4. Theoretical Framework Discussion
The Motivation For Expansion
Tesco certainly has plans to continue to expand internationally as it has previously, making tremendous efforts to create an international market for its products. Their continuous direction for growth is the motive, which could only go so far and achieve so much in the UK and Irish markets. As they are already achieving £700 million from international sales they are demonstrating their ability to operate successfully in international markets. Before opening new facilities in international markets Tesco carries out surveys of customer preferences in the locality it is planning to enter, thus paying close attention to customers’ needs prior to geographical market entry. As customers’ requirements change they change, as stated in their Annual Review. Leahy,T 2008,‘60%+ of Group sales area is international’ Annual Review and Summary Financial Statement 2008 (page 9). Whilst this probably seems and obvious thing to do before setting up stores and depots in foreign countries, the writer believes it is the preparation they carry out that has greatly assisted towards their previous successes.
Another new market sector they have recently entered is Legal Services. As reported by Times Online on the 15 November, 2006 plans for a new Government Bill were introduced in the Queen’s Speech that will allow “non-lawyers to own and operate law firms for the first time”. ‘Era of Tesco Law is upon us’ Times Online 15 November 2006, viewed 15 April,2008, (http://business.timesonline.co.uk/tol/business/law/article1087184.ece) this has meant that many different companies will be allowed to offer legal services, providing they can ensure the correct standards are applied and maintained. From the title of the article referred to above, it seems that Tesco were deeply involved in the campaign to bring about this change in the law relating to the legal profession. A website search located Tesco’s portal offering these services, viz. www.tescolegalstore.com, which seem to be offered as a third party rather than from their own company, i.e. Tesco acting as agents for a law firm. Further searches revealed an article written in the Business Section of the Leicester Mercury by Noel Walsh, vice-president of Leicestershire Law Society, stating that “within the next three years we shall see legal services becoming available to non-law firms in what has become known as ‘Tesco law’” which further suggests that at this stage Tesco are not yet handling this type of work directly. Walsh, N ‘We’re ready for Tesco law’, ‘Leicester Mercury’, 14 April, 2009, P. LMO2, viewed 16 April 2009.
The above paragraph is a further example of Tesco management’s motivation to pursue further channels for new business opportunities.
Tesco’s management must apply the same careful and investigative criteria to potential new store locations as they have done in the past.
One would think that given the size of the German economy, the largest in the EEC, Germany would be a target country for consideration. However, from Wal-Mart’s previous experience this country should be treated with caution. Wal-Mart opened stores commencing in 1998 and over a period established 85of them. Wal-Mart’s approach was to repeat their successful US model, without any modification to suit the European, or at least the German consumer style of product preferences and presentation. As the largest retailer in the world (their claim), Wal-Mart assumed the same model which they had used to achieve their world status (which was mainly due to the extremely large American economy) could be repeated in Germany. Whereas as reported earlier in this paper, Tesco’s strategy is to investigate customer preferences for each target country they select and where necessary, and in order to gain a market share change their model by installing the same or very similar practices to the purchasing cultures of the successful local or national competitors.
Louisa Schaefer reports in DW-WORLD.DE that according to the study carried out by Andreas Knorr and Andreas Arndt of the University of Bremen Wal-Mart upset labour relations with their employees, by for example pressuring their German managers to adopt the same American practices in the workplace. Schaefer, L. ‘World’s Biggest Retailer Wal-Mart Closes Up Shop in Germany’, quoted in a study by Knorr, A & Arndt A. 2006, DW-WORLD.DE, Business Section, 28/07/2006. [viii] According to the aforementioned study, the closure of 85 stores was likely to cost Wal-Mart $1billion. In the same report by Louisa Schaefer Wal-Mart’s Chief Executive, David Wild admitted to some really bad mistakes during an interview for ‘Welt am Sonntag’ newspaper by trying to sell American products, the main reason being because their product buyers were American. Ironically, the main beneficiaries from this calamity were the Metro Group who had been seeking extra sales floor space in Germany and acquired Wal-Mart’s 85 stores for far less than the market value, although the purchase price wasn’t disclosed.
Considering their R.O.C.E. of 12.9% (ref. Item 2. above), this is not particularly high, and until a few months ago, i.e. before the credit squeeze began to bite one could obtain a better return on equity market bonds and other investment products. The R.O.C.E percentage doesn’t seem to be due to the price cutting that Tesco had to engage in during 2008 because it is slightly higher than the fiscal 2007 level of 12.6%.
Net Cash-flow of £3,343 million is good, and so it should be for a retail business that receives the majority of its revenues at point of sale.
New Potential International Market
Now let us consider a possible new overseas country where Tesco could set up additional stores. According to the previously referred to ‘Annual Review and Financial Statement 2008′ although Tesco has stores in south-east Asia it has none in Australia or New Zealand, both English speaking countries with similar western style national cultures to the UK, Ireland and North America. These two countries form part of the pacific basin, as do some of their Asian operations. Although geographically close, the types of food products Asians generally purchase are quite different to the western types Australians and New Zealanders would purchase. So, therefore, there would not seem to be the logistical advantage for moving food stuffs between the two regions as one might first imagine, although there may be advantages in utilising distribution of vehicle fuels, viz. petrol and diesel.
Since Australia has a larger economy than New Zealand we will focus on the potential in Australia.
Some Australian Competitors to Tesco;
Coles Stores has 760 stores and employ 92,000 people. Stores are situated in Queensland, Tasmania, New South Wales, South Western Australia and Western Australia. Coles Stores sell similar grocery products to Tesco, including on-line shopping. Whilst it hasn’t been possible to obtain financial data on their level of revenues, one can assume given the number of stores that they would become a significant competitor.[ix] Coles Stores is owned by the very large Westfarmers Group, which owns many different companies, and appears to be a holding company rather similar to companies such as Hanson and Invensys of the UK.
Woolworths is another competitor to be considered, it commenced trading in the 1920’s in Sidney and now has over 700 stores across Australia. They also offer online shopping, in keeping with many groups these days. In 1985 Woolworths acquired Australian Safeway stores, which they say gave them market leadership in the 1980’s.[x]
Franklin Group is a smaller group than the previous two mentioned above and have 80 stores around the suburbs of New South Wales. This supermarket group was founded in 1941 by Frank Lindstrom, which is where the Franklin’s name originated. Even though they are a small group, they are well established and with plans for further expansion, and according to their website they are seeking to add between 5 to 10 additional stores per year over the next few year, under the current South African ownership of Pick ‘n Pay who re-launched the Franklin Group in 2002. Franklin is also environmentally conscious with their offering of ‘envirobags’, etc. and with the slogan “say no to plastic bags” helping to reinforce this policy.[xi]
The three examples shown above of typical competitors that Tesco would face, should not cause them too much concern, or offer any significant resistance to seriously considering Australia as a potential new international market to enter. They seem to have overcome any globalisation problems they may have encountered in Asia, central Europe and in America with some good results after only commencing American operations during the latter part of 2008.