INTRODUCTION

Tesco was founded in 1924 by John Edward Cohen and named as Tesco Stores Limited in 1932. Since
then, Tesco was responsible for several small revolutions in the UK retail industry. When the RPM act
was abolished in 1964, Tesco started growing rapidly acquiring grocery store and small chains of super
markets throughout the country. But, until 1995 Sainsbury was the market leader and was always ahead
of Tesco. Year 1995 was an important year in the history of Tesco, as it overtook Sainsbury and became
the market leader.

Currently, Tesco PLC is the market leader in UK retail industry and has control over 25% of the market
share. Tesco's core UK business is significant within the group, with over 250,000 employees and 1,779
stores. Tesco also diversified its business activities to non-food and retail services like apparels, finance,
telecom, travel. All the products in food and non-food sector are offered in different price ranges where
‘Tesco Finest’ being their premium brand.

Tesco’s Core Strategy

The core strategy of Tesco was Pile ‘em high, sell ‘em cheap. Product, Price, Place and People are four
fundamental principles on which Tesco’s philosophy of business is built upon. It succeeded in giving
convenience to the people with respect to product, price and place. This commitment made them to
embrace upon a method that people in a local area to buy from them and to sell every one in the whole
country. They achieved it through opening up hundreds of stores in majority locations in the country and
entered into e-tailing through tesco.com. Along with tesco.com, the loyalty club card system introduced
by Tesco gave them a distinctive capability of observing the buyer’s mentality and arranging the store
format accordingly. Similarly, it gave them an edge over competitors with respect to consumer trends,
cross-selling, seasonal peaks etc which largely determine the retail business. It has grown to such an
extent that in some places people have a choice to choose between Tesco, Tesco and Tesco.

Tesco’s Resources & Capabilities

Tesco’s success is large based on their resources and capabilities. Apart from their financial resources,
which are the source for their, expansion plans across sectors and boarders, some of their core capabilities
lie in Information Technology where Tesco Hindustan Service Centre (Tesco HSC) plays a formidable
role. With the help of their IT services, Tesco is able to track any business transaction that happens in any
part of the world. Another important capability, which they developed over years, is Global sourcing
which helps them in maintaining their cost leadership. Tesco Club Card is another important method
through which they developed their competence in predicting the consumer buying behavior and
arranging their stock accordingly in the stores, stocking according to the seasonal peaks etc. Coupled with
the above said factors, the strengths of Tesco PLC are helping them to develop their business across
borders.

Strengths of Tesco

1) Increased market share: Tesco is the largest retail group in the UK. The group had 26% share of
the UK grocery market as of December 2006. It accounted for 56.1% of all UK supermarket
shoppers in 2007. In October 2006, 66.2% of the online food and grocery shoppers purchased
online from Tesco. Tesco operates 3,262 stores. The group has 30 distribution centers, of which
six are dedicated to non-food and clothing. Tesco has grown its non-food division to the extent
that its revenues now total 23% of total group earnings. Tesco’s international business segment is
growing steadily, and is predicted to contribute nearly a quarter of group profits over the next five
years. If geographical spread continues to grow, this will ensure Tesco’s continued regional
strength.

2) Tesco.com - e-tailing venture success: Tesco.com is the largest online grocery shopping service
in the world. It is the fourth biggest online retailer in the UK, behind Amazon, Dell and Argos. Its
revenues grew by 29.2% in 2007, reaching £1,226 million in turnover.Tesco.com serves 850,000
regular customers in the UK, which include households from both urban and rural areas. It gets
more than 250,000 orders every week. In the UK, for parts of the country where Tesco has few
stores or where those it has are exceptionally busy, it has developed a tesco.com-only store.
Anticipating the even larger opportunity in online non-food markets, the group launched Tesco
Direct for catering to non food segment in August 2006 and this was made online through
tesco.com.

3) Strong brand image: Tesco has an impressive brand image. It is associated with good quality,
trustworthy goods that represent excellent value. Tesco’s innovative ways of improving the
customer shopping experience, as well as its efforts to add value through financial services have
resulted in strong brand equity. A strong brand image, besides enhancing customer retention rates,
enables the group to launch more products under its own labels and allows it to enter new markets
and product lines relatively quickly, as was the case with its entry into the personal finance
market.

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 4) Adaptability – in formats and Location: Tesco is one of the flexible companies in retailing
having the capacity to adapt itself in different formats and locations. It operates in a range of store
formats like Tesco Express, Tesco Metro, Tesco Extra, and Tesco Superstore. Also, it has shown
the local responsiveness in its international operations designing its business model and store
formats according to the local situations.

5) Tesco’s Financial Condition: Tesco has reported an 11.8% rise in underlying annual profits for
2007 to £2.846bn. Online and non-food items helped to boost Tesco's UK business, while sales
from its international stores also showed strong growth, up 25.3% in 2007. Tesco shares rose
7.29%, or 28.50 pence, to 419.50p at close of trade. Tesco is a growing company and the strategy
is designed to deliver growth and performance, while maintaining focus on investing for the future

STRONG GROWTH ACROSS THE GROUP

52 weeks ended 23 February 2008 2007/8 Growth vs. 2006/7
(on a continuing business basis)
Group sales (inc. VAT) £51.8bn 11.1%
Group trading profit £2,751m 11.0%
Underlying profit before tax £2,846m 11.8%
Group profit before tax £2,803m 5.7%*
Underlying diluted earnings per share 27.02p 20.8%**
Diluted earnings per share 26.61p 14.2%
Dividend per share 10.90p 13.1%
* 15.3% growth excluding last year’s exceptional items; principally the Pensions A-Day credit
** 13.1% growth on a normalised 28.9% tax rate
(http://www.tescocorporate.com/page.aspx?pointerid=A9C8B12C59264C51B77AA40476A2AFEE)

Weaknesses of Tesco

1) Dependence on UK and Europe: Tesco is heavily dependent on the UK market. In fiscal 2007, it
derived 76.6% of its total revenues from the UK, 13% from the rest of Europe and 10.4% from
Asia. One of its competitors, Wal-Mart derived 22.1% of its revenues from its international
operations. Another competitor Carrefour derives over 52% of its revenues from its international
operations. Concentration of operations in the UK and Europe makes it vulnerable to market
conditions in this region and puts it at a competitive disadvantage relative to rivals with a larger
presence in fast growing Asian markets.
2) Weak returns: Tesco has recorded weak returns in the last few years. Its return on assets, return
on investments and return on equity during 2005-2007 were 7.1%, 8.3% and 16.8%, respectively.
Whereas, one of its competitors Marks and Spencer’s recorded return on assets, return on
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 investments and return on equity of 11.4%, 15.2% and 49.3% for the same period. Weak returns
reflect the inability of the management to deploy assets in profitable avenues, and this could result
in decreasing investor confidence.
3) Weak inventory turnover: Tesco has recorded weak inventory turnover in the fiscal year 2007.
Its inventory turnover ratio for fiscal 2007 was 25.1. One of its competitors J Sainsbury recorded
an inventory turnover of 29.4 for the same period. Another competitor, WM Morrison’s, recorded
an inventory turnover of 32.5 for the same period. Low inventory turnover ratio indicates that the
group is not able to rotate its inventory faster and does not have an effective inventory
management system in place. Low inventory management could increase the sale of goods on
discount. This would affect the group’s revenue growth in the coming years.

Tesco’s Value chain analysis

1) Inbound Logistics: The inbound logistics is of critical importance in the Tesco value chain,
because of the strong bond between Tesco and its suppliers. Tesco needs to make sure that the
stores get the right products at the right price, the right quality, the right quantity and of course at
the right time. Balance between these elements is central, so at the end, the consumers get what
they want. The inbound logistics is one of Tesco’s competitive advantages and deals with
reception of products, staff scheduling, facilities planning, stock control and storing.

2) Operations: The operation within the Tesco organization is in fact all the different products
arriving to the store and placed in-store. Tesco buy large amounts of groceries, clothes, electronics
etc. so they get the advantage of economies of scale, then they increase the price and sell it direct
to the consumer with a positive margin. That is very simplified how Tesco’s operation works, of
course there are things to be done before they sell it, like packaging, machining, testing of
products, assembling, till operations and store operations.

3) Outbound Logistics: The outbound logistics is a smaller area in the organization because Tesco
do not have to send things out of their stores; customers come into the store and pick up their
groceries, pay at the till and go out again. However, queuing management is important, so the
customer gets a quick and efficient check-out. The location of the store and the car park outside
the store is also central and linked closely to the consumer when they leave the store. Customer
management is essential for the reason that Tesco is customer driving and the company needs all
the information they can get about their customers to develop customer relations.

4) Marketing and Sales: Because of Tesco’s size, the company uses many marketing tools like

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 Public Relations, advertising, promotion and in-store layout which “hit” the consumer on all
senses when they shop. Tesco also have many in-store sales techniques, from different price
schemes like expensive, less expensive and cheap areas in the store, in addition to price
comparison with ASDA and J. Sainsbury etc. They do everything there is to capture the customer
while they shop at Tesco’s and try their best to make sure people will come back. Another
marketing scheme is their vouchers, you can actually use an ASDA voucher in the Tesco store and
that is a perfect example of the sales techniques and Tesco’s willingness to capture customers.

5) Service: Tesco has many employees working all around the store, if you cannot find a special
article at the store and asks an employee, they will either show you where it is or find somebody
who knows about the article. Another service is when people check out and pay the employee at
the till always asks the costumer if they need any help with packaging. Service outside the store is
provided by the effective www.tesco.com where people can buy groceries, clothes and electronics
online. Furthermore Tesco has a service and repair group who concentrates on everything that
evolves service and repairs of product. Therefore, TESCO is managing its entire value stream for
each product family, rather than leaving each firm to optimize its own activities and buffer itself
against other upstream and downstream. The aim is to pull products across the value chain quickly
and accurately, rather than make a forecast well ahead of demand and sell the resulting stock. It is
based upon improving operational capability and joint process analysis rather than based on
supplier auctions and big centralized information systems.

Strategies being incorporated by Tesco

Cost Leadership: Tesco incorporated the cost leadership strategy by managing their supply chain
management effectively and efficiently. Tesco’s success has been built on low prices as they tries to
eliminate middlemen in the supply chain activity and improves their value chain.

Differentiation: Tesco’s another strategy is differentiation where Tesco is competing with their rivals on
product differentiation by providing finest range of product owned by Tesco itself. In Tesco, we can buy a
bottle of wine from £5 up to £50 which shows the Tesco’s differentiation in products from cheap to finest
quality.

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Tesco’s recent strategies in other countries

International growth forms a key element of Tesco’s four part strategy and the business currently trades in
12 countries outside the UK, mainly in Asia and Central Europe. Over half of Tesco’s selling space is
now outside the UK. Following is the brief summary stating the Tesco’s operation in other parts of the
world which showing its foreign entry modes in different markets:

Japan
Tesco began its expansion into the notoriously difficult Japanese market in July 2003 by buying a 94.54%
shareholding in the C Two-Network. C Two-Network trade using the brand names Tsurukame,
Tsurukame Land, Foodlet Tsurukame and Kamechuru. It’s a successful retailer with 78 neighbourhood
supermarkets and wholesale outlets around the Tokyo area. In April 2004, Tesco acquired Fre'c, another
Japanese chain.63 Fre'c was a bankrupt Japanese chain, with 27 stores on the outskirts of Tokyo. Of
Fre'c's outstanding £50m debt, some is being rescheduled by the Industrial Revitalization Corporation of
Japan; the rest will come from C Two-Network.
Tesco is expected to use C Two-Network's links to processed-food wholesalers and Fre'c's knowledge of
fresh produce to open between five and ten small stores a year. In Japan, Tesco is relying on customer
loyalty to the high street, whilst its US and European rivals, including Wal-Mart, Costco, Carrefour and
Metro believe their fortunes lie in encouraging a culture of out-of-town superstores.

China
In March 2004, Tesco bought 50% of Ting Hsin International, 66 which owns 25 hypermarkets in China,
operating under the names Hymall and Le Gou. It gave Tesco a presence in some of the key Chinese
urban areas, linked it with a good local operator, and provided plenty of scope for expansion. The deal
gave it a market-leading position in Shanghai – China’s largest retail market – leapfrogging over arch-
rival Carrefour in the process. It is said that the Chinese retail market will be worth $596 billion by 2010
(up $166 billion from its current value); it is no surprise that these retailers see the potential in China.
However, as well as battling amongst themselves for market share, Wal-Mart, Tesco and Carrefour will
also have to compete with the numerous other competitors. Thus China is seen as a desirable country for
foreign investment because of the increasing encroachment of capitalism and the low cost of labour. What
is clear is from this is that there is no “one size fits all” strategy when moving overseas in the food retail
sector.

USA

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The United States has a population of 296 million making it the third largest country in the world, after
China and India. It is by far the largest economy in the world, with GDP of $12,458 billion. Its economy
has also seen strong growth, with GDP growing 5% per annum from 2001-2005. This growth is expected
to continue at c.6% per annum from 2005-2010. The United States grocery market is currently worth over
$600 billion and is forecast to grow 40% over the next five years. Tesco PLC announced in February,
2006 that it wants to enter United States. It entered US through the development of a new convenience
format, Fresh & Easy beginning on the West Coast in 2007. The US's west coast is huge and under-served
by food stores. California is the country's most populated state with 35Million people. Meanwhile
Phoenix and Las Vegas are the fastest growing cities in the US. They developed the business through
organic growth, with initial capital expenditure of up to £250 million per year, which was funded by
existing resources. More importantly though, "convenience" retailing as we know it in the UK - a small
shop selling a wide range of fresh, top-up groceries - does not exist in the US, where a convenience store
means a petrol station selling cigarettes, doughnuts and little else. Also Fresh & Easy will offer high-
quality, healthy food. Half of the goods will be own-label and will contain no trans-fats, artificial colors
or flavorings. Customers will be able to do their weekly shop if they wish, although most will simply pop
in for select items. In offering a new type of store, Tesco is neatly circumventing competing head-on with
the likes of Wal-Mart. Its greatest competitors will be smaller chains such as Trader Joe's, which is owned
by Germany's Albrecht family, the Aldi; and Whole Foods Market.

The Internal analysis of the company shows its strategic performance in key geographical markets and its
experience to operate successfully is the evidence of its competent resources and capabilities, which can
be leveraged to capitalize on the largely untapped and highly lucrative Indian Retail space.

INDIAN RETAIL INDUSTRY

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The India Retail Industry is the largest among all the industries, accounting for over 10 per cent of the
country’s GDP and around 8 per cent of the employment. The Retail Industry in India has come forth as
one of the most dynamic and fast paced industries with several players entering the market. But all of
them have not yet tasted success because of the heavy initial investments that are required to break even
with other companies and compete with them. The India Retail Industry is gradually inching its way
towards becoming the next boom industry. The total concept and idea of shopping has undergone an
attention drawing change in terms of format and consumer buying behavior, ushering in a revolution in
shopping in India. Modern retailing has entered into the Retail market in India as is observed in the form
of bustling shopping centers, multi-storied malls and the huge complexes that offer shopping,
entertainment and food all under one roof.

A large young working population with median age of 24 years, nuclear families in urban areas, along
with increasing workingwomen population and emerging opportunities in the services sector are going to
be the key factors in the growth of the organized Retail sector in India. The growth pattern in organized
retailing and in the consumption made by the Indian population will follow a rising graph helping the
newer businessmen to enter the India Retail Industry.

In India the vast middle class and its almost untapped retail industry are the key attractive forces for
global retail giants wanting to enter into newer markets, which in turn will help the India Retail Industry
to grow faster. Indian retail is expected to grow 25 per cent annually. Modern retail in India could be
worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket.
The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per
cent per year. The future of the India Retail Industry looks promising with the growing of the market,
with the government policies becoming more favorable and the emerging technologies facilitating
operations.

The huge future growth potential presented by Indian Retail Industry is a serious goldmine which a lot of
business retail houses are vying to grab. But like any other industry, the retail industry presents its own
challenges and opportunities which the businesses need to take care of. A detailed external analysis of the
retail market in India will bring forth the issues and factors involved in translating potential into success.
A through macro-environment analysis of the Indian Retail Industry is presented through the PESTEL
framework analysis to point out the relevant factors involved.

PESTEL ANALYSIS

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Political

1) Fiscal policy & Taxation Regime: Excise & Import duty rates have been reduced substantially. Many
processed food items are totally exempt from excise duty. Custom duty rates have been
substantially reduced on plant & equipments, as well as on raw materials and intermediates,
especially for export production. Corporate taxes have been reduced and there is a shift towards
market related interest rates.
2) Tax Deductions: Though Budget 2008 does not have substantial direct benefits for retail sector,
general reduction in excise duty rate from 16% to 14% and increase in maximum exemption limit
of tax for individuals is certainly a welcome move which in long run would increase the
consumption levels and consequently, the profitability of the retailers. Further, extension of
section 35D which allows deduction for expenses incurred for the purpose of expansion, to service
sector would make expansion a more lucrative option for the retailers. Reduction in excise duty
from 12% to 8% on certain varieties of writing, printing and packaging papers will lead to direct
benefits to retail industry. Proposal to reduce central sales tax from 3% to 2% is a good breather
for retail industry, which gives an indication that we will slowly move to the GST regime.
3) Political Populism: Due to the apparent affect of modern retail on the millions of kiryana stores in
the country, central and state governments are quite reluctant to push for modern retail especially
foreign retailers. The pressure for populism translates into the incumbent ally of the government,
the Left, and the opposition BJP antagonistic to foreign FDI in retail.

Economic
1) Rising incomes, increased advertising, and a jump in the number of women working in the
country's urban centers have made goods more attainable and enticing to a larger portion of the
population. At the same time, trade liberalization and more sophisticated manufacturing
techniques create goods that are less expensive and higher quality.
2) Manufacturing is no longer the dominant sector of the GDP. Also, the share of agriculture has
gone down from a high of 70 per cent in the sixties to just about 27 per cent today. The value
added services sector has emerged as the growth engine of the economy. India’s retail industry is
likely to cross Rs 100,000 crore by 2010 and the share of organized retail could go as high as 20 to
22 per cent from present 3 per cent. It is largest employer after agriculture includes 8% of
population.
3) Also share of organized retail is expected to rise significantly because more than Rs 20,000 crore
of investment is being planned by both domestic and foreign players in retail space in the coming
five to seven years. As per the Technopak estimates, 92 per cent of these investments are slated
for urban areas and 8 per cent for rural. Of the urban investments, majority share of investments is
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 slated for the hypermarket (38 per cent) and supermarket (21 per cent) formats and about 62 per
cent of urban investments are expected to go to A-type or above cities. Retail market in the
organized sector in India is growing can be seen from the fact that 1500 supermarkets, 325
departmental stores, and 300 new malls are being built. Many Indian companies are entering the
Indian retail market which is giving Indian organized retail market a boost. (See appendix 4 and 5)
4) To tap increasing potential of the Indian consumers, a large number of big corporate houses are
now entering into the retail arena. These include big corporate names like Tata, Reliance, RPG,
Rahejas, Piramal, Bharti and Birla as well as other small and medium sized players already
established. (See Appendix 3)

Sociological
1) The growth in the Indian organized retail market is mainly due to the change in the consumer’s
behaviour. This change has come in the consumer due to increased income, changing lifestyles,
and patterns of demography which are favourable. Now the consumer wants to shop at a place
where he can get food, entertainment, and shopping, all under one roof. The buzz today is malls,
supermarkets and hypermarkets and within them there are several different formats being tried.
2) A large young working population with median age of 24 years, nuclear families in urban areas,
along with increasing workingwomen population and emerging opportunities in the services sector
are going to be the key factors in the growth of the organized Retail sector in India.
3) A research body specializing on retail industry—says “As the current economic boom in India
spreads to Tier II and Tier III cities and towns, reaching out to prospective consumers in these
cities is high on the agenda of most retail companies. Retailers consider market presence in these
cities and towns key to their growth and profitability.”
4) Greater per capita income: Increase in disposable income of middle class households - 20.9%
growth in real disposable income in ’99-’03.
5) The urban consumer is getting exposed to international lifestyles, is inclined to acquiring asset and
is becoming more discerning and demanding than ever. The consumer mindset is also changing
with an increasing tendency to spend spurred by the easy availability of credit as well.
Demographically, post-liberalization children are coming of age and India boasts of 100 million
17-21 year olds and they tend to spend freely as the youth is getting more independent due to their
working lifestyles helped by the greater levels of education in the country.

Technological
1) India encourages foreign technology agreements in all industries. The Reserve Bank of India (the
apex exchange control authority in India) grants automatic approval to foreign companies for
transfer of technology subject to the following limits: Lump sum technology fee up to USD 2

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 million and royalty payments up to 5 percent on domestic sales and 8 percent on export sales
subject to an overall ceiling of 8 percent of total sales.
2) Greater investment in the food processing sector technology – better operations in production
cycle distribution, investment in cold storage chains solving the perennial problem of wastage.
3) Indian retail is quite advanced in basic IT adoption like enterprise resource planning (ERP),
network, etc. as compared to foreign retailers. However, implementation has not been managed
well due to the lack of sector understanding, both with clients as well as IT consultants. It is also
lagging in the realm of advanced IT products and solutions such as replenishment planning,
analytics, RFID (radio-frequency-identification), and warehouse management systems. The usage
of IT in the back-end supply is fairly low in India. The unorganized sector, a considerable portion
of the retail industry, is lagging behind in IT usage. This could be one of the key reasons why IT
usage percentage remains low in the Indian retail industry. Even though technology is available to
cater this segment, factors such as money, low understanding of benefits etc. deter its usage.
Currently, national and multi-format retailers are the most aggressive players in IT spending.

Environmental
1) Safety and health related issues are particularly important for food products.
2) Use of pesticides and commercial fertilizers in agro commodities, quality of chemicals used as
preservatives and other ingredients in processed food etc. are areas of concern.
Besides food, there are many environmental issues such as use of organic dye in fabrics, bio-
degradable packaging materials and tamper-proof containers in packaging etc.
3) Statutory clearance relating to pollution control and environment for setting up an industrial
project is required under the Environment Protection Act. Industries like petro-chemical
complexes, petroleum refineries, cement, power plants, bulk drugs, fertilizers, dyer, paper, etc
require such clearance.

Legal
1) Different laws govern the food processing sector in India. The prevailing laws and standards
adopted by the Government to verify the quality of food and drugs is one of the best in the world.
Multiple laws/regulations prescribe varied standards regarding food additives, contaminants, food
colors, preservatives and labelling.
2) Employment laws are very stringent and MNC’s have to abide them. There is no rule of hire and
fire and trade unions plays an important role in the regular working environment. There are
enormous numbers of employment laws regarding legislation of workforce, dismissal, winding up
of contract, etc.
3) The Real Estate market is highly distorted and the legal system in India is Pro-tenant and the

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 zoning laws also vary from state to state. Plus, the non-availability of government land and
fragmented private holdings makes it difficult for retailers to acquire land
4) Current Indian FDI Regime, FDI in trading up to 51 percent is permitted under the automatic route
provided it is primarily export activities and the undertaking enjoys classification as an export
house/trading house/ super trading house/ star trading house. Further 100 percent FDI is permitted
in trading (through the FIPB route) in the following areas:
a) Exports
b) Bulk imports with export/exbonded warehouse sales
c) Cash and carry wholesale trading
d) Other import of goods or services subject to certain conditions.

The PESTEL analysis, presented above, has brought out the pertinent factors of the macro-environment in
which the industry is operating. The next strategic step is to look at the micro-environment of the retail
market and how the competition unfolds itself for a retail business. The usage of Michael Porter’s Five
Forces framework will help in bringing forth the nature of the competitive intensity and how competition
is played out in the retail business. Combined with the PESTEL analysis, the five forces framework will
provide a holistic understanding of the challenges and opportunities and thus form a basis on which the
eventual market entry strategy would depend.

PORTER’S 5-FORCES MODEL

Threat of new entrants
1) High entry barriers - it is very difficult to create an efficient and effective supply chain
management, Government imposed FDI restriction on foreign retailers - no FDI allowed in multi
brand retailing & 51% allowed in single brand retailing, and sky touching real estate prices.
2) Some Indian companies have already attained the economies of scale and pan India presence.
Therefore, it becomes very difficult for the new entrant to compete with the established
companies.
3) Companies adopting cost leadership and product differentiation strategy will succeed in the
industry; this makes entry difficult for the new entrants.
4) There are high exit costs as once companies set up their operations as it is very difficult to wind up
all the operations due to the high float costs.
5) There is also the fear of retaliation by the small kiryana/mom & pop stores owners who are
loosing their customers to big retailers. This happened in states of Uttar Pradesh and West Bengal
where government forced big retailers to close down their operations as they feared loss of the
market share for small kiryana stores and local vendors.

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Threat of Substitutes
1) For the organized retail operations, a lot of substitutes already exist in the various unorganized
retail options like hawkers, mom & pop stores etc.
2) Switching cost to substitutes is low as consumers have many suppliers in the market.
3) From the merchandise view, there really is no substitute for the food grocery items as the
customers have to buy the daily requirements of fruits, vegetables and pulses, so they have to
shop.

Intensity of Competitive rivalry

1) Rivalry is intense as there are many small and equal sized competitors in the market.
2) Industry is very competitive as slight change in pricing policy can lead to increased market share.
3) There is great diversity in between competitors as some competitors are operating through
hypermarket format whereas some through supermarket format. Plus, they have different market
segmentation for consumers.
4) Degree of differentiation is less as all the retailers will more or less provide standardized products.
Differentiation will occur only in brand and pricing policies. Therefore, the rivalry will be intense
among companies.
5) Competitors will pursue aggressive growth strategies as everyone will want to have pan India
presence as early as possible to gain the first mover advantages.

Bargaining power of Buyers

1) Customers are huge in numbers with immense diversity among them. Consumers from north India
will have different buying behavior as compare to consumer from east, west or south India.
2) Price sensitivity will play an important role in stimulating customer buying behavior.
3) Switching cost is low due to the presence of large number of suppliers.
4) Buyers can threaten suppliers by integrating backwards; this increases their bargaining power.
5) Suppliers are large in number therefore, buyers have more bargaining power.

Bargaining power of Suppliers

1) Suppliers are small in size and large in numbers hence have low bargaining power.
2) Suppliers have differentiated products to sell and hence may have bargaining power depending
upon the differentiation they are able to achieve.
3) Suppliers’ threat to integrate forward into the industry is negligible; although the big national
brands like Unilever, P&G have vast and extensive distribution networks across the country but
they do not have retail operations with no such intention as well because of the vast consumer
choices available and diverse consumer preferences.

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Having had a look at both the macro and micro environments of the Indian Retail, the competitor analysis
of the retail players is presented to show the status of the retail operations in India and to present an idea
of what the different retail companies are doing in India. Based on this knowledge, the market entry
strategy can be drawn for Tesco to better able to position itself amongst the competitors.

COMPETITOR ANALYSIS
The retailing industry in India started changing in the 1980s with the introduction of open economy. It
saw the emergence of some major players in the textile sector like Bombay Dyeing, Raymond’s, S
Kumar’s, and Grasim, which opened their retail chains. Subsequently, Titan, one of the pioneers in the
watch industry started the concept of organized retailing by opening a series of showrooms. Up to first
half of the 1990s, these were the organized retailers. The trend was that manufacturers looked for
alternative sales channels to make their products available to consumers. But in the latter half of the
1990s, the trend changed, i.e., a group of pure retailers in different fields started looking for
manufacturers for selling their products to consumers. A group of corporate like the Piramals (Cross
Road), the Tata’s (Westside chain of stores), the Rahejas (Globus and Shoppers’ Stop), ITC (Wills
Lifestyle), S Kumar’s, RPG Group (Food World, Giant, Music World and Health n Glow) entered into
the retailing sector. This led to a revolution in the retail sector. Yet, the organized retailing in India is in
its nascent stage and contributes less than 4% of the total industry revenue which increases its competitive
rivalry in the industry.

Presence of players like Reliance Retail, Pantaloons, etc which are operating in almost all kinds of
formats and foreseeing major expansion drives, can pose a threat to the profit potential of Tesco. With
small mom-and-pop kiryana stores which covered almost 96% of unorganized market will not be wiping
off the picture any sooner and will bite for at least a major chunk of the total retail potential of India for a
while. Moreover, at present what a consumer gets is standardized up to large extent across the purchasing
options, so this leaves little scope for a new entrant to actually innovate and bring something new that a
consumer finds more interesting and satisfying to use. This is an apothegm of large standardization of
products in retail industry. Also, huge expansionary budgets from domestic players like Reliance Retail
which hopes to reach more than 70% of India in just 5 years achieved through huge finance backing is
also an indicator of the level of rivalry one would get to see in the near future. High competition is not
only expected from industry incumbents like Pantaloons, Birla, Tata and RPG et al but from future
competition in the form of Carrefour, Thai Group, Mahindra & Mahindra etc who hope to savor the
mammoth Indian retail pie. Despite central pressures from Leftist Wing party and Indian players to
foreign competition saying that domestic retail outlook is still nascent, foreign competition has started to
creep in whatever form it is allowed and forming a basis of hyper competition as and when legalities are

14
done away with.

Strengths of domestic companies

1) Knowledge of Indian retail industry.
2) Know the diversity of consumer and their buying behavior.
3) Some of the companies have pan India presence.
4) Have huge amount of capital.
5) No problem of FDI which foreign players have to face.

Weaknesses of domestic companies

1) May not be able to compete with foreign players in supply chain logistics management system as
some of the companies are facing problem in this department.
2) Don’t have the knowledge of an international retail environment which a foreign company will
have.
3) Many of the companies are in market entry stage.

Opportunities for New Entrants

1) Highly unorganized market.
2) Increase in the disposable income of the high and middle class.
3) Changes in the buying behavior pattern of Indian consumers.
4) No FDI limit in cash and carry operations.
5) Pressures mounting up on Indian government to deregulate FDI restrictions.
6) Indian firms welcome the international competitor.
7) Demographic pattern of India is changing.
8) The traditional retail sector is expected to increase from US$ 324 billion, in 2006 to US$ 493
billion, by 2011. The share of the modern retail in the Indian Retail Sector is also estimated to increase
from 4% in 2008, to 16% in the next five years.
Threats for New Entrants
1) Real estate costs are high.
2) The taxation and legislation system is complex and difficult to navigate.
3) Finding strategic location for setting up new stores.
4) Investment problem.
5) Personnel problem.
6) Supply chain logistics management.
7) Entry of foreign retailers.
8) Left and BJP are against the big retailing companies.

15
 9) Suppression from local kiryana stores.
10) Relaxation in multi brand FDI may take long time.

Challenges for foreign competitors

Indian market is like a gold mine for all the retailing companies and all the companies are trying their best
to get entry in to the country. But due to the restriction by the Indian government in FDI, companies are
restricted up to certain context. Like, in multi-brand retailing, there is no FDI till now whereas in single
brand retailing, the limit of FDI is 51%. Therefore, Tesco will not be alone who is getting difficulty in
market entry in India, there are other companies as well who are facing the same problem. At present, its
only METRO AG and WAL-MART who have entered the market, METRO entered by opening up their
cash and carry operations in which FDI is 100% whereas Wal-Mart is also doing the same thing but they
will supply only to BHARTI due to their JV. Hence, all the companies are looking for strategic business
partners in India for the entry. Recently, talks are going between Carrefour and Parsvnath and many other
foreign companies are willing to find Indian business partners.

Key success factors for growth in Indian retail industry

Location ("Right Place, Right Choice"): Location is the most important ingredient for any business that
relies on customers, and is, typically, the prime consideration in a customers store choice. Location
decisions are harder to change because retailers have to either make substantial investments to buy and
develop real estate or commit to long-term lease with developers. Location decision-making problem is
more complex by a slowdown in both growth of the population and new shopping centre construction.

To site a location in India is all the more difficult for a retailer, as the real estate values in India are the
highest. This leads to an extensive analysis of the location before choosing the final establishment of the
retail store. When formulating decision about where to locate, the retailer must refer to the following
strategic plan:

a) Investigate alternative trading areas.

b) Determine the type of desirable store location.
c) Evaluate alternative specific store sites.

The domestic competition has bought prime locations which are close to the customer at strategic
locations inside various cities. In India, for instance it’s better for the companies seeking locations for
supermarket or discount stores to be near the residential areas whereas those preferring to open
hypermarkets go for prime locations outside the cities. For e.g. Domestic Supermarket chains pantaloons,
subhiksha, trent, vishal mega mart, spencers, etc have strategically place their supermarket operations

16
near residential areas which in indian market is very crucial because of the proximity preference of the
consumers. On the other hand, companies like reliance retail, Spencer’s. Bharti Wal-mart seeking location
in outskirts of cities for hypermarket format.

Merchandise : The primary goal of most retailers is to sell the right kind of merchandise and nothing is
more central to the strategic thrust of the retailing firm. Merchandising consists of activities involved in
acquiring particular goods and services and making them available at a place, time and in the quantity that
enable the retailer to reach its goals. Merchandising is, perhaps, the most important function for any retail
organization, as it decides what finally goes on the shelf of the store.

Two key elements of this are Supply Chain Management, which deals with the sourcing and flow of
goods; and Merchandise Management, which is the actual managing of goods. The modern consumer is
posing a challenging task for Indian retail. More aware, more confident and much more demanding,
today's consumer wants the best product at the best price. And that's not all; the manner in which the
product is presented to him/her has to be perfect too. Retailers have, therefore, been busy trying to keep
pace with all these requirements and at the same time striving to remain profitable. Most of the retailers
are paying serious attention to their products and focusing on the various aspects of merchandise and
supply chain management to give customers what they desire good quality at an affordable price. All the
more, most of the retail chains in India follow the "Hub n Spoke Model" of warehousing. So, it takes time
as well as effort for the goods to reach the store due to many governmental checks in the transit process.

Another key factor which companies have to look for in order to thrive is to effectively integrate their
supply chain with the most efficient IT support from it existence competencies. For e.g. Pantaloon has
made SAP, the industry best practice for ERP (Enterprise Resource Practices) and CRM (Customer
Relationship Management), the corner stone of its IT strategy. “In a country this diverse”, Mr. Biyani
explained, “We need to respond to customer the way they would like us to respond. SAP helps us to
reduce the time it takes to move the product from mind to market”.

The desire to be ahead of the competition and maintain future stream of revenues, companies vie for
diversifying their product portfolios not just in order to spread risk across businesses but to protect their
market share as consumers have less switching cost in shifting to other alternatives. For e.g. Spencers,
vishal mega mart, Trent, etc entered the food retail segment to increase their product portfolio and give
stiff competition to the rivals like subhiksha, pantaloons, big apple, reliance fresh, etc.

Pricing (Value for money): Pricing is a crucial strategic variable due to its direct relationship with a
firm's goal and its interaction with other retailing elements. The importance of pricing decisions is
growing because today's customers are looking for good value when they buy merchandise and services.
Price is the easiest and quickest variable to change.
17
External factors that influence the retail pricing are: Consumers, Government regulations such as sales
tax and import duties effect the pricing of the products to a greater extent, current and potential
competition such as pricing policies adopted by the firm affect the pricing structure of the product, for
instance, price undercutting by competitors lowers the average price of the product in the market,
manufacturers, wholesalers and suppliers, underestimation of the bargaining power of your suppliers
can lead to inappropriate pricing which affects the product sales; overlooking the middlemen by directly
sourcing from the manufacturer can improve your operating margins which is a key factor in an already
margin crunched grocery market, for e.g. Reliance retail has given contract manufacturing to farmers to
improver their own margins and a competitive price to consumer or value to the product.

Target Audience ("Consumer- the prime mover "): "Consumer Pull", however, seems to be the most
important driving factor behind the sustenance of the industry. The purchasing power of the customers
has increased to a great extent, which is influencing the retail industry to a great extent, a variety of other
factors also seem to fuel the retailing boom. With increase in double-income households and working
women, there is an increasing pressure on time with very little time being available for leisure.

In this scenario, consumers are seeking the convenience of one-stop shopping, whereby, they could have
better utility of time. As a result, they are also seeking speed and efficiency in processing. Being more
aware, consumers are on the look-out for more information, better quality and hygiene as well as
increased customer service. These changes in consumer behavior also ensure well for the retailing
industry.

However, in India there are no uniform trends with respect to consumer buying behavior. There are
visible differences in the shopping pattern of consumers across income segments. Thus, it is becoming
difficult for retailers to mould their services according to customer changing desires. The retailers have to
spend enormous amount of time, money and effort in understanding the consumer to ensure that their
offering is just right product attributes at the right price and targeting the right need with the right
message. Further, the offerings that retail chains make in their different outlets have to vary from one
geographical location to another due to varied cultures followed by different areas in India. For instance,
the prevalence of the different retail formats in India reiterates the need to cater to the different
requirements of the pricing, convenience and location. For e.g. Subhiksha caters the need of day to day
convenience household shopping while Supermarkets like Big Bazaars caters to the weekend shopping
need of the families.

E-Tailing: E-Tailing is the latest buzz, and practically everyone is jumping onto this bandwagon every
day; after all one of the biggest drawbacks of physical retailing is finding space and managing people.
Web-based retailing seems, at least at first glance, to do away with all this with one click of the mouse.

18
But e-tailing has its own complexities, and one is not going to get ahead in this race unless one has
thought through all the relevant issues and structured an offering that combats these. E-tailing, after all, is
a business like any other and requires all the discipline and planning that goes with it, in fact, more,
because the entry barriers are lower than in most other physical businesses.

STRATEGY

Despite government FDI regulations, the attractiveness of Indian retail is making the foreigner players to
enter the industry via different routes. Every company is trying to find out its own strategic routes and
FDI loopholes to enter the market in accordance with their strengths and competencies. For instance,
Metro AG, world’s number third retail company entered the Indian retail sector through Cash & Carry

19
operations where there is no FDI restriction by Indian government. This reflects Metro’s wait & watch
strategy where they are waiting for the relaxation in FDI restrictions on multi brand retailing so that they
can come in front end retail and in the mean time just concentrate on building up a strong supply chain
and logistics network and focus on back end operations, and they are doing reasonably well. On the other
hand, Wal-Mart, world’s number one retailing company entered the Indian market through a joint venture
for the back end operations with an Indian telecom company, Bharti Telecom, in supply chain activities
and franchised the front end retail operations as per the FDI limitations. This shows their intent to
establish a brand image and market visibility as quickly as possible and not to wait for the FDI relaxation
in anticipation of the increasing competition in the future. Wal-Mart is pursuing aggressive growth
strategy where they want to have pan India presence in less than two years. Therefore, we are taking
Metro AG as the benchmark in cash & carry operations and Wal-Mart deal is the benchmark in terms of a
foreign company setting up operations in front end through franchising.

Therefore, after analyzing the whole status of the Indian retail industry and SWOT analysis, we stipulate
there are two possible marketing entry strategies for Tesco to enter India:
a) Cash & Carry

b) Back-end wholesale with Front end Franchising we came up that there are two modes of entry to
enter the Indian retail industry.

Cash and Carry: The cash-and-carry concept is based around self-service and bulk buying. To be able to
shop, customers need to be duly registered and be issued a card, which shows that they are eligible to buy
at XYZ Cash & Carry. It is primarily a Business-to-Business wholesale operation. Cash & Carry's
customers include retailers, hotels, restaurants, caterers and other business professionals. Its
characteristics are:

a) Lower investment (real estate, advertisement cost) – Since cash and carry operation does not
involve direct selling to large number of end users, and being a B2B business, the customer base is
limited, the advertising cost for the retailer is low. Since retailer is only into wholesale for which a
great number of stores is not necessary because of less exposure to end consumer, real estate
investment need not necessary be that high as when compared to that needed if they wish to enter
front-end retail.

b) Easier Operations – For the simple reason of maintaining few numbers of stores and more
attention on stock availability than issues like advertising, retail space acquisition, etc.

20
 Market Entry Strategy

MARKET ENTRY
STRATEGY

CASH AND WHOLESALE WITH

CARRY FRONT END OPERATIONS

ADVANTAGES DISADVANTAGES
Lower Investment Lower visibility of brand and its private labels
Easier Operation Lower profits compare to front end
Lesser Competition
Locking its entry to enter front end in future
Lower Contractual

ADVANTAGES
Customer visibility of brand is high
Customer – loyalty
Market penetration
Knowledge of consumer behavior
c) Lesser competition compared to front end – For the clear reason of fewer competitors operating
Risk Sharing
solely on cash-and-carry business model than in front-end operations, there is better and easier
probability of gaining market leadership. Higher Profits

d) Lower contractual costs, Negotiations – Since a retailer can operate as a wholly owned
subsidiary, they need not enter using a partnership agreement with some other company, which
21
 reduces negotiation/contractual costs.

Comparative Analysis of cash-and-carry versus front-end

a) Lower visibility of brand and its private labels in cash-and-carry: Backend operations refer
that Tesco will not be in direct touch with the end-consumers; hence, Tesco as a brand will not be
popular since it cannot display its private labels to major front-end retailers already having their
own labels. Besides Tesco have more than 12000 private labels which shows that along with
selling the local brands Tesco would like to compete using better margins with private labels. We
believe that with retail boom in India and huge number of retailers entering the market, no big
retailer will promote Tesco private labels, leading to Tesco losing its brand presence.

b) Higher Profits compared in front end: Cash and carry operation being a wholesale business
earn profits on bulk sales, but on a product-margin basis, the profit is low while compared to front
end operations. Generally, private labels can be squeezed for maximum margins and since it is
logically not viable for Tesco to promote its private labels, Tesco is not left with sustaining
profitability only in cash-and-carry operations.

c) Cash-and carry locks entry to enter front end in future (backward looking strategy): There
is a possibility for Tesco to enter into back-end operations now and start its front-end operations
over years as the FDI regulations are relaxed by the Government, considering greater profit
potential in front-end. This would act as a disadvantage to Tesco as retail market in the country
would be highly developed and gaining a market share would be a costly affair. Moreover
inexperience in adjusting to consumer behavior, real estate disadvantages, etc might pose a hurdle
to its entry in the front-end.

PROPOSED STRATEGY
Considering the comparative analysis of cash-and-carry and wholesale-with-frontend, and specifically
looking at the benefits of entering with front-end because of huge profit potential from Tesco’s
experience with private labels and huge future market opportunity, we propose a business strategy for
Tesco to enter India by having a joint venture in front end while maintaining its wholly owned back-end
operations. The strategic advantages of coming through this route are:

Added Advantages of Front-end Operations

a) Customer visibility of brand is high

b) Customer – loyalty

c) Market penetration

22
 d) Knowledge of consumer behavior

e) Risk Sharing

f) Higher Profits

g) Customer Loyalty and trust in brand due to joint venture (partner firm)

As per the FDI regulations, Tesco cannot enter in the front-end operations in India on its own. It needs a
partnering Indian firm who is willing to enter into retailing and has a strong financial, political and social
presence in the Indian market. Apart from these the major hurdles to enter into retail market in India are
slated to be Supply Chain, Information Technology and Real Estate. There is no doubt about the fact that
Tesco has developed its expertise in supply chain management systems and Information Technology;
hence the only problem is real estate. With the ever increasing real estate costs and the paucity of good
locations at strategic positions due to the haphazard building laws and unregulated growth that has
happened in the majority of the cities, getting a prime location is of utmost importance. Although things
are improving a lot as with the advent of a large number of big real estate players building up suburban
areas outside cities and even within cities which are properly planned and executed. Even full fledged
housing projects are being built with all the resident facilities ranging from cinemas to supermarkets all
within the precincts. As Tesco’s target customers should be in the Metro and Tier I-II cities getting prime
locations for building supermarkets and hypermarkets - which would be the ideal format for Tesco to start
its operations as maximum growth is predicted in these two formats in the future as per a KPMG report
on the Indian retail formats – and hence a franchisee agreement with a player who can have access to such
real estate locations.

For the success of its retail chain it is very necessary that these stores are strategically located and to get
these locations we suggest the best partnering could be done with a giant real-estate player In India.
Unitech, Ansals, Parsavnath, DLF, Prestige, etc are few to mention names that do not need introduction in
the real-estate industry in India. But among the big 5, growth of DLF has been most promising for over 6
decades. Started in 1946, contribution of DLF in real estate has been instrumental and is considered no
less than a revolution. DLF Home Developers of Residential Colonies, are being reckoned as the DLF
IPO has created waves in the industry in India and globally. Hence we propose the player for the joint
venture as DLF has shown keen interest in investing in retail market in India. DLF will be an additional
advantage as it also enjoys good political support in the country, which is important to establish in the
retail market. Real Estate is booming in India and the concept-cities are becoming a common place.
Besides DLF itself is a huge trusted brand and owns potential to pull consumers. Hence we suggest DLF
would be an ideal choice for the partnership. Partnering with DLF will not only give prime locations in
the existing cities but also the best location for the developing concept cities and small towns. Tesco

23
would save a great deal on purchasing /renting out-lets with DLF taking its responsibility. Taking the
Bharti-Walmart deal as a benchmark we propose the following strategic terms of the deal for Tesco with
important differences from the benchmark deal in terms of maintaining full fledged managerial control
over the back-end operations where the real value would lie for Tesco’ operations and acquiring
equivalent share in the front end operations as and when the front end FDI regulations are relaxed over
time. The structure of the deal we are proposing is thus as follows:

Proposed Structure of Joint Venture

Back end
Indian FDI TESCO’S DLF

0% 75% 25%

100% 75% 25%

Front –End

Indian FDI TESCO’S DLF

0% 0% 100%

100% 51% 49%

The above given is the proposed structure for Joint venture between Tesco and DLF. On the back
end we propose that Tesco’s will hold 75% of the stakes and DLF will hold the rest 25%. And the stakes
at the back end will remain same even when Indian FDI deregulates 100%. This means to say that DLF
will be assured of 25% stakes from the back-end until the life of Tesco in India.

On the front-end as per the Indian FDI regulations Tesco’s will not be able to make any investments,
hence 100% will be invested by DLF while it will also enjoy 100% profits. But as when FDI starts
deregulating Tesco will start buying stakes from DLF. When FDI deregulates completely Tesco would
buy up to 51% stakes and DLF will own 49% of the stake.

CONCLUSION

"Drive to the east" is one of the most important strategies considered and pursued by most of the
multinationals across industries and retail industry is in the fore front. Tesco PLC, third largest retailer in
24
the world is one of the aggressive participants to enter Asian markets. Having had their presence in Japan,
Thailand, Malaysia, China, South Korea Tesco is seriously considering options to enter Indian market
develop its business. Well developed infrastructure, large portion of middle class, and urbanization are
some of the most important factors which attract international retail giants to enter Indian market. India,
which is increasingly getting price sensitive, is an opportunity for Tesco which has its business model
built upon cost leadership. But, FDI regulations with respect to the Retail sector are major hurdles for the
International Retailers. With O% FDI in multi brand front end retail, it is necessary for companies either
to enter through cash and carry model or fully owned back end operations and franchising in the front
end. For a company like Tesco with a large number of private brands cash and carry is not a lucrative
option to pursue because of lesser visibility or brands and hence franchising in the front is advisable.
Among many other factors, acquiring quality real estate is the most important aspect which should be
considered in choosing a partner. Presence of lesser international Retailers and large portion of
unorganized retailers demands a faster move with respect to the entry.

APPENDIX 1

25
APPENDIX 2

(Source: A.T. Kearney GRDI 2006)

APPENDIX 3

26
Name US $ Million

Future Group (Pantaloon) 444

Shoppers Stop 133

Landmark (Lifestyle) 80

Trent 53

Subhiksha 44

Vishal Mega Mart 25

(Source: (Singhal, A., 2006, slide 19)

APPENDIX 4

APPENDIX 5
27
Source: Technopak Analysis

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28
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