Case Study: TESCO Homeplus

TESCO Homeplus: Adding Creativity to the Discount Retail Store Business

KIM Jin-Hyuk

RETRO-BEnCHmARking
When TESCO, Britain's global retailer, opened a new store offering household goods and electronic products in Manchester, England, in October 2005, customers soon realized that they were in for a new kind of shopping experience. First, the Manchester stores 4,700-square-meter layout covered two floors rather than a single
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floor and had a moving walkway, allowing customers to travel between floors. In England, the tendency had been for discount stores to have a single floor, as multiple floors were viewed to be inconvenient. The second attention grabber was the difference in design and content. Only a small part of the store was dedicated to fresh produce, a TESCO hallmark. Instead, most of product lineup consisted of non-food items such as clothing, kitchen utensils, bedding, industrial

KIM Jin-Hyuk

A nightview of Homeplus Sangdong, Bucheon

Even the stores name incorporated a departure. After careful deliberation, TESCOs head office made the somewhat surprising decision to add Homeplus to the stores name, reflecting its heavy emphasis on non-food, household goods. What happened was a wholesale adoption by TESCO of know-how that had been accumulated in running its Homeplus store, a joint venture with Samsung Corporation, in Korea. The two-floor layout, product line selection, product display, and even the name of Homeplus were all imported from the Korean store. The knowhow of store management accumulated in the Korean operation had been recognized as superior in efficiency and taken on board whole. So, what were the management secrets of Samsung TESCO the Korean operation that even a global retailer like TESCO could learn from?

Jumping into a Crowded market Sector

In 1997, Samsung Corporation opened its first three retail stores, including Homeplus Taegu. However, the 1997-98 Asian financial crisis put the new operation in serious difficulty by May 1999. The company decided to seek foreign investment. At the same time, TESCO PLC was seeking ways to expand in Asia after successfully gaining a foothold in Thailand. On May 1, 1999, Samsung TESCO was launched. TESCO PLC injected more than US$200 million into Homeplus and Samsung provided US$40 million worth of goods. Even if the financial crisis had not occurred, the aisles were not clear for Samsung Corporations push into retail. E-Mart, Koreas first discount retailer, had a six-year head start on Homeplus, while deregulation opened the door for WalMart in 1997. In 1998, the US retail giant opened in Korea by purchasing four local stores and
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products, and toys. The goods were also displayed differently. For example, cosmetics were arranged by brand name, while bedding and chinaware displays were charmingly decorated, unlike other TESCO stores. Wooden tiles gave the flooring a sophisticated look, and the interior was lit brightly with lighting set up over each display stand. The lighting was showcased in a variety of shapes and sizes instead of standard florescent lamps. The ceiling, painted white, was cleanly finished.

Case Study: TESCO Homeplus

planned the quick construction of six brand new stores. Lotte and LG, two more formidable Korean retailers, also joined the rush into the Korean discount market along with French retailer Carrefour. In total, there were 12 discounters in Korea by 2000 and Homeplus ranked No. 12 in terms of number of stores and sales before the TESCO deal. Korean customers are considered by many to be the hardest in the world to please and are a highly demanding customer group in that they want both the low prices of discount stores, and the high level of service typical of department stores. Wal-Mart and Carrefour, the two main competitors for the top spot in the global discount industry, were unable to meet the demanding requirements of Korean customers, and eventually had to withdraw from the Korean market. Korea was even called the grave of global retailers at one time. Samsung TESCO expanded rapidly despite the tough conditions. It opened five stores in 2000 and seven more between 2001 and 2003. Not only did Samsung TESCO break through the KRW 1 trillion mark (US$664 million) in sales two years after opening the first store in 2000, but it hit new highs of around US$1.4 billion and US$2 billion, respectively, in sales in the shortest time in discount industry. In four years, the company jumped from 12th to second in the discount retail segment. As of April 2008, Samsung TESCO had 66 large off-price chain stores and 73 express supermarkets, with total sales estimated at US$4.05 billion. With such extensive market reach, Samsung TESCO is currently aiming for the No. 1 slot among major discounters within the next few years. Of all the countries that TESCO entered, Korea was the only one where stores did not operate under the TESCO name. Instead, stores were simply called Homeplus in the Ko80 | www.SERIWorld.org

Korean customers are considered by many to be the hardest in the world to please and are a highly demanding customer group in that they want both the low prices of discount stores, and the high level of service typical of department stores.

rean market. The impetus behind Samsung TESCOs impressive growth consists of five distinct elements.

Value Store Jumping into a Red Ocean as a latecomer, Samsung TESCO prepared a fresh concept. At the time, other discount warehouse stores emphasized two strategic features to market themselves: a wide variety of products and low prices. However, this strategy required trade-offs. The stores lacked interior designing and sold in bulk, which enabled the stores to negotiate

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wholesale price reductions. At first, customers were attracted to the low prices, but complaints eventually swelled. Management at Samsung TESCO was very alert to these complaints. Reacting decisively to consumer demands, Homeplus executives decided to create a completely new discount market through brand positioning analysis. This led to the new concept of a Value Store, which implied a store that provides customers with a new, higher level of value. The Value Store concept was introduced through the Ansan store on August 30, 2000. It was the first store to use the brand name of Samsung TESCO Homeplus. Shoppers were all surprised by the layout: All the products were displayed on the second and third floors, while the first floor was occupied by a culture center and food court, a sharp contrast to competitors who crammed their shelves. The new store had unusually put a high priority to the comfort and convenience of customers. The Ansan store was an immediate success. Sales doubled those of nearby competitors, exceeding management expectations and redefining the discount retail industry. With the success of the Blue Ocean strategy of finding and leading a new market, Homeplus leapt from the bottom of the first-generation discount market segment to the top of the second-generation discount market segment. Subsequent Homeplus stores offered services ranging from a nursery to financial products such as insurance and loans.

TESCO to try to create a new Blue Ocean through another transformation. Homeplus third-generation discount store integrated emotion and culture. It was characterized by Artience, the integration of art and science. While the second-generation discount store focused on convenient living, the third-generation store counted on its advanced artistic, cultural, and health service to appeal to the emotions of customers. Opening on September 1, 2007, Homeplus Jamsil in southern Seoul introduced the next generation store with four concepts Art, Well-being, Touching, and Hi-tech to appeal to customers eyes and hearts. The entire fourth floor was an art gallery: 3,636 square meters of space that is not operated or intended to generate revenue. This was unheard of for a discount store in Korea or abroad. The exhibition space was devoted to finding and supporting new artists, including students. The store also contained a culture center, which offers evening and weekend courses. The purpose was not to grab customers, but become a local center for continued education. It was unprecedented to find a store offering fresh produce and organic foods and also provide a fitness club, sauna and

A TESCO Homeplus store on opening day

Artience
Homeplus marketing edge was eventually lost as rivals imitated the concept in their subsequent store openings. The adoption of Homeplus innovations by its rivals turned the Blue Ocean into a Red Ocean. This led Samsung
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Case Study: TESCO Homeplus

golf driving range. Finally, a high-end wine bar allowed customers to enjoy their purchases in the store itself.

Scientific Approach to Distribution Homeplus is also famous for retaining information and communication technology. The stores introduced a self-checkout system and a smart card system which automatically counted products in a shopping cart, for the first time in discount industry.
The main upgrade to the third-generation discount store was its scientific approach to distribution. For example, the Jamsil store introduced an automatic queue counting technology with the aim of eliminating waiting in checkout lines. Automatic sensors detected the number of shoppers and ordered standby cashiers to go to their cash registers when needed. The self-order and self-pay system in a food court was another distinguishing change. Through the product positioning system, by which customers could find the location of products with a touch screen, and an auto productsupplement system, easy and convenient shopping was introduced in the discount industry. TESCO headquarters in England quickly saw

the benefits of adopting high-tech in running its stores. Indeed, during 2002-03, Samsung TESCO sent around 70 experts of this high-tech management system to transplant it in TESCOs operations in other countries.

Customer-Focused management Homeplus stores can be recognized at a glance, even from far away, thanks to its symbol, inspired by Londons iconic Big Ben clock tower next to the British Parliament. Homeplus has its own philosophy that all of its stores are the customers parliament, and that Homeplus makes its decisions according to its customers opinions.
The philosophy of the customers parliament is not just a matter of design or a simple slogan. TESCO PLC shared its 80 years of experience in conducting and analyzing customer surveys with its Korean partners. Today, Homeplus places great importance on seven types of customer surveys conducted 200 times annually. One of them, the price image survey, tries to identify customers emotional response to the price of an item, as well as their opinion of actual value of the products. Homeplus thus listened to the customers voices, which competitors had failed to heed attentively, employing many consumer surveys and elaborate analysis.

1 RFID Cart 2 Homeplus Culture Center 3 Green Store 4 Homeplus Art Gallery 1 2 3

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KIM Jin-Hyuk

The pairing of Samsung and TESCO meant two distinctive corporate cultures had to be bridged, as Asian corporate culture stresses personal connection, self-sacrifice and teamwork while Western business culture emphasizes rationality, individual expectations, principles, and transparency.

Based on the results, they were able to create new stores with the new concepts that customers wanted.

Synbaration and global management The pairing of Samsung and TESCO meant two distinctive corporate cultures had to be bridged, as Asian corporate culture stresses personal connection, self-sacrifice and teamwork while Western business culture emphasizes rationality, individual expectations, principles, and transparency.
To reconcile the differences, Samsung-TESCO launched synbaration, combining the Korean word synbaram and English word rational. Synbaram expresses the high spirits or high emotion that leads a person to over-achieve. This is reflected in the unique tradition of presenting a new supervisor with a pair of shoes and a chair. The shoes represent the practice of field management, and the chair engraved with the supervisors name symbolizes the dignity and the self-respect of a community leader. Another important combination is glocal, melding global and local management. This reflects the idea that Samsung will pursue localization while making the greatest possible use of the advantages of a global corporation. The emblematic case of glocal management is the combination of British store management with Korean-style format and techniques of dealing with customers. A major factor behind the failure of Wal-Mart and Carrefour in Korea was the lack of localization. Another example of glocal management is that Korea is the only foreign market in which TESCO relies on a local person to be CEO. Other senior executives also are Korean. Korean-style attention and approach to customers is ensured but the system for operating the network of Homeplus stores is influenced by British methods.
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Case Study: TESCO Homeplus

OngOing CHAllEngES
Homeplus rose to become Koreas second-largest discount chain around 10 years after its first opening. In the meantime, Wal-Mart and Carrefour folded their operations in Korea. Analysts said both companies were slow to expand in Korea, costing them both market share and the ability to obtain the best prices from suppliers. However, even in the absence of the two international behemoths, Homeplus has plenty of competition from industry leader E-Mart, Lotte Mart and other domestic retailers. Korean consumers are also considered especially demanding and capricious, and relentless effort is required to keep pace with fast-changing consumer moods, fads and demands. Samsung TESCO has been able to grow quickly as it reacted more quickly to the changing demands of its customers. And it is now applying a greater effort to its social contribution activities. Homeplus is not only a retail chain but the
|Figure 1

Homeplus has taken a keen interest in environmental management. It carries out the nation's largest grass-roots environmental education for children through its e-Paran Children's Environmental Education Program.

Number of Stores and Sales of Samsung TESCO Homeplus

Sales (Unit: Million Euro) 4,169

Number of stores

3,257 2,882 2,569 2,081 1,745 1,277 750 332 146 2 1999 7 2000 2001 2002 2003 2004 2005 2006 2007 14 28 21 42 31 52 66

110

2008

Source: Samsung TESCO IR Report 2008. 12

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KIM Jin-Hyuk

worlds largest lifelong education institution as well. A total of US$186 million was invested for culture centers, and the annual operating costs amount to US$18 million. Some 3,600 instructors are responsible for 340 courses on average per store, and as many as 650,000 people annually are being given an opportunity to pursue lifelong education. Unlike some other discount stores or department stores which operate culture centers only in main downtown stores for the primary purpose of attracting customers, Homeplus runs culture centers in every store nationwide. Each store has a culture center of around 400 to 660 square meters. The combined total area of all culture centers nationwide is over 28,000 square meters. This is equal to the size of three stores. Recently, TESCO Thailand has shown an interest in adopting the culture center operation of Homeplus into its own operation. Homeplus is also eagerly participating in shared management through volunteer work and a cooperative bazaar. By holding a sharing bazaar of Homeplus stores nationwide, products of 310,000 worth US$2.3 million were donated in 2000. A moving-store of Homeplus, which operates a bazaar that tours around the country, is now in its fourth year. Also, in conjunction with the 75 beautiful stores across the nation, a Homeplus Day is held with employees. In addition, Homeplus has taken a keen interest in environmental management. It carries out the nations largest grass-roots environmental education for children through e-Paran Children's Environmental Education Program. Implementing training programs of 15 sessions for eight years, 15,000 children have participated in the program. This effort, which is devoted to innovative ways of reducing greenhouse gas emissions, has gained widespread attention and is designed to measure and control the amount of

carbon dioxide produced by the company. This includes the carbon footprint of corporate vehicles and employees on business trips. Through this program, Homeplus hopes to cut its 2006 level of carbon emission in half by 2020. To transform from a good company to one that is admired and respected by giving back to the community through continuing social contribution; this is the forward-thinking goal of Samsung TESCO Homeplus, which possesses the gene of challenge and creativity.

KIM Jin-Hyuk is a Research Fellow at Samsung Economic Research Institute. His research focuses on the retail and service industries. Contact: jhkim@seri.org

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