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 / First Quarter 2002 / Issue 26(originally published by Booz & Company)


Welcome to Tesco, Your Glocal Superstore

The U.S.’s Wal-Mart, almost invincible in its home market, has not been able to register a profit or gain significant market share in Germany. Since Wal-Mart’s acquisition of Asda in 1999, its U.K. sales have sputtered. Only 15 percent of the company’s revenues come from outside the U.S.

As Tesco’s global expansion progresses, the company may be tempted again to try moving into more mature markets. Although management is well aware of the risks of facing formidable competitors in well-developed retail markets, successful companies also like a challenge. Tesco is seriously considering establishing a presence in Japan, and clearly hopes its joint venture with Safeway supermarkets to provide a Web-based delivery service in the U.S. will give the company a foothold from which to grow in America.

Tesco faces another challenge: Will it be able to manage its growth abroad without neglecting its home market? One of the greatest dangers of global expansion is becoming distracted from domestic affairs. Some of the best multinationals — Coca-Cola and Gillette, for instance — have been foiled on the home front as they expanded abroad. Growth in developing countries often masks problems at home during boom times. However, when a synchronous recession affecting all countries occurs, as now seems to be the case, those weaknesses in the home market are usually exposed.

At a press conference in November announcing interim results for 2001, Tesco CEO Terry Leahy acknowledged that, with the world economy in recession and with Tesco in the middle of a rabid price war in the U.K., total company sales growth will probably be under 5 percent in the second half of 2001.

With greater political and economic tensions around the globe, international expansion in retailing will likely slow, and reverse globalization may actually occur as companies retreat from abroad. As Marks & Spencer pulls out of continental Europe and the U.S., for example, it is clearly banking on marketing initiatives at home to spur a revival of its business. In the current climate, stockholders may favor companies with pure or predominantly domestic operations.

In an uncertain business environment, globalization may seem a risky growth strategy. On the other hand, perfecting marketing that is sensitive to local culture and operations that are efficient on a local and global scale may prove to be the only globalization strategy that works.

Exporting a High-Tech Business Model

In the back room of a Tesco store near Heathrow airport, a woman inspects bags of items for an online order to be delivered later that afternoon. “We need a box of peaches,” she tells a young man next to her. He fetches one from the shop floor. The operation is conspicuously low-key — no fancy conveyer belts, no big warehouses, no cutting-edge computer systems.

Yet Tesco’s dot-com delivery service, launched in 1996, has achieved what so many others have not: It has survived five years and is profitable. In 2001, the online revenues reached $450 million, and although the unit lost $13 million in 2000 because of expansion into new business lines like CDs and videos, its grocery business was profitable.

What made Tesco’s model work when others didn’t? Quite simply, patience and cost control. Tesco executives, watching the American online delivery services from afar, were bewildered by the amount of money companies were throwing around in order to create state-of-the-art operations. In the mind of Tesco’s management, there was no point in spending a lot of money on a service that did not yet have many customers.

The U.K. chain decided to move slowly and cheaply, adding a handful of personnel to service orders in the back rooms of existing supermarkets. The company was also tight-fisted on marketing, preferring to piggyback Tesco’s existing reputation rather than create a separate campaign.

Tesco invested just £56 million ($82 million) to build its online business. Webvan Group Inc. had spent $1.2 billion by the time it folded. And whereas Webvan raced to enter 24 markets in three years, Tesco, over a five-year period, gradually rolled out its service to about one-third of its 692 stores in the U.K. “You have to sweat your existing assets,” says David Reid, Tesco’s deputy chairman and head of international expansion. “That’s the key to profit on the Internet, or in any other area.”

With most of its online competition overseas wiped out, Tesco plans to expand its Internet services abroad. In June 2001, the company announced an Internet delivery joint venture with the number-three U.S. supermarket group, Safeway Inc. Tesco will provide the know-how for running the service; Safeway will fulfill the orders through GroceryWorks, an unprofitable startup that is now a Safeway subsidiary and its exclusive online grocery distribution channel.

As it did with its online initiative in the U.K., Tesco is taking it slow. It already has closed three GroceryWorks warehouses to reduce costs, and it will introduce the system to only a few stores in 2002.

But Tesco also is taking calculated risks. For example, in South Korea, where it currently has seven successful supermarkets and plans to open more, Tesco will launch an online shopping service in 2002. What is South Korea’s attraction? A strong base of upwardly mobile consumers and the highest residential penetration of broadband Internet connections in the world.

— V.G.

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  1. James A. Gingrich, “Five Rules for Winning Emerging Market Consumers,” s+b, Second Quarter 1999; Click here.
  2. Michael Flagg, “In Asia, Going to the Grocery Increasingly Means Heading for a European Retail Chain,” Wall Street Journal, April 4, 2001
  3. Peter Martin, “The Fall of the House of Marks,” Financial Times, October 2, 2001
  4. Robert Peston, “Still Hungary: The Champion of the Checkout,” Sunday Times of London, September 23, 2001
  5. Andy Reinhardt, “Tesco Bets Small — and Wins Big,” Business Week, October 1, 2001
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