By Jon Whiteaker -
While in charge of Tesco’s European and Asian operations, Philip Clarke was at the forefront of the UK-based retailer’s huge international expansion drive.
After taking over the reins from departing CEO Terry Leahy this week, Clarke will have the ultimate responsible for achieving its global goals and exploiting key emerging markets.
Neil Saunders, Consulting Director of Verdict Research, argues: “Tesco’s most significant growth opportunity comes from international expansion, and so it will be a key strategic focus under Clarke.
“His experience will mean he is acutely aware of some of the challenges involved.”
Under his guidance the number of Tesco stores in China has risen to 88 and last November the retailer announced that it aims to quadruple revenue in China to about £4 billion over five years by more than doubling its number of hypermarkets.
The appeal of the second largest country in terms of GDP is obvious for any large UK retailer, with domestic growth potential so hard to come by and rental rates frustratingly high.
Partner at law firm Faegre & Benson Melanie Wadsworth advises both UK and Chinese companies on reciprocal deals, and says the potential of the Chinese market for UK retailers is too enticing to ignore.
“A hugely growing Chinese middle-class is looking for big brands, with a particular cache surrounding UK and US brands, and increasingly knowledgeable consumers do not want cheap knock-offs,” Wadsworth explains.
Tesco has already been able to establish itself in China and has learnt that acquiring local knowledge and working hard to earn the trust of local partners is essential to succeeding in the country.
Retail Analyst for Charles Stanley Sam Hart points to the number of Chinese nationals employed in the company’s management and specialised product lines as keys to Tesco operations in the country, but entering the market after its competitors has left it at a disadvantage.
“The main challenge for Tesco in China is obtaining good sites for the stores,” Hart comments.
“Most of the best sites in tier one cities have already been taken by local operators and other international operators (e.g. Walmart and Carrefour), who entered the market much earlier. Tesco is therefore focusing on second tier cities.”
This is part of the reason Tesco has invested in three shopping centre sites in the country, revealed last week, as footfall will be boosted by its stores being part of larger schemes.
Projects like this bring their own issues however because the Chinese government will only tend to endorse developments from foreign companies that are joint ventures with local firms, and negotiating these partnerships can be a slow process.
Wadsworth explains: “Pretty much everything in China happens through relationships. It could take three or four years for a deal to be done because companies entering the Chinese market need to build up those relationships of trust.
“Everything is very fluid and until the deal is nailed down you cannot be sure that it will go through.”
Add to this the insecurity of knowing that the Chinese government ultimately owns all property and can change the corporate goal-posts at anytime, and it becomes clear that despite its good start it will take a lot of work for Tesco to fulfil its potential in China.
One market where potential has not been converted into success, or at least not yet, is in the US where the retailer’s Fresh & Easy brand is yet to make a profit.
Clive Black, Analyst for Shore Capital, states: “Tesco made fundamental errors in assessing the appetite in the US for a hybrid British proposition.
“It has now had to Americanise its offering, meaning more brands, bigger product sizes, more vouchers and promotions.”
It is all too easy for large retailers to rush into markets without doing adequate research, with Kingfisher in China and Walmart in Japan two recent examples, and so Tesco’s experience in the US is no exception.
Saunders adds: “Internationally, Clarke will need to strike a balance between ambition and speed on the one hand and doing enough groundwork to get it right on the other.”
It is generally agreed that Fresh & Easy only has another 12 months or so to prove its worth before Clarke will have to make a decision on whether to jettison the project.
Incoming legal issues could also prove troublesome for international expansionists, with the new Bribery Act likely to prove somewhat of an obstacle for many UK companies trying to do business in emerging economies.
“Under the new act, even if you do not know about it, if a foreign associate of a UK company has paid a bribe they will still be liable and the only defence is to argue that you had adequate procedures in place to ensure this would not happen,” Wadsworth said.
“However, in these environments it is entirely standard and acceptable to take payments and give gifts to oil the wheels of business.”
India is a country with massive business potential due to its population size and raising living standards but corruption is endemic and UK retailers may find it difficult to compete if their rivals have a regulatory advantage.
Despite these challenges, IGD recently predicted that Tesco will be the fastest growing global grocer over the next five years, ahead of its larger international competitors.
The work Clarke has done in his previous position has earned him many plaudits and it should prove to be the perfect preparation for running Tesco.
“He has tremendous drive and energy but has difficult shoes to fill, and I do not think it is fair to judge him yet. The portents, however, look good,” Black said.
Leahy’s legacy will weigh on his shoulders and there will be pressure to live up to impressive expectations but if Clarke can successfully maintain Tesco’s international growth he will be praised like his predecessor.