Tesco International Learning Experience Essay Example

Tesco International Learning Experience Essay The Emerald Research Register for this journal is available at www. emeraldinsight. com/researchregister The current issue and full text archive of this journal is available at www. emeraldinsight. com/0959-0552. htm Retail multinational learning: a case study of Tesco Mark Palmer Aston Business School, Aston University, Birmingham, UK Abstract Purpose – This article examines the internationalisation of Tesco and extracts the salient lessons learned from this process. Design/methodology/approach – This research draws on a dataset of 62 in-depth interviews with key executives, sell- and buy-side analysts and corporate advisers at the leading investment banks in the City of London to detail the experiences of Tesco’s European expansion. Findings – The case study of Tesco illuminates a number of different dimensions of the company’s international experience. It offers some new insights into learning in international distribution environments such as the idea that learning is facilitated by uncertainty or â€Å"shocks† in the international retail marketplace; the size of the domestic market may inhibit change and so disable international learning; and learning is not necessarily facilitated by step-by-step incremental approaches to expansion. Research limitations/implications – The paper explores learning from a rather broad perspective, although it is hoped that these parameters can be used to raise a new set of more detailed priorities for future research on international retail learning. We will write a custom essay sample on Tesco International Learning Experience specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Tesco International Learning Experience specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Tesco International Learning Experience specifically for you FOR ONLY $16.38 $13.9/page Hire Writer It is also recognised that the data gathered for this case study focus on Tesco’s European operations. Practical implications – This paper raises a number of interesting issues such as whether the extremities of the business may be a more appropriate place for management to experiment and test new retail innovations, and the extent to which retailers take self-re? ection seriously. Originality/value – The paper applies a new theoretical learning perspective to capture the variety of experiences during the internationalisation process, thus addressing a major gap in our understanding of the whole internationalisation process. Keywords Learning, International business, Retailers, Multinational companies Paper type Case study Retail multinational learning 23 Introduction International retailers frequently emphasise the cognitive aspects of the retail internationalisation process. Examples of this abound but include Tesco’s utilisation of embedded research teams within Japanese families to monitor consumption behaviour prior to their acquisition of the Japanese C Two chain in 2003. Within the international retail literature, however, there has been limited detailed empirical or conceptual research on international retail learning (Clarke and Rimmer, 1997). Thus, although learning has played an important role in shaping the way retail companies behave in practice, comparatively few studies actually address international retail learning. An absence of detailed empirical or conceptual research on international retail learning is The author would like to thank Dr Barry Quinn at the University of Ulster for his thorough critiques of his ideas on an early draft of this work. This paper has developed out of doctoral work supported by Sainsbury’s. The author is also grateful for the assistance of British Stores Shops Association and, in particular, The George Spencer Trust under individual Research Awards. International Journal of Retail Distribution Management Vol. 33 No. 1, 2005 pp. 23-48 q Emerald Group Publishing Limited 0959-0552 DOI 10. 1108/09590550510577110 IJRDM 33,1 24 therefore a major gap in our understanding of the whole internationalisation process. It is contended that important insights and valuable lessons have been learned by retailers from their own successful international forays as well as the visible success of other companies in the international marketplace. Not all international retail operations have been successful however, and the dif? cult and highly contested process of scaling back of retailing operations to remedy mistakes may also result in an equally valuable learning process for international retailers (see Palmer 2000, 2002a, b). A number of researchers have called for research to re-examine the ways in which retailer internationalisation has been conceptualised (Dawson, 2001; Howard and Dragun, 2002). The recent critiques of Wrigley (2000), Burt and Sparks (2001) and Burt et al. (2002) suggest that the existing conceptualisations neither adequately capture the multiplicity and dif? ulties in retail internationalisation process, nor suf? ciently explain the variety of approaches to internationalisation being used by retailers. Various explanations of the retail internationalisation process are emerging, but one viable and promising line of inquiry is the area of international retail learning. Notable in this respect is Clarke and Rimmer’s (1997) analysis of Daimaru’s (a Japanese department store) investment in a new outlet in Melbourne, Australia, which provided an initial step towards understanding the cognitive aspects of the international retail investment process. Indeed, this research has drawn a number of important lessons learned from retail market entry and development. Despite the value of this initial research, and although the international retail learning process itself and the outcomes are occasionally referred to in the literature (see Treadgold, 1991; Alexander and Myers, 2000; Evans et al. , 2000; Vida, 2000; Dawson, 2001; Arnold, 2002), its conceptualisation and analysis remains largely under-theorised and under-developed. What is required, according to Clarke and Rimmer (1997), is a research approach that explores â€Å"the way in which a retail ? m re? ects on individual decisions it has made, and how this might in? uence their perceptions and actions†. From this perspective, it is critical to understand international retail experiences through re? ection and analysis, and to identify what has been learned from the internationalisation process. Furthermore, while some researchers in the ? eld have indicated that experienc e is important for many aspects of market entry and development (Treadgold, 1991; Williams, 1991a, b; Evans et al. 2000; Doherty, 2000) it is clear that these studies do not provide detailed empirical or conceptual understanding of this complex learning phenomenon. For example, this work does not directly deal with the questions: What are the components of this experience? What lessons can be drawn from this experience? How does this experience shape or inform the decision-making process of the international retailer? It would therefore appear that the international retail literature is less developed in considering what retailers have learned from their experience of internationalising store operations. This paper aims to probe these issues by providing a more extended debate and considered analysis of the concept of international retail learning within the context of Tesco’s internationalisation process. It should be noted that it is outside the scope of this paper to present a review of the international retail literature (see the excellent reviews by Alexander (1997); Alexander and Myers (2000); and Burt et al. (2003)). This would increase the length of the paper substantially while the theoretical background on international retail learning has previously been laid out in detail elsewhere (see Palmer and Quinn, 2004). In this paper, the discussion will mainly pertain to the empirical case study ? ndings of Tesco. The paper begins by brie? y positioning the case ? ndings by way of a conceptual framework put forward by Palmer and Quinn (2004) on international retail learning. More detailed discussion of this framework can be found in Palmer and Quinn (2004). Following this, an overview of the methodology is put forward. The main part of the paper presents the case ? ndings of Tesco and the paper will conclude with a discussion of the key ? dings. International retail learning framework Palmer and Quinn’s (2004) recent work provides a useful conceptual framework for examining the studies to date on international retail learning. Drawing on the broader management literature on organisational learning and international retailing, Palmer and Quinn (2004) synthesised the various components of international retail learning (see Figure 1). The broad components of Figure 1 frame a series of research questions for studying international retail learning and these include: . What do retail internationalists identify as the most important lessons learned from their experience of internationalising retail operations? . To what degree has this knowledge been absorbed by the internationalising retail company? . What is the locus of international retail learning diffusion or transfer? . What are the outcomes from the lessons learned and how do these shape the future decision-making and learning behaviour of the retailer? For the purposes of this paper, the aim is to explore the dimensions of international retail experience and how hese shape or inform the strategic decision-making process of the retailer. Thus it does not provide an in-depth analysis of the other components of this framework in relation to the international activities of Tesco. The experiences of Tesco are essentially conceptualised under three main broad dimensions. These Retail multinational learning 25 Figure 1. A framework of international retail learning IJRDM 33,1 26 dimensions make a d istinction between the internal corporate and the wider external view of international retail experience. The ? rst critical area refers to the internal strategic processes. The second theme concerns the external strategic processes. This includes the interactive aspects of the retailers’ international environment. The third dimension considers the internal operational functions. These dimensions are especially important when conceptualising experience and interpreting Tesco’s international learning in this paper. The paper now turns its attention to the methodology of the study and this section will brie? y outline the details of the primary research undertaken. Methodology This study employed an interpretative, qualitative methodology to examine the international retail learning. The single case approach has been an increasingly popular methodology within the retail internationalisation literature of late, and it has enabled various authors to provide some very important new insights into the subject area (Sparks, 1995; Shackleton, 1996a, b; Clarke and Rimmer, 1997; Wrigley, 2000). Furthermore, ? eld research that involves investigating the views and opinions of organisations directly and indirectly involved in the decision-making process is receiving increasing support within the literature (Shackleton, 1996a, b; Sparks, 1996; Palmer, 2002a, b; Palmer and Quinn, 2003). These authors have highlighted the limitations of relying solely on the views of the case company under investigation and have highlighted the insights into the retailer internationalisation process that can derive from surveying a diverse variety of organisations and stakeholders involved in the process. Stakeholder parties in the retail internationalisation process should therefore not be underestimated. Indeed it may be argued that a strong interdependence exists between investment banks and ? rms with respect to advising retail executives on strategy, structure, and international retail operations. Eliciting the views of investment bankers would therefore allow the research to gain access to the tacit knowledge and practical know-how gathered through years of experience through the direct interaction with the company via research, consulting and advisory services utilised by retail executives. Multiple and independent sources of evidence, including market research reports, company pro? les, ? nancial statements and so on were also used to corroborate the interview data and, by so doing, develop convergent lines of inquiry (Yin, 1994). The case of Tesco was chosen for three reasons. First, the transformation underway in Britain’s largest retailer has been profound, while its growth has been one of most consistent amongst its international peers (1995-2002), with estimated sales rising to e45. 9 billion in 2003. Indicative of the scale of its international ambitions, Tesco unveiled one of the most radical and ambitious internationalisation programmes that that would involve the development of 200 hypermarkets in Europe and Asia, generating GB? 10 billion sales per annum by 2004 and which, in proportional terms, would be equivalent to that of UK-based food retailers, ASDA and J. Sainsbury sales combined. This strategy, however, has been overshadowed by Wal-Mart’s $10. 6 billion takeover of ASDA in the UK and has gone largely unnoticed in the academic literature. Second, despite the scale and growth of Tesco’s internationalisation, the focus of many researchers has been on the international activity of US retailer, Wal-Mart (Arnold and Fernie, 2000; Palmer, 2000; Burt and Sparks, 2001; Hallsworth and Clarke, 2001; Fernie and Arnold, 2002), or Sainsbury’s capital investment in the US market (Shackleton, 1996a, b, 1998; Wrigley, 1997a, b, 1998; Muskett, 2000). Only modest attention has been attributed to Tesco in the academic literature (see Palmer, 2002b for a recent example). Tesco’s success abroad therefore remains an under-emphasised case within the contemporary academic literature. Third, internationalisation has been a major aspect of the strategy of Tesco over the years. Signi? cantly though, not all of Tesco’s international operations have been successful and this has resulted in some form of divestment. It is argued that divestment is a highly visible case of where learning is likely to have taken place. A total 62 interviews were undertaken during 1999 and 2000 with the leading food sector buy- and sell-side analysts, and international retail merger and acquisition specialists (i. e. those within the corporate strategy unit in the corporate ? nance division of investment banks) and senior executives of the retailer under investigation. In planning the interviews, particular attention was given to the danger of the interviewees presenting biased views and opinions (see Palmer and Sparks (2004) for a wider discussion of the limitations of this method). This research used â€Å"convergent in-depth interviewing† (Dick, 1990 cited in Carson et al. , 2001). In short, it is an in-depth interviewing method that allows the researcher to develop, clarify, verify and re? ne the core issues of the interview protocol. It consists of a number of interviews in which the procedure is both structured and unstructured. During the early stages the content of the interview is unstructured and ? exible during which the interviewee tells a story about key events or episodes and what they have learned about their experiences from these events. The process used in the interview then becomes more structured as the interviewer converges in speci? c issues of the research problem and to disprove the emerging explanations of the data (Carson et al. , 2001). The length of the interviews typically varied from half-an-hour to three-and-half-hours. Rather than concentrating on one or two aspects of the dimensions of Tesco’s international learning, the interview protocol explored learning initially from a broad perspective. In line with the arguments put forward by other researchers (Hallsworth, 1992; Clarke and Hallsworth, 1994; Clarke and Rimmer, 1997; Burt and Sparks, 2001, Dawson, 2001) a broader perspective may be necessary so that these parameters can be used to raise a new set of more detailed priorities for research on international retail learning. That is to say, each lesson is not necessarily an end in itself, but an entry point for a wider discussion. Data collection and analysis were simultaneous. Analysing data involved categorising and triangulating the evidence from the multiple perspectives, and the presentation of ? dings largely followed the most recent interview protocol. However, it should be noted that the analysis of learning is not easily de? ned in terms of beginning or end points and this research identi? ed extreme situations and critical incidents which were transparently observable for data collection. Moreover, Tesco’s experiences were not assessed by any quantitativ e measurement of the amount of learning occurred, but rather by reference to the content of these experiences and the impacts that such learning had on the outcome or trajectory of international expansion. The paper now reports the ? ndings from the in-depth interviews. The key themes from the ? ndings are discussed in the sections that follow. Excerpts from the in-depth interviews are used throughout the ? ndings section in order to illuminate and contextualise relevant themes. For con? dentiality reasons, the identities of respondents will not be disclosed during the remainder of this paper. This case study will be largely formatted in the same way as the dimensions outlined in the framework. The data Retail multinational learning 27 IJRDM 33,1 28 athered for this case study focus on Tesco’s European operations. While Tesco’s investment activities in Asia are strategically important, it is argued that the most insightful aspects of the company’s international investment and divestment activities occurred in the European market. The ? ndings proceed with an initial overview of the case company’s international developments. The main body of ? ndings follows this, and directly examines the lessons learned by Tesco from the internationalisation of retail operations and their impact on the future trajectory of international operations. Tesco’s international background This section provides an overview of the markets chosen by Tesco. The company initially expanded into the geographically close markets of Ireland and France. Tesco’s initial international foray was in 1979 when they purchased 51 per cent of Albert Gubay’s Three Guys operation for GB? 4 million in the neighbouring market of the Republic of Ireland. This expansion proved to be immature given the structural capacity for expansion and the relative strength of the company within their domestic market at the time of the initial international foray. This untimely venture abroad was summed up by one sell-side analyst: The perceived success (or otherwise) of their early venture abroad would have been considered insigni? cant to the company’s fortunes at home, and as a result, this largely undermined the company’s (perceived) efforts in the eyes of the ? nancial markets as being a peripheral and/or even a distraction to the core UK business. The continued realignment, focus and momentum of the company in the UK market provided the context in which internationalisation had taken â€Å"a secondary position† in the company’s corporate development agenda. Tesco subsequently divested the Three Guys operations to the Dublin-based supermarket company H. Williams in 1986. Towards the end of the 1980s, the company embarked on research efforts into possible international growth options and these primarily centred on the US market, but also covered several European countries. The company spent several years investigating the North American market during the late 1980s and early 1990s. The product of this research effort was the company’s move into the French market. Tesco’s ? st foray into mainland Europe with the acquisition of the medium-sized supermarket chain Catteau in December 1992 was intended to be the company’s springboard to international expansion and serve as a platform for European growth in particular. The company’s rationale at the time for acquiring a small regional chain was that they were going to build Catteau into a national chain in France. Tesco acquired an effective 85 per cent holding, leav ing 15 per cent of the ownership in the hands of management as part of an incentive scheme. According to the analysts’ research at the time, the company was attracted by Catteau’s good record and high pro? tability. Group turnover of the chain in 1991 was GB? 340 million and over 80 per cent of this revenue came from retailing (Catteau also had wholesaling and franchise activities). Management felt that Catteau’s impressive net pro? tability re? ected the economies gained from a tight geographical clustering of stores and the strong centralised cost controls, and as a result, the ? nancial markets were largely supportive: At the time the ? ancial markets pointed out that Tesco had done all the classic right things – the lesson learned from UK retailers’ forays overseas has been that it is vital to buy a successful business rather than a â€Å"turnaround† situation and retain strong local management. By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Catteau, and later in 1997 would completely wit hdraw from France. For much of this early expansion, the company focused on structurally mature markets, but with more recent expansion the company has been more disposed toward emerging markets (see Table I). The third phase of the company’s international expansion was in 1995, when management acquired the Global supermarket chain in Hungary for GB? 15 million. This did not represent a particularly expensive entry, and indeed, this was re? ected in the poor quality of the assets purchased – in total 43 small stores. The intention of the company was not to trade the stores in the long-term, but rather to secure a foothold in the market and learn from these businesses, while later building a larger hypermarket business based on their experiences. Using the Hungarian acquisition as a foothold in eastern Europe, the company subsequently acquired Savia SA in Poland for GB? 8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired for relatively little ? nancial consideration and designed to secure a foothold in the Polish market for Tesco from which to develop a hypermarket business. In 1996 the company entered the Czech Republic and Slovakia through the acquisition of Kmart for GB? 77 million, acquiring a portfolio of 13 stores with an average selling space of 72,000 ft2. Essentially the Kmart business geographically was an in-? ll acquisition between Tesco’s Polish and Hungarian investments. Tesco also re-entered the Irish market with the acquisition of ABF’s Irish food retailing business for GB? 630 million in 1997. Following the ABF acquisition, the company secured their position as the largest food retailer in Ireland with 109 supermarkets and annual sales of GB? 1. 23billion. And in addition Tesco captured 17. 5 per cent of the market in Northern Ireland and 19. per cent in the Republic securing number one position in both markets. The initial move into Asia, and the Thailand market in particular, came in May 1998 with the purchase of a 75 per cent majority controlling stake in Lotus, a chain of 13 hypermarkets which cost GB? 111 million for the equity – assuming GB? 89 million as their share of Lotus’s debt. Lotus’ previous owner, Thai CP Group (a major agricultural supplier in the region) retained a 17 per cen t stake, with SHV Makro holding the remaining 8 per cent. Tesco subsequently entered South Korea. In March 1999, Tesco formed a joint venture with Samsung, one of South Korea’s largest conglomerates, into Year 1979 1992 1994 1994 1998 1999 2000 2001 2002 2003 Country Ireland France Hungary Czech Republic/Slovakia Thailand South Korea Taiwan Malaysia Poland Japan Method of entry Acquisition of The Three Guys chain Acquisition of Catteau Acquisition of 51 per cent of Global Acquisition of K-Mart business Acquisition of 75 per cent share of Lotus Partnership with Samsung (81 per cent) Acquisition of one Makro store Joint venture with Sime Darby Bhd (Tesco share 70 per cent) Acquisition of HIT hypermarket from Dohle Gruppe Acquisition of the C Two (C2) Retail multinational learning 29 Source: Not disclosed Table I. Tesco’s international expansion IJRDM 33,1 30 which the company invested GB? 80 million in cash. Later that year the company increased their share of the joint venture from 51 per cent to 81 per cent at a cost of a further GB? 30 million. Tesco further developed operations in the region when they entered Malaysia in early 2002. In a similar structure to the other Asian operations, the Malaysian operation, Tesco Stores (Malaysia) Sdn Bhd, was established as a joint venture with a local company Sime Darby Behad. Tesco would own 70 per cent of the equity, but the operation would be under local control. Tesco later entered Japan during July 2003. Dimensions of Tesco’s international retail experience This section provides an overview of the various dimensions of Tesco’s international retail experience emerging from the in-depth interviews. Important lessons learned are extracted from the company’s international retail experiences. Internal strategic processes Market section experience. Tesco’s internationalisation raises several questions regarding the nature of their market selection decision experiences. Tesco’s decision-making process highlights the contrasting motivational structures that underpin the various paths towards international markets which eventually led to different spatial behaviours. In qualitative terms, the interviewees highlighted a number of important characteristics of Tesco’s market selection decisions: . Retaining spatial focus is more important than capitalising on small-scale opportunities in diverse markets. Competition from local retailers in their chosen markets is virtually non-existent. . Dynamics for the international retailers are relatively level (which is not the case in Latin America where Carrefour has operated for almost 20 years). . Capitalised on oppo rtunistic events unfolding within the existing portfolio of international retail markets. Tesco’s expansion was spatially characterised as being largely regional in nature and less global oriented. Cautiously, Tesco had decided to dominate the smaller central European markets that are unlikely to attract much attention from the large retail multinational peers such as Carrefour and Wal-Mart who preferred to focus on the larger markets. The company incrementally entered markets rather than entering several markets at the same time, limiting the large start-up losses as one executive explained: What is important to us is not the number of countries we are present in but rather that we attain, and/or sustain number one or two position in each of these countries. The aim is to balance the global scale that comes from Tesco with the local strength of being a market leader. Market position gives you market share, which in turn gives you scale, which in theory, should allow you to have the lowest cost base, best buyers, best offers to customers, therefore the best revenues, earnings and dividend growth. That is why retail multinationals aim for leadership in markets and strong regional presence. It’s a virtual circle. The importance of due diligence processes in foreign markets and/or target’s operations is repeatedly inferred from the company’s executives and the corporate advisors. During the interviews, the company’s management suggested that initial phase of expansion via international acquisitions placed too much emphasis on opportunism: Organic growth is, in your hands, acquisition-driven, consolidation is not. Acquisition-driven consolidation is opportunistic, particularly with businesses that are privately owned. It’s not something that is easily predictable. We are not blind to acquisition opportunities, but the nature of the opportunities and when they present themselves is anybody’s guess. Organic store-by-store development allows for a much more strategic approach to internationalisation. Retail multinational learning 31 In turn, this would result in the management placing greater emphasis on store-by-store development that allowed the company to become more strategic in terms of their selection of markets, procurement, distribution and store locations. Based on this evidence, it was apparent that the nature of the market selection decisions would be shaped by the mode of entry used and whether or not opportunities existed. Entry mode experience. Tesco used a combination of multinational entry mode strategies within one country. As previously discussed, Tesco entered the central and eastern Europe by acquiring a relatively small chain of convenience stores in Hungary, a supermarket business in Poland and a department store chain in the Czech Republic and Slovakia (see Table II). It was certainly unusual for such a large public company to become involved in these operations, and even competitors at the time questioned the logic of their approach. However, the use of â€Å"seed† acquisitions with a view to develop knowledge of the market before expanding organically through store-by-store development allowed Tesco to minimise their own human and ? ancial capital in the face of potential economic and political uncertainty. Some of these small stores would later be closed down and replaced by large hypermarkets nearby. Although Tesco faced criticism and, indeed, pressure from the ? nancial markets, there are sometimes comp elling reasons for retaining a small operating presence in a foreign market where international competitors are already established. First, the small presence would facilitate the implementation of an acquisition strategy by securing the necessary contacts and networks into foreign retailers and local suppliers, especially considering the challenges associated with family owned and controlled chains. Second, retaining a direct and small operating presence in a competitors’ major market would lead to important insights into the competitive behavioural dynamics of competition that otherwise would not be possible without a direct presence. During the interviews, management made this point: The reality is that you are not going to learn everything until you either open a store or purchase a chain in the new market. Price (GB? million) 13. 4 8. 0 77. 0 200. 0 80. 0 386 Sq. footage (million) 0. 1 0. 2 1. 0 1. 6 0. 2 NK Country Hungary Poland Czech Republic and Slovakia Thailand South Korea Poland Source: Not disclosed Acquisition Global Savia K-Mart Lotus Homeplus HIT Date June 1994 November 1995 March 1996 March 1999 April 1999 July 2002 No. of stores 43 36 13 13 2 15 Table II. International acquisitions by Tesco in emerging markets IJRDM 33,1 32 Small experiential or pilot stores were an integral part of initial learning phase of expansion, while later might be seen as surplus to requirements to international expansion, and consequently divested. Indeed, after an initial period of understanding these store practices, management decided that the primary development comprised the hypermarket format. The development of the new hypermarket format was primarily driven through two pilot stores. Despite a relatively cautious approach to market selection, Tesco rather mbitiously developed a completely new format in a distant market – a format, moreover, which had not been tested in the domestic market. This approach allowed the company to experiment and radically depart from their existing domestic supermarket format and extend the non-food merch andise content of their international store operations. Tesco’s entry mode experience did not mirror the experiences adopted by manufacturing companies. In the broader international literature Chang’s (1995) ? ndings showed that when Japanese electronic ? rms ? rst acquired an international business, they did so in one in which they had a strong competitive advantage in order to reduce the risk of failure. In stark contrast Tesco entered new markets by acquiring relatively weak target ? rms or by launching into areas where they were less strong in terms of a distinct competitive advantage. Tesco’s initial forays into Ireland and Czechoslovakia clearly illustrate this point. In Ireland, dif? culty with post integration led to the realisation that these â€Å"turnaround† cases were disproportionately demanding for management resources, and in the Czechoslovakia Tesco moved into non-food merchandise lines by acquiring the Kmart department stores. Divestment experience. What surfaced as a main theme from the ? ndings was the intense learning process during international retail divestments. The ? dings indicated that failure or partial failure during the