With clever service enhancements and its mix of practical goods and value-priced specialty items, it’s little wonder that Tesco has become the darling of U.K. retail. “The company has the unique ability to be all things to all people,” says Andrew Kasoulis, an analyst with Credit Suisse First Boston. “It’s possible to go into a Tesco and budget shop or prepare for an upscale dinner party.”
Economies of Localization
As Tesco exhausts growth possibilities at home, it is redoubling its foreign expansion. The group plans to open 140 stores overseas within the next few years, one of the biggest commitments to globalization in the industry. Yet Tesco knows all too well that acquiring or opening new stores abroad is risky. In fact, the company’s first foray onto foreign soil was an unqualified disaster.
In 1993, the company purchased the French chain Catteau. But the acquisition failed because the combined company didn’t have the critical mass to beat the highly competitive French giants, like Promodès and Carrefour, on their own turf. Unable to make the acquisition work, Tesco sold the Catteau operation to Promodès four years later. (Promodès itself was later purchased by Carrefour.)
When Tesco was asked by the government of Hungary, in 1994, to purchase a piece of Global, a troubled Hungarian grocery retailer, Tesco executives agreed to send U.K. staff to scout the situation. In Hungary, managers saw a very different retail picture than existed in France. And, in the region generally, they saw the kind of growth prospects Tesco was seeking. Central Europe had a newly affluent population that was clearly open to fresh shopping experiences. And unlike France, the region had few large domestic retailers, leaving the field wide open to foreign competitors. “If you get in early enough, you have the luxury of building your business in a market with little competition and where consumers are open to new ideas and new ways of doing things,” Professor Yip says.
In 1994, Tesco purchased a 51 percent stake in Global. The next year, the retailer moved into Hungary in full force, then followed quickly with Tesco stores in Poland, the Czech Republic, and Slovakia. Three years later, it expanded into emerging markets in Asia.
Tesco was not the first retailer to see opportunity in economically advancing countries. In the 1990s, Carrefour had begun to establish itself in Central Europe, too. Indeed, the French retailer had more experience in globalization than Tesco did, and many of its foreign operations were turning a profit. However, Carrefour’s strategy was to spread out. With a presence in 25 nations, the company has no more than a 3 percent market share in any one country outside France, according to Mr. Breese. In essence, its strategy is to gain a strong foothold before the competition gets too strong, so it can more easily build its business later on.
Tesco, on the other hand, is opting for depth — dominating in contiguous countries — rather than the global breadth Carrefour has sought. By forming clusters of shared costs, Tesco hopes to build regional economies of scale. Geographic proximity maximizes efficiency by enabling stores to share resources, even if they don’t operate in the same country. Tesco stores in Slovakia and the Czech Republic, for instance, import up to one-third of their products from each other. The company has also calculated that it needs 15 stores in any single country to be profitable. “That spreads around head-office cost and other expenses,” Mr. Reid says.
For the time being, Tesco has limited its regional expansion to Central Europe and Asia, where it now has more than 139 stores. International sales were up 46 percent to £1.7 billion ($2.5 billion) in the first half of 2001, according to Tesco’s interim statement of results.