Tescos strategy of expansion into China

Present an insightful evaluation of the general strategy and one specific aspect of its international strategy. To do this you should analyse the financial strength of the business. You need to use recent data. You need to draw on an appropriate literature. Key issues for managers need to be clearly identified. You need to show how the specific strategy fits into the global plan. You need to set your report against the background of current global business challenges. You need to provide and evaluation of the strengths and weaknesses of the strategy.

For example, Tesco’s strategy of expansion into China

This report outlines the opportunities facing Tesco as a result of its international expansion strategy in Asia – focussing on its current expansion in China.

Layout

Start with an executive summary.

e.g. This management report sets out to evaluate the strengths and weaknesses as well as the opportunities and threats associated with Tesco’s strategy of developing a strong presence in the retailing market in China. The specific strategy that is explored is that of developing four storey shopping malls. The move into China is part of a generic growth strategy by Tesco, particularly focussing on large emerging markets. The report shows that there are significant opportunities in a market that was worth £600 billion in 2010. Challenges facing management involve making sure that all of the primary activities in the value chain are efficient and effective, and developing ongoing relationships in China to ensure a cultural fit between Tesco’s objectives, and strategies and those of stakeholders in China.

Next introduce your organisation.

1.Tesco as an organisation

Tesco’s scope

Today Tesco is an international retailer of household goods, food, and clothing, as well as providing a delivery service and banking service in some markets. Tesco’s home market is the UK, but since 2005 the company has increasingly been developing its presence in new markets – particularly continental Europe, the United States and Asia (including Thailand, South Korea, Indonesia and China).

Tesco’s competitive strength

Tesco is currently the world’s third largest international retailer after Wal-Mart and Carrefour. However, a recent report (2008, Global Retailing: Preparing for Change, IGD) forecasted that by 2012 Tesco will be in second position with an estimated growth rate of 12% compared with Carrefour’s 7%. Tesco’s strength rests in providing value for money offers supported by strong partnerships, and an effective supply chain.

2.Tesco’s strategies

Tesco’s generic strategy

Tesco has five main elements to its strategy. It is the first of these elements that this assignment focuses on in particular. The five areas are:

1.To be an international retailer

2.To maintain a strong core UK business

3.To be as strong in non-food as in food

4.To develop retailing service

5.And to put the community at the heart of everything we do.

The retailing market in the UK has become saturated. Tesco is the leading player in this market account for £1 in every £7 of grocery sales. However, the potential to increase growth in the UK is limited faced by increasing saturation of the market and intense competition. Tesco is therefore increasingly focussing on the development of new international markets. This includes the development of Fresh n Easy stores in the US, and a range of new hypermarket formats in Asia.

2.2 Tesco’s strategy for China

Tesco has targeted China as a particularly important growth opportunity.

Tesco entered the Chinese market in 2004 by forming a 50:50 partnership with Ting Hsin Internal Group (with existing retailing outlets). Shenkar and Luo (p.319) argue that ‘partner selection is widely recognised as a vital factor in Global Strategy Alliance success’. They believe that ‘benefits will only accrue through the retention of a partner that can provide the complementary skills, competencies, or capabilities that will assist the firm in accomplishing its strategic objectives.’ Ting Hsin’s competencies included existing experience in the Chinese market, and strong links with local and regional government. Ting Hsin was able to provide Tesco with know how in relation to local operating conditions (include local laws, and customer patterns). By 2006 Tesco was able to increase its stake in the partnership to a 90:10 relationship. In 2008 Tesco rebranded its stores as Tesco Legou (Happy Shopping) to localise the branding of the product. Fateh, K (2008. p.355) identifies the value for multinationals of developing hybrid international strategies combining global integration with host country focus. Tesco’s rebranding and focus on meeting the needs of local customers in China makes it possible to support locally developed products with the vast marketing and financial resources of Tesco’s headquarters office.

3 Tesco in China

3.1 Features of the market in China

Currently grocery sales in China are worth £600 billion (2010). There are 221 cities in China that are predicted to have more than one million inhabitants by 2025 compared with 35 in Europe now. It is urban dwellers in large cities that provide the target market for Tesco in China. In urban areas in China shopping malls have become particularly popular locations for supermarkets. In China there are fewer cars than in the UK (2 per 100 population). Tesco has already opened four lifespace shopping centres.

A lifespace shopping centre is made up of four floors. The first floor contains the Tesco hypermarket. The other floors contain other shopping premises that may be leased to other companies to sell their goods – often clothes and household items such as furniture.

3.2 Expansion in China

Tesco is expecting to quadruple its annual sales in China between 2010 and 2015. The current strategy is to build 50 shopping malls in China by 2015 and to develop a further 30.

3.3 The advantages of the joint venture format

Tesco’s partnership with Ting Hsin took the form of a joint venture set up for the purpose of ongoing cooperation (Stonehouse, G p.271). Ting Hsin already had 25 up market mall type stores in 25 locations. Tesco was therefore able to benefit from this substantial presence in the market in China. The benefits for Ting Hsin related to Tesco’s global buying power, reputation and the strength of finance that Tesco could bring to the table.

4.Tesco’s financial strength

4.1 Sales and profits

Tesco’s 2010 Income Statement showed a sales revenue of £57 billion from which it generated operating profits of £3.4 billion.

Tesco’s current strategy is that of growth. This growth strategy is built on sales growth. For the last ten years Tesco has generated operating margins in the UK of roughly 6%. However, sales growth in the UK is relatively slow. In the second quarter of 2010 sales growth in the UK was 5.3% (Tesco Income Statement, October 2010).

4.2 Tesco’s financial strength in Asia

The first two Asian markets that Tesco entered since 2000 were Thailand and South Korea. Tesco is currently making operating margins in these countries of 5%.

The table below highlights Tesco’s financial position in Asia:

Sales and profits 2010 (Source: Tesco: Operating Report 2010)

Asia Sales £5,725m

Asia trading profit £228m

Asia trading margin 4.6%

Tesco is particularly interested in developing its presence in Asia. In the most recent annual company review (2010), the Chief Executive stated:

‘Our important Asian markets in particular are emerging strongly from

recession.’

In contrast, he pointed out that economic recovery in the UK is slow and steady.

In the second quarter of 2010 Tesco reported the following figures for sales growth:

UK 5.3%

Group 8.8%

Asia 27.7%

4.3 Tesco’s financial strength in China

In 2010 Tesco’s sales in China were worth £848m. The company reported that it was on the verge of breaking even in China. Tesco’s current strategy in China is to build 50 shopping malls in China by 2015 and to develop a further 30.

5 Tesco’s operations in China

5.1 Tesco’s focus areas

Tesco’s original strategy involved focussing on three regional areas. These were city areas in which average incomes were relatively high and in which consumers were already exposed to international influences. The three areas were Shanghai as a hub for operations in Eastern China, Beijing in the North and Guangzhou in the South.

5.2 Core competences in China

Tesco already source many products which go into its stores across the globe from Chinese manufacturers. It sources $1.1 billion of products from China a year. Tesco therefore has built strong relationships with local suppliers in China. Tesco has had many years of experience as a large retailer in developing supply contracts with suppliers in the UK. This is thus a core competence (Prahalad and Hamel, 1990) of the organisation. Core competences are those attributes of an organisation that give it

a distinct advantage over competitors. Other core competences that Tesco has built in China include centralised distribution centres. These reduce the numbers of deliveries required to individual stores, thus resulting in substantial cost savings. Tesco has also developed own brand products for China – the ‘value’ brand, and Tesco Legou.

Another core competence is that of developing relationships. This fits in with Tesco’s strategy of ‘putting the community at the heart of everything we do’ (Tesco Strategy document). Tesco has 58 stores in 22 cities in China. The company employs 17,600 staff, 99% of whom are local to the store.

Tesco’s experience of driving value through all aspects of the value chain (Porter, 1974) in the UK have been applied to its operations in China – including the organisation of inbound and outbound logistics, supermarket operations, market research and customer service.

6 Management issues facing Tesco

6.1 Cultural complexity

A key issue facing Tesco management in developing operations in China relates to levels of cultural complexity. Fateh (p.132) distinguishes between countries with low context cultures like the United Kingdom and countries with high context cultures such as China. The difficulty facing British managers in working in China is that some meanings and interpretations of events are not explicitly stated. This was an important reason for Tesco to create a joint venture partnership as a market entry strategy. By working with Chinese partners and Chinese managers Tesco has been able to deal with issues associated with cultural complexity and to develop strong networks of relationships within the local communities in which its stores have been sited.

6.2 Potential areas for difficulty

Carrefour and other international supermarket chains operating in China have had difficulties in some areas with regards to gaining planning permission and licences to operate from local authorities. Initially Chinese government policy was to only allow Foreign Direct Investment in the sector in collaboration with a local partner. Although this requirement has since been relaxed Tesco has chosen to work closely with its local partner in order to develop strong community relationships and thus an ongoing licence to operate in the regions were its malls are cited.

7.Evaluation of the strategy

7.1 Break-even point

Tesco’s has announced that it is currently at the point of breaking even in China (Financial Times, 2010). Today, Tesco recognise Asia as being the major area for its international growth strategy. This compares with ten years ago when the company was almost exclusively a UK retailer. The position is quite different today as shown by Tesco’s presence in Asia:

Number of stores (2010)

UK 215

Asia 186

Sales area space (ooo square feet)

UK 31,285

Asia 28,838

Operating margins are slightly higher in the UK when compared with Asia (about 1p in the £ higher), however, sales growth is much faster in Asia. Thailand and South Korea have already proved to be profitable markets for Tesco.

7.2 Competitive challenges

The challenge facing Tesco in China is that it is a highly competitive market. Tesco is not the only company developing local partnership arrangements. Tesco has committed a substantial portion of its cash reserves and profits into investing in China. As shown in this report there are substantial economies of scale to be achieved by operating in central locations in China’s thriving city areas. Key issues that managers need to face include ensuring ongoing strong relations with local partners and employees. Tesco’s competitive success rests in providing value for money products with relatively cheap prices. These competitive strengths go down well with Chinese consumers looking for value for money.

7.3 Credibility challenges

Developing links in China requires working closely with local government authorities, and construction companies to develop new malls. It is essential that Tesco makes sure that the quality of workmanship on these new malls is to the highest planning and safety standards. It is essential in sourcing products from local suppliers to ensure that all products meet the same levels of safety standards that Tesco employs in its other outlets across the globe. The market in China is potentially the most substantial on the globe. Tesco already sources substantial quantities of its supplies from Chinese manufacturers. There is thus every possibility that Tesco’s international strategy of growth will yield high sales revenues and profits in China.

Exemplar references.

You need to reference all of the texts that you include in your work.

E.g.

Fatehi, K, (2008) Managing Internationally, Succeeding in a Culturally Diverse World, Sage, London.

You also need to reference any information you get directly from company reports and websites.

E.g.

Tesco, 2010, Annual Report and Financial Statements.