CASE STUDY #5

TESCO’S INTERNATIONAL MARKET EXPANSION

“A Partial Success Story”

Toufik(3408463), Soren…(…) & Maximilian Prinz (3425508)

CONTENTS

1. Introduction

2. Why WOS in the U.S. market?

3. Assessment of withdrawing from the Japanese & the U.S. market

4. Evaluation of switching from WOS to JV in China

5. Q&A

6. References

INTRODUCTION

• Founded in 1919, London• #1 in UK and #3 in the world• 5400 stores outside UK

Map of Tesco’s worldwide activities

(Mapchart, 2015)

(Tesco PLC, 2015)

Question 1

Identify and discuss those factors motivating Tesco to build its own stores for entering the US market rather than relying on acquisitions as it has done in most other foreign markets.

REASONS TO ENTER THE U.S. MARKET

• External factors making the U.S. market favorable for Tesco:• Size and growth of market• Market potential in rural areas

• Internal factors making the U.S. market favorable for Tesco:• Knowledge / experience of retailing• Market knowledge of U.S. market (research)• Innovative store format (competition)• Risk management

DEFINITION OF WOS

“Wholly-owned subsidiaries (WOS) are the final stage in the spectrum of foreign entry strategies.

These are characterized by complete ownership by the parent company”

Bradley (2005)

MOTIVATING FACTORS FOR BUILDING WOS IN U.S.

WOS? Yes!• Full control• No profit sharing• Flexibility and quick decision making• No information dissemination

Take risk and get rewarded

Acquisitions? No!• Integration problems• Resistance from employees• Poor communication

Tesco in USA

Question 2

In 2011 and 2013, Tesco has announced its exit from Japan and the US market respectively. Critically assess those factors that compelled Tesco to withdraw from these 2 markets.

TESCO’S PERFORMANCE

Market entry JapanAcquisition

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Market entry USAOwn Stores

Withdraw from theJapanese market

Withdraw from the U.S. market

Share Price

(Hargreaves Lansdown, 2015)

REASONS TO WITHDRAW FROM JAPAN1. DID NOT FULLFILL CONSUMER NEEDS

• Japanese visit several shops many times a week• Japanese require wider selection of goods and foodstuffs• Japanese question the quality of stock in hypermarkets

(Passport GMID, 2015)

2. MARKET SITUATION

• Fiercely competitive and unprofitable• Declined market

Psychic distance

Value Retail Market

(Hofstede, 2015)

REASONS TO WITHDRAW FROM USA1. MERCHANDISING & STRATEGY PROBLEMS

• Too much private label• Not enough loose produce• No loyalty card• Some genuinely random store location

(Passport GMID, 2015)

2. MARKET SITUATION

• Most price competitive• Sub-prime crisis• No economies of scale

Value Retail Market

ASSESSMENT OF THESE FACTORS

MOST IMPORTANT FAILURES

Japan• Tesco should have spent more into research to acquire a better market

knowledge• JV would have been a better market entry strategy to gain knowledge

USA• Did not find a solution to reduce costs (EoS)

LESS IMPORTANT MEDIUM IMPORTANT VERY IMPORTANT

JAPAN - market situation- psychic distance

- satisfaction of shareholders

USA- merchandising and

strategy problems- sub-prime crisis

- no materialisation ofeconomies of scale

- satisfaction of shareholders

Question 3

Critically evaluate Tesco’s decision to switch from wholly-owned stores to creating a joint-venture with the state owned company, Resources Enterprise (CRE), in China.

Question 3: Changing the market entry strategy in China

Benefits from making a joint venture with CRE:

• Tesco becomes part of China’s biggest retailer

• Creating annual sales of £10 bn

• Cautious approach

• Sub-scale business not profitable in China

• CRE = Economies of Scale needed for profitability

• Local knowledge / market intelligence

• Avoiding another foreign ‘defeat’

“They got the business where they wanted it to be without spending lots of money”

cf. Mike Tattersall, retail analyst

Question 3: Changing the market entry strategy in China

Drawbacks from making a joint venture with CRE:

• Tesco brand will disappear from Chinese market

• Not full control over profits and know-how

• Shared decision making and profits

• Different cultural backgrounds and management styles

• Investment in 20 % stakes

Question 3 (continued)

What prevented the company from withdrawing altogether from China as it did from Japan and the US market?

Question 3 (continued): Why not withdraw from Chinese market?

• Lucrative market with huge potential

• Avoid another defeat in foreign operations (Japan & U.S.)

• Huge opportunity to create joint venture with CRE

REFERENCES

Hargreaves Lansdown (2015). Available from: http://www.hl.co.uk/shares/shares-search-results/t/tesco-plc-ordinary-5p/share-charts [Accessed 23 November 2015].Hofstede (2015). Available from: http://geert-hofstede.com/ [Accessed 4 December 2015].Mapchart (2015). Available from: http://mapchart.net/world.html [Accessed 4 December 2015].Passport GMID (2015). Available from: http://0-www.portal.euromonitor.com.lispac.lsbu.ac.uk/portal/statistics/tab [Accessed 23 November 2015]. Tesco PLC (2015). Available from: http://www.tescoplc.com/index.asp?pageid=276 [Accessed 4 December 2015].