tesco supports many local businesses in the UK and Poland. 91 per cent of its suppliers say that Tesco treats them well. In addition, Tesco also supports women being employed in senior lever positions. There are three women on Tesco’s Board of Directors in the UK and 19 per cent of directors are women worldwide. (CSR Report Tesco, 2010; Finch, Julia, 2010)

The British Food Retail Industry

For the following analysis of the UK food retail industry I used Porter’s Five Forces Model. (Appendix 2)

Buyer Power:

There is a wide range of different types of stores with large chain supermarkets or hypermarkets like Tesco Plc and more specialty, luxury or organic food outlets. “Accordingly, the financial muscle of each industry player differs depending on the type of player” (Food Retail Industry UK, 2010). Price and convenience play a big role anyhow they are not necessarily the principal factors for the industry players. During the past few years the health consciousness has grown enormously therefore consumers ask for healthy food products. According to this, the culture of convenience is facing a big change back to fresh food products instead of frozen food or instant meals. Food retailers must accommodate such diverse interest. All in all you can say the Buyer Power is moderate. (Food Retail Industry UK, 2010)

Supplier Power:

The suppliers of the British food retail industry are primarily food manufacturers, farmers and agricultural co-operatives. Most of the large retailers in the UK have relationships with many different suppliers. This minimizes the dependency on a specific supplier which strengthens the retailers. Moreover, retailers can control pricing fluctuations. Smaller retailers like organic outlets are facing problems with suppliers because there is only a limited number of suppliers. Thus, smaller retailers are more dependent of their supplier. Overall the supplier power is moderate. (Food Retail Industry UK, 2010; Ivory Research, n.d.)

New Entrants:

The UK food retail industry is quite saturated hence the threat of new entrants is very low. Nevertheless the rapid growth of health consciousness leads new companies wanting to enter the UK market. This can be very difficult for them because of existing large-scale retailers, the security of heavy branding and a direct head-to-head competition. The threat of new entrants is fair.

Substitutes:

Substitutes of the main food retailers like Tesco Plc are small convenience stores or organic stores but they are not seen as a real threat. Another substitute would be the food service branch. It is not seen as a threat because health consciousness is become more popular and also after the financial crisis many people have to save money and cannot afford eating at a restaurant. Therefore the threat from substitutes is weak.

Rivalry:

The competition in the British food retail industry is enormously high. Tesco faces acute competition from ASDA, Sainsbury’s, Morrisons and Waitrose. Consumers compare prices and special offers more and more so there is always a price war between the competitors. Furthermore, during the time of recession discounters like Aldi and Lidl took over the market. In 2008 they recorded a growth of sales of over 25 per cent. Overall you can say the rivalry is strong in the UK. (Food Retail Industry UK, 2010; Ivory Research, n.d.)

The United States for expansion

4.1 United States Food Retail Industry

During the past few years the US food retail industry has been growing slightly with a CAGR of 5.3 per cent. In 2009 the US food retail industry had revenues of $ 859.1 billion (Appendix 4). 80.2 per cent of total revenues were created by hypermarkets, supermarkets and discounters (Appendix 5). Convenience stores and gas stations only generated $ 94.1 billion which is 11 per cent of total revenues. The United States generate 19.8 per cent of the whole global food retail industry (Appendix 6).

4.2 PEST analysis of the United States

During the last 60 years the United States have been the most powerful and successful country worldwide. They have a very strong economy and “a stable political establishment which has witnessed the continuity of certain policies irrespective of the regime” (Country Analysis Report USA, 2010). In November 2008 Barack Obama won the presidential election against John McCain of the Republican Party and in January 2009 Mr. Obama assumed office.

The United States had a Gross Domestic Product (GDP) of $ 14,120 trillion in 2010 and therefore are the second biggest economy behind the European Union. During the 1990s the North American economy boomed but after the events of 9/11 it slowed down. Then in 2008 after the financial crisis the United States went into a recession. The GDP declined until the third quarter of 2009. This downturn was the deepest and longest since the Great Depression in the 1930s. (CIA World Factbook 2010).

“On the social front, as a result of its rapidly aging population the US faces the risk of slower economic growth, serious labor shortages and rising taxes over the next few decades” (Country Analysis Report USA, 2010). Thus, the force on public retirement and healthcare systems will increase. Furthermore, the US have a very high diversity in the distribution of income (Gini index of 45 in 2007). (CIA – The world fact book, 2010) 1 per cent of the population belongs to the upper class and in 2009 these people owned 37.1 per cent of the entire property of the United States. (Wikipedia Vereinigte Staaten, 2010) Therefore the poverty rates are the highest of all developed countries. The gap between the poor and rich is getting bigger and bigger. (Country Analysis Report USA, 2010)

Looking on the technological factors the United States have been the leader in adapting and applying technology worldwide. “Regulatory and legal reforms in a broad range of industries began in the 1970s and accelerated over the course of the 1980s, resulting in deregulation in many sectors, which has enhanced competition and improved overall efficiency” (Country Analysis Report USA, 2010).

SWOT analysis of Tesco Plc

The following part refers to the main facts of the SWOT analysis of Tesco Plc. You can see the full analysis in Appendix 7.

Tesco Plc aims to be an international retailer and has been focusing on non-food merchandise. The company expanded their market share aggressively in the category of non-food products. In the last four years Tesco has doubled its sales in electrical equipment and around 20 per cent were sold over the online channel. Furthermore, during 2009 the company doubled its market share in games which was a result of allocating it more space in the stores. Tesco took several measures to attain the competitive advantage compared to the other retailers already present in the market. In addition, sales in toys rose by 25 per cent in the Financial Year 2010 and clothing sales increased by 7.3 per cent.

During the recession, all four leading UK retailers lost customers to discounters like Aldi and Lidl. Nevertheless all three competitors of Tesco were able to gain back their market share except Tesco. Factors like pricing, quality or the expansion of stores helped the companies to recover. However Tesco lost 0.2 per cent and now has a market share of 30.7 per cent. (Tesco Plc Business Profile, 2010; Guardian, 2010; Ivory Research, n.d.)

Opening the small convenience stores named “Fresh & Easy” in the United States was a great opportunity for Tesco Plc. US consumers have been changing their grocery shopping habits. They have become more health consciousness and don’t want to drive long ways to huge supermarkets like Kroger, Supervalu or Safeway. The reason for that is especially the situation of the US economy. Fuel prices have been rising enormously and according to this US shoppers don’t want to drive long distances to do their grocery shopping. Moreover, US citizens have never spend so much time at work than during these days therefore the demand of new smaller stores will continue to grow. (Trust, Jamie, 2008)

Nevertheless Tesco already has a big competitor with Wal-Mart. It opened four pilot stores in Phoenix in 2008 which is the same area Tesco operates in with its Fresh & Easy stores. “Wal-Mart has wider and deeper US consumer data than Tesco, which means it can potentially better align the merchandise mix and adapt from day one” (Attwood, Karen, 2008) Furthermore, the prices at the smaller Wal-Mart stores will lower than the prices at Fresh & Easy because Wal-mart has such a strong purchasing power in the United States. (Attwood, Karen, 2008)

Mode of Entry-Tesco Plc in the US

Foreign market servicing strategy

When a company chose a country they want to expand to, it has to face different types of foreign market servicing strategies and has to choose the best suitable for that country. Most of the times the mode of entry has a huge impact on whether the expansion was successful or not. The following methods are often used by companies venturing abroad: exporting, international licensing, international franchising, specialized entry modes and foreign direct investments (FDI). Foreign Direct Investments are split up in the “Greenfield Strategy”, “Acquisition Strategy” and “Joint Ventures”. (Griffin and Pustay, 2007)

In 2007 when Tesco expanded its business to the United States it used the greenfield strategy to establish the “urban” style supermarket “Fresh & Easy”. The Greenfield strategy has advantages and disadvantages. When a firm uses this strategy it starts from scratch. It either leases or buys land for its business. Advantages of this strategy are that the company can choose the site of the country which best fits to its business. Moreover, the firm starts completely new and doesn’t get involved with already existing debt or old equipment which could happen with the acquisition strategy or a joint venture. However, disadvantages can be not having “immediate access to local retail savvy, not just in store design and assortment but also in the critical area of store locations” (Silverthorne, Sean, 2010). (Griffin and Pustay, 2007, p. 381)

Greenfield Strategy in the US food retail industry

When a firm wants to enter a new market there are different frameworks it could use to find the best suitable strategy for expansion. For the following part I chose the OLI paradigm which was developed by John H. Dunning. O stands for ownership advantage, L for location advantage and I for internalization. (Griffin and Pustay, 2007)

Tesco Plc had an ownership advantage in the United States in terms of the product. The consumer behavior of US citizens has changed during the past years to becoming more health conscious. Tesco wanted to open small convenience stores with the focus on fresh vegetables and fruits and fresh prepared meals. Moreover, US citizens don’t want to drive long distances anymore to get their groceries. They want smaller stores close to their neighborhood which was the way Tesco entered the US market. However, Tesco had an ownership advantage it could not use expansion as the best way to venture abroad to the United States. The food would be spoilt by the time it gets to the States. (Trust, Jamie, 2008)

Furthermore, Tesco was aware of the changing eating and shopping habits of the US costumers. During the time Tesco entered the North American market with Fresh & Easy none of the big retailers in the States had a concept like Tesco had. After the establishment of Fresh & Easy, Wal-Mart started opening the same kind of “urban” convenience stores. Therefore Tesco Plc had a location advantage when they entered the United States with the greenfield strategy. (Trust, Jamie, 2008; Attwood, Karen, 2008)

Tesco decided to use the Greenfield strategy instead of a joint venture with a North American company or acquiring a firm. It did a joint venture once before in France which failed and Tesco had to withdrawal. Additionally, licensing or franchising which are methods for entering a market when a location advantage is existing, are not suitable for a supermarket like Tesco. Normally Tesco chooses to use the acquisition strategy which has been very successful for many expansions like Poland, Hungary or the Czech Republic. (Scribd, n.d.) However, for entering the United States Tesco used the Greenfield strategy. Two of its main suppliers in the UK named “Wild Rocket Foods” and “2 Sisters Foods” agreed to come with Tesco to the United States. (Birchal, Jonathan, 2010) The first store was opened in Hemet, California in November 2007. By the end of September 2010 Tesco established 168 stores around California, Nevada and Arizona. (Wikipedia, 2011) Tesco had an Internalisation Business Advantages in the US and could therefore use FDI to enter the market.

Nonetheless, Fresh & Easy is not doing as good as Tesco wanted it to be. First of all it got hit by the US recession in 2008. Tesco thought it was developing a strong brand in the US which could stand through the recession. Anyhow, the recession and a “slower-than-expected response to its innovative small store format” (Birchal, Jonathan, 2010) forced Tesco to close 13 of its Fresh & Easy stores in 2010. (Haber, Dominic, 2010) Furthermore, after five years Tesco still hasn’t made any profit with its subsidiaries in North America. (Silverthorne, Sean, 2010) It is supposed to make profit by the financial year 2012/13. To achieve this, the company has to open up to about 400 stores which means it has to establish two stores every week. (Haber, Dominic, 2010)

All in all Tesco hasn’t been successful in the United States so far. It maybe should have entered the market with an acquisition of an established firm as they did effectively before. If Tesco would have acquired a firm they would have had “immediate access to local retail savvy, not just in store design and assortment but also in the critical area of store locations” (Silverthorne, Sean, 2010). With choosing the acquisition strategy Tesco could have been successful in the United States by now.

Conclusion

Establishing a business in a foreign market is not always easy. If a company doesn’t do enough research about culture, customer behaviour or competitors it can easily fail in expanding its business. The company needs to find the best suited entry strategy for the country it wants to enter.

Overall the expansion of Tesco Plc to the United States wasn’t successful. Although the PEST and SWOT analysis showed that the North American market was a remunerative market Tesco didn’t choose the right method to enter the US food retail market to become successful.

Tesco should have used the acquisition strategy instead of the Greenfield strategy. By doing so it maybe wouldn’t have failed by now.

http://www.ft.com/cms/s/0/476b0648-7d73-11df-a0f5-00144feabdc0.html#axzz1Ap4dtIuY Birchal, Jonathan, 2010

http://topnews.us/content/227289-fresh-easy-see-profit-201213-financial-year (Haber dominic)

http://hbswk.hbs.edu/item/6462.html (Silverthorne, Sean, 2010