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Retail
Retail multinational learning: multinational
a case study of Tesco learning
Mark Palmer
Aston Business School, Aston University, Birmingham, UK 23
Abstract
Purpose – This article examines the internationalisation of Tesco and extracts the salient lessons
learned from this process.
Design/methodology/approach – This research draws on a dataset of 62 in-depth interviews with
key executives, sell- and buy-side analysts and corporate advisers at the leading investment banks in
the City of London to detail the experiences of Tesco’s European expansion.
Findings – The case study of Tesco illuminates a number of different dimensions of the company’s
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international experience. It offers some new insights into learning in international distribution
environments such as the idea that learning is facilitated by uncertainty or “shocks” in the
international retail marketplace; the size of the domestic market may inhibit change and so disable
international learning; and learning is not necessarily facilitated by step-by-step incremental
approaches to expansion.
Research limitations/implications – The paper explores learning from a rather broad
perspective, although it is hoped that these parameters can be used to raise a new set of more
detailed priorities for future research on international retail learning. It is also recognised that the data
gathered for this case study focus on Tesco’s European operations.
Practical implications – This paper raises a number of interesting issues such as whether the
extremities of the business may be a more appropriate place for management to experiment and test
new retail innovations, and the extent to which retailers take self-reflection seriously.
Originality/value – The paper applies a new theoretical learning perspective to capture the variety
of experiences during the internationalisation process, thus addressing a major gap in our
understanding of the whole internationalisation process.
Keywords Learning, International business, Retailers, Multinational companies
Paper type Case study
Introduction
International retailers frequently emphasise the cognitive aspects of the retail
internationalisation process. Examples of this abound but include Tesco’s utilisation of
embedded research teams within Japanese families to monitor consumption behaviour
prior to their acquisition of the Japanese C Two chain in 2003. Within the international
retail literature, however, there has been limited detailed empirical or conceptual
research on international retail learning (Clarke and Rimmer, 1997). Thus, although
learning has played an important role in shaping the way retail companies behave in
practice, comparatively few studies actually address international retail learning. An
absence of detailed empirical or conceptual research on international retail learning is
I would like to thank Dr Barry Quinn at the University of Ulster for his thorough critiques of my International Journal of Retail &
Distribution Management
ideas on an early draft of this work. This paper has developed out of doctoral work supported by Vol. 33 No. 1, 2005
Sainsbury’s. I am also grateful for the assistance of British Stores & Shops Association and, in pp. 23-48
q Emerald Group Publishing Limited
particular, The George Spencer Trust under individual Research Awards. 0959-0552
DOI 10.1108/09590550510577110
IJRDM therefore a major gap in our understanding of the whole internationalisation process. It
33,1 is contended that important insights and valuable lessons have been learned by
retailers from their own successful international forays as well as the visible success of
other companies in the international marketplace. Not all international retail operations
have been successful however, and the difficult and highly contested process of scaling
back of retailing operations to remedy mistakes may also result in an equally valuable
24 learning process for international retailers (see Palmer 2000, 2002a, b).
A number of researchers have called for research to re-examine the ways in which
retailer internationalisation has been conceptualised (Dawson, 2001; Howard and
Dragun, 2002). The recent critiques of Wrigley (2000), Burt and Sparks (2001) and Burt
et al. (2002) suggest that the existing conceptualisations neither adequately capture the
multiplicity and difficulties in the retail internationalisation process, nor sufficiently
explain the variety of approaches to internationalisation being used by retailers.
Various explanations of the retail internationalisation process are emerging, but one
viable and promising line of enquiry is the area of international retail learning. Notable
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Figure 1.
A framework of
international retail
learning
IJRDM dimensions make a distinction between the internal corporate and the wider external
33,1 view of international retail experience. The first critical area refers to the internal
strategic processes. The second theme concerns the external strategic processes. This
includes the interactive aspects of the retailers’ international environment. The third
dimension considers the internal operational functions. These dimensions are
especially important when conceptualising experience and interpreting Tesco’s
26 international learning in this paper. The paper now turns its attention to the
methodology of the study and this section will briefly outline the details of the primary
research undertaken.
Methodology
This study employed an interpretative, qualitative methodology to examine the
international retail learning. The single case approach has been an increasingly popular
methodology within the retail internationalisation literature of late, and it has enabled
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various authors to provide some very important new insights into the subject area
(Sparks, 1995; Shackleton, 1996a, b; Clarke and Rimmer, 1997; Wrigley, 2000).
Furthermore, field research that involves investigating the views and opinions of
organisations directly and indirectly involved in the decision-making process is
receiving increasing support within the literature (Shackleton, 1996a, b; Sparks, 1996;
Palmer, 2002a, b; Palmer and Quinn, 2003). These authors have highlighted 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. Indeed it may be argued that a strong interdependence
exists between investment banks and firms with respect to advising retail executives on
strategy, structure, and international retail operations. Eliciting the views of investment
bankers would therefore allow the research to gain access to the tacit knowledge and
practical know-how gathered through years of experience through the direct interaction
with the company via research, consulting and advisory services utilised by retail
executives. Multiple and independent sources of evidence, including market research
reports, company profiles, financial statements and so on were also used to corroborate
the interview data and, by so doing, develop convergent lines of inquiry (Yin, 1994).
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 most
consistent amongst its international peers (1995-2002), with estimated sales rising to
e45.9 billion in 2003. Indicative of the scale of its international ambitions, Tesco
unveiled one of the most radical and ambitious internationalisation programmes that
that would involve the development of 200 hypermarkets in Europe and Asia,
generating GB£10 billion sales per annum by 2004 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 Retail
attributed to Tesco in the academic literature (see Palmer, 2002b for a recent example). multinational
Tesco’s success abroad therefore remains an under-emphasised case within the
contemporary academic literature. Third, internationalisation has been a major aspect learning
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. It is argued that divestment is a highly visible case of where learning is 27
likely to have taken place.
A total of 62 interviews were undertaken during 1999 and 2000 with the leading
food sector buy- and sell-side analysts, and international retail merger and acquisition
specialists (i.e. those within the corporate strategy unit in the corporate finance division
of investment banks) and senior executives of the retailer under investigation. In
planning the interviews, particular attention was given to the danger of the
interviewees presenting biased views and opinions (see Palmer and Sparks (2004) for a
wider discussion of the limitations of this method). This research used “convergent
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in-depth interviewing” (Dick, 1990 cited in Carson et al., 2001). In short, it is an in-depth
interviewing method that allows the researcher to develop, clarify, verify and refine the
core issues of the interview protocol. It consists of a number of interviews in which the
procedure is both structured and unstructured. During the early stages the content of
the interview is unstructured and flexible during which the interviewee tells a story
about key events or episodes and what they have learned about their experiences from
these events. The process used in the interview then becomes more structured as the
interviewer converges in specific issues of the research problem and to disprove the
emerging explanations of the data (Carson et al., 2001). The length of the interviews
typically varied from half-an-hour to three-and-half-hours. Rather than concentrating
on one or two aspects of the dimensions of Tesco’s international learning, the interview
protocol explored learning initially from a broad perspective. In line with the
arguments put forward by other researchers (Hallsworth, 1992; Clarke and Hallsworth,
1994; Clarke and Rimmer, 1997; Burt and Sparks, 2001, Dawson, 2001) a broader
perspective may be necessary so that these parameters can be used to raise a new set of
more detailed priorities for research on international retail learning. That is to say, each
lesson is not necessarily an end in itself, but an entry point for a wider discussion. Data
collection and analysis were simultaneous. Analysing data involved categorising and
triangulating the evidence from the multiple perspectives, and the presentation of
findings largely followed the most recent interview protocol. However, it should be
noted that the analysis of learning is not easily defined in terms of beginning or end
points and this research identified extreme situations and critical incidents which were
transparently observable for data collection. Moreover, Tesco’s experiences were not
assessed by any quantitative measurement of the amount of learning occurred, but
rather by reference to the content of these experiences and the impacts that such
learning had on the outcome or trajectory of international expansion.
The paper now reports the findings from the in-depth interviews. The key themes
from the findings are discussed in the sections that follow. Excerpts from the in-depth
interviews are used throughout the findings section in order to illuminate and
contextualise relevant themes. For confidentiality reasons, the identities of respondents
will not be disclosed during the remainder of this paper. This case study will be largely
formatted in the same way as the dimensions outlined in the framework. The data
IJRDM gathered for this case study focus on Tesco’s European operations. While Tesco’s
33,1 investment activities in Asia are strategically important, it is argued that the most
insightful aspects of the company’s international investment and divestment activities
occurred in the European market. The findings proceed with an initial overview of the
case company’s international developments. The main body of findings follows this,
and directly examines the lessons learned by Tesco from the internationalisation of
28 retail operations and their impact on the future trajectory of international operations.
capacity for expansion and the relative strength of the company within their domestic
market at the time of the initial international foray. This untimely venture abroad was
summed up by one sell-side analyst:
The perceived success (or otherwise) of their early venture abroad would have been
considered insignificant to the company’s fortunes at home, and as a result, this largely
undermined the company’s (perceived) efforts in the eyes of the financial markets as being a
peripheral and/or even a distraction to the core UK business.
The continued realignment, focus and momentum of the company in the UK market
provided the context in which internationalisation had taken “a secondary position” in
the company’s corporate development agenda. Tesco subsequently divested the Three
Guys operations to the Dublin-based supermarket company H. Williams in 1986.
Towards the end of the 1980s, the company embarked on research efforts into possible
international growth options and these primarily centred on the US market, but also
covered several European countries. The company spent several years investigating
the North American market during the late 1980s and early 1990s.
The product of this research effort was the company’s move into the French market.
Tesco’s first foray into mainland Europe with the acquisition of the medium-sized
supermarket chain Catteau in December 1992 was intended to be the company’s
springboard to international expansion and serve as a platform for European growth in
particular. The company’s rationale at the time for acquiring a small regional chain
was that they were going to build Catteau into a national chain in France. Tesco
acquired an effective 85 per cent holding, leaving 15 per cent of the ownership in the
hands of management as part of an incentive scheme. According to the analysts’
research at the time, the company was attracted by Catteau’s good record and high
profitability. Group turnover of the chain in 1991 was GB£340 million and over 80 per
cent of this revenue came from retailing (Catteau also had wholesaling and franchise
activities). Management felt that Catteau’s impressive net profitability reflected the
economies gained from a tight geographical clustering of stores and the strong
centralised cost controls, and as a result, the financial markets were largely supportive:
At the time the financial markets pointed out that Tesco had done all the classic right things
– the lesson learned from UK retailers’ forays overseas has been that it is vital to buy a
successful business rather than a “turnaround” situation and retain strong local management.
By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Retail
Catteau, and later in 1997 would completely withdraw from France. For much of this multinational
early expansion, the company focused on structurally mature markets, but with more
recent expansion the company has been more disposed toward emerging markets (see learning
Table I).
The third phase of the company’s international expansion was in 1995, when
management acquired the Global supermarket chain in Hungary for GB£15 million. 29
This did not represent a particularly expensive entry, and indeed, this was reflected in
the poor quality of the assets purchased – in total 43 small stores. The intention of the
company was not to trade the stores in the long-term, but rather to secure a foothold in
the market and learn from these businesses, while later building a larger hypermarket
business based on their experiences. Using the Hungarian acquisition as a foothold in
eastern Europe, the company subsequently acquired Savia SA in Poland for
GB£8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired
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for relatively little financial consideration and designed to secure a foothold in the
Polish market for Tesco from which to develop a hypermarket business. In 1996 the
company entered the Czech Republic and Slovakia through the acquisition of Kmart for
GB£77 million, acquiring a portfolio of 13 stores with an average selling space of
72,000 ft2. Essentially the Kmart business geographically was an in-fill acquisition
between Tesco’s Polish and Hungarian investments.
Tesco also re-entered the Irish market with the acquisition of ABF’s Irish food
retailing business for GB£630 million in 1997. Following the ABF acquisition, the
company secured their position as the largest food retailer in Ireland with 109
supermarkets and annual sales of GB£1.23billion. And in addition Tesco captured 17.5
per cent of the market in Northern Ireland and 19.4 per cent in the Republic securing
number one position in both markets.
The initial move into Asia, and the Thailand market in particular, came in May 1998
with the purchase of a 75 per cent majority controlling stake in Lotus, a chain of 13
hypermarkets which cost GB£111 million for the equity – assuming GB£89 million as
their share of Lotus’s debt. Lotus’ previous owner, Thai CP Group (a major agricultural
supplier in the region) retained a 17 per cent stake, with SHV Makro holding the
remaining 8 per cent. Tesco subsequently entered South Korea. In March 1999, Tesco
formed a joint venture with Samsung, one of South Korea’s largest conglomerates, into
Price Sq.
(GB£ No. of footage
Country Acquisition Date million) stores (million)
to reduce the risk of failure. In stark contrast Tesco entered new markets by acquiring
relatively weak target firms or by launching into areas where they were less strong in
terms of a distinct competitive advantage. Tesco’s initial forays into Ireland and
Czechoslovakia clearly illustrate this point. In Ireland, difficulty with post integration
led to the realisation that these “turnaround” cases were disproportionately demanding
for management resources, and in the Czechoslovakia Tesco moved into non-food
merchandise lines by acquiring the Kmart department stores.
Divestment experience. What surfaced as a main theme from the findings was the
intense learning process during international retail divestments. The findings
indicated that failure or partial failure during the internationalisation process had a
marked effect on the future trajectory of Tesco’s international expansion. The strategic
effect of Tesco’s divestment in France and Ireland has resulted in the firm now
ensuring that they establish a strong market-leading position in new markets. For
example, Tesco’s aggregate market share in Hungary and Poland is over 40 per cent.
The advantages of a dominant market position for learning lie in the success that such
a position implies. A strong market position can obscure relatively small mistakes,
whereas for small-scale operations such mistakes might prove to be fatal.
The Catteau divestment experience resulted in an equally valuable learning process
for Tesco. Sell-side analysts suggested that Tesco delayed essential corporate
divestment and reconfiguration even under intense pressure when it emerged that the
French operations were experiencing difficulties. The company found themselves
locked into the business through various exit clauses – out-manoeuvred by Catteau’s
management – bidding competitors and the investment banks facilitating the
completion of the divestment:
Tesco have learned that advisors can advise but that’s all. Don’t trust any investment bank.
The management were misguided and ill-advised with Catteau in France. There’s no question
that the management of Catteau are to blame. International retailers should never trust
anybody they are buying assets from.
It was clear that Tesco’s management learned from this experience by improving the
techniques to prevent the commingling of the management lock-ins and sunk costs,
which made divestments very difficult, in terms of future acquisition due diligence
processes. While the idea that continuous dissatisfaction from failure may seem
particularly useful to initiate learning (Butler et al., 1991; Barwise, 1997; Arino and Retail
de la Torre, 1998), it remains difficult in practice. The acquisition of Catteau for Tesco
and the subsequent years (i.e.1992-1997) marked a continuous process of management
multinational
dissatisfaction with the French operations. This dissatisfaction generated negative learning
press commentary, but also weakened management and investor confidence and visibly
undermined the strategic credibility of the company. The company’s most high profile
divestment had led to management evaluating progressive store-by-store expansion not 33
with a view of proactively developing an exit strategy in the planning and due diligence
phase of expansion as the following management viewpoint suggests:
. . . but with a view to our investment being underpinned by assets. Now that comes back to
my point about the long-term liability of assets. If you are in a market where the currency
devalues and the asset value diminishes in this unstable environment – that is a due diligence
mistake. Rather retail multinationals must invest in assets which are underpinned by asset
value rather than nebulous goodwill in the context of organic growth.
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(Tsang, 1999). Intention relates to commitment. On the surface it appears that Tesco
possessed a learning intent, however, it is questionable whether this learning genuinely
went beyond the “official corporate line” at least in the early phases of
internationalisation. When management were asked to discuss the structures and
processes through which the international learning was disseminated back to the UK
market, critically there appeared to be no planned, structured, nor systematic
mechanisms or formal processes for capitalising on this learning. The company’s
acquisition of Catteau in France did not prove to be the platform from which to inspire
experimentation abroad. Nevertheless, the next phase of the company’s expansion into
central and eastern Europe coincided with the company’s ambition to broaden their
non-food merchandise in the UK market. The impetus was then on the diffusion of
what the company had learned from developing a new format which accommodated
non-food items in the overseas markets. This had a catalysing effect. Over time, the
company began to employ personnel whose sole responsibility was to transfer the
hypermarket format learnings back to the UK from central and eastern Europe. These
learning agents represented a new dimension in the company’s organisational
structure, but there were difficulties in this process as management highlighted:
The learning challenge following on from this is how do management then transfer those
learnings to the home market and explain to the headquarters that they don’t know
everything, there is a better way of doing it. A new product, process – that is culturally
incredibly difficult to implement. This is extremely difficult to understand and teach the
domestic market.
According to the sell-side analysts, these problems were much more acute in the
aggressively industrial approach adopted by Tesco than the looser federal approach
which emphasises the role of the international firm as a “vehicle” for investment.
.
a merger with a large European retailer would leave Tesco as the junior partner;
and
.
Tesco is more vulnerable to an aggressive bid.
Tesco resisted such pressures and decided to pursue international expansion
independently through organic store-by-store expansion – albeit much more
aggressively than had hitherto been the case (i.e. the development of 200
hypermarkets over four years). During what was rapidly emerging as one of the
most intense periods of retail merger-and acquisition-driven internationalisation, the
growing sense of unease among analysts began to surface about the long-term
endurance of Tesco internationally. However, management held their nerve – the
speculative scenarios which had been envisaged in the early 2000s (see Wrigley (2002)
for example) pointing towards a series of mergers and acquisitions at both the global
and local level failed to materialise. Instead, quite remarkably, the immediate years
following 2000 saw relatively little consolidation whatsoever. Through a series of
competitive adjustments including exploiting the benefits conferred by the scale of
their UK operations, it seems that Tesco’s strategy paid off – and, importantly,
deterred any hostile takeover bids. While the strategic effects of this intense period are
difficult to determine analysts suggested that this period of vulnerability for Tesco led
to a greater realisation of the strategic necessity of the company’s international
operations in ensuring the long-term future of the company.
At the local competitive spatial level, Tesco adjusted operational retailing aspects,
sometimes with minor modifications and at other times ensuring fundamental
transformation of the format during the internationalisation process. Both buy- and
sell-side analysts believed that this international juncture was an area where
companies could learn and experiment at the extremities of the company:
It will offer a company which is open to change the opportunity to observe and adopt best
practice and apply it throughout the totality of their organisation. It will see Tesco competing
directly with some of the best food retailers, notably the French hypermarket operators.
In central Europe and Asia, Tesco is competing directly with some of the best food retailers in
the world, notably Carrefour, Auchan, and Ahold. As a result, Tesco is having to learn how to
merchandise non-food departments and how to hone their merchandising skills.
IJRDM The above quotations serve to draw out how much of the learning takes place as the
33,1 expansion unfolds and the competitive situation evolves rather than simply with prior
market knowledge. In other words, as the company faces novel situations and makes
small mistakes through trial-and-error expanding, management form more realistic
perceptions of the foreign market. The need for learning-by-doing at the local spatial
level indicates that learning from the internationalisation process will often be a
36 gradual, reiterative process (Alexander, 1997).
External regulatory experience. Faced with the inevitable prospect of different
degrees of regulatory constrains in dissimilar international retail markets, Tesco
generated negative publicity and commentary in both the Irish and French markets.
The contrasting cultural nuances were particularly apparent in the different ways of
conducting business concerning the management of the planning process. In Ireland, in
the context of an unclear planning policy frame, the company attempted to impose a
process that had been utilised in the UK:
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They [Tesco] underestimated how the planning process in Ireland worked at two levels. First,
they underestimated the extent of local networks and contacts in the property industry. They
didn’t have enough agents and advisors. There was very much a local way of doing things,
which relied on who you know as much as how much you know. Second, there is a different
decision-making process, slightly opaque series of planning policy guidance and framework.
There was no independent planning inspectorate, with a lot of years experience in
determining planning proposals for new stores.
When Tesco announced several proposals for new store development in Ireland and
there was little guidance with regard to planning, this led to several years of
independent planning and formalised inquiries. Although Tesco had been actively
addressing the legitimate concerns of customers, suppliers and small retailers in these
markets, it is clear that the company failed, at least initially, to communicate and
negate the concerns that the local authorities and other stakeholders adequately. The
strategic effect of this is difficult to determine in more recent expansion, but with
experience, rather than conceiving of regulation simply as fait accompli in international
markets and emerging markets in particular, Tesco embarked on a public relation
campaign that would attempt to influence important regulatory decisions in their
favour. In marked contrast to the early phase of development, Tesco noticeably
changed by becoming proactive in enhancing their credibility and reputation in new
markets with national and local governments as well as providing new opportunities
for local suppliers to export produce. As a significant measure of the company’s
commitment to internationalisation, upon Tesco’s entry into the Irish food retail
market, management were willing to enter into an agreement with the government
which meant that Tesco had to adhere to a number of promises and guarantees
including operating an autonomous head office, retaining existing employees and the
sourcing of Irish products.
Internal regulatory experience. Tesco learned from the importance of involving
major shareholders during the internationalisation process. Tesco required the support
and guidance of the financial institutions and, indeed, this forced them to invent
communications and governance processes in order to stay informed of institutional
investor concerns and perspectives. Arguably, Tesco’s initial cautionary approach
towards internationalisation was attributable to the restraints placed on the company
by their shareholders’ expectations. According to management, at the time of Tesco’s
first high profile, albeit small international acquisition, the gist of the financial Retail
analysts’ perceptions towards Tesco’s internationalisation was that the capital multinational
markets inhibited or constrained Tesco’s international expansion:
learning
Tesco wanted to do a deal in France in the mid-1990s but were prohibited at the time by the
City. They wanted special dividends and share buy-back options and didn’t want to take the
risk of them going abroad.
37
Serious questions were being asked by the financial analysts concerning the financial
requirements and the pressures to sustain international growth. However, over time,
the question from the financial analysts then became how rapid Tesco should expand
internationally rather than whether or not they should actually internationalise. One
sell-side analyst’s report at the time succinctly put it:
The only question is the “haste” with which it is pursued and whether shareholders get a
parallel sight of the cash through the dividend. In the context of Catteau, Tesco seems to be
taking it reasonably slowly; it certainly is delivering a progressive pay out.
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As previously discussed, Tesco came under intense scrutiny and found themselves
subject of speculation of takeover bids during the mid to late 1990s. To combat this
Tesco embarked upon a number of investor relations initiatives. Some, as reported in
the press at the time, interpreted Tesco’s emphasis on overseas expansion as “a coded
plea to re-rate the shares and put it in a stronger position to take part in the
international acquisition-driven consolidation process” (Osborne, 1999), so that the
company would not become increasingly marginalised in the acquisition-driven
consolidation process. Management were obviously concerned about the company’s
valuation during this period relative to their international peers and deputy chairman
David Reid (cited in Riera, 2000) suggested as much:
People should be concerned if share prices are lower over here, as there is a possibility that
the whole UK food retail industry could be owned by foreign competition.
Unfortunately for Tesco, these efforts were interpreted as a one-off public relations (PR)
exercise. The findings tentatively suggest that a one-off PR campaign for its own stake,
in the context of intense consolidation pressures, will not be positively interpreted by
the financial markets. Instead, it was interpreted as a coded plea to re-rate the shares
and put the retail multinational in a stronger position to take part in the international
acquisition-driven consolidation process, rather than an open and meaningful ongoing
dialogue between the financial institutions and Tesco. Tesco’s message was not being
effectively relayed to investors – in part, because analysts were placing excessive
weight on the company’s past international (in)experience and this obscured the
prospects for prospective earning power from future international investments.
international operations. By virtue of this size, Tesco had greater availability of capital
and human resources for areas such as store management, site location analysts,
marketing and financial personnel, supporting and sustaining international operations.
Reflecting on this issue one buy-side analyst made the following point:
The biggest lesson of all is a human resource lesson. Where do you get experienced
international management? While Carrefour and Ahold have considerable management
depth and breadth, relatively new internationalists have less human resources.
Also of increasing importance for the less experienced retail multinationals was the
advisory support from external firms such as investment banks, management and
property consultants and even manufacturers. The investment banking advisory
support intensified when Tesco expanded via merger and acquisitions, making
possible a deepening of the knowledge transfer process, closely co-ordinating the
activities with the investment banks, and expanding the learning process outside the
boundaries of the company. Investment banks can therefore act as an agent for
transferring knowledge regarding the dynamics in other international markets – in
effect accelerating the learning curve for a less experienced retail multinational.
Investment banks can be involved at any stage in the internationalisation process as
one advisor explained:
We are not retailers but we can provide comprehensive information, which facilitates the
retailers’ learning and helps to narrow down the potential options.
These networks also extend beyond the financial institutions. One important
dimension for sustaining the company’s aggressive expansion programme has been
the close relationship with their largest supplier, Procter and Gamble. For example,
Tesco utilised Procter and Gamble to fund an international field trip so that the
executives got an insight into retailing practices in Asia.
Financial capital experience. Progressive international expansion is likely to result in
the deterioration of the financial profile. From 1995 onwards, the conditions for
international expansion were far more capital intensive. These costs were principally
driven by the rising valuation (acquisition multiples) placed on acquisition targets,
which, during the wave of acquisitions, broke decisively beyond historical ranges. On
top of that, costs were exacerbated by the increasing sophistication of in-store retail
environments which, even within the emerging markets, required additional levels of Retail
capital investment as well as broader, supporting investments in information multinational
technology (IT) systems, distribution/logistics infrastructures and supply chain
management. Developing markets have attracted considerably more international learning
competitors, resulting in a virtuous cycle of heavy capital investment. One sell-side
analyst commented that for Tesco:
[. . .] the Polish market is developing at such a pace that in order to win custom, the in-store
39
environment needs to be highly sophisticated from the outset – especially in the highly
competitive cities such as Warsaw.
Additional external sources of financing were therefore often required to supplement
international growth. Tesco relied on external funding both in the form of debt and
equity from the financial institutions. A key factor for Tesco, however, was the size of
their cash generating domestic markets, which allowed them to invest with confidence
in international emerging markets. In 2002, for example, Tesco financed the HIT
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acquisition in Poland (estimated £386 million) from trading rather than incurring debt,
benefiting from the cash generating strength of their core UK business. Critical
post-integration investments were also supported from earnings from the UK business.
Underlying Tesco’s international programme was a relatively strong domestic
position, which was in stark contrast to their main rival in the UK, Sainsbury’s.
Sainsbury’s international expansion became more difficult in the face of opponents,
who slowly undermined the company’s international aspirations with resounding
attacks on their under performing core business. Many buy- and sell-side analysts that
have followed this line of reasoning:
On the back of poor domestic expansion, retail multinationals should not plan on any foreign
acquisitions as this will only accelerate the demise of the current domestic operations. To
wield power across markets, a retail multinational must have some measure of strength in
their domestic market. In other words, retail multinationals with under performing or
insignificant positions in their domestic market will not have sufficient financial or human
resources to fully implement their international strategy.
If you are struggling in your domestic market, what credibility do you have that you can
manage a business in another country?
At the Global Institute of Grocery Distribution conference in early 2000, Tesco’s
management stressed that they would not make the same mistakes as Sainsbury’s in
their domestic and international operations. It is clear that management learned a
considerable amount from Sainsbury internationalisation process, and briefly pointed
to Sainsbury’s under investment in the domestic market.
Marketing and communications. The experiences of Tesco highlight some
important lessons concerning international marketing and communication issues. In
the international retailing literature, Lord et al. (1989) have noted how multinational
retailer expansion can often be a PR disaster – sometimes confrontational and
controversial; leading to conflict with other retailers and suppliers, but also between
the financial markets and the retail multinational (see also Wrigley, 2000). It is clear
from the case findings that Tesco suffered from negative publicity in a number of
ways. At the investor-retailer level, Tesco’s fiduciary responsibilities were often
strained due to ineffectual and disjointed marketing communication programmes. A
IJRDM lack of PR activity during the early phase of internationalisation placed Tesco at a
33,1 slight disadvantage, for their international peers wasted few opportunities to play
gently on some of the financial markets’ concerns regarding Tesco’s international
expansion. One sell-side analyst made this point:
One of the biggest risks of international expansion is to the reputation of the retail
multinational. When a company’s international reputation is questioned, valuation collapses,
40 and as a consequence, management can’t make further acquisitions. Then management
spend all of their time on the back foot trying to build credibility rather than growing the
international business.
Serious questions were being asked of Tesco in this regard, but management defended
their position explaining that:
PR skills play a part in the way some of these perceptions get blown up. If pressed, we would
say that the other retail multinationals are better at “talking up” their story than Tesco, which
tends to take the old fashioned view that the results should speak for themselves.
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standardised goods. There have been a number of strategic outcomes. First, Tesco
have deliberately strived to occupy the top three position in all of their international
markets. Tesco have performed less well and in some instances exited the market
where they could not reach a sufficiently critical size. For example, management cited
this as a reason for their divestment of Catteau in the French market. Second, Tesco’s
actual sourcing efforts within the broader international context also shows several
visible attempts by the company to aggregate scale across multiple markets and
establishing pan-regional presence in contiguous markets. Third, attempts to
re-organise their global sourcing activities practises by establishing buying centres
in emerging markets to develop the product range. Tesco has encouraged local food
suppliers to develop retail brands, under the Tesco own brand. On the one hand, this
prohibited the degree of global sourcing efforts, but on the other, it has substantially
improved the overall diversity of the company’s product mix which was increasingly
being exported into other international markets.
Discussion
As Tesco accumulates knowledge while internationalising, important insights and
lessons have been learned from stimuli internal and external to the company. By
reflecting on these different learning experiences, particularly when contextualised
within detailed single case-level research, various dimensions of retailer
internationalisation have emerged. In spatial terms, it appears that Tesco
concentrated their efforts with more experience on dissimilar markets in key regions
or clusters aiming to achieve a market leading position. One explanation for this
activity may be that as Tesco accumulated more experience they recognised the
importance of local and regional scale economies for achieving profitability. In other
words, retaining spatial focus was therefore more important than capitalising on
opportunities in diverse markets. The decision of selecting a particular market may
depend as much on the availability of suitable acquisition targets and the conditions of
potential sellers as it does on the attractiveness of the market (Dawson, 2001). For
Tesco, market selection was thus entangled with entry mode choice. Evidently,
acquisition-driven expansion had been a form of “postrationalised opportunism” where
both management and the financial institutions partisan to the acquisition rationalise
IJRDM the acquisition after it is accepted by the other company. Market selection decisions
33,1 mirrored this opportunistically-driven behaviour. In this respect, the main lesson that
Tesco had learned is that they must be in a position to quickly take advantage of
unexpected events (threats or opportunities). How Tesco dealt with unexpected
successes, miscalculations, mistakes and serendipity was of critical importance to the
international operations succeeding. The preceding evidence of Tesco also suggests
42 that acquisitions have proved to be an important prism for learning. On several
occasions Tesco used small-scale, nothing-to-lose acquisitions to minimise their own
human and financial capital in the face of potential economic and political uncertainty
in developing markets and to accumulate local market knowledge. These acquisitions
have provided Tesco with invaluable experiential opportunities to be “surprised” by
the marketplace and so to learn. The case evidence revealed that a willingness to
experiment and feedback input on the results from local store managers and expatriate
managers is a meaningful lesson.
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The case of Tesco also indicates that the internationalisation process of retail
multinationals is not always a progressive and straightforward process (Alexander and
Quinn, 2002; Burt et al., 2002, 2003; Mellahi et al., 2002). The findings add new insights
into the complexity of the international retail divestment process. It appears that Tesco
had learned rather valuable lessons from their own divestment experiences, while other
retailers’ international market withdrawals provided an opportunity to observe overt
behaviour. From the Catteau experience, Tesco became locked into an inappropriate
acquisition through various acquisition-related contractual (earn-out) clauses with
Catteau’s management which in turn prohibited a swift and timely exit. A lack of
experience as an internationalist was visible in the Republic of Ireland when faced with
the task rejuvenating, re-branding and re-launching relatively weak store operations as
well. While it is true that such operations offer undeniable opportunities to improve the
operations, Tesco later recognised that, in reality, these “turnaround” acquisitions were
disproportionately demanding of critical management’s time and resources.
Apart from underestimating the level of effort required for these “turnaround”
operations, Tesco painfully learned from employing an inappropriate corporate model
in the French market. Alexander and Myers (2000) have remarked that the differences
between ethnocentric (centralised) and geocentric (decentralised) operating structures
will impact the international learning process. Tesco viewed their early international
moves abroad as a business extension and a redirection of free cash flow – effectively
limiting organisational learning opportunities. From the mid-1990s onwards however,
publicly-listed retailers had come under intense pressure from their shareholders to
demonstrate where and how value could be added to the international operations. This
had a catalysing effect. A lack of clarity in this respect would have severely
undermined the strategic credibility of the retail multinational and inevitably placed
financial cost of capital restrictions (Palmer, 2002a). Tesco were initially unclear and
less confident about the most appropriate corporate model with which to proceed.
Effectively, Tesco passed through a number of iterations of organisational structure
before finally adopting a hybrid structure between centralised and decentralised
operations, before ultimately adopting an aggressively industrial model. Perhaps more
importantly, the initial experiences of Tesco’s control capabilities have proved that it is
impossible successfully to adopt both corporate models simultaneously.
What is clear from an analysis of the findings regarding learning structures and Retail
processes is that an organisational-led learning multinational goes beyond the “official multinational
corporate line” that executives may use to justify minority entry positions or failures in
new markets and deliberately establishes systematic internal learning processes to learning
support international learning. Within the context of international retail expansion in
Europe, Alexander (1997) suggested that retailers have lacked systematic internal
processes to support their decisions with respect to appropriate host market strategies. 43
The present study would largely support his findings at least as far as the development
of internal learning structures is concerned. It is proposed that innovations and
continuous improvements are more successfully absorbed by the proactive
formalisation and development of internal learning mechanisms. The formalisation
and development processes for learning were seemingly rather fortuitous insofar as
market expansion into eastern Europe coincided with their ambition to broaden the
non-food merchandise in the UK. The impetus was then on the diffusion of what the
company had learned from developing a new format which accommodated non-food
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Conclusion
There has been a marked acceleration in the scale of international investment during
the 1990s and as the process of internationalisation gathers pace, it is vitally important
to understand what retailers have learned from their experiences. The aim of the paper
was to provide an expository overview of one company’s experiences of
internationalisation, however it is anticipated that the findings arising from the
study will help to develop understanding of the subject area in general. It has been
shown that the concept of “learning” provides an important conceptual framework and
a new perspective for reinterpreting, re-evaluating and refining the existing literature
on retailer internationalisation. Such learning accounts necessarily are richer and
deeper but less elegant than success-failure dichotomies. The preceding case study of
Tesco illustrates a number of different dimensions of the company’s international
experience. Many important lessons have been learned by Tesco during the course of
their internationalisation process, enhancing the adaptability and responsiveness of
the company. Tesco has undoubtedly experienced several “shocks” in the marketplace
– and as result the company was much more vigilant and willing to experiment, learn
and react to the unexpected during later phases of expansion. How far Tesco could, or
would, apply the lessons learned from their experiences for future expansion is largely
dependent on the company’s capacity to identify the sources of international learning
in different contexts, absorb and institutionalise this knowledge. In some
circumstances, it has also been shown that the company did not learn from their
experience, even with the benefit of hindsight.
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