How the cookie crumbled for Tesco in China

How the cookie crumbled for Tesco

Updated: 2013-08-26 06:56

By Mike Bastin ( China Daily)British retailer can still succeed in China if it becomes a premium, exclusive brand

About nine years after the British supermarket chain Tesco PLC launched its gung-ho, go-it-alone expansion across the Chinese mainland, it announced on Aug 9 that it was to merge itsunprofitable operation into a State-run company as a minority partner. Tesco’s partner, State-owned China Resources Enterprise Ltd, will dominate the tie-up, with Tesco taking just a 20percent stake.

This marks a humiliating retreat for the British retail giant and, rather than representing part ofany coherent strategy, appears to be an attempt to limit losses.

Tesco has also recently announced that it plans to “concentrate on the UK market”, yet theBritish retail market remains sluggish at best with no prospect of growth, unlike internationalmarkets such as Asia, and China in particular.

One has to question the credibility of Tesco’s overall strategy and, therefore, its seniormanagement. Do they possess the talent to shape the Tesco brand into a truly global outfit?

Problems negotiating with suppliers and regulators, and soaring costs, for rent and labor, arecited as key reasons behind Tesco’s failure on the Chinese mainland. In addition, strongcompetitors such as Carrefour SA and Wal-Mart Stores Inc, combined with a move towardonline grocery shopping, have not eased Tesco’s plight.

Access to prime urban locations is undoubtedly a contributory factor in Tesco’s demise. Localcompetitors often enjoy a natural advantage here with government connections.

Tesco’s go-it-alone entry strategy in 2004 has also been a factor in the demise of the oncefabled retailer. History, and recent history at that, is littered with similar tales of foreigncompanies trying to penetrate Chinese mainland. The British retailers B&Q PLC and Marks andSpencer PLC are prime examples, both having had little success in China and both havinginitially sought to transplant their British business model.

However, all of the above stand out as symptoms of Tesco’s poor performance in China. Theroot cause can be found in the apparent ethnocentric attitude that no doubt dictates all aspectsof Tesco’s management thinking and strategy.

This is not unusual for a company so successful in its British home market. Sadly for it, thatsuccess has not been replicated in any overseas venture. Embarrassing retreats in the US andJapan have also severely dented Tesco’s image.

Tesco has experienced huge success in the British retail market. Since the mid-1980s, when itwas the first British retailer to issue a loyalty card, it has risen magnificently above manyestablished competitors such as J Sainsbury PLC with an incredibly well-managed hybridstrategy combining reasonable quality with affordable prices and good service.

Tesco also managed to secure many of the most attractive locations for its supermarkets inBritain.

Its success, particularly under the leadership of Terry Leahy, appeared not to lead to a senseof complacency and strategic drift that so often characterizes such an incredible rise. Leahy’smantra was always “we can do better” despite year after year of impressive financial resultsand a stronger and stronger grip on British retailing.

This appears to have changed. Tesco’s incredible attention to detail and masterful market-orientation have been replaced by an arrogance and a belief that what worked in Britain wouldwork overseas.

It was extremely foolhardy to launch a mainland entry in 2004 without some sort of joint venturewith a Chinese partner or partners. The Chinese mainland is a very different market, whererelationship building with suppliers, distributors and regulators is key. The Chinese are alsovery different and changing, and food is inextricably linked to cultural and social factors inChina, unlike in Britain.

As part of the initial tie-up though, Tesco should also have laid firm plans and intentions tobuild the Tesco brand. Even today, about nine years on from Tesco’s first foray in China, thecorporate brand name is barely known.

Tesco’s Chinese name le gou, translates to “happy shopping”. A reasonable attempt at positivebrand association but which lacks the cultural fit and emotional resonance of Carrefour’s jia lefu meaning “happy family”. Carrefour has quite deliberately avoided the “shopping” associationin favor of the “family” association, so central to Chinese culture.

However, on a more strategic level, Tesco appear to have neglected any consideration ofbrand positioning or repositioning. With established and entrenched competitors such asWalmart and Carrefour, Tesco could never succeed with a similar brand positioning strategy.However, an opportunity still exists for a niche retailer brand with a premium, exclusive brandposition in the mainland marketplace. In fact, many foreign brands have repositioned in thesame way in China, for example BMW AG, Ikea and Starbucks Corp.

All of these and so many more high quality, but rationally positioned, foreign brands haverepositioned in China and offer a far more emotional brand experience. At present thisresonates with China’s burgeoning urban middle class shopper.

Such repositioning should have guided Tesco’s China strategy. Such an emotional offeringcreates greater brand meaning and loyalty and also reduced dependence on prime location.People are far more likely to seek out more exclusive, emotional offerings.

Indeed Tesco need look no further than its British stronghold, where the niche, premium retailerbrand Waitrose occupies just the position that remains unoccupied in China today.

Clearly, what works in Britain will probably not work in China. Far from retreating in China,Tesco should now regroup, reposition and rebrand with “exclusivity”, “emotion” and “enterprise”as core brand values.

The author is a visiting professor at the University of International Business and Economics inBeijing and a researcher at Nottingham University’s School of Contemporary Chinese Studies.The views do not necessarily reflect those of China Daily.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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