Tesco Conquering the Middle Kingdom

1.0 Introduction

Tesco – once only known in UK is now the third largest retailer in the world. Such phenomenal success in 80 years has only been possible due to aggressive internationalization. And few countries hold similar prospects as China - the middle kingdom. The purpose of this report is to explore and understand how Tesco has been faring in China, one of the most domestically and internationally challenging market. The report is mainly divided into eight parts. After this brief introduction, the following section outlines the key values and strategies of Tesco PLC, followed by Chinese retail market analysis. Section four dissects Tesco's standing in China using various theoretical tools while section five narrates the existing and forthcoming challenges. Finally some strategic recommendations are laid out in section six.

2.0 Tesco PLC – values & strategies

In order to better evaluate Tesco, it is crucial to get a brief overview of its core values and strategies. At the centre of the values guiding Tesco lays the intent ‘to create lifetime loyal customers by crafting value for them' (Tesco PLC) . Tesco aims to adhere to this core value by focusing on customers (by understanding and competitively mitigating customer needs while being a responsible corporate citizen) and employees (by investing in people, team building and listening to their needs).

Tesco's international strategy is based on six core elements – flexibility, localization, focus, multi-formats, capability and brand development . Tesco practices localization in its operations, human resource management as well as through products and services. Identifying the local knowledge as a crucial success factor the preferred entry mode for Tesco is Joint venture with an established local partner to gain local market insights. Tesco focuses on the customers and develops capabilities by investing in people. Tesco brand is a tool to build long lasting customer relationships. To summarize Tesco fits itself to the local market by being local at what it does (Food & drink Europe).

3.0 Market analysis

China is a high velocity market with constantly shifting consumer demands and market trends. Intense competition and volatile legal, political, socio economic, environmental and technological situations make it even more challenging. On the counter side, it is one of the fastest growing economies in the world with tremendous forecast of growth. The following section presents a brief overview of the retail market in china, the competitive environment, the consumers, the workforce to determine the attractiveness of the Chinese retail industry.

3.0.1 Market situation

The Chinese food retail industry has enjoyed phenomenal growth in recent years with growth by 198% between 2001-2008 (Access Asia). Although previously limited to Shanghai, Guangzhou and Beijing region with intensifying competition the retailers are extending their reach to the other 1st, 2nd, 3rd and other tier cities (Data Monitor). With expected urban population of 874 million by 2030 (IGD, 2008) and households with annual earnings between 25,000-10,000 RMB to grow to 200 million by 2015 (McKinsey) there is huge business prospect. In 2007, sales through supermarkets accounted for 35.2% of the market's overall value (Data Monitor). However, market penetration by the major retailers is still insignificant as evident with the top 100 retailer's accounting for only 10% of the total retail sales (The Economist). Hypermarkets hold only 3.7% of the total food market in China (Data Monitor). Such market condition offers tremendous opportunities of growth opportunities for the retailers.

3.0.2 Competitive landscape

The number of supermarkets in China has grown rapidly during the last 20 years. Traditional mom-and-pop stores and wet markets dominate the market even though the four behemoths of the global retail industry – Wal-Mart, Carrefour, Tesco and Metro is present in the major cities (Data Monitor). Local groups – Shanghai Friendship, Beijing Gome Home Appliances and Beijing Hualian Group are leaders with Carrefour ahead amongst the foreign players. These foreign retailers are major competitors of Tesco. Carrefour bases its businesses on localization; Wal-Mart's strategy is "every day low price" and "satisfactory service" and Metro focuses sales through small- and medium-sized stores (Kinsey and Xue, 2005). With such intense competition companies focus on achieving scale of economies as profit margin/product is very low.

3.0.3 Consumers and market trends

The middle income household is the target customer group