Tesco's shrewd move in Japan
In acquiring C Two-Network in Japan, UK retailer Tesco has again shown a shrewd ability to find a successful local company to acquire and to enter a major but difficult foreign market.
Elsevier Food International, Vol. 6, Number 3, September 2003
Roy Larke and John Dawson
Japanese retailing is in the doldrums generally with falls in year-on-year sales and deflation at retail and wholesale levels. Within the economic mire, though, are a number of very successful medium-sized firms that through innovative management and marketing have been able to turn the deflation to their advantage. C2 is one of the half dozen or so of these in the food sector around Tokyo.
C Two-Network
C Two-Network (or C2) is a name few will know, even in Japan. It trades through 78 stores, about 26 of which are wholesale cash and carry outlets. Its store fascias include Tsurume, Tsurume Land and Kamechuru, each varying from 100 to 1,000 square metres.
The C2 standard retail format carries packaged groceries alongside fresh food, with the latter in the larger stores provided through in-store specialist tenants. It targets shoppers in the vast suburbs to the north and west of Tokyo. The wholesale side of C2's business includes Niku no Hanamasa, one of the fastest growing cash and carry food wholesalers in Tokyo.
Almost un-Japanese
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Tesco avoids the potential pitfalls of relying on price competition and operating efficiency, something that has dogged the efforts of Carrefour and other retailers in Japan. |
More importantly, C2 has an almost un-Japanese retail business culture. Although mostly individually owned when Tesco moved in, the company has a clear growth and expansion strategy. Profit has been its main strategic target, with overall net profit after tax of ¥ 1.9 billion in 2002, a margin of 3.8 per cent. This figure has grown from only 381 million Yen as recently as 1998, with sales more than doubling in the same period. C2 clearly has a firm grasp of the necessary elements to make its retail business profitable.
Almost uniquely in Japan, C2 gleans 23 per cent of sales from retail own label and directly sourced items. This is one of the highest proportions of any food retailer in Japan. Own brands account for about 30 per cent of gross margin at present, but the company aims to increase this to 50 per cent in the future. Through the own brand policy, C2 aims at an average gross margin of 30 per cent. The potential to grow from this base is considerable and importantly the own label strength provides entry into supplier relationships that Tesco would have found hard to obtain by other entry mechanism.
Also setting it apart from many other Japanese retailers is a willingness to empower local managers. The store-based management teams have considerable influence over local merchandising to make it acceptable to the housewives in the local trade area. This has built up a store of knowledge at local level that will be invaluable to Tesco as it learns about Japanese consumer needs.
It is clear that C2 has a firm understanding of international retail needs, and the company was well positioned as a potential international acquisition - another rarity given the reluctance of many Japanese firms to relinquish control to an overseas concern.
Building their own niche
One of the key developments in retailing in Japan at present is the growth of a small number of regional supermarket chains like C2. While larger, more visible retailers struggle with debts and unfocused, multi-category formats, a handful of mid-sized supermarket chains have built their own niche in limited geographical areas. The majority of these are based on high-quality, fresh produce, but in the more competitive Tokyo market, C2 has distinguished itself by offering even greater focus on packaged items.
A strong foothold
Some may be surprised that Tesco did not go for a larger format partner, but the choice of the small, food focused retailer makes sense in Japan's mature market. Whereas retailing in Japan is highly competitive among the larger formats, food retailing remains highly fragmented and will be one sector to see major growth and consolidation over the next few years. The option to expand as a food specialist in relatively small store formats contrasts vividly with Carrefour, Wal-Mart, and Costco, the three existing international food retailers in Japan. All three went for large format, multi-category stores, with Costco and Carrefour operating directly and Wal-Mart acquiring Seiyu, a large, but struggling general merchandise chain. None of these have made much headway in Japan as yet, but Tesco's move should allow for much faster progress. Acquiring a small successful company and building on a strong foundation makes good strategic sense in complex foreign markets.
By acquiring C2, Tesco has gained a strong foothold in the second largest consumer market in the world. More importantly, it has done so in food, a sector in which is traditionally excels. Through the C2 acquisition, Tesco avoids the potential pitfall of relying on price competition and operating efficiency as its key competitive advantage in Japan, something that has dogged the efforts of Carrefour and others. Tesco now has strategic options as it decides whether to build its new Japan base through growth of existing operations at C2, acquisition of other similar mid-sized operations, or expansion into its more common international hypermarket formats. Neither Carrefour nor Wal-Mart have these strategic options, being boxed into relatively inflexible strategies in their current Japanese adventures. Whereas too many overseas retailers see the high consumer prices in Japan as an opportunity to compete on price, Tesco has recognised Japanese demand for quality and niche specialisation. It is a small start, but one that could well provide a springboard to rapid and major growth.
Roy Larke is professor of retailing at the University of Marketing and Distribution Sciences (UMDS), Kobe, and visiting professor at the University of Edinburgh. He can be contacted at editor@japanconsuming.com
John Dawson is professor of marketing at the University of Edinburgh and visiting professor at Escuela Superior de Administraci6n y Direcci6n de Empresas (ESADE), Barcelona and UMDS, Kobe.
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