TESCOS NEIGHBOURHOOD MARKET ENTERS UNITED STATES

The world economy has evolved from isolation from each other by barriers to cross-border activities wherein distance is no longer an issue due to advances in transportation and telecommunication technology. Moreover, it is noted that material culture is starting to look similar as national economies are merging into an interdependent and integrated global economic system (Friedman, 2005). All these processes are linked and referred to globalisation.

The impact of globalisation has encouraged companies to expand its operation across its home country in order to compete in the challenging market environment. As one of the leader in the retail industry, Tesco PLC (Tesco) has taken advantage of the current environment by moving into the United States (US) for expansion purposes. The report will analyse Tesco’s strategy in the US by analysing the impact of globalisation towards the industry, evaluating the reasons and strategy for internationalisation, the effect and challenges faced in regards to the internalisation exercise.

Description of Tesco

Tesco is a United Kingdom (UK) based international supermarket chain, which has the largest global sales and domestic market share sales. Based on its revenue, the company is the third largest retailer in the world next to Wal-Mart and Carrefour (Data Monitor, 2010). The key to Tesco’s success is based on its low prices, high quality products and experienced customer service which overall has lead to continuing growth of profit to the company.

In 2006, Tesco announced its plan to enter the US market by opening small size grocery stores named Fresh & Easy Neighbourhood Market (Fresh and Easy). Tesco has selected the less aggressive market location on the west coast, California, Nevada, and Arizona to avoid the highly competitive market. The store has started its operation together with the distribution centres in 2007. Based on the latest financial report in 2009, it was noted that Fresh and Easy is currently trading at loss.

Tesco’s competitive advantage

According to Teece, Pisano and Shuen (1997), the success of a company highly depend on the uniqueness of the company’s resources and capabilities in creating competitive advantages. The two main perspectives in the Resource-Based View (RBV) are the internal analysis of phenomena within an organisation and external analysis of the industry and its competitive environment (Collis and Montgomery, 1995; Eisenhardt and Martin, 2000).

The resources and capabilities are evaluated in terms of value, rarity, inimitability and organisation (Barney, 1995). Furthermore, Carpenter and Sanders (2009:103) suggest that in turn for a company to gain competitive advantage, it should possess resources and capabilities that are valuable, rare, inimitable, non-substitutable and exploitable (VRINE model).

The value of the resources and capabilities interacts with the market sources and will differ based on time and industry. The three fundamental market forces; scarcity, demand and appropriability determines the value of the resources and capabilities (Collis and Montgomery, 1995). To answer the question of value, organisation could evaluate whether its available resources and capabilities are meeting the market demand. As for Tesco, it relies on its brand, supply chain capabilities, store location and varied product offering wherein all these components have satisfied the value requirement, as it has been able to meet the demand in the grocery market. For instance, the company has a strong brand image that is associated with good quality, trustworthy goods that represent excellent value (Data Monitor, 2010).

Resources and capabilities owned by Tesco are similar to other retailers but in terms of the brand name and variety product offering differs them from the competitors. Tesco pays detailed attention in transforming its brand through packaging and the promotion of ‘every little worth’ concept. The success of the company in terms of customer loyalty relies on the loyalty card system and customises approach for each customer. In RBV concept, Tesco can be characterised as a competitive parity company based on its valuable but not rare resources and capabilities (Collis and Montgomery, 1995).

Tesco’s strong position within the retail industry is due to its different approach in the service concept and introduction of various quality products. Moreover, it has competencies in its supply chain that affected its operational level in the work routines. Competitors could imitate the said resources and capabilities but it is difficult to do so as the tacit amount of knowledge, time and huge investment is required (Hanan and Freeman, 1984) which in the meantime, Tesco will continue to gain its competitive advantages.

Based on the above evaluation, it is observed that Tesco has managed to exploits its resources and capabilities that as a result provide competitive advantages to the company. Tesco’s exploitation of its resources and capabilities is reflected in its market share and financial performance. Tesco currently controls about 30% of the grocery market in the UK with a turnover of £56,910 million (Data Monitor, 2010). Moreover, with the aided competitive advantage, Tesco has managed to perform well in its international operation.

Theory of globalisation

The era of globalisation has started in the early 1970s due to the convergence of several political, technological, social and competitive factors. According to Yip (1989), it is considered as one of the most important business strategies as it is a process which businesses create value by leveraging its resources and capabilities across borders. The topic on globalisation has been widely discussed which resulted to different perspectives and arguments. There are two different theories in relation to globalisation which are hyperglobalists and transformationalist theory.

Hyperglobalists theory argues that the world is moving towards a global world that is subject to massive economic and political process of change which is clearly identified by the existence of a single global economy. National culture differences are largely seen by the progressive powerful multinationals as variations in consumer preference is reflected in the international marketing mix (Wall and Rees, 2004:14). In view of this, the theory supports the globalisation in terms of efficient allocation of resources through international trade.

In contrast, the transformational theory argues that globalisation is a powerful force impacting economic, social and political environments which involve uneven processes with unpredictable outcomes rather than linear progression to a predictable outcome. Many have argued that globalisation tends to reinforce inequalities of power both within and across nation resulting in global hierarchies if privilege and control for some but the economic and social exclusion of others (Wall and Rees, 2004:15). Therefore, the affect of globalisation is differently experienced across the globe.

Based on the above theories, it is believed that globalisation can act as a tool that could benefit every human being across the globe. Although the negative effect has been discussed and identified, the same should not be ignored and must be addressed for the benefit of mankind.

Globalisation drivers and its impact on the retail industry

Yip (1992) has identified the globalisation drivers based on the industry conditions. Each industry has its own level of globalisation that is determined by the external drivers which are normally uncontrollable by the business or market environment.

Economic, Political and Legal

Financial Factors Factors

In respect of the retail industry, technological factors play an important contribution to the drivers of globalisation. The technology change has impacted on the lower cost of transportation and communication as well the unit cost of production through economies of scale or the localisation of productive capacities and sourcing in low-cost economies (Lasserre, 2007:17). For example, the current electronic global marketplace would not exist without the existence of the global communication network such as the World Wide Web. Moreover, the low cost transportation has made shipping products around the world more economical, thereby helping in creating a global market. In response to the changes, Tesco has managed to apply the technology to selling through online which has is impacted on the company’s sales performance.

Moreover, as a result of globalisation, there is a convergence of consumer needs which has increased the brand awareness of consumers worldwide (Yip, 1989). Urbanisation and industrialisation of societies are one of the reasons for convergence of customer behaviour and needs. By having the same needs, consumers are bound to have the same requirement that leads to standardisation of products.

Meanwhile, the liberalisation of trade and investments played an important factor in supporting the need of globalisation. It has therefore created a common market place and economic integration worldwide. Previously, there were rules and regulations that limit the Foreign Direct Investment (FDI) as to protect the local players. However, the scenario has changed and with the development of the free trade among nations, many companies took the advantage by doing cross-border investments to expand its market existence and profitability. In terms of Tesco, its initial output was significantly limited by the size of its domestic market in the UK but now, it has the chance to take advantages of economies of scale by going global.

The trend in globalisation creates changes in the macro dimension of the environment. The change in the economic dimension has leaded the society to enter world or global economy. Clearly, the changes could be seen in the emergence of global market, global competitor and the integration of the economic. The impact of the fundamental changes is noted through the capital movements, concern on productivity and employment as well as emergence of the world economy as a dominant economy unit (Friedman, 2005). The continuous and rapid globalisation of the world economy indicate that globalisation of retailing activities is a major management issue for retailers nowadays and currently it is foresee to be more intensified in the near future.

Tesco’s Strategy for Internalisation

5.1 Country and Risk Analysis Framework

The county analysis framework provides an overview of the national business environment in terms of opportunities and risks which enable companies to enhance value creation and strategic fit for its business. Ghemawat (2007) examined distance as the root of most costs and risks of conducting business in new markets and concluded that distance is more than geography; it includes dimensions of culture, administrative and political power, and economics. Therefore, in decision-making, businesses must account for these dimensions of distance as its influences in different ways. CAGE framework is used for the analysis as it provides further in-depth analysis on the country compared to PESTEL framework.

The total population of 301 million in US indicate a huge market opportunities that allow Tesco to build its position as a world largest retailer. By penetrating the market, Tesco foresee a better growth in terms of its international expansion. It is seen as a right move by Tesco to the previous expansions have proven to be a success. The operation in the US will be similar to the UK due to the same language used as medium of communication. This leads to an easy option in conducting business wherein the similar concept in the UK could be exported to the US with minimal changes in adapting to the market.

US have been a dominant global power in terms of economy, political, technological and cultural affairs and has a long enjoyed its status as a superpower over nations’ policy making (Data Monitor, 2010). It is clearly seen from its economic point of view where the county is categorised as the largest economy in the world which is back-up with the most developed economic systems. This links to the process of entering the US market which is supported by a comprehensive legal framework for business entities that creates a positive investment climate. US have favourable policies in promoting Foreign Direct Investment. Furthermore, in the international arena, it has secured the support of majority of nations that allows it to direct global policies. With the stabilised politic environment, there is absence of violence that ensures a safety business environment. All this factors have encouraged Tesco to pursue its goal in penetrating the US market.

Cross-Cultural Risk

RISK

Based on the risk analysis, it is identified that the main related risk to Tesco in the US are financial, economic and operational risk. In terms of financial risk, the fluctuation of the currency exchange rate and inflation will definitely have an impact on Tesco’s ability to operate at an efficient capacity. As to reduce the risk, Tesco has decided to enter single markets at a time and evaluate the success before considering for further expansion. For the US expansion, stores are opened based on geographic region rather than entering different states, which allow Tesco to limit its exposure to a loss if the expansion is unsuccessful. Meanwhile, for the operational risk, problems related to logistic and stock will lead to inefficiency of production and performance.

5.2 US Retail Industry Analysis

The competitive environment involves factors that are relevant to an organisation’s strategy. The industry-based view can be analyse using Porter’s five forces as include it includes the overall structure rather than focusing on one element (Peng, 2009:35). The competition in the US grocery market is intense as they compete in terms of price, product and promotion. Some of Tesco’s major competitors in the US are Trader Joe’s, 7-Eleven, Safeway, and Wal-Mart.

Tesco’s Fresh and Easy operates within the retail industry that forces are driven in the industry would identify the strength and weaknesses of the organisation. There has been a significant growth in the grocery environment in terms of size and market dominance of large players. Competitive rivalry is considered a high threat as other retailers are applying the same operation concept wherein power has been built through operating efficiency. As a result, retailers have to be innovative to maintain and build its market share. Hence, Fresh and Easy has refocused its strategy based on price and value with added value elements of good customer service (Times online, 2007).

High competition is a powerful force and stands as a strong barrier for new entrants who desire to enter the industry. For example, it will be difficult for new entrants to raise sufficient fund due to large fixed costs and highly developed supply chains. This is in line with Tesco’s huge investment for Fresh and Easy in terms of advanced technology for stock controls systems (Euromonitor International, 2009). However, a high level of product differentiation together with low cost and dynamic market revenue growth has elevated the rivalry to an extent. Retailers in this sector are highly fragmented and therefore retailers will put considerable barriers to entry to ensure less competition in the market (Alexander and Korine, 2008).

The more standardised or undifferentiated the product, the lower the switching cost and hence there is a high threat of the bargaining power of buyer. Buyer power acts to force the price down but due to the various choice of substitute products, retailers have the power for the price setting. Therefore, in meeting customer’s needs, customising service combine with low prices, constant promotion and better choices have enabled Fresh and Easy to control and retain its customer base.

There is a low threat to the bargaining power of suppliers as often retailer such as Fresh and Easy dictate the price to be paid to the supplier as if the suppliers does not agree on the price, they will be left with no retailer. The relationship with the suppliers has impacted the limitation of the strategic freedom for the company which influences its margin. As a result, the forces of the competitive rivalry will reduce the profit margins for retailers and suppliers.

There is a threat of consumers switching to substitutes due to the variety of choices of products in the market. The industry has change overtime wherein small chains of convenience stores are emerging which provides more alternative choices to the consumers. In response to this trend, Tesco has started to open Fresh and Easy based on small-scale operations in local town and city centres.

The biggest threats for Tesco in regards to its Fresh and Easy stores are the rivalry and bargaining power of buyers. The retail industry in the US is viable which results to healthy profitability provided the company continuously improves itself and is flexible in the challenging market.

5.2 Tesco’s expansion to US

Due to competition and the impact of globalisation, companies are expanding its operation to other countries outside the home country which indeed require that application of the global strategy. According to Peng (2009:18), global strategy is defined as strategy of firms around the globe which particular form of international strategy which is characterised by the production and distribution of standardised products and services on a worldwide basis. Tesco’s motivation for expansion to the US with its Fresh and Easy stores are merely based on market and innovation seeking as its main goal is to achieve higher profit margins as well as future organisational learning and growth.

Ghemawat (2007) suggest that in order to boost sales and market share, companies have to maximise its local relevance. Therefore, by entering the US retail market organically has provided advantage to Tesco to start fresh by creating a highly distinctive new store concept. This route allows the company to manage its capital expenditure and learn from experience for its future expansion. Fresh and Easy is a small format convenience grocery stores focusing on fresh foods and ready meals at low price. The strategy to break into the US market is based on three key areas: affordability, freshness and convenience (Data Monitor, 2010). By focusing on convenience store, Fresh and Easy will not be directly competing with retailers like Wal-Mart and meanwhile will differentiate itself from the larger format traditional retailers.

In addition, Ghemawat (2007) suggest that strategic choice requires some degree of prioritisation of which the AAA Triangle Model can assist the company in doing so. It is suggested that it is impossible to employ three strategies but companies normally should focus on own or two in trying to build competitive advantages. Due to the matured and intense competition in the US retail industry, it was difficult for Fresh and Easy in terms of arbitrage. Therefore based on the said model, Tesco global strategy was based on a minimal adaptation of which Fresh and Easy stores are designed, by adapting to the local responsiveness and aggregation on standardisation of product to take advantages of economy of scale.

International strategy adopted by Tesco for Fresh and Easy is similar to its Tesco Express approach in the UK, featuring fresh produce, alcohol and an in-store bakery with minimal adaptation to the US consumers requirement (Times online, 2007). This is line with the integration-responsiveness framework which indicates the replication of the strategy by using its core competency and specific advantage wherein pressure of local responsiveness and pressure for global efficiency are both low (Peng, 2009:353). By using this strategy, expansion process will be at a slower compared to the global retailers but the advantage of this strategy is it provides a greater learning effect and broader knowledge-based to the company (Palmer, 2005).

The minimal adaptation incorporated is related to the store format wherein larger pack sizes and more space allocation on frozen food to cater for various types of product assortment which is based on the US consumer’s preference (Euromonitor International, 2009). Meanwhile, the chain uses a straightforward “everyday low prices” strategy which is 15% cheaper compared to other competitors (Finch, 2009). The existence of Fresh and Easy has created awareness by the competitors wherein competitors have improved its products offering and seeking for a suitable location in order to compete.

In terms of aggregation, it uses one brand name fit all strategy which was argued by consumers as there are no differentiation among the store brand products on value price product, natural and organic and premium products. In lieu of this, Fresh and Easy did not manage to create consumer perceptions on the brand name and subsequently affected its sales performance.

6.0 Tesco’s future in US

In terms of profitability, Fresh and Easy has yet to make profit from its operation. There is uncertainty for the company to achieve profitability in the near future as its expansion process has delayed as compared to its initial plans due to economic crisis which particularly affected the consumers in some of its first few store opened in 2007. Therefore, it will definitely take longer period for Fresh and Easy to achieve its target goals.

It was observed that Tesco’s Fresh and Easy stores use one brand name fits all strategy for its products and marketing strategies (Times online, 2007). This approach is not relevant to the US market as consumers have a strong perception of brands (Euromonitor International, 2009). This has to lead to confusion to consumers as there is no product differentiation between discounts or value priced, natural and organic and premium products in the stores. Fresh and Easy should separate its brand names similar to its UK approach i.e. finest for premium products and value for discounted products that will lead to a better merchandising, pricing and marketing strategies. This assist consumer to have different brand names for each category than price focused items.

Further analysis is required in analysing the progress of Fresh and Easy in the US. By doing so, a decision can be made either to leave the market and expand to other potential markets. Based on Tesco’s track record on its international operation, the company has successfully penetrated the market well which is reflected in the financial performance. Strategy formulation is an important element as it is a continuous learning process which enables Tesco in planning for its future expansion. Tesco’s strategy for expansion to the US seems flawed as a different global strategy was applied although in-depth research was made before the expansion.

Tesco should maintain its existing strategy to enter a market through joint venture or acquisition with an existing player in the market as it is observe as an effective manner for expansion (Palmer, 2005). Moreover, Tesco should take note that other companies which have attempted to enter US highly competitive market have failed due to the reason of not understanding the psyche of the American consumer. Tesco’s bold move to the US without a partner seems unreasonable as the existence of a partner will provide essential knowledge for local business environment and consumer cultures. This indeed observed when Tesco overlook on the interpretation of a convenience store in US which differs from the UK. In the US, convenience store is associated with petrol stations wherein the UK, is it a store. In addition to this, Kay (2009) indicates that findings from the US consumers suggest that consumers are less loyal to the US as purchase are made based on the cheapest price at any stores. Based on this differences, Tesco did not managed to introduce the British model in the US market although is foresee as a competitive advantage in the retail industry.

Conclusion

During the past years, there has been a growth in the scale of international investment and as the process continues, it is important to understand the learning and experience gained from the expansion exercise. It is undeniable that by entering new markets like US, it acts as one of the main drivers for the company’s revenues and expansion strategy. However, Tesco needs to evaluate its strategy in order to sustain its performance in the US. One of the mistakes made by Tesco’s US expansion is believing that exporting successful business model to foreign country is an easy process. Although Tesco has its own competition advantages, the aspect of culture should not be left out as it plays an important role in ensuring the success of the business (Ghemawat, 2007).

The success of a strategy depends on the strength in terms of learning, knowledge and suitability.

Tesco would need to apply the entire lesson learned from the expansion exercise as future expansion is dependent on the company’s capacity to recognise the sources for international learning of the knowledge gained. This will definitely allow Tesco to move, adapt and learn fast for better performance in the US market.