Reference no: EM133358602

Case Study: By 2007 Tesco's share of the UK market had increased to 30% and it had come under criticism for its market power. As a result, Tesco was actively pursuing growth opportunities in foreign markets in Eastern Europe and China and had decided to make a determined assault on the US market. Many observers considered this to be an ill-advised move given the dominance of WalMart in the US and the fact that the US grocery market was mature. But the boss of Tesco, Sir Terry Leahy, reckoned that this was a sound business move, given the basis of Tesco's competitive advantage. Tesco started from a formidable base. At one time the third ranked grocery retailer in the UK, by 2007 it was the third ranked in the world. The top three are summarised below. In its previous foreign operations Tesco focused on tailoring stores to local needs. The approach in the US was to be totally different. First, the trial of a store in Santa Monica was conducted in secrecy and customers were told that it was really a film set. The openings were planned to be fast and numerous - for example, 21 stores in Pheonix opening almost simultaneously. According to Sir Terry entry had to be significant otherwise imitators could move in before critical mass is achieved. He said "In retailing there aren't huge barriers to entry. That's one of the reasons you can't hang around and trial this thing. You have to launch and go." Clearly that means Tesco had to commit to a gamble; Warren Buffet appeared to think the gamble worthwhile because he purchased 3% of Tesco shares to become one of its largest shareholders. Second, the research was without precedent: Tesco executives and researchers spent weeks living with US families to determine what affected their buying behaviour. The city of Pheonix was studied for a year before approaching the Greater Pheonix Economic Council to seek help in finding retail sites. Third, Tesco had a much more ambitious plan than simply entering a lucrative market; the intention was to change the way Americans shop and eat. This was clearly a tall order and there are several strands to the approach. The segmented market A salient feature of the US grocery market was the split between luxury (Whole Foods) and cheap (Wal-Mart) stores. Stores in the middle (Kroger, Safeway) had been squeezed: they found margins under pressure whenever Wal-Mart opened up and at the same time had to incur high infrastructure costs to maintain their 'quality' image. Tesco aimed to build on its UK success of appealing to all sectors of the market and focus on the middle market. It aimed to target this market in three ways. First, by concentrating on small stores holding a relatively small, high quality, stock. The idea was that the combination of convenience and quality was something new. Second, by stocking 'ready meals' that were familiar to the British but virtually unknown in the US. There appeared to be a hole in the market here but why should it exist? The reason had to do with the US grocery supply chain, where costs had been beaten down by competition. The result was that there were only two types of ready-made meals available: those that last because they have been preserved and those prepared from raw ingredients in the store. Thus, while Americans were good at moving goods large distances and keeping them cheap, the British specialised in regular, frequent deliveries to city centres. The British supply chains were more efficient so small stores could switch from sandwiches at mid-day to ready-made suppers in the afternoon. Because labour is relatively more expensive in the UK, economies of scale in centralised food preparation had been exploited to make meals that can last for a few days; the variety is enormous - the typical UK supermarket stocks about 50 different meals. Tesco was the most successful UK retailer in the production of ready meals. Third, Tesco had been at the forefront of technological change in its supply chain. For example, it was the first to use trucks that have separate compartments for frozen, chilled and ordinary food making it possible to sell groceries in small stores at supermarket prices. Another application of technology is the use made of its shopper database. Correlations between purchases are used to fine tune stocks, with the result that stores serving different areas can be completely different. It is also able to identify unexpected correlations, such as the fact that families buying baby products also buy more beer because young parents do not have the time to go out to pubs and restaurants. The important point is that Tesco acts fast when it identifies a particular correlation or buying trend. But will it export its advantage? Will the UK business model work in the US? Some critics pointed to the difference in travel habits, with many Tesco stores being located near to subway and railway stations. It is argued that Americans would be much less likely to purchase ready meals on the way home. Tesco reckoned that the trend to healthy eating would be in its favour with its focus on organic products. It also projected itself as healthy and green, with the development of energy efficient stores. US shopping habits were also in favour of Tesco. Americans shop more frequently than the British because they have to visit more retailers because of lack of choice. Tesco's aim was to supply more focused choice so that shoppers would have confidence that they could get all they need at one shop. What does history say? It is a fact that few retailers have successfully entered a mature market in a developed country. For example, Sainsbury, Marks & Spencer and Carrefour have all failed in the US.

One

explanation for this is that food retailing is still a local industry: one consulting company has found, for example, that a 40% market share in one market is much more profitable than 10% market share in four markets. But companies such as Wal-Mart, who have a successful formula in the US, have not always been able to export it abroad. Wal-Mart had to withdraw from Germany because it could not adapt to local conditions. There is also no such thing as a world brand in food retailing, in the same way as Zara and Gap in clothing. In fact, Tesco entered the US under the name Fresh & Easy. There is no doubt that if Tesco were successful, it would be imitated by US incumbents, despite the relative inefficiency of their supply chains. Whether this imitation will be successful only time will tell. Tesco could design an efficient logistics system based on UK experience, but the actual construction of a novel supply chain from scratch in the US is an expedition into the unknown. So, what is the risk to Tesco? Sir Terry was frank about the fact that he stood to lose personally in terms of career and reputation; Tesco stood to lose about $1 billion but that would have little impact on a company that made $5 billion profit in 2006. As Sir Terry said, "If it succeeds then it's transformational."

Question:

1. Assess competitive conditions facing Tesco in the US grocery market.

2. How did Tesco intend to overcome adverse competitive forces?

3. Use the process model to assess the likelihood of Tesco being successful in the US.