Factors affecting retail patterns in china


Since the start of the 2000's, several international retailers have entered into many emerging markets around the world. The most prominent reasons for this shift of retailing attitudes towards internationalization into the emerging markets is attributed to market saturation and cut-throat competition in Western Europe and the United States and previously unexplored opportunities in the emerging markets.

UK's largest retailer Tesco is operating in various markets in the continents of Europe and Asia. The purpose of this research is aimed to look at UK's largest and world's third largest retailer's experiences in the emerging market of China including what problems and opportunities it has in the Chinese retail market, which, as pointed out by many critics, has the potential to provide lucrative returns to the international retailers.

During the 1990's and 2000's, Tesco made many international forays and developed a base of consistency and made localisation policies by taking into account of local culture and local preferences. Chinese market offers a huge amount of opportunities for retailers with internationalisation ventures representing a 15% growth in the last 20 years. After its entry into the Chinese retail market in 2004, Tesco faced a different kind of market in respect of consumer preferences and tastes as compared to its other ventures in other Asian markets like South Korea, Japan and Thailand. To cover this variation in the Chinese market, Tesco entered into a joint venture (JV) with a local partner. The aim was to learn from the experiences of a local retailer before embarking onto an expansion strategy. Another strategic purpose for this JV agreement was to tackle and combat an environment of competition with other international retailers, Wal-Mart and Carrefour, already operating in China.

The research explains how Tesco faced the problems in the emerging Chinese market by employing strategies to accommodate the market sentiments. Strategies like entry and expansion strategies, store management and localisation strategies are discussed in more detail. The ending portion of the study discusses what challenges and problems Tesco faces in the Chinese retail market.

Chapter 1: 1.1 Introduction

In recent economic crisis, when around the world economies in various countries, even in the most developed economies like United Stated, the United Kingdom and other western European Economies, are struggling to maintain its growth levels steady, China has been able to increase its GDP growth levels from 6.8% in the first quarter of 2009 to 11.9% in the first quarter of 2010. Due to resultant increased economic activity and thus increased wages; the Chinese retail industry has become one of the largest retail industries in the Asia-Pacific and has also attracted a large number of international retailers from around the world. Chinese retail industry has witnessed a growth in hypermarkets, supermarkets and convenience stores. This rapid growth has been contributed by a rapid growth with the emergence of advanced trade activities due to a rise in per capita income and the changing lifestyles of the emerging middle-income segment of the Chinese social structure.

The study under review is to look at UK's largest retailer Tesco's experiences in the growing and lucrative market of China. With group sales of £59.4 billion in 2009 as compared to £37.0 billion in 2005, Tesco was able to maintain its growth level despite recent global economic downturn. Until now, Tesco delivered its customers products and services facing challenges of market competitiveness and passiveness both at home and abroad.

Tesco emerged as the top retailer in the UK along-with operating in 14 countries in Europe, Asia and the United States with 4,331 stores by employing 470,000 people and is ranked as the third largest retailer in the world.

1.2 Project Motivation

With a very large area of the country and an uneven development of the market, China is not only very attractive for the foreign investors but at the same time is of a very complex in nature to understand and approach.

It is generally perceived that for retailers who want to develop a strong international network, China is an important strategic location. This strategic importance increases the bargaining power of retailers over suppliers which in turn strengthened their global market positioning.

Therefore, what will be the impact on Tesco's growth and sustainability in operating in China in recent developments in factors like Government's attitude towards foreign investment, changes in GDP growth rate and per capita income and more market oriented retail environment are the main derivers to conduct this study. This argument is further backed by the fact that in recent years there is an increase of middle class population whose earning power has increased many folds than previously and their consumption patterns, especially towards retail spending, have changed upward remarkably.

Another focal motivational factor is what Tesco has experienced from its operations in China or what it has learned from its retail experiences in China to manipulate opportunities and ward off its problems especially in the above mentioned circumstances in the Chinese economy as a whole.

1.3 Scope of the retail industry in China

From its formation as a Peoples' Republic until mid-70, China's economic system remains mainly under tighter control of the central government. Three major sectors of the economy - industrial production, agricultural production and the stock management & selling of goods in commercial departments were under tighter government control. Price mechanism, quantity and other sphere of the economy were fixated by the state departments.

This policy of centralisation gave a stricter control over resources through planned, focused and steady development of China's economy, on one hand, but on the more pessimistic side, this concentrated policy obstructs innovation and growth of the economy.

During the years from 1978 to 1984, economic reforms were extended from rural areas to the cities. These reforms were the starting point for the 'socialist market economy' which gained reputation in the early years of 90s, after almost 10 years of the reform in 1992. Some of the elements of the economy remained within the tighter control of the central, i.e. the public sector, while other were experimented and implemented within the principles of the capitalistic perspectives.

Thus from the perspective of decentralisation, retail sector saw much opportunities to flourish in the Chinese market to meet the requirements of the market economy by creating a modern enterprise system and a link between the domestic and international market to bring 'synergies' for a unified and open market system throughout China in order to identify, allocate and optimise the available resources.

1.4 Factors affecting the retail patterns in China

1.4.1 Emergence of a new moderate to high earning middle class

During the transforming period of more than 20 years since 1978, china not only gained a tremendous economic growth but also adopted a policy of openness by joining the World Trade Organisation (WTO) and opening its 'economic gates' to the outside world to bring in new foreign investment.

This enhancement in the economic outlook changed the per capita structure with an eightfold increase and there was a decline from 50 to 10 percent of the population which was living near or absolute poverty. The consequent result was the emergence of an urban middle class, 23 percent of the total population (China Daily, 2 February, 2010) with more sophisticated consumption pattern and with high demand for quality products with lot of variety and innovation to be provided by the retailers.

1.4.2. Increase in 2nd and 3nd tier cities

There is also an increase of second and third tier urban retail market as a result of a vast number of middle class masses moving towards cities in search of better jobs and living conditions. Therefore, the revolutionised retail sector, now, is not only for first tier retail markets or main city centres but also for consumers who are living in 2nd and 3rd tier retail market. These new formats of cities induced foreign retailers to increase their market share and growth in china. Emergence and increase of these 2nd and 3rd cities provide a great opportunity for Tesco to expand in order to increase not only its market share but also to strengthen its market positioning especially when a large number of local retailers and many competitive international retailers are operating in the Chinese retail market.

.4.3. Reduced Government restrictions

On 11 December 2001, China became the member of the World Trade Organisation (WTO). Mike Moore, WTO Director General said at the conclusion of the meeting of the Working Party on China's Accession to the WTO:

"International economic cooperation has brought about this defining moment in the history of the multilateral trading system. With China's membership, the WTO will take a major step towards becoming a truly world organization. The near-universal acceptance of its rules-based system will serve a pivotal role in underpinning global economic cooperation".

According to WTO negotiations, China commits to 'liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules'.

With the openness of the Chinese market to the outer world, especially after joining the World Trade Organisation, China is becoming less restrictive to foreign investors in retail sector. Now foreign retailers are able to have the option to establish wholly-owned foreign enterprises (WOFEs) rather than operating through a joint venture (JV). This has resulted in increased confidence and now foreign retailers are not only enjoying organic growth by increase their store numbers but also entering into new agreements by acquiring or merging with other chains in the retail industry.

In 2006, Ministry of Commerce decided to hand-over the centralised power from Beijing of approving the small and medium sized foreign invested retail operations to the local entities of the Ministry of Commerce at the provincial level. This shows a commitment by the central authorities that they are willing to give a sense of ease and freeness for the international retailers.

Currently, there are at least 35 retailers in China out of top 50 global retailers. Ministry of commerce gave approval to more than 1,000 multinational retailers and wholesalers to operate in China with contractual foreign direct investment of USD 1.9 billion, in 2005 alone.

1.4.4. Foreign investment

After accession to WTO, China has shown gradual changes in its trade and foreign policies. The major change is the gradual shifting from direct state intervention in the economy to support exports and import substitution. Investment is permitted with reduction of import barriers.

Currently, china's trade policy is to accelerate its economy to the outside world to boost its economic development. This major source of development will not only be the state-backed trade agreements but also investment through foreign private enterprises.

1.4.5. Gross Domestic Product (GDP)

Gross Domestic Product (GDP) in the year of 2009 was 335,353 million Yuan, an increase of 7 percent in respect of the previous period. The following table shows GDP growth (current prices) has increased from 184,937 million Yuan to 335,353 million Yuan which is an increase of 81% (current prices) over a period of 5 years. (Table 1 & Graph 1: GDP 2005 to 2009)

1.4.6. Consumer prices

The general level of consumer prices in China was down by 0.7 % over the previous year. Of this total, the prices for food went up by 0.7%, the producer prices for manufactured food dropped by 5.4 percent, of which, the prices of means of production down by 6.7 percent, and for means of subsistence decreased by 1.2 percent. The purchase prices for raw materials, fuels and power went down by 7.9 percent.

In February 2010, the consumer price index went up by 2.7 percent year-on-year (it was 1.6 percent decline in February 2009), or 1.2 percentage points higher than that in the previous month. Of this total, the growth in cities was up by 2.6 percent and that in rural areas was 2.9 percent. The food price went up by 6.2 percent while the non-food price rose by 1.0 percent. The prices of consumer goods went up by 3.0 percent, and the prices of services grew by 1.7 percent. In the first two months, the year-on-year change of consumer price was up 2.1 percent (it was 0.3 percent decline in the same period last year). Grouped by commodity categories, in February, of the eight categories of commodities, six of them experienced prices rise and the rest two witnessed prices decline. Of which, prices for food up by 6.2 percent, prices for tobacco, liquor and articles up by 1.6 percent, price for clothing down by 1.3 percent, prices for household facilities, articles and maintenance services down by 0.8 percent, health care and personal articles up by 2.4 percent; transportation and communication rose by 0.1 percent, recreation, education, culture articles and services up by 0.8 percent, and housing up by 3.0 percent.

In February 2010, month-on-month change of consumer price was up by 1.2 percent. Of which, price in cities went up by 1.2 percent and that in rural areas went up by 1.1 percent. The food price grew by 3.3 percent while the non-food price up by 0.1 percent. The price of consumer goods grew by 1.2 percent and the price of services up by 1.0 percent. Grouped by commodity categories, in February, prices for food up by 3.3 percent month-on-month, prices for tobacco, liquor and articles up by 0.1 percent, price for clothing down by 1.5 percent, prices for household facilities, articles and maintenance services up by 0.1 percent, health care and personal articles up by 0.3 percent; transportation and communication up by 0.4 percent, recreation, education, culture articles and services rose by 1.0 percent, and housing up by 0.1 percent.

Changes in consumer prices 2005-2009

Source: World Trade Organisation

1.4.7. Per Capita Income

In 2009, the annual per capita net income of rural households was 5,153 Yuan, or a real increase of 8.5 percent over the previous year when the factors of price increase were deducted. The annual per capita disposable income of urban households was 17,175 Yuan, or a real increase of 9.8 percent. The proportion of expenditure on food to the total expenditure of households was 41.0 percent for rural households and 36.5 percent for urban households.

Changes in per capita income 2005-2009

Year Yuan

2005 3255

2006 3587

2007 4140

2008 4761

2009 5153

Per capita net income of rural households 2005-2009

Per capita disposable income of urban households 2005-2009

Source: World Trade Organisation

.4.8. Population

At the end of 2009, the total number of Chinese population, excluding residents in Taiwan Province, Chinese Compatriots in Hong Kong & Macao and Chinese living abroad, reached 1,334.74 million, an increase of 6.72 million over that at the end of 2008. The year 2009 saw 16.15 million births, a crude birth rate of 12.13 per thousand, and 9.43 million deaths, or a crude death rate of 7.08 per thousand. The natural growth rate was 5.05 per thousand. The sex ratio at birth was 119.45. The relevance of these figures to the current study is that these represents ever increasing consumers to which Tesco can attract towards its products to both its market share and its profits in the long term.

1.4.9. Employment and Wages

At the end of 2009, 779.95 million people were in jobs. This figure is higher by 5.15 million as compared to the previous year (2008). 311.20 million people were employed in urban areas out of this total figure which represents a net increase of 9.0 million. While on the other hand, with an increase of 0.1 % as compared to the same category in 2008 the urban unemployment rate through unemployment registration was 4.3 percent at the end of 2009.

According to Beijing Municipal Bureau of Statistics, the average wage of workers in Beijing in 2008 was 44,715 Yuan as compared to 39,867 Yuan in 2007, an increase of 12.17%. In the city of Shanghai, the average wage of workers was 39,502 Yuan in 2008, with an increase of 13.8% over the previous year in respect monthly average income of 3,292 Yuan, according to Shanghai Human Resources and Social Security Bureau.

1.5. Research Objective

The current study is relevant to Tesco's operations in China. Therefore, the aim of this project is to investigate the retail experiences of Tesco in China by going through both its qualitative and quantitative performance. Quantitative performance relates to Tesco's financial and other statistical aspects and in terms of its qualitative performance special attention is paid to its strategy of how and why Tesco has been able to reap the seeds of its 'localisation' or 'adaptation' strategy in China.

Attention will also be focused on how Tesco managed to walk off its problems and what opportunities it has able to manipulate to prolong both its presence and growth in the most lucrative market among the growing economies of the world. The importance of it is strengthened by the fact that Chinese Government is more lenient than before towards foreign investment through private enterprises.

From the above discussion following questions are required to be answered in this research project:

(a) What are the experiences of Tesco in retailing in China

(b) Which set of problems and opportunities is available to Tesco in the retail sector of China

1.6. Tesco at a glance

Tesco stands top in the British retail industry. Tesco was founded by Jack Cohen when first started to sell through a small stall in a traders market in 1919 in East of London whom dwellers were mostly from the impoverished class. Cohen's stall became famous for its cut-price strategy in retail which still stands as a strategic option for Tesco. Furthermore, Cohen was also able to steer clear of the company through economic downturn, technological changes and increase consumers' sophistication and severe competition from its rivals. Tesco was formally born in 1924 when Cohen started to develop his Tesco Shops. Since then Tesco saw a gradual increase in its growth (Tesco PLC 2000). Tesco has grown steadily since then.

To retain its customers, Tesco launched a hugely popular loyalty scheme of Green Shield Stamps in 1977 under the supervision of Lord Ian MacLaurin who also become chairmen of Tesco during the period from 1985 to 1997. From this time until now, Tesco did not look back as a retailer and on a consistent basis it developed or introduced novelties in the retail market. Tesco was the first retailer who was able to manage to picking up so-called 'first-mover advantages' in its efforts to become a top retailer in the UK (Lieberman and Montgomery 1988).

During the 1980's, Britain saw an influx of European discount retailers on its soil. Initially, Tesco saw a growing competition from such retailers but it managed to pass through clearly by introducing new policies, for example, under the chairmanship of Terry Leahy in 1997, offering its own-brand products range which proves an economy for its customers. According to Hollinger (1998), 'If there is a difference between the two [CEOs], it must be that while MacLaurin was building an efficient and customer-focused retailer in the UK, the 41-year-old Leahy has ambitions to conquer the globe.'

Despite its initial two unsuccessful experiences in the France and Ireland, today, Tesco is able to grow its internationalisation process in Central Europe and has made the company more confident about its global expansion plans, especially in the Asian continent. A Tesco's IT director, Ian O'Reilly, according to Hollinger (1998) had said that 'If we do not do it, then ultimately we will die'.

Tesco proved itself as an innovator in the retail industry in the UK by enjoying the advantages of the first mover as opposed to its competitors but also striving to avoid the disadvantages that become advantages to followers (Lieberman and Montgomery 1988), for example retaining its trained staff. Tesco history is enriched in innovative endeavours. Tesco was the first retailer in the UK to develop large supermarkets; it was the first to launch a cut-price policy which led to serious price wars; it was the first to introduce the card-based loyalty scheme, and was the first to add financial services to it; and finally it has become the first to launch electronic shopping in the mid-1990s. Through the effective use of information technologies, it was the first retailer to introduce a completely automated replenishment system, aimed at linking-in suppliers, and use an advanced scanning programme (barcode reader) from Siemens Nixdorf, aimed at cutting cashier training by up to 60 percent while simultaneously detecting the available stock in the supermarkets. Tesco was one of the first supermarkets to pursue a policy of organic food as opposed to GM food. This policy for pursued for two reasons, i.e., response to consumer demand for organic food, and use of local sources, which are GM-free suppliers, wherever possible (Greenpeace 1999).

In 1993, the three most important innovations were the introduction of cut-prices products under Tesco's own brand name, then the introduction of its Club Card loyalty scheme which was also followed by its rivals (Sainsbury's and Safeway) in the UK and then the introduction of online shopping. In 1997, Tesco also launched its credit card through a joint venture with the Royal Bank of Scotland.

Ian O'Reilly said that they wanted to attain the advantages of being the first mover, although this helped in the competition somewhat (Hollinger 1998). But despite this and until the follower retailers adapt these novelties to their markets; Tesco is able to exploit the advantages arising from their pre-emptive investments. Current CEO Terry Leahy, then Tesco's marketing director, was responsible to launch the own-label range and the introduction of the club card loyalty scheme. According to Hollinger (1999), Leahy's it were Leahy's ambitions which transform the Tesco's outlook into a one-stop sort of shopping mall. This case demonstrates the importance of an employment strategy and good management as determinants of corporate strategy.

1.7. Tesco's Philosophy

Tesco's has based its entire business philosophy on 'customer services'. The components of this notion portray a cumulative perspective from bottom to top.

Customer Service Centre

Customer Assistants in every store

Staff responsible and sympathetic to the customer

Charming shopping environment

Quality and value

Source: Tesco's official website (www.tesco.com)

Terry Leahy, the chief executive believes that "the biggest challenge for any business is to keep in touch with customers and be aware of how their needs are changing and be able to respond quickly to their changing needs."

1.8. Summary

Today, China has represented itself as a modern economy transforming from centre-oriented to a more liberal market economy. As a result various sections of the Chinese economy are changing and retail sector is one of them, which is developing at faster rate. More and more international retailers are in an effort to invest in this hugely vast and most profitable market. This argument is more strengthen by the fact that after joining with WTO and easing its economic barriers, the living standard of the Chinese population is changing and as a result demand for consumer goods is increasing. Other factors which are contributing to this increased demand include emergence of a new moderate to high earning middle class, Increase in 2nd and 3nd tier cities, growing Gross Domestic Product (GDP) and Per Capita Income, etc.

Tesco as the number one UK retailer and the third largest world entered in the Chinese market in 2004 and since then is expanding its operations from big cities to 2nd and 3rd cities to increase its market share in this most lucrative retail market of the world.

In the next chapters, focus is placed on how Tesco managed to expand in the Chinese retail market, after initial entry, thorough its learning from experiences and what problems it has faced and what further problems are there to solve and, finally, what opportunities its has already exploited and what further are there it has to explore.

Chapter 2: Literature review

2.1. Introduction

It is generally considered that research in the field of international retailing has missed and overlooked a basic and vital component, namely experience or learning, of the retail internationalization process. This paper explains the learning through experiences from the point of view of Tesco's international retail operations.

2.2. Conceptual underpinnings for the research

Companies doing retail business in the international market frequently stressed the process of acquiring retail knowledge by the use of reasoning, intuition or perception or putting some thought on the retail process. There are plenty of examples available to be worth mentioning, however, Tesco's own example is more relevant to this research. Before entering into the Japanese market and the acquisition of the Japanese C Two chain in 2003, Tesco utilised its research teams which were implanted into the Japanese families to monitor and observe their consumption patterns.

As Clarke and Rimmer (1997) has pointed out that there has been a lack of evidence in the form of written literature available regarding the detailed practical or conceptual research on the issue of retail learning on international level. Therefore, despite the fact that the way the international retail companies were able to do international retailing in the real world, international retailing process itself was significantly affected by the process of learning. Moreover, there have not been so many studies available which addressed this issue, i.e. the process of learning in international retailing. Even today, a vast gulf persists between our understanding of the international retailing process and international retail learning process. This is due to the non-existence of the detailed experimental, observational, pragmatic and practical research or, on the other hand, non availability of theoretical, abstract, or intangible research, which inevitably hinders the process of international retailing in depth. In the real, practical world, it has generally been construed and understood that the multinational companies who were involved in the process of international retailing learned lesson from their own mistakes and successes by entering into markets which were unfamiliar to them or from the lessons learnt by the success of their competitors or other companies who were also involved in international retailing. However, it must be noted that not each and every international retail operations have been successful. Another dimension of learning in the international operations for the retailers (Palmer 2000, 2002a, b) may be that of the difficult and highly contested process of reversing of the international retailing operations to rectify the mistakes.

There are many researchers who have called for extended research to analyse the various options available to re-assess how conceptually the internationalisation of retail sector has already been propagated (Dawson, 2001; Howard and Dragun, 2002). According to the studies and conclusions of Wrigley (2000), Burt and Sparks (2001) and Burt et al. (2002), the conceptualisation of international retailing has been unable to grasp the essence on two fronts: on the one side it has been unable to properly face the multiplicity and complications in the process of internationalisation of retail sector and on the other side, the concept of internationalization has been unable to explain an assortment of approaches of internationalisation with sufficient thought generally used by a large number retailers. A variety of explanations of the internationalised retail process are emerging, however, one viable and promising line of investigation is the sphere of learning in the international retailing. In this regard a notable example can be give of the analysis conducted by Clarke and Rimmer (1997) in respect of a department store namely Daimaru of Japanese origin. The analyses assessed that the investment of Daimaru in Melbourne (Australia) in a new outlet provided an initial insight to understand the process of acquiring knowledge by the use of reasoning, intuition or perception (i.e. cognitive aspect) of the process of investment in the internationalisation of retail. This analysis has given both insight and valuable lessons to many other researches, which gained and learnt these learning outcomes from initial entry into the retail market and then when the retail process is further developed after initially entered into that particular market.

The conceptualisation of the learning process in the sphere of international retailing has not been given much attention both in terms of theory and its further development, although the initial research has provided a base to further contemplate on the issue and also that despite the fact that the process of learning retail on international horizons and the results of initial research has taken some place in various works (Treadgold, 1991; Alexander and Myers, 2000; Evans et al., 2000; Vida, 2000;Dawson, 2001;Arnold, 2002). According to some researchers, such as Clarke and Rimmer (1997), a more elaborated research approach is needed to further develop and explain "the way in which a retail firm reflects on individual decisions it has made, and how this might influence their perceptions and actions".

From the above discussion, it is a focal perspective to understand and to gain know-how about the process of international retail experience via a continuous process of reflection and analysis. Moreover, it is also important to identify and to further understand that what lesson has been learnt from the process of internationalisation in retailing. Furthermore, although some analysts and researchers in the field of internationalisation and learning from internationalisation has pointed out that experience has a vital importance when entering into a new market and then in respect of further development when once settled in that market after initial entry (Treadgold, 1991;Williams, 1991a, b;Evanset al., 2000;Doherty, 2000). However, it is also evident that such researches and studies are not able enough to put forward more detailed practical (empirical) and conceptual understanding of this learning phenomenon in international retailing. An example might be that if, say, this work does not deal directly with the questions like: 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? By posing these questions it would inevitably come to light that the literature relevant to international retailing is underdeveloped in respect of what international retailers have been able to learn from their internationalised retailing experience. 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 to present a review of the international retail literature, is outside the scope of this paper. For detail study of the literature works ofAlexander (1997);Alexander and Myers (2000); andBurtet al.(2003) are useful. By putting a detailed review will increase the length of the current while the theoretical background on international retail learning has previously been laid out in detail elsewhere (Palmer and Quinn, 2005). In this paper, the discussion will mainly pertain to the empirical case study findings of Tesco in international retailing in China. The paper begins by briefly positioning the case findings by way of a conceptual framework put forward byPalmer and Quinn (2005)on international retail learning through experience. More detailed discussion of this framework can be found inPalmer and Quinn (2005). Following this, an overview of the methodology is put forward. The main part of the paper presents the case findings of Tesco's experience in China and the paper will conclude with a discussion of the key findings.

2.3. Summary

Experience or learning has not been given much attention in the international retail process. For this reason, Tesco took about four years before its entry (2004) into the retail market of China and observed how to enter and then to expand its operations in the Chinese retail market. From this point of view, Tesco had already started to learn even before it entered in China. Later on, this learning process continued through its experiences in this most vibrant retail market. In the forthcoming chapters, experience or in broader terms learning from experience is shown as a continuous process in response to changes in consumer behaviours, market orientation, government legislations, etc.

Chapter 3: Research design and methodology

3.1. Introduction

This study uses the data from various authentic sources like books, newspapers, trade journals, government agencies, trade associations, industry news & developments and other databases including company's own publications mostly available on online. The question in this instance is to find out the experiences Tesco has gained by conducting its core business activity, i.e. retailing but on international bases. The objective of the research process is to capture the contextual data and complexity of the issue in order to learn from the collective experience of the relevant field. The main purpose of this study is to research beyond merely a 'reporting of observations', to explore the retail market environment in China to understand the issue comprehensively and to strive to seek for the relevance of the theory by observing the real world environment, that is, Chinese retail market analyses.

3.2. How research methodology works?

In recent times, many authors (Sparks, 1995;Shackleton, 1996a, b;Clarke and Rimmer, 1997;Wrigley, 2000) are encouraged to do more research in order to explore further some very important new insights into the subject area. Moreover, practical research provides the opportunity to investigate resultant views and opinions, in response to experience gained and lessons learnt, of the personnel directly or indirectly involved in the decision making process. This approach has been gaining enhanced support from within the literature (Shackleton, 1996a, b;Sparks, 1996;Palmer, 2002a, b;Palmer and Quinn, 2003). These researchers has shown light on 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. In this study the strongest and the most focal stakeholder is the Chinese Government, the direct or indirect actions of which can significantly change the whole scenario. For example, any kind of restriction, say, restriction on store location may have strong impact or repercussions on the company policy or sales revenue/profitability. Indeed it may be argued that a strong interdependence exists between Chinese Government's policy, local partners and the company (Tesco) itself in respect of advising retail executives on strategy, structure, and international retail operations. Eliciting the views and practical experiences of the local retail players would, therefore, allow the research to gain access to the tacit knowledge and practical know-how gathered through years of operational experiences. Multiple and independent sources of evidence, including market research reports, company profiles, financial statements, etc were used to corroborate with the data available within Tesco's publically available documents in order to develop convergent lines of inquiry (Yin, 1994).

3.3. Reasons for the selection of Tesco

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 the most consistent amongst its international peers (1995-2002), with estimated sales rising to 45.9 billion in 2003 and to 54.3 billion in 2010. Indicative of the scale of its international ambitions, Tesco unveiled one of the most radical and ambitious internationalisation programmes that would involve the development of 200 hypermarkets in Europe and Asia, generating 10 billion sales per annum 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 (seePalmer, 2002b). 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. Significantly though, not all of Tesco's international operations have been successful and this has resulted in some form of divestment (Ireland, 1986; France 1997; Taiwan, 2005). It is argued that divestment is a highly visible case of where learning is likely to have taken place.

3.4. Summary

This chapter provides information on how the data will be collected, i.e., by various databases available online and further points out that reliance is put on the experience gained and not merely what has been observed to get insight of the research. Furthermore, attention is paid to seize the context of the data and severity of the issue concerned to gather collective experience of the relevant field. For example, the impact on Tesco's experience in retailing by a major stakeholder, i.e., the Chinese governments would provide a lasting experience, learning in this context, on company's internationalisation strategy in China.

Tesco's internationalisation process stems from transformation of its home country's retail industry and in spite of Tesco's success in the international retailing in many countries, not much literature has been written to provide an insight. These are the reasons which provide enough grounds to write this research when coupled with Tesco's own divestment experience in France, Ireland and Taiwan.

Chapter 4: Analysis and findings

4.1. Introduction

Britain's largest retailer opened its first ever convenience store at China's Industrial hub, Shanghai in March 2008. However, until opening this convenience store, Tesco has been operating through hypermarkets in China. The main purpose of opening this convenience store, i.e. Tesco Express, was to attract customers who still preferred to buy from the traditional Chinese wet markets operating in the open, which can be found across China and which sells fresh fish and seafood, chicken, fresh vegetables and fruits. Head of Tesco Express in China, Ian Longden said that "we think we can create a new type of neighbourhood store in China by taking the guarantee of quality and consistency that a big western brand can bring and combining that with convenience and value for money." Tesco also announced to further open such stores within next few years across China. Tesco adapted this policy of experimenting a new kind of store format to be operated in China was the fact to gain differentiation over the store formats of its arch rivals in China, i.e. Wal-Mart and Carrefour, which have hypermarkets and discount store formats in China.

Frank Badillo, Director of Global Research Program of Retail Forward Inc., said in 2006 about the Tesco's entry into the Chinese retail market in the following words that "Tesco's entry is particularly ominous for Wal-Mart. Even though the company is not as big as Wal-Mart or Carrefour, it's proven it can successfully expand internationally, particularly in Eastern Europe, and in Korea where Wal-Mart's struggled." In 2007, Tesco's CEO, Ken Towle said that "China is a great place for customers and has a lot of competition. We hope our share is as good as that of our competitors."

Tesco started to operate its retail business China in 2004 under the banner of Hymall, by entering into a 50-50 joint venture with a local retailer. China was considered as a lucrative market due to its strong and rapid economic growth and high potential. Tesco increased its stake in the joint venture to 90% in December 2006.

The initial entry into China and gradual expansion was due to part of Tesco's strategy to seek new opportunities and growth. Tesco stand out amongst its competitors as one of the top international retailers by pursuing the retail policy of localising in its products' offerings. Tesco was operating through its 56 hypermarkets in China by February 2008. The company started to generate profits by the first half of the year 2007-08 in its Chinese venture. Tesco's sales figure stood at 702 million for the year ending February 2008.

4.2. Tesco: A background note

Jack Cohen (Cohen), a former Royal Air Force member during the First World War, established a grocery store in 1919 using his gratuity he received from his military service on leaving. In 1924, Cohen began to sell tea he bought from a tea supplier TE Stockwell and also forming the company name Tesco by joining the 'TE' and 'S' for TE Stockwell and the first two letters of Cohen 'CO'. In 1929, Tesco opened its first store in Edgware, London. Cohen was impressed by the self-service format of stores when he visited the United States. In 1947, Tesco started to float its shares in the stock market by going public and started to trade by opening self-service stores in 1948. Tesco opened its first self-service supermarket in 1956 in Maldon, Essex selling a wide variety of both food and non-food products. In 1968, Tesco opened its first supermarket, an extended version of supermarket, at Crawley, West Sussex.

'Pile it high, Sell it cheap' was the strategy adapted by Cohen to sell products in Tesco stores and attracted a large number of customers. However, this strategy gave Tesco fame as a retail company with stores for middles class and this gave them a low end image. Tesco also tried unsuccessfully to integrate and maintain other companies by the 1970's which it acquired until then. These companies included Burnards (1955), Williamsons (1957), Harrow Stores (1959), John Irwins (1960), Charles Phillips (1964) and Victor value (1968). During the 1970's, Tesco stores were not only small and ill-equipped but also were selling products with mediocre quality. In the middle of the 1970's, Tesco closed few of its smaller stores in order to meet demands induced by rising income levels and better quality perceptions about the products. Later on Tesco started to concentrate on delivering better customer service and quality with a increased, wide range of products through its revamping efforts.

Tesco run a successful campaign in the year 1977 to offer products under the slogan of 'Checkout at Tesco' to in an effort to keep its image of a company offering products at competitive prices. The aim of this campaign was to counter competition from other retail companies, e.g. Kwik Save, offering discounted products. By the end of the 70's, this campaign was so successful that its annual turnover was over 1 billion in 1979 and Tesco up-rooted as one of the leading retailer in the United Kingdom.

During the 90's, Tesco took other measures not only to retain its existing customers but also to expand its customer base. These steps included introduction of a new service 'One in Front' scheme. This scheme ensured that customers spend less time on the service counter by open a new counter if there is more than one customer on a counter. Another scheme was to offering loyalty cards to Tesco's customers with the aim to retain its customers. Customers were able to accumulate reward points on their shopping on these loyalty cards. These points can later be redeemed for cash / gifts / discounts. Other services offered by Tesco were personal finance, internet shopping and mobile phone services. These service gave and edge to Tesco and it grew sharply overtime and as of February 2007,it was the largest retailer in the UK in terms of sales and with an approximately 30 % of market share in the grocery market in the UK. In the year ending February 2007, Tesco earned a sales figure to the tune of 46.61 billion with a pre-tax profit of 2.6 billion and also became one of the top global retailers in the year 2006.

4.3. Tesco's International Experience: Operations and Strategy

Tesco's started its international debut in 1979 by entering into Ireland by acquiring 51% equity shares of 3 Guys stores which were owned by Albert Gubay. However, this acquisition did not work long and in 1986, after about 7 years of operations in Ireland, Tesco has to divest its investment in 3 Guys stores. The main reason for this divestment was that Irish customers were rejecting the British products sold there.

France was the next venture where Tesco entered in December 1992. Tesco acquired 85% equity holding in a food and grocery retail chain Catteau SA in North East of France. At that time Catteau SA was operating with 72 superstores, 7 hypermarkets and 24 small stores the brand name of Cedico. However, this venture proved to be a failure due to sever competition Tesco was faced from big names in French retail market like Carrefour and Promodes and then in 1997 Tesco sold its holding in Catteau to Promodes. Although, Tesco's initial forays in Ireland and France proved to unsuccessful, however, its later international ventures were successful.

Tesco was able to establish its presence in the Scottish retail market by acquiring William Low, a Scottish retailer, for 247 million in 1994. Hungary was the next market where Tesco purchased Global Supermarkets' 51% stake in the same year when it entered into the Scottish market. Poland was the next country where Tesco acquired Savia SA in 1995 for a value of 8 million. Tesco entered into Czech Republic and Slovakia in 1996 by acquiring 13 department stores for 79 million operated by K-Mart, a US based retailer. Tesco, by operating in countries in which are in close geographical proximation of Britain, was able to enjoy not only operational economies but also was able to deliver a wide a range of products to its customers in those countries. Tesco made another attempt to enter into Ireland in 1997. This time Tesco acquired 630 million of shares in Irish food retail operations of Associated British Foods Plc and became the largest food retailer in Ireland.

After a successful period of operations in the Europe, Tesco's next foray was the Asian market. Thailand was the first country where Tesco started its operations in May 1998 and acquired Lotus Supermarkets with a stake of 75%. In March 1999, Tesco put its foot into the South Korean retail market by entering into a joint venture with Samsung with a 51% share and invested to the tune of 80 million. By the end of 1999, Tesco increased its equity stake to 81% by investing another 30 million into the venture. Tesco also formed a joint venture in Malaysia, its next venture in the year 2002, with Sime Darby Behad, a Malaysian based retailer. Tesco's next ventures were in Japan and Turkey in July 2003 and in 2004 Tesco entered into the growing market of China. Tesco raised 780 through sale of its shares in February 2004 to fund its international operations as part of its expansion plans.

4.4. Learning Experiences

Localisation was the lesson Tesco learnt from its international retail operation in France which it used successfully in its other international operations. Philip Clarke, international operations director of Tesco, said that expansion drive will utilise 11 years experience operating in markets across Central and Eastern Europe (CEE) and Asia. Clarke speaking at a conference of IGD Global Retailing further said that "We are relatively new to operating in foreign markets. But we've taken lessons from our experience. We need to be flexible - each market is unique and requires a different approach. That means entering the market in different ways, through joint ventures, stand alone businesses, buying established players and start-ups." He further said that to have a connection with customers store presentation adapted to local conditions is very important. For example, in Thailand Tesco mimicked the 'wet market' environment for its fruit and vegetable section in its hypermarket. The purpose was to attract consumer to what they are used to for generations.

Instead of venturing into bigger projects, Tesco focused its internationalisation strategy on expanding relatively smaller markets. This was especially the case in those markets, i.e., Eastern Europe and Asia, where the level of competition was of a lesser degree. To gain local knowledge of the market, Tesco adapted a strategy of entering into joint ventures and acquisitions. This was the strategy used by Tesco to enter into Central European countries and Asia. In this way Tesco was not only able to establish its contacts with local suppliers and also to gain insights into the local markets.

The biggest hurdle which Tesco faced was the recognition of its brand by local customers when it ventured into some international markets. Therefore, Tesco realised that it British identity did not work in these markets and it decided to use the identity of its well-known local partner, instead, to attract and retain customers. Tesco's international operations director Philip Clarke said that "The best local operators tend to be the ones that win, and what Tesco is trying to do is to be local wherever it is. Not to bring our western prejudices to the business - bring our knowhow by all means - but let the locals tell us what really matters to their customers." He further mentioned that "Unless there is an advantage to using the Tesco brand, we don't. In Turkey, customers do not know what Tesco is but they know what Kipa is so we are keeping it as Kipa."

Another strategic step which Tesco took to enhance its image as a local retailer was to employ local management and staff. In all of its foreign stores Tesco employed 95% local employees. Even for the key and managerial positions Tesco hired local people with vision that local store assistants would be more at ease to report to the people who are from the same locality or country. Although the company has a single international operating plan governing store sizes, marketing and supply, each country's offering is tailored to suit market conditions by local staff. According to Clarke "A telling sign is that only 100 out of my 100,000 international staff are British." According to Leahy, "The people on the ground have to be the people in charge. They understand the customers, they understand the cultures, and they have got to make the decisions. So my leadership can only be around for providing a broad framework for behaviours in terms of customers and staff. You can only be successful by being the best local retailer."

Although training of these local management personnel according to company's culture and values was a big task for Tesco, however, Tesco's top management are of the view that local people were the ones who knew the customers well and therefore should be given complete authority.

Tesco's values

No one tries harder for the customers

  • Understand the customers better than anyone
  • Be energetic, innovative, and be first for customers
  • Use our strengths to deliver unbeatable value to our customers
  • Look after our people so they can look after our customers

Treat people how we like to be treated

  • All retailers, there's one team, the Tesco team
  • Trust and respect each other
  • Strive to do your best
  • Give support to each other and praise more than criticize
  • Ask more than tell and share knowledge so that it can be used

Enjoy work, celebrate success and learn from experience

Source: Tesco's official website (www.tescocorporate.com)

When Tesco was expanding its operations internationally, it acquired those small businesses which were performing well in the country. After acquisition, instead of putting new staff into the stores, Tesco retained existing stores staff and management personnel. In all of its international operations, Tesco gave full authority to local managers to run day-to-day affairs of its stores. Tesco employed only 100 British managers in its international operations and the main purpose of these managers was to teach and train the local managers the Tesco way of working as it does in the Britain. Thus, in most cases the UK personnel who were sent abroad worked as trainers to inculcate the Tesco Way in international operations.

The Tesco Way

Over the years we've developed an approach to doing business and this has become known as the Tesco Way. We have drawn together the five elements of that approach

  • Our Core Purpose: The reason for all that we do
  • Our Goals: what we have set out to achieve
  • Our Values: The way we want to behave
  • Our Principles: Better, Simpler, and Cheaper
  • Our Steering Wheel: Measures progress against our priorities and provides a visual reminder of our Plans

Understanding and managing the Tesco Way is a key ingredient for success at Tesco. The Tesco Way is a way of working which is Better, Simpler and Cheaper.

Source: Tesco's official website (www.tesco.com)

The best strategy Tesco adapted in its international operations was to localise its stores keeping in considerations of the demands posed by the local consumers. This could be explained by the example of salami and sausages sold in Poland while on the other hand fresh fruit & vegetables and living reptiles were sold in Asian markets. Tesco adapted the format of wet markets in Thailand in its stores to accommodate customers' preferences of buying fresh food from such markets and who are also fond of interacting face to face with local vendors. Local festivals and holidays also offered an opportunity for Tesco to localise. In Poland, Tesco stocked candles for All Saints' Day.

However, Tesco kept its standard functions while offering products on the basis of localisation in its international operations. Giving convenience to its customers in its stores remained the main aim of Tesco. Tesco provided its customers an opportunity to select from a wide range of products including labels other than Tesco's. Tesco provided its customers with babies baby friendly cats in many of its stores. To give its operations and offerings an enhancement in foreign market, Tesco always seek feedback from its customers. Philip Clarke, Director of Tesco's International Operations, explained Tesco's international strategy in these words: "The best local operators tend to be the ones that win, and what Tesco is trying to do is to be local wherever it is. Not to bring our western prejudices to the business - bring our know-how by all means - but let the locals tell us what really matters to their customers."

4.5. Tesco's international strategy: Main Objectives

From Tesco's official website, its international strategy can be bullet-pointed as follows:

  • Be flexible - Each market is unique and requires a different approach
  • Act local - Local customers, local cultures, local supply chains, and local regulations require a tailored offer delivered by local staff.
  • Keep focus - To be the leading local brand is a long-term effort and takes decades, not just a few years.
  • Be multi-format - No single format can reach the whole of the market. A whole spectrum from
    convenience to hypermarkets is essential and you need to take discounter approach throughout.
  • Develop capability - developing skill in people, processes, and systems and being able to share this
    skill between markets will improve the chances of success in challenging markets.
  • Build brands - Brands enable the building of important lasting relationships with customers.

4.6. Retail industry in China

China is one of the most growing nation in terh world iwht its population of more than 2 billion. Early 2000's saw the growth in the disposable income of the emerging middle class in china as a result of better economic conditions. It was estimated at that time that the aggregate spending will be more than USD 500 billion by 2010. In 2005, china became the seventh largest retail market in the world after USA, UK, Japan, Germany, France and Italy.

In the east of China, most population is wealthy and consequently spending is higher. The well-developed cities of Shanghai, Beijing, Tianjin and Guangdong are the cities with high spending by consumers in the retail sector as compared to other cities. The population living in urban areas will reach 874 million by 2030 from 529 million in 2004, as per the research conducted by a research firm IGD. These favourable trends provide great opportunities for the retail sector in China.

Spending in retail sector was USD 756 billion in 2005 and is expected to grow to the tune of USD 2.4 trillion by 2020. This growth rate increase is expected to be supported by the rising income levels across China. Moreover, it is estimated that the annual increase in number of households will grow to approximately 200 million by 2015 as compared to 42 million in 2003 with and earning capacity of RMB 25,000 AND RMB 100,000, according to the consultancy firm McKinsey.

However, there are still possibilities of improvements in the retail sector in China. 10% is the figure attributed to top 100 chains in China in the retail sector out of total retail sales. Out of these 100 top retail chains, share of foreign firms was 20% of the total sales. The sales of the top 100 retailers in China in 2005 stood at RMB 707.6 billion with a growth rate of 42% as compared to the same figures in 2004. Top 100 retailers were running 38,260 stores across China.

In urban areas consumers are changing their preferences and buying fresh foods more from supermarkets than from traditional wet markets. More and more supermarkets are opening their stores in rural areas and in 2005 more than 70,000 supermarkets were opened in these areas. In the coming years it is estimated that due to the high levels of economic activity retail industry will saw an unprecedented growth.

4.7. Retail Regulations in China: Before and after 2004

Before 2004

Chinese Government did not allowed foreign investment in the retail industry in the form of joint ventures or wholly-owned subsidiaries before July 1992. However, realizing the potential growth of the Chinese economy, Central Government allowed foreign investment in the retail industry through joint ventures with local players in big cities like Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao and in five special economic zones of Hainan, Shenzhen, Zhuhai, Shantou, and Xiamen.

Three years later in 1995, Chinese Government listed the Chinese retail industry in its directory for foreign investment, although under the restricted category in an effort to encourage foreign investors to invest in China. By the end of 1995, both Central Government and Provincial and State Governments gave approval of 300 joint ventures. However, in 1998, Central Governments cancelled all foreign funded joint venture approvals given by the local authorities and directed such ventures to restructure their agreements otherwise such joint ventures should be closed down.

Next year in 1999, Central Government announced more lenient measures for the foreign retailers by allowing them to form joint ventures cooperative retail or wholesale companies in Central Government's administered cities, the five special economic zones and the capital cities of provinces and autonomous regions. However, there were certain restrictions to be adhered to by the foreign retailers. These include:

  • Chinese partner's stake would be 51% in a wholesale joint venture
  • Franchising and other forms of indirect chain-store formats were prohibited
  • Foreign commercial joint ventures were not allowed to act as a commodity import or export agent but
    can import product they sold, limited to 30% of their total yearly sales revenue

After 2004

After joining the World Trade Organisation in 2001, China became less strict than before in its economic policies. This can be exhibited by when in 2004 the Central Government of China allowed foreign retailers to open their stores in any part of the country without its permission and even allowed wholly-owned foreign retailers to own their Chinese subsidiaries. Any number of stores could be opened by foreign retailers and they do not have to follow any criteria regarding sales, assets or capital to gain an entry into the Chinese market. Moreover, foreign retailers were allowed to source global brands merchandise locally with any stipulation that the goods purchased should be exported and were also permitted to continue all distribution activities including transportation, wholesaling and retailing.

4.8. Tesco's entry in China

Since the early 2000's, as stated in the print media, Tesco had been in an effort to enter into the Chinese retail market. For this, Tesco had been looking a local partner to embark on its expansion plans in China. Initially, Tesco failed to find a suitable local partner but in March 2004 it was reported that it was in talks with a local partner. In between the process of finalising the deal, Tesco had researched the local Chinese markets and found that at that time in 2004, Chinese retail market had been dominated by local Chinese players in the retail sector. These players include Shanghai Friendship, Beijing Gome Home Appliances, and the Beijing Hualian Group. On the other hand, two major foreign retailers, US based Wal-Mart and France based Carrefour, were also performing well in the Chinese market. The presence of foreign retailers was 25% of the total supermarkets in china.

Tesco entered into an agreement to acquire 50% equity in Ting Cao, a wholly-owned subsidiary of Taiwanese retailer Ting Hsin in September 2004. Ting Cao was operating with 25 stores in the high-end areas of Shanghai, Hangzhou, Ningbo, Tianjin, Shenyang and Dalian under its banner "Hymall" or its Chinese name "Le Gou". The head of Tesco China, Ken Towle said that "We have the scale and expertise but not the local experience. That's why we teamed up with Hymall..." Ting Cao' had recorded sales of 330 million with a post-tax profit of 5.5 million in 2003 and serving around 2 million customers per week.

Tesco surprised many observers when it entered into an agreement with a local retailer. Tesco's international operations' director, Clarke, clarified this in the following words:

"...although I am an expert at retail operation, I was born in Liverpool, I'm not a Chinese; therefore we need a partner who is familiar with China's market. We don't want to jump into this market single-handedly."

Tesco acquired 50% stake in Ting Cao by paying 140 million to Ting Hsin and both venture partners had equal representation in Ting Cao's board with joint venture's president from Tesco and CEO and chairman were from Ting Hsin.

There are several strategic reasons for Tesco to choose Hymall. As Hymall was already operating in the Chinese market it knows its customer base and understands the local market sentiment and also that the management of Hymall was knowledgeable in its retail practices, which were quite advance in comparison to other local retailers. Hymall also had larger number of customers especially in Shanghai and other major cities. According to an analyst, Robert Gregory, Tesco took a strategic step to enter into the Chinese market by using an existing pool of Hymall's 25 stores instead of starting from zero, especially when nobody knows Tesco brand in China. Furthermore, it could have been a big problem for Tesco if it had to select and acquire strategic store locations in order to attain competitive advantage. Hymall's existing fleet of store located at strategic localities solved this problem for Tesco. In respect of why Tesco selected Ting Hsin as a strategic partner to start its operations in China, Leahy, Tesco's CEO said that Ting Hsin was already performing well in the Chinese retail market and that the Hymall is the right store chain to start with which already had strong presence in most vibrant areas of Chinese retail market.

On the other hand, management of the Ting Hsin was also optimistic that it will become one of china's top retailers with the help of Tesco. Wei Ying-Chiao, Chairman of Ting Hsin said that the strategic partnership with Tesco will pool their management skills and technological knowledge and experiences to manipulate further strategic and competitive advantages. This strategic alliance will strengthen the Hymall customership and its overall position in the Chinese retail market.

Retail analysts opined that both Tesco's advance retail technology and operations skills will, when combined with local knowledge and expertise of Ting Hsin, save both time efforts to flourish their business and market share.

4.9. Tesco's expansion strategies

At the initial stages of retailing in China, Tesco, instead of selling private label brands in Hymall stores, sold the existing brands with which customers were familiar. Director of Corporate affairs of Tesco, Lucy Neville-Rolfe, said that "at first we will sell what is in stores at present...then look to bring in our own brand."

Tesco started to sell its private label brand in the last months of 2006 with the name of Tesco Value. Tesco used this label on over 500 products which includes pre-packed foods, needles, biscuits, tissue papers and convenience foods. When Tesco value was launched Towle said that we have launched what customers want and fresh foods is the area where demand is difficult to be met and that "...better quality, pre-packaged products where the price is good... is a big area of opportunity." Tesco developed these products in its own product development facility in Guangxin. Moreover, Tesco also sold its value range under the Hymall brand and Tesco had planned to increase its private label products to about 3,000 by 2012.

In the same year in 2006, Tesco asked for permission from the Chinese Government to use its Tesco logo in Chinese market. Chairman and CEO of Ting Hsin said about the use of Tesco logo that this will enhance the image of the joint venture's brand name and to make customers know that "...we are international".

Tesco attained the controlling stake in Ting Cao, which had around 44 Hymall hypermarkets in China at that time, by acquiring additional 40% shares for 180 million. When Tesco acquired this additional stake in Ting Cao, Tesco's Chief Executive Officer Terry Leahy, said that:

"We have seen exciting growth in China since announcing the joint venture two years ago and are looking forward to the partnership entering a new phase. Ting Hsin continues to be a large shareholder in the business. They are a valued supplier of food products and we benefit from their unrivalled local knowledge as we grow the Hymall business together."

As the end of 2006 was approaching, Tesco owned 47 stores with sales area of 4.2 million square feet and employing about 17,400 personnel in China and there was a growth rate of 19% in Hymall store sales in comparison to the previous year.

At the start of the next year, February 2007, Tesco inaugurated its first store in China with its own 'Tesco' logo which appeared together with 'Le Gou' in China. Chinese customers are keen to touch the food when shopping. To meet this requirement shelves in the store were placed in such a way that customers were able to touch and feel the products before buying. The area was over 8,000 square meters, i.e. 86,100 square feet and there were more than 500 employees in the store.

On opening of its first store under its own banner in Beijing in 2007 a Tesco's spokesman said that Tesco is opening this store as an experiment and Tesco's intention is to keep the brand name in China until "...how well receive the new format is."

A 'China graduate program' was launched by Tesco in 2007. The main purpose of this scheme was to select Chinese students studying in British institutions who were then trained in Tesco stores in the UK for a period of six to eight months and the remaining period out of 12 months in Tesco stores in Shanghai. This scheme was launched to bring together Chinese culture and Tesco's way of operations to help the company to understand the Chinese market and to facilitate expansion strategies in China.

Tesco took a major step in September 2007 by renaming all Hymall stores in China to 'Hymall Tesco'. Tesco retain the name Hymall in order to retain existing customer base. This brand restructuring also includes change of uniform, design & layout and the symbols used in the stores to give it a standard international look adapted by Tesco's stores all of its stores in various countries.

In the same year, Tesco also restructured its operations in China in order to deliver its customer better value. As China is a very big and vast country, therefore, it was felt convenient by the Tesco management to control its operations on a regional basis according to specific demands of customers in a specific region. Hence, Tesco started operate in the country by three main regions, namely, North and North East region, Eastern region and the Southern region. A regional director was appointed to head each of these three regions.

4.10. How Tesco managed its stores and its merchandise in China?

Tesco design its stores with two stories or floor with the first floor stocked with food stuff and the second floor with non-food stocks such as clothing, durables and bicycles. In China, the preferred mode of transportation is the bicycle. Therefore,

Tesco in one of its stores in Shanghai provided a cycle parking lot for its customers. All of Tesco stores were provided new and advance knowledge and expertise in information technology, food safety etc., by Tesco headquarters. However, it made sure that these stores were managed as they had already been managed by the Chinese management. Tesco started to sell its private label products, for example, tinned food, jams, etc in these stores under the slogan of imported products. This way Tesco was able to manage and retain its existing customer base as customers did not find any major change after Tesco's restructuring in these Hymall stores. When Tesco started to sell under the Hymall name, customers did not realised that they were buying products from a UK based company. Tesco's initial strategy was to build a presence in the Chinese market instead of rapid expansion or increasing its stores numbers or to establish Tesco brand. According to Neville-Rolfe, Tesco's strategy was to operate in a local fashion, i.e., "We are going into local markets in a local fashion. It doesn't seem to be essential to use the Tesco name."

Tesco started display its own products in various stores after it acquired a major stake and after conducting a major exercise of rebranding. Then in the next step Tesco introduced its loyalty card scheme, named as Tesco Clubcard, in the country. This scheme became very popular among the customers and about 3.7 million customers joined the scheme in the first six months of the launch of the scheme.

Most analysts in the retail sector noted that Tesco is slowly introducing its brands in the Chinese market by selling few products at a time. Under the brand name of Tesco Le Gou, Tesco introduced 134 grocery and fresh lines and over 600 non-food lines. As per price is concerned, in order to be competitive, Tesco set prices for these products 20% lower than the products with brand name of similar quality.

In another bid by Tesco to secure its distribution channels and to retain and improve the quality of its products, it opened a fresh food distribution centre in Shanghai in March 2007. The areas covered by this distribution centre were Shanghai, Jiangsu and Zhejiang provinces.

Tesco found that in urban areas a large number of customers still prefer to buy their grocery and fresh vegetables from traditional wet markets. Therefore, to counter this and as part of its multi-format store strategy, Tesco opened a Tesco Express convenience store in March 2008 in Shanghai. This strategy of Express stores was adapted to meet customers' needs by providing everything in a neighbourhood store. This strategy was influenced by Tesco's own successful strategy in another market, Thailand, which has similar characteristics as a market as is the case in China. In Thailand, Tesco has more than 300 Express stores and which contributed to Tesco's success in that country.

4.11. Think Local: Tesco's strategies of localisation in China

It is a general perception in recent years that to operate in a international market, it is very important that the company is not aware of but able to adapt to local culture, consumer behaviour, consumer habits and local customs and finally to modify and deliver the products accordingly. In China, Tesco combines its core strategies as in the UK with other of its international operations to adapt to local conditions. According to Tesco's CEO, Terry Leahy, it is important that operations are blended with the local circumstances and a single top-down model would not work. Moreover, Tesco also appointed Chinese senior management personnel to run it stores.

Instead of changing consumers' preferences, Tesco modified its own practices according to consumers' needs. Moreover, Tesco also observed through its own research before entering into the Chinese market that to operate in the Chinese market is very different from other of its operations in Europe. In China, customers prefer to feel and touch the products before buying it as is said by Tesco's spokesman, Greg Sage. He also said that "We took four years to study the market. It's very different from other countries."

In respect of staff management at its stores, Tesco also adapted the localisation policy by keeping a 'hands-off' policy with its staff in China. Tesco appointed all the middle managers who were Chinese and only the most senior positions were occupied by British employees. The proportion of Chinese personnel to British personnel was one British employee against one thousand Chinese employees. According to one of the Tesco's Chinese employees, "When we heard that a British firms had bought a stake in the company, everyone was bit worried that it would mean big changes but so far there hasn't been anything that noticeable." This strategy was retained even after Tesco acquired a major stake in China and there were not many lay-offs. This was because retail operations in China needed many personnel, especially in China where customers visit stores more frequently for their shopping.

Tesco designed its stores' interiors according to local customs and most importantly as per preferences of the local customers. However, exterior of stores resemble to those of in other countries. Individual customers greeted at stores in each stores entrances by staff in traditional Chinese manner.

Tesco sold well-known local brands along-with other locally sourced products in its stores. Tesco sourced about 60% of its international sourcing from China through more than 300 suppliers at the end of 2006. In 2007, Tesco sourced about 2.2 billion worth of goods from China and planned to source more than 4 billion in the next two years. More remarkably, the fresh produce section in these Chinese stores was different as compared to in stores in Europe. Chinese staff shouted aloud in these sections to attract customers' attention for products which included live reptiles, for example, turtles, fish, toads, jelly fish, etc. All these live animals were selected by the customers and then cut to cater the customers' needs. The purpose of selling such live animals was to counter the competition from the traditional wet markets, but in a more health conscious manner. According to Wei Ying Chiao, "It is a balance between a wet market and a supermarket. We have created a familiar feeling for the grand mums."

Tesco sold local products in a local manner. For example, Tesco sold rice in traditional bins made of wood and tin packs were used to sell oil. Various Chinese variants were sold from Tesco stores such as Chinese cookies, sesame seed balls, egg rolls, dried fungi, noodles, etc. Tesco tried not only to generate loyalty through its brand but also catering the needs of its Chinese customers by offering them local products. As in the words of Towle, "Our brand is very important for generating loyalty, but our customers are Chinese and we need to give them the local products they want, too."

As is the case with every customer to be served quickly, therefore, check-our counter were designed in such a way to provide a quick service as most customers buy in small quantities but with regular intervals. The average spending per visitor per customer is about 5.25, mostly in cash, therefore, quicker check-out process required to be a necessity which Tesco tried to achieve.

Tesco operates mostly in city center areas in China, as most other retailers are in located in city centres. Tesco went a step ahead by providing courtesy pick and drop bus service from various locations in the city to Tesco stores, for example, in Beijing.

In last few years china is transforming itself to a more liberal economy, especially adapting market economic principles to run its economic and business affairs. As a result, a new middle class is emerging with a changed life style and living habits. In urban areas, now both husband and wife are a working and as a result weekly shopping has become a norm instead of traditional shopping patterns. Another change in daily routine of these working people is to find less time to cook their meals. Therefore, to meet this need from customers Tesco launched microwaveable ready meals.

With heavy emphasis on localisation, Tesco has enabled itself to attract more and more customers to its stores. This is especially the case in Shanghai, where a vast number of people belong to working segment of the society. These consumers buy a wide range of products available at Tesco stores. A Beijing based customer commented about Tesco and its efforts to deliver quality products at affordable prices that "I used to go to the Chinese supermarket. But here it's inexpensive, there's more choice, and it's close to home."

4.12. Outlook and opportunities

Due to the continuous evolving of the Chinese retail sector, it is expected that the deal activity will remain strong over the medium term until the achievement of the consolidation in the sector is reached. To finance the aggressive policies of new store openings and adapting the policies of entering into merger and alliances, more and more emerging retailers will keep trying to follow the footsteps of Gome and Wu-Mart in the process of seeking strategic financial investors before tapping the capital markets. Opportunities also arise from the reshaping and restructuring of the retailers under the control of the state and by the introduction of external investors into the retail market. Supplier base has also been strengthened by the restructuring of the retail sector since the introduction of new government policies in the Chinese retail industry.

Chinese government mainly allows two types of foreign companies to operate into the Chinese market. The first one is the joint venture whereby a foreign company joins hands with a local Chinese company to operate in the country. The second form is the wholly owned foreign enterprise (WOFE) whereby 100% control and operating activities are performed by the foreign company in china. With the market easing policies of the Chinese Government by reducing restriction on the foreign companies to operate in China, international retailers like Tesco are increasing their share in the market by either entering into agreements with local partners by the urge to either acquire existing chains to accelerate their entry into the market or in order to take the lead by freeing themselves from the local partners, by taking advantage of eased restrictions, and setting up retail wholly owned foreign enterprises. However, it must be kept in mind that all joint partners are not equal and, therefore, should not be considered as irrelevant. For example, when early movers like Carrefour entered forcibly into joint venture agreement with unsuitable partners began to acquire stakes in those JV partners in a number of stores around the country when restrictions eased by the government. While on the other hand, later entrants like Tesco were able to choose a proven local partner to be benefited from its experiences and strengths and later acquired more stakes in the company.

When a leading local retailer sits into talks with a foreign retailer, local retailers are more stronger than the foreign retailers in term of increased bargaining power and these local retailers demands higher valuation from foreign retailer, most likely unwilling to give up control, and also are on the edge that they knew to what extent alternatives are available from private equity and capital markets. This scenario poses a threat for new entrants into the Chinese retail market. Therefore, it could be said that Tesco may be able to explore the opportunities especially if this scenario is prolonged. Moreover, although under the WTO umbrella Chinese retail market has created options for foreign retailers to enter into the Chinese retail market, however, a strong tactical entering and expansion strategy is required along-with apt investment. Therefore, Tesco must be aware of such policies to accelerate its expansion plans in the Chinese market.

In the Chinese retail market the Chinese government is the biggest stakeholder as its direct or indirect actions may expand or limit the opportunities for Tesco. Recently, Chinese government has shown leniency towards international retailers by entering into joint ventures or even giving them permission to operate through wholly owned entities. However, it must be noted that although Chinese government has give a green signal to foreign retailers to do business in the Chinese market but still Tesco require a strong tactical expansion strategy couple with appropriate investment in order to accelerate its expansion plans in the Chinese retail market.

On the other side, a strategic partnership between domestic Chinese retailers and suppliers could be a kind of new competition not only in the mainland china but also, may be, overseas. As some domestic retailers may operate in the vicinity of china especially where there is product overlap, this domestic suppliers and retailers coalition could try to be more powerful and as a result the fight for market share against Chinese retailers will soon be played out not just in mainland cities, but in the global market.

In recent years due to a global trend, both local and foreign retailers in an effort to increase their market share and network, to enhance their bargaining power are expanding aggressively. This easiest and the fastest way to achieve this goal is through an acquisition that can provide a retailer to begin with to compete with its rivals by giving strong signals. Although there is huge media coverage of recent foreign invested acquisitions in the retail sector in china, however, the truth is that the biggest merger and acquisition activity is observed within the domestic retailers in Mainland China with a land-grab mentality emerging in a game of grow-or-die. Furthermore, both private and state-owned retailers are in a rush to combine their retailing in a number of categories from home appliances and food retailing to sports and fashion. As modern trade just started few years back, there are many other areas, e.g., geographical markets and product category, are left to be explored where there does not exist established chains results in a shortage of suitable acquisition targets.

But on the more optimistic side, however, a rapid increase in market development has shown that the targets markets are emerging with incredible speed. For example just outside major cities about 70,000 new supermarkets opened only in 2005, while the Beijing municipal government expects to see around 600 new convenience stores and supermarkets open in its suburbs in 2006 alone. This rapid expansion in chain stores is expected to stimulate merger and acquisition activity as active players in the retail sector try to enhance the scale and market share in the other regions. Now chain store are changing from merely selling food and grocery to home appliances, mobile phones, clothing, sports, personal care, toys and offices equipments and resultantly acquisition and consolidation process will inevitably copy this trend in order to be more competitive as more competition grows.

Due to the rigorous vertical control of the market, movement of resources was restricted until the start of the economic reforms and especially until China joined the WTO, when a substantial growth in the inter-regional flow of goods and services was witnessed in China. However, many factors such as either a legacy of history or new phenomena born of reform still hampered the fast development of a national market. With the increase in net personal incomes of the emerging working class consumer spending had been increasing on food, which ultimately constitute as the largest proportion of the consumer expenditure in Mainland China.

In the case of Wal-Mart, a higher percentage of sales is contributed by food sections in its stores in China as most Chinese customers like to buy fresh food and in many cases, fresh meant alive. Therefore, to meet customers' demands for absolute freshness combined with the poor transportation network required that a large variety of foods had to be procured locally instead of through Wal-Mart's centralised procurement system. Diminished economies of scale and interrupted supply chain meant higher costs in satisfying Chinese consumers.

4.13. Problems and Challenges

As per research of a market research consulting services company, RNCOS, the total Chinese retail market value in 2005 was USD 756 billion, while of this proportion, only 20% accounts towards an organised retail market. It was expected that ranking of the Chinese retail market in world will move from number seven in 2005 to number five in 2010, surpassing both France and Germany. However, on the more pessimistic side, analysts viewed the Chinese retail market to take long time to replace the existing traditional wet markets in China, as it is facing competition from a fragmented positioning due to domination of local retailers.

Inflation struck China during 2008 with higher fuel and food prices. More usual and daily products, such as cooking oil, rice, pork, etc, were sold with inflated prices. This price-pushed inflation made it difficult for Tesco to sell at lower prices with problems to maintain customers' levels.

Tesco took almost four years to study Chinese retail market in detail and then it decided to adapt localisation policy. However, this policy was not without problems. Tesco stores were selling live reptiles to meet its customers' needs. But a video released on the internet showing how turtles were slaughtered in Tesco's stores China was used by animal rights activists in Britain against Tesco. There were allegations against Tesco that to gain profits, it is ignoring its corporate responsibilities. In its Corporate Responsibility Report of 2007, Tesco responded to such allegations that it has received more than 300 letters and emails from its customers in the UK regarding the sale and the way of killing of live turtles and frogs in its stores in China. Tesco said that in the above report that "... we commissioned new scientific research from Professor Song Wei, who introduced the first Animal Welfare Law course in China at the University of Science and Technology. This evidence, along with papers shared by the NGOs, has enabled us to begin a review of our current standards and procedures on turtle farming, transportation, sale and slaughter." However, Tesco also reiterated at the same to not to change the habits of the local people.

China is one of the emerging and lucrative retail markets in the world. Currently, major retail players in world are operating in China including Wal-Mart (a US based and the largest world retailer, started ground-work in China in 1994 and started operations in 1996) and Carrefour (a French based and the world's second largest retailer, entered in China in 1995). Tesco is facing a severe competition from these retailers. These retailers have a competitive advantage over Tesco as these retailers entered into the Chinese market before Tesco. These retailers have made their presence and strong customership in China than Tesco.

There were not only international retailers but local retailers were also making it difficult for Tesco to do the business. These local retailers were copying whatever Tesco was introducing in the market from store format to product prices and quality and were forcing Tesco to innovate at a later stage to be distinctive. Nick Debnam of KPMG in Hong Kong explained it in these words.

With the emergence of Tier-II cities across China, major international retail players such as Wal-Mart and Carrefour, put forward plans in 2008 to expand to these areas to increase their customer base and market share. On the other hand, Tesco planned to remain in the areas surrounding Beijing, Shanghai and Guangzhou in an effort to increase its market share and sales in response to rising income levels of people living in these areas.

Since its joining with WTO, China had allowed foreign retailers to do business in the Chinese market. However, Chinese Government is contemplating to introduce new rules and regulations for foreign retailers, for example, it may be that foreign retail companies need to file their proposed expansion plans and to co-ordinate with local communities in order to have opinions regards impact of Tesco's stores in their localities. According to Robert Gregory from retail sector research Company Planet Retail, in order to protect the local retailers Chinese Government seems to favour them as compared to foreign investors in the retails sector. Preferences would especially be giving to local retailers in respect of allocation of store location.

Despite these obstacles, Tesco is confident to retain and improve its market share in the Chinese retail sector. Tesco's CEO, Terry Leahy, is very optimistic about its venture in China and said that "We will have to scale up in China, it's such a big place that you either have to ease out or commit quite a bit." However, to achieve desired results may take many years, he said.

4.14. Summary

In recent years, China has emerged as the most lucrative economy of the world. For this reason, many international retailers are heading towards China to have less or more share of the market. Tesco entered into this market in 2004 to in an effort to use its already acquired capabilities and international retailing gained from operating in various European and Asian markets. However, the Chinese retail market proved to be different as compared to other markets in respect of consumers' retail attitude and spending, market formats, product orientation, distribution channels, staffing and management personnel. To counter these difficulties Tesco adapted the strategy of localisation. This localisation policy proved to be a starting point in the learning process through insight experience of Tesco's retailing in China. Tesco learnt from its experience that instead of venturing into bigger projects, that's why when Tesco entered into China, it went into an agreement for a joint venture with a local partner.

When Tesco started to operate in the Chinese retail market it learnt that it has to change its format according to local commonly known formats if it wants to excel its operations in China. That's why China adapted the style of wet-market in its stores to sell fresh produce. This also supports Tesco's value that Tesco must understand the customers better than anyone and to be energetic, innovative, and be first for customers.

Tesco also learnt from its experience that to give their customers a local look it must have local management personnel besides its local staff in its stores. Moreover, management personnel were even given authority to 'think local' so that Tesco be able to maintain and to further increasing its market share.

In past few years, Chinese government has given less restrictive environment to foreign retailers to operate in China. As Chinese government is the strongest stakeholder, any direct or indirect actions from it could either adversely or favourably have an impact on Tesco's operations in China. Therefore, Tesco must be resilient and tactful to adapt to its own expansion policies.

Chapter 5: Conclusions

5.1. Introduction

Since its inception in 1929, Tesco is continuously expanding. In its home country it has become the number one surpassing its arch rivals Sainsbury's and Asda. After its successful operations in the United Kingdom is continuously expanding abroad and now it is one of the fastest growing retailers and stands third largest retailers in the world after Wal-Mart and Carrefour. The study under review contains matter relevant its experiences in China by conducting retailing activities.

5.2. Summary and conclusion

Tesco entered into the Chinese retail market in 2004 and now is growing at a faster pace in the country. The study under review provides an insight into its experiences. Before entering into the Chinese market, Tesco researched the Chinese market in detail as it did when it entered into the Japanese market. However, despite the fact that many international retailers are doing business in many countries not much literature is available on the issue experience or learning through experience. Therefore, in the real, practical world, it has generally been construed and understood that the multinational companies who were involved in the process of international retailing learned lesson from their own mistakes and successes by entering into markets which were unfamiliar to them or from the lessons learnt by the success of their competitors or other companies who were also involved in international retailing.

Data used in this study has been collected from various sources such as newspapers, trade journals, government agencies, industry news, etc along-with from company's own publications available online. Moreover, as is pointed out by many critics, practical research provides the opportunity to investigate resultant views and opinions, in response to experience gained and lessons learnt, of the personnel directly or indirectly involved in the decision making process.

This study has been conducted on the basis that UK's retail market is transforming rapidly. Therefore, new horizons are being explored by Tesco, China one of those frontiers, in a bid to enhance its market share and ultimately its profitability. Another reason is to contribute some thought in already scarcely available literature on Tesco's experiences in retailing in China when coupled with Tesco's own divestment experience in France, Ireland and Taiwan.

The best strategy Tesco adapted in its international operations was to localise its stores keeping in considerations of the demands posed by the local consumers. In china, to counter the traditional wet-market format, Tesco sold fresh produce and live animals. However, Tesco kept its standard functions while offering products on the basis of localisation in its international operations in china. Giving convenience to its customers in its stores remained the main aim of Tesco.

Now with continuously learning from its experience in retailing in China, Tesco has been able to expand its operations and growth in China. This is evident by a recent expansion plan by Tesco in China that it has to begun to accelerate store and infrastructure development as part of their long-term strategy to become a leader in the market. There is a plan by Tesco to construct large multi-level freehold shopping centres, which will be built around Tesco hypermarkets, in the major cities of the three main economic regions - around Shanghai, Beijing and Shenzhen/Guangzhou. These regions will each have modern distribution and supply chain facilities. Tesco now have 56 hypermarkets, mostly around Shanghai and their first stores in the other regions are trading well. The first four of new large developments will be constructed in the current year and it is forecast that there will be a strong sales, including good like-for-like growth in the year and China made a modest profit.

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