Tesco Expansion into the USA (Fresh & Easy)

1.0 Introduction

Countless businesses implement global development strategy to grow the company prospects presented by growing economies. Popular aims consist of expanding revenue, avoiding the competitive host market, joining an emergent or lucrative marketplace. Becoming successful when expanding is difficult as shown with Tesco. Throughout this essay, we desire to show the expansion of Tesco and how they failed within the U.S. There were many reasons why Tesco failed and will be highlighted throughout. It will show many reasons and factors that caused them to collapse such as poor strategic choices, Cultural issues and underestimating competitors.

1.0 Company Profile

Tesco is an incredibly profitable British global grocery store, dominates the superstore market in the UK, with a prominent share of 31.9% (Rena, D, 2007). Tesco had over 7,500 shops globally across various nations such as India and Malaysia. Tesco had undergone enormous achievements globally; however, have failed in several marketplaces. The year 2007 market leaders Tesco ventured to the USA marketplace swiftly forming over 190 Fresh and Easy stores (Reinders, et al, 2013) positioned throughout three states Nevada, California and Arizona (look appendix 1) (Zielke, S., 2010). Although Tesco has expansion familiarity, Tesco still made numerous vital mistakes. Figure 1 shows the start to finish of Tesco’s expansion to the US.

3.0 Strategic Analysis

Tesco extended its company to the US using a greenfield strategy to launch the Fresh & Easy stores. A Greenfield approach holds benefits/drawbacks. If a multinational utilizes this approach, it chooses whether to rent or purchases property to begin, allowing them the choice of location that best fits. However, drawbacks can be lack of “immediate access to local retail savvy” (Silverthorne, Sean, 2010) causing issues when expanding. Additionally, they have implemented market development selling existing products in a new market (see figure 2).

Figure 2

4.0 External Analysis

In order to determine the most important external issues we must conduct a pestle analysis for Tesco (See Appendix 3) According to Duffin, (2020) the U.S is one of the most dominant and lucrative nations globally. The same literature suggests their economy is “a stable political establishment”. November 2008, Barack Obama triumphed the political vote giving USA a position of power, indicating that companies will succeed in this country such as Tesco. In 2010 the U.S GDP was $14,120 trillion, which indicates that they are one of the second biggest economies behind the EU. After 2008, their economy crashed due to the recession with a decline in their GDP which had a large downturn since the Great Depression in 30’s (Duffin, 2020) causing potential issues for Tesco.

Duffin, (2020) states that “On the social front, as a result of its rapidly aging population the US faces the risk of slower economic growth, serious labour shortages and rising taxes over the next few decades”. This has impacts on public retirement and healthcare methods to rise. 1% of the populace are into the higher class, with 37.1% of people owning the entire property in 2009 (Simons, 2011). This study indicates that deprivation levels are the greatest in established nations, with a substantial disparity amongst rich and poor economies (Duffin, 2020).

The Technological aspects highlight that the U.S are the leaders of adapting their technologies. (Duffin,2020) quotes “Regulatory and legal reforms in a broad range of industries began in the 1970s and accelerated over the course of the 1980s, resulting in deregulation in many sectors, which has enhanced competition and improved overall efficiency”. This making it harder for Tesco to become successful due to the amount of competition.

5.0 Swot Analysis

Tesco Plc had strength in the U.S in terms of the products. As buyer behaviour of citizens changed becoming conscious of health and nutrition. Tesco opened convenience shops with a focus on fresh fruits and vegetables. Furthermore, U.S consumers didn’t want to drive lengthy distances becoming environmentally aware. Consumers would like convenience stores nearby for a quick and easy shopping experience and Tesco based their strategy due to this information.

The weaknesses can be shown via the recession, as the four big supermarkets lost market share due to discounters such as Lidl and Aldi. However, Tesco was not able to regain its market share like their competitors due to factors like quality and pricing. Yet, expansion of stores did help regain market share over time leaving them with 30.7% a 0.2% loss (Griffith, 2019).

Launching convenience stores labelled “Fresh & Easy” was an exciting prospect for the U.K market leaders. As they believed that the U.S customer base had changed there shopping habits to those of the U.K. Tesco saw this as an opportunity to expand, also due to the recent recession it caused fuel prices to rise meaning that consumers were less willing to drive long distances to supermarkets such as Safeway, SuperValu or Kroger having a convenience store would give them the edge to accessibility. Additionally, U.S consumers must work longer hours to combat the poor economy, meaning demand for new reduced shops will maintain to increase due to again convenience (Genda,2010).

The major threat to Tesco will be Wal-Mart as they have opened similarly styled shops at a fraction of Tesco’s price. They have located stores in the same region as Tesco causing customers to choose between the two convenience stores. According to Brunn, (2006) Wal-Mart have a substantial advantage over Tesco as they have been active in the market for many years. They understand the culture and the wants and needs of the U.S customer base. Additionally, as Wal-Mart is cheaper than Tesco this will cause an issue for Tesco and will most defiantly lose market share to their rivals (Brunn,2006) (see figure 3).

Figure 3

6.0 Porters Diamond Model

This model will evaluate whether the U.S market has a competitive advantage and attractiveness for Tesco to enter in (look at figure 4).

5.1 Factor Conditions

In 2010 14.4 million citizens were hired in the U.S retail industry, which had a positive impact on companies in the USA (Henderson,2012). This had great implications for their employability, as it indicates that there is a wide pool of talented individuals ready for employment. The U.S transport link has had enormous development rates in recent years; however, a disadvantage is soaring expenses of establishing up services in capitals, with larger competitors such as Wal-Mart relating to Tesco.

5.2 Demand conditions

In 2009, the U.S retail market rose to $4.13 trillion (Grewal, 2011). The market is slowly growing, which makes it more attractive for large retailers to enter to increase their overall share. This research also states that 66% of the U.S GDP comes from the wholesale expenditure. The trade-in commodities compared to local goods sold is less, which has a positive impact on local industries. Tesco could focus on regional products to lower expenses due to the high demand for local commodities is greater than imported goods.

5.3 Related and Supporting Industries

The U.S wholesale marketplace has a well-established supply chain, with lots of recognized purchasing practices accessible. Due to suppliers offering top quality services, it allows them to become more attractive for retail companies to set up a chain store within the U.S market. Their efficiency and transport are essential for the functionality of the retail industries, which is an important factor to contemplate prior to expanding into the U.S as this will be a key part to Tesco’s success in the U.S.

5.4 Firm strategy, Structure and Rivalry

Tesco’s strategy has been the firm’s success with its innovative knowledge for checkouts with a high-level stockpile management system in place. The U.K market is of substantial importance to Tesco being the dominant supermarket, it allows them to expand and explore new ideas.

Figure 4

7.0 Basis of Competition & Key Failing Factors

Tesco Plc has yielded great accomplishments when enrolling in foreign markets using acquisitions and strategic partnerships. However, Greenfield entries have shown to be expensive for Tesco. Though Greenfield entries offer the business autonomy and possession over its procedures, it has demonstrated to be incompatible in the U.S. Despite the widespread research Tesco made before the expansion of the U.S marketplace, its failure validates that the study was faulty or insufficient (Ahlert et al ,2010). Moreover, its procedures in the U.S were a try to replicate its procedures of the UK as they attempted standardisation rather than localisation. A dilemma with the marketplace study was the following only focused on the purchasing habits of American citizens and overlooked added vital cultural aspects such as price, shopping experience, and shopping atmosphere. This causing key errors for Tesco, a counteractive investment needed to have been established to combat the marketing aspects issues (Zante’s et al, 2011). An example of this would be Tesco selling pre-packaged fruits caused issues as Americans favour choosing their fresh fruits.

Tesco neglected the U.S consumer base as it underestimated it as Tesco thought that the culture would be like that of the UK which was not the case. Tesco was enticed to the U.S market via the growing economy and the ever-soaring estate value (Bowley 2017). The key reasons that persuaded Tesco attempt the Greenfield strategy within the U. S. As this was a reasonably practical opportunity when expanding, yet Tesco neglected recognising the underlining economic issues which may have prevented them from the financial crash in 2009. Building on from this the decision of Tesco to venture to U.S market via Greenfield strategy was mainly motivated by management short-term gain as they saw the U.S a booming market. Subsequently, numerous errors can be highlighted via its entry and exit techniques from the U.S marketplace (Yoder, 2016).

Starting with initial error Tesco made during the point they entered where they started opening additional stores when they were still making a loss. Furthermore, the business was powered by management interests for power due to the previous global success stories. This causing the Tesco to become over-optimistic causing them a distorted vision of reality as they were steering the business in the wrong path (Zante’s et al, 2011). Overall, the most significant issue causing Tesco to fail was that the strategy for the post entry. This highlighting the flaws when trying to compete in the world’s largest retail outlet. Due to these issues, it has resulted in Tesco making substantial losses within the U.S marketplace, causing Tesco to be pressed to exit having not once made a profit. When Tesco entered Taiwan it still ran into similar having companies that dominate the market just like Wal-Mart do in the U.S.This causing the company to struggle when making profits causing them to do exit as they did in the U.S (Ho,C.W, 2011).

8.0 Recommendations

This study has shown the key issues Tesco encountered in the U.S based in this we will look at recommendations that could have been implemented for Tesco to turn a profit. To start with it is important to change strategy as the greenfield investment strategy caused them to lose great amounts of money. Both times they implemented this strategy it failed (U.S & Taiwan) causing them to withdraw both expansions due to fierce competitors. These two strategies failed due to cultural differences; therefore, we should advise Tesco to use the localisation strategy as they will help them fit in with the local culture (Cowell, et al, 2003). As shown above, the supermarket industry is more complex and people believe as it represents the culture and the way of life for consumers. Consequently, for a company to succeed when expanding it is essential that the strategy is related to the cultural aspects fitting the customers’ needs and wants. It is key for Tesco to utilise this strategy if they want to become successful in the future when expanding. Additionally, Tesco will need to become more efficient when looking at market research as they missed key issues causing them to fail. As they overlooked the essential wants and needs demanded from the customers.

9.0 Conclusion

In this essay, we have evaluated and highlighted key areas that caused Tesco to fail. However, if Tesco wants to improve in the future it would be essential for them to conduct reliable research. They should have localised when expanding into the U.S as this would give them a better chance of understanding the wants and needs of the customer. However, it isn’t as simple as that Tesco will have to use a range of strategies to become successful in the U.S.