Tesco’s four-point master plan

It is difficult to pick or punch holes in British retailer Tesco’s strategy, whether at its home market or internationally, as many a retail analyst will tell you following the company’s record-breaking set of financial results for 2003-2004, with group sales rising by 18.7 per cent to £33.6 billion.
Elsevier Food International, Vol. 7, Number 3, September 2004
Steve Foster

Paul Mumford, senior fund manager at fund management company Cavendish Asset`Management, says there is one large hole in Tesco’s strategy. “They are too successful, but seriously it is difficult to find a flaw in their strategy.”
Tesco’s key strength has been to stick rigidly to its four-part growth strategy, which the company first embarked upon in 1997: to focus on its core UK market; to expand non-food; to expand into retailing services; to grow internationally.

Core UK business
The first part of the strategy, to retain a focus on its core UK business, which still accounts for around threequarters of its sales turnover, has been an undoubted success. Tesco remains the leading supermarket chain in the UK, with over a 17 per cent market share (Taylor Nelson Sofres), and accounts for £1 in every £8 spent in shops in the UK, despite strong competition from Asda-Wal-Mart.
Sir Terry Leahy, Tesco’s chief executive, says; “This year, our out-performance of the UK retail market has been the highest since records began. We have further improved our price position with nearly £200 million investment this year, maintaining our position as the UK’s best value retailer. We have seen a step change in non-foods growing market share from five per cent to six per cent.”
Rhys Williams, a senior analyst at investment brokerage Seymour Pierce, says Tesco’s UK performance goes from “strength to strength.”
One of the main thrusts for Tesco in the past year has been to expand its convenience store business following the acquisition of the 870- store T&S chain in January 2003 and the subsequent acquisition of 45 convenience stores from Adminstore in early 2004. The majority of the Adminstore outlets, based around Greater London, will be converted to the Tesco Express convenience format while around 450 T&S stores are to be converted to Tesco Express over the next three to four years.
Grocery remains a core element across Tesco’s UK retail business although margins remain static and Tesco has had to invest in price reductions to compete with Asda-Wal-Mart’s deeply-funded and aggressive every day low pricing strategy. Tesco will also face strong price competition from its traditional adversary Sainsbury’s and the newly-formed Morrisons- Safeway chain, following Morrisons’ acquisition of Safeway in 2004. The second part of the strategy has been to grow as  strong in non-food at Tesco as it is in food. In the UK, Tesco is now the number one retailer in the baby goods market and has achieved a 60 per cent sales growth in the last year in DVDs. Tesco has also invested in its clothing range including new distribution facilities and dedicated staff in store.

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Tesco Enters China
In mid-July 2004, Tesco announced its first entry into China through 50:50 joint venture agreement with the Ting Hsin group, for its wholly owned subsidiary of Ting Cao, which operates the Hymall hypermarket chain in China. Tesco has paid €210 million for the stake and the deal is due for completion by November 2004.
Hymall operates 25 hypermarket stores located primarily in high quality shopping malls in the affluent coastal cities of China including Shanghai. There are plans for Hymall to open another ten stores in the coming year. The average store size is 8,300 square metres.
Tesco said both parties are committed to developing the business together. Ting Hsin, one of China’s leading consumer food and beverage producers, will bring their extensive local knowledge and operating expertise, while Tesco will add its supply chain, product development and store operations expertise.
Tesco chief executive, Sir Terry Leahy, said: “China is one of the largest economies in the world with tremendous forecast growth and a market we have researched extensively over the last three years. Ting Hsin is a business with an excellent team...Ting Hsin is the right partner and Hymall is the right store chain for our strategic move into this exciting market. It is also a tremendous opportunity to acquire a 50 per cent stake in an established and profitable local business with strong local management. Hymall is already a leading retailer in Shanghai, China’s largest retail market and the chain of 25 hypermarkets provides an excellent base of stores from which we can grow together.”

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Retailing services
The third part of the strategy has been to respond to consumer trends by expanding into new areas such as financial services, online shopping and telecoms. Tesco’s retailing services include Tesco Finance, which has over four million customers in the UK and series of services including loans, credit cards and insurance.
Another retailing service, Tesco Telecoms, launched own-brand Tesco mobile phones last year in  addition to a range of telecom services.
Tesco.com is the world’s leading online grocery company, and its online shopping service is available in the Republic of Ireland and South Korea in addition to the UK. It has also exported its expertise to the Safeway chain in the United States.

Locale scale strategy
The final piece in the Tesco strategy jigsaw is to progress as an international retailer with a long term strategy for growth.
As for future growth M & M Planet Retail predicts that the main source of future growth for Tesco’s international business will be generated in Asia, especially as consolidation and market maturity is increasingly prevalent in Tesco’s markets in Europe.
It is worth noting that Tesco was not always a successful international retailer. Its first foray into international retailing was the ill-fated acquisition of the 100-plus Catteau chain in Northern France in 1993. Catteau was subsequently sold to Promodes in 1998, although Tesco does retain its Tesco Vin Plus store in Calais. The lesson learned from its foray into France has been to grow steadily and surely.
Tesco’s 2004 results revealed that sales turnover in Europe (excluding the UK) was £3,834 million, an increase of 27.5 per cent on the previous year. Sales turnover in Asia was £2,847 million, up 31 per cent on the previous year.
Tesco’s international ambitions are now such that Sir Terry Leahy views Tesco as being one of the top three international retailers in the world. Tesco’s international retail business accounts for more than 45 per cent of Tesco’s total floor space and where non-food accounts for a substantial share of sales.
Underpinning that strategy has been Tesco’s ability to write in a measure of flexibility into the master plan to take account of local markets. This can clearly be seen in its acquisitions of C-Two Network’s convenience store chain in Japan in 2003 and the joint venture agreement for the Hymall hypermarket chain in China in July 2004. In these two markets Tesco did not acquire the number one or two retailer has as been its traditional international strategy, but instead chose to buy into smaller-sized retail companies.
David McCarthy, managing director of food retail research at Citigroup Smith Barney, pointed out at the latest in the series of IGD global retailing conferences in London that a key element in Tesco’s international growth is to employ a local scale rather than a global scale strategy. Adopting and adapting to a local scale, which includes local sourcing and utilising local management, means that Tesco’s model requires the least adjustment according to McCarthy.
Mumford at Cavendish Asset Management points out that Tesco has built up its international business in a “sensible and responsible way”. Tesco did not, for example, dive into the United States market where, according to Mumford, international retailers are likely to “pay above the odds” and “you can’t get the margins”. Mumford says; “Instead Tesco started its international business in a small way and has built it up.”
Williams at Seymour Pierce, believes the international performance and strategy of Tesco is “pretty solid”. Williams says Tesco’s strategy is to either enter markets by acquiring the number one or two retailer or as in Japan and China to enter through smaller-sized retailers to learn about consumer trends and markets. Williams sees Tesco’s entry into both China and Japan through smaller retailers as a wise decision due to the size and diversity of these markets.
Mumford at Cavendish Asset Management agrees that Tesco’s entry strategy for China is the correct one. “It is important to gain a foothold in a market like China, which is far from mature, and then learn about the market and then expand. Going in there as a ‘greenfield’ operation would not have made sense”.
Equally buying the number one or two retailer would not have been a sensible move according to Mumford. “It would be a pretty massive mistake if it didn’t work out.”
As for Tesco’s future prospects in China Mumford says: “Looking ten years’ ahead it could be regarded as a bit of a coup, and a good platform for growth.”
Williams at Seymour Pierce says that it is difficult to pick holes in Tesco’s international strategy. He points at initial weaker than anticipated performance at the Hit chain in Poland, but adds that improvements are being made as integration gathers pace and that Tesco “is making quite a significant operation in that country.”
Williams also sees Tesco as a true international  retailer because of its geographical spread, but more importantly through the number of countries it operates in across Europe and Asia. With its resilient performance and four-pronged approach, Tesco’s critics find it difficult to spot flaws in the company’s strategy. But the single greatest threat to Tesco’s continued success both at home and internationally could be Tesco itself either through arrogance or over ambition. On current measures, however, this remains a highly unlikely prospect.