Analysis of Tescos entry into the US Market

University Degree Business and Administrative studies

Contents

Terms of Reference…………………………………………………2
Procedure……………………………………………………………2
Findings

Introduction…………………………………………………2
Background of Tesco………………………………………...2
Tesco’s Corporate Strategy………………………………….4
Tesco’s Global Strategy……………………………………...4
Tesco Around the World……………………………………..5

Tesco in US…………………………………………………………..5

Why Tesco Enters US?.............................................................7

5.0 Fresh and Easy……………………………………………………………7

5.1 Economic Factors…………………………………………………8

5.2 Cultural Factors…………………………………………………..8

5.3 Political and Legal Factors……………………………………….9

5.4 Corporate-government relations………………………………… 10

5.5 Balance of Payment…………………………………………….. 12

6.0 Conclusion ……………………………………………………………… 13

7.0 References ……………………………………………………………… 14

1.0 Terms of Reference

This report critically evaluates the global business strategy with a particular focus to its entry in to US. It has to be submitted on January 2008 and is for Sandeep.

2.0 Procedure

The Information gathered while creating this document was from academic texts, from books, journals and relevant web pages. The appropriate references have been provided in the bibliography section of this report.

3.0 Findings

3.1 Introduction

Tesco is one of the UK’s largest and top supermarket operators in the world with profits exceeding £2 billion. In 2008, Tesco became the world's fourth largest retailer, the first movement among the top five since 2003. Originally specializing in food and drink, it has into areas such as , , , , , , retailing and renting , , , , and .

It is planning to open a thousand-strong chain of discount stores in the US. Tesco plans to invest more than $250m (£120m) [$2.5 billion over the next five years] in its US business launch. This expansion plan and strategy places it directly against competitor retail giant Wal-Mart. Many UK retailers have found it difficult to survive or compete in the US retail market. The US retail market is most competitive in the world, a fact well-known to British retailers Sainsbury's and Marks & Spencer which failed to attract US customers.

3.2 Background of Tesco

founded Tesco in 1919 when he began to sell surplus groceries from a stall in the East End of London. The Tesco brand first appeared in 1924. The name came about after Jack Cohen bought a shipment of from T.E. Stockwell. He made new labels using the first three letters of the supplier's name (TES), and the first two letters of his surname (CO), forming the word "TESCO".

The first Tesco store was opened in 1929 in , , Middlesex. Tesco floated on the London Stock Exchange in 1947 as Tesco Stores (Holdings) Limited. The first self service store opened in in 1951 (still operational in 2008 as a Metro), and the first supermarket in in 1956.

During the 1950s and the 1960s Tesco grew organically, but also through acquisitions until it owned more than 800 stores. The company purchased 70 stores (1957), 200 outlets (1959), 212 stores (1960), 97 Charles Phillips stores (1964) and the chain (1968) (sold to in 1986).

1980’s

In May 1987 Tesco completed its hostile takeover of the chain of 40 supermarkets in the North of England for £220 million.

1990’s

In 1994, the company took over the supermarket chain , successfully fighting off for control of the -based firm which operated 57 stores. This paved the way for Tesco to expand its presence in Scotland, which was weaker than in England. In 2006 was branded as "Tescotown", because well over 50p in every £1 spent on food is believed to be spent in its three Tesco stores.

Tesco introduced a , branded '', in 1995 and later an shopping service. As of November 2006 Tesco was the only food retailer to make online shopping profitable. In 1996, the typeface of the logo was changed to the current version with stripe reflections underneath. assumed the role of chief executive on 21 February 1997, the announcement having been made on 21 November 1995. On 21 March 1997 Tesco announced the purchase of the retail arm of which consisted of the , and chains in the and , as well as associated businesses for GB£640 million. The deal was approved by the European Commission on 6 May 1997. This acquisition gave it both a major presence in the Republic of Ireland, and a larger presence in Northern Ireland than Sainsbury's which had begun its move into the province in 1995.

In 1997, Tesco Stores Limited and (part of ) forged a business alliance that included several petrol filling stations on lease from Esso, where Tesco would operate the store under the Express format. In turn, Esso would operate the forecourts and sell their fuel via the Tesco store. Ten years later, over 600 Tesco/Esso stores can now be found across the United Kingdom.

2000’s

In July 2001 it became involved in internet grocery retailing in the USA when it obtained a 35% stake in GroceryWorks. In 2002 Tesco purchased 13 HIT hypermarkets in Poland. It also made a major move into the UK convenience store market with its purchase of T & S Stores, owner of 870 convenience stores in the , Dillons and Day & Nite chains in the UK.

3.3 Tesco’s Corporate Strategy

In order to protect its brand image, and given its expansion plans in Thailand, Tesco has recently been employing a policy of launching defamation proceedings. In November ...

This is a preview of the whole essay

2000’s

3.3 Tesco’s Corporate Strategy

In order to protect its brand image, and given its expansion plans in Thailand, Tesco has recently been employing a policy of launching defamation proceedings. In November 2007, Tesco sued a Thai academic and a former minister for civil and defamation. Tesco is claiming that the two pay £1.6m and £16.4m plus two years' imprisonment respectively. They have been alleged to have misstated that Tesco's Thai market amounts to 37% of its global revenues, amongst criticism of Tesco's propensity to put small retailers out of business. One plank of this strategy has been Tesco's use of its own-brand products, including the upmarket "Finest", mid-range Tesco brand and low-price "Value" encompassing several product categories such as food, beverage, home, clothing, Tesco Mobile and financial services.

3.4 Tesco Global Business Strategy

One of the largest retailers in the world, Tesco's initial experiences with globalization was not successful. However, subsequently Tesco started localizing its stores and products according to the international markets. It entered South Korea in the year 1999 by forming a joint venture with a well established local retailer – Samsung. The joint venture helped Tesco acquire in-depth knowledge of the market and also helped it acquire the best store locations. Tesco began operating in the country under the well established 'Home Plus' banner. Tesco localized its stores according to the preferences of the Korean consumers and brought in some of its global best practices into the country.

Tesco entered Ireland in 1979, when it acquired a 51% equity stake in 3 Guys stores owned by Albert Gubay. In 1986, Tesco divested itself of the store when it found itself unable to sustain its operations in the country as customers were rejecting the British products that it sold in its stores. During the late 1980s and the early 1990s, Tesco examined the options available in the US and European countries, after the government's regulations regarding the out of town stores.
In December 1992, Tesco entered France by acquiring an 85% equity holding in Catteau supermarkets, which operated under the Cedico brand with 72 superstores, 7 hypermarkets, and 24 small stores. However, Tesco failed to sustain itself in the market due to competition from French retailers like Carrefour and Promodès. In 1995, a law was passed in France which prohibited the opening of new large retail stores.

3.5 TESCO Around the World

Tesco had learnt some lessons on globalization from its bitter experiences in France and also from other companies like Marks & Spencer , the UK-based clothing retailer. Its experiences in France gave it an insight about the functioning of different markets.

Tesco realized that business strategies that were successful in the UK would work in the other markets only if they were given a local flavor. The company also learnt that it was important to hire local staff and use personnel from the UK to spread knowledge about the company.

In the case of Marks & Spencer, the company tried to offer typically British products to customers in other countries. It opened its first store in France in 1975 and the next store in 1977. In France, sophisticated and fashionable customers did not like the garments styled in a typically British manner. In other European countries, shoppers found that they could obtain better quality products at lower prices locally. Marks and Spencer also ventured into Canada in the early 1970s, but it was considered to be a store for senior citizens.

4.0 TESCO IN U.S.A

Tesco, a major UK-based retailer, entered the US market in November 2007, opening a small-format store named Fresh & Easy. The case describes Fresh & Easy's entry strategy, touching on market research, store format, layout, location, etc.

It then discusses some of the criticisms that the store attracted in the US. The case also discusses Tesco's decision in April 2007 to halt the opening of new Fresh & Easy stores for three months, after 61 stores had been opened. The case ends with a brief discussion on the unfavorable macro environment in the US, with inflation and recession rearing their heads.

Tesco is moving into the United States via a home shopping deal with the US supermarket group Safeway. Tesco is moving into the United States via a home shopping deal with the US supermarket group Safeway.
Tesco is paying $22m (£16m) for a 35 per cent stake in Safeway's internet-based home shopping service called GroceryWorks. Tesco will run the service out of Safeway's 1,700 stores, though it will carry the Safeway name.
Safeway, which is completely separate from the UK business of the same name, had been operating its online grocery business out of a single dedicated warehouse in Dallas, Texas. But the venture has been a failure and will be closed down.
The new service, run using Tesco's systems, will start by this autumn in the San Francisco Bay area. Ironically, this is the home base of WebVan, the online start-up that was supposed to revolutionise the US grocery market before the dot.com crash. "It is ironic that it will be starting in the same areas where WebVan burnt around $430m," commented Terry Leahy, Tesco's chief executive.
Tesco hopes to reach 150 million customers in the US, compared with the 50m it can access in the UK. Internet penetration is 60 per cent in the US, compared with 30 per cent here.
Commenting on the deal, Tesco's chief executive Terry Leahy said: "Last year we outlined our desire to take Tesco.com into different markets, including the US. Safeway represents the best of American supermarkets, and this is a solid base for the development of our online business. Safeway has good buying power, a strong brand and well-run stores."
Mr Leahy said the service will break even at the operating level by the end of next year.
The US deal represents a coup for Tesco, whose approach of picking e-commerce orders from its stores rather than purpose-built warehouse was criticised when it was launched in 1996.
Since then Tesco.com has attracted almost a million customers, who place 70,000 orders a week. It now has annualised sales of £300m.
Rivals such as Sainsbury's have dropped plans to build dedicated warehouses to fulfil e-commerce orders and are moving instead towards a store-based model.
Tesco has not ruled out further deals in the US, although Mr Leahy said there would be conducted via GroceryWorks. "With this deal in place it will appeal to other retailers," he said.
The company has also not ruled out opening stores in the US, although its main focus is on emerging markets in central Europe and the Far East. Tesco's shares closed 1p lower at 263p.

4.1 Why Tesco Enters US?

Tesco the largest retailer in the UK entering the US market with investment as much as $435 million a year to build convenience stores in a number of undisclosed West Coast locations. It has to operate nearly 2,500 hypermarkets, superstores, supermarkets and c-stores in 13 countries and has more than 370,000 employees. The company reported sales of nearly $60 billion worldwide

Tesco reached this position through consistent focus on four part strategy for growth:
A strong, growing core UK business offering customers excellent value, choice and convenience
Aim to be as strong in non-food as they are in food
They follow the customer into new areas - like retailing services such as financial products (Tesco Personal Finance), internet shopping (Tesco.com) and telecoms (Tesco telecom offers mobile, fixed line and broadband services).
A leading international retailer with a long term strategy for growth.

5.0 Fresh & Easy

Fresh & Easy had announced in October 2007 that the first California and Arizona stores would open . However on , , Fresh & Easy opened its first store, in , as a "soft opening". (Soft openings are traditionally done in the retail business to test systems and store staff, and prepare for a larger "grand opening.") The Hemet store, near the company's distribution center, along with five others in Los Angeles and Orange Counties, then had their "grand opening" on , .

Fresh & Easy Neighborhood Market currently employs 20 to 30 associates per store.
In California, part time employees are paid a starting hourly wage of $10 hour. Those who work at least 20 hours per week get a health insurance plan which they also contribute to. Assistant managers, called Team Leaders, currently are paid $13 hour. In Arizona and Nevada, each of these positions pay $1 per hour less.
Two of the current 76 Fresh & Easy Neighborhood Market stores are located in urban underserved areas, also called "food deserts," where there are few if any supermarkets. One is the Eagle Rock or Glassell Park store and the other store is in Compton, California.
Tesco will open three Fresh & Easy Neighborhood Market stores in underserved neighborhoods in Northern California early next year: one in San Francisco's Bayview-Hunters Point neighborhood, one in a neighborhood in Oakland currently underserved by supermarkets, Oakland,and one in the Oak Park Neighborhood of Sacramento. The Oak Park location is being developed by former star , elected in November 2008 as Mayor of Sacramento.
From April, 2008 until the end of June, Fresh & Easy Neighborhood Market took a pause from opening any new stores. That hiatus was lifted with the , opening of a store in Manhattan Beach, California. Tesco now has 100 total Fresh & Easy stores as of , . The newest store in the chain will open in mid-January 2009 in .

In spite of all its pre-launch planning, Tesco's Fresh & Easy received mixed reactions from critics and shoppers. While there were some who appreciated the layout and convenience of the stores, many people were not happy with the choice of brands that Fresh & Easy offered. According to some analysts, a major problem with the stores was that they stocked too many private label products - reportedly, around 45 percent of all the items in the stores were private label.

5.1 US ECONOMY

The United States has a population of 296 million making it the third largest country in the world, after China and India. It is by far the largest economy in the world, with GDP of $12,458 billion (£7,119 billion), representing 29.5% of global GDP. Its economy has also seen strong growth, with GDP growing c.5% per annum between 2001-2005. This growth is expected to continue at c.6% per annum between 2005-2010. There are significant areas of population concentration in the USA, with over 54% of the population living in the ten most populous states and 32 cities with populations greater than 1.5 million. The United States grocery market is currently worth over $600 billion (£343billion) and is forecast to grow 40% over the next five years. Compared to the UK, there is a higher proliferation of retail formats, including traditional formats such as supermarkets and newer formats such as super centers, warehouse clubs and dollar stores.

5.2 US CULTURE

The development of the culture of the United States of America — , , , , , , and the — has been marked by a tension between two strong sources of inspiration: European sophistication and domestic originality.

American music is heard all over the world, such as through , and by singers such as , , , , , , and the ; American movies and television shows can be seen almost anywhere, including icons like , and ; American sports figures are widely known, such as , , , and ; and American movie actors and actresses are widely recognized such as , , , , and . This is in very stark contrast to the early days of the American republic, when the country was generally seen as an agricultural backwater with little to offer the culturally advanced world centers of Europe and Asia. At the beginning of her third century, nearly every major American city offers classical and popular music; historical, scientific and art research centers and ; dance performances, musicals and plays; outdoor art projects and internationally significant architecture. This development is a result of both contributions by private philanthropists and government funding.

5.3 Political and Legal Factors

Most schools in the United States teach the Declaration of Independence, Constitution, Bill of Rights, and the writings of the Founding Fathers as the definition of the country's governing ideology. Among the core tenets of this ideology are the following:

Democracy: The government is answerable to citizens, who may change it through elections.

Freedom of Religion, separation of Church and State: The government's power in matters of religion is limited to prevent abuse of power.

Equality: The laws should attach no special privilege to any citizen (that is, citizens should be equal before the law).

Freedom of Speech: Individuals and political parties debate how this ideology applies to particular circumstances, and may disagree openly with any of it.

At the time of the United States' founding, the economy was predominantly one of agriculture and small private businesses, and state governments left welfare issues to private or local initiative. As in the UK and other industrialized countries, laissez-faire ideology was largely discredited during the Great Depression. Between the 1930s and 1970s fiscal policy was characterized by the Keynesian consensus, a time during which dominated economic policy virtually unchallenged. Since the late 1970s and early 1980s, however, laissez-faire ideology has once more become a powerful force in American politics. While the American welfare state expanded more than threefold after WWII, it has been at 20% of GDP since the late 1970s. Today, modern American liberalism, and are engaged in a continuous political battle, characterized by what the Economist describes as "greater divisiveness [and] close, but bitterly fought elections."

Prior to the United States pursued a policy of in foreign affairs by not taking sides in conflicts between foreign powers. The country abandoned this policy when it became a , but the country remains skeptical of . The ideology of the incumbent President and the President's advisers largely determines the government's attitude in foreign affairs.

5.4 Corporate Government Relations

The concept of corporate social responsibility has gained a great deal of importance in recent years as companies begin to grapple with a whole set of fundamental questions about governance and the role of corporations in the world. Companies are gradually beginning to understand the extent to which public sector involvement and close governmental relations are increasingly driving responsiveness to expectations

Tesco made no political donations during 2003. During the year the group made contributions of £44,713 (2003 - £31,282) in the form of sponsorship for political events: Labor Party - £14,368; Conservative Party - £5,502; Liberal Democrat Party - £6,340; Plaid Cymru - £1,300; Fianna Fáil - £1,203; Usdaw (the main union for Tesco employees) - £16,000.

In the late 1990s Tesco executives featured on six government task forces, more than for any single company and far more than the other supermarket chains. These included Terry Leahy, who sat on the Board of Trade's Competitiveness Advisory Group (although from the DTI website it is unclear whether this still exists in 2004) and former Tesco Retail director, Michael Wemms, who was a member of the New Deal Task Force. Currently, John Longworth, group trading, law and technical director of Tesco PLC, sits on the Government Advisory Committee on Packaging Waste and Recycling, and is also one of nine commissioners of the Health and Safety Commission. Lucy Neville Rolfe, Tesco's Director of Group Corporate Affairs, also sits on Government committees.

Tesco gave the Labor Party more than £5,000 in sponsorship in 1997 and 1998. It is the biggest backer of the New Deal scheme and has offered 1500 'opportunities' for New Deal applicants. Tesco's former Chief Executive Ian McLaurin sits in the House of Lords, and in 1999 Tony Blair's government launched its first annual report in Kensington Tesco.

Tesco has had a prominent presence at Labor Party conferences. In 2002, it sponsored the National Reception at the Party conference. In 2003, it sponsored the Constituency Delegates' Welcome reception, and co-ran a fringe debate 'Promising the Earth? Food, Farming and Rural Communities': presumably a fascinating 'greenwash' occasion considering the reality of Tesco's total contempt for UK farmers and rural communities. See section on 'Tesco's dealing with suppliers and farmers'.

Many campaigners believe that supermarkets bring undue influence on local government, especially when seeking planning permission for stores. Transforming local government is certainly on Tesco's agenda. Tesco is a corporate partner of the New Local Government Network (NLGN) which is 'an independent think tank seeking to transform public services, revitalize local political leadership and empower local communities'.

Tesco is keen on employing former government officials Tesco's Company Secretary and Director of Group Corporate Affairs, Lucy Neville-Rolfe, is a fascinating example of 'revolving doors' between industry and government. At Tesco, her responsibilities include government, EU and competition issues, investor relations, communications, community affairs and corporate affairs policy for the international business in 10 countries. She reports directly to Terry Leahy.

Public relations

Tesco uses a range of Public Relations firms including:

Weber Shandwick Worldwide;
72 Point (part of the SWNS Group - the UK's biggest independent press agency);
CHA, the workplace communications consultancy;
Good Relations
GGK Public Relations (Poland)
The Maitland Consultancy.
Lawson Lucas Mendelsohn (LLM)

5.5 Balance of Payment

This is a measure of the extent of trade between the United Kingdom (UK) and the rest of the world. This trade is referred to as imports and exports, which in balance of payments accounting is looked at in terms of the change of ownership of resources linked to the payment for the change of ownership.

Imports represent the purchase of items from abroad that result in sterling being sold to acquire the foreign currency used to purchase the item. This is recorded as an outflow of funds.
Exports are the sale of items to other countries leading to sterling being purchased by foreign buyers to complete the transaction. This is recorded as an inflow of funds.

Despite hitting a soft patch in the middle of the year, the UK economy continued to perform strongly in 2004. Equally robust economic growth is forecast in 2005 with exports expected to gather momentum. However, concerns remain about sluggish growth across the euro zone and weak consumer demand in key markets, especially Japan.

The UK imports more goods than it exports, and during 2004 the trade-in-goods deficit widened to a record £14.7bn. The high level of sterling against the US dollar compounded the shortfall. Meanwhile, Britain’s surplus on service exports, such as banking and insurance, has fallen.

Balance of Payments Equilibrium

In a floating exchange rate the supply of currency will always equal the demand for currency, and the balance of payments is 0.
Therefore if there is a deficit on the current account there will be a surplus on the financial account.
If there was an increase in interest rates this would cause hot money flows to enter into the UK, therefore there would be a surplus on the financial account

Source:

6.0 Conclusion:

The company strategy is for long term growth and It has a “Core Purpose” of “creating value for customers, to earn their lifetime loyalty”. Tesco is built on two strong values “which drive the way we do business”:

No one tries harder for customers
Treat people how we like to be treated

The company website states that “Tesco is committed to conducting business in an ethically and socially responsible manner”. Tesco has a commitment to be a good citizen “acting responsibly wherever we operate” and this translates into a Code of Conduct for Suppliers, a Code of Ethics for staff, a commitment to protecting environment, using commercial strength to put principles into practice and a commitment to playing a positive role in community.

7.0 References