122. Analysis of Tesco to Enter Vietnamese Supermarket

Analysis of Tesco to enter Vietnamese supermarket

Table of Content 1

Introduction .......................................................................................................................... 2

2

Tesco Background ............................................................................................................... 2

3

4

2.1

SWOT ........................................................................................................................... 2

2.2

Resource based view .................................................................................................... 4

2.3

PELST analysis............................................................................................................. 6

2.4

Porter 5 forces model .................................................................................................... 7

Tesco in Asia........................................................................................................................ 9 3.1

Supermarket revolution ................................................................................................ 9

3.2

Motives and Objectives .............................................................................................. 10

3.3

Performance in FY 2013............................................................................................. 14

Vietnamese supermarket industry ...................................................................................... 15

1

4.1

Overview .................................................................................................................... 15

4.2

Drivers of Change of the Retail Industry in Vietnam ................................................. 18

5

Entry mode for Tesco in Vietnam ...................................................................................... 19

6

International competitive strategy...................................................................................... 21

2

1

Introduction

2

Tesco Background According to Tesco (2012), Tesco is one of the most popular retail chain stores in the United

Kingdom. After the Wal-Mart of the United States of America and Carrefour of France, this is considered as the third largest retailer in the world. Tesco has operation in fourteen countries of the world covering Europe, Asia and North America and occupy more than thirty percent of the United Kingdom retail market. 2.1

SWOT

To observe strength, weakness, opportunities and threats, it is important to carry out SWOT analysis which will give a brief idea on how Tesco is performing in the market. Strengths: Tesco is a powerful retail brand. It is known as a company that is value for money, very convenient with the wide range of products, all products in one place. TESCO have very secured market position in the global market. Tesco also expanded to different stores like Tesco Metro, Tesco Express which made it more convenient for the customers. Because of the size and facilities, Tesco buy in bulk which means they take benefit of economies of scale. That means they can lower prices when they want in order to keep the prices attractive and be competitive with stores such as Asda or Sainsbury. By creating loyalty packages such as club card they achieving loyal customers what is important and is as a consequence they are successful company. 3

Weaknesses: Tesco’s finance profit was impacted by bad debt form credit cards and to many household insurance climes. Also by trying to gain new markets other that food sector such as books they are facing obstacle because there are companies that are specialising already in this area such as Amazon that might provide better service and have more loyalty from customers in this area. In recent times Tesco is trying to do some online selling. However to start online selling like other leading online stores, Tesco needs to invest a lot of cash for the new web technologies, where Tesco is lacking in free cash at the moment as they have large amount of debts which can be destructive as when interest rates is increasing. Opportunities: There are many opportunities for Tesco. Tesco should stick with the strategy that they following at the moment about entering new markets with new products. Big opportunities are on the Internet as Tesco is trying to meet the needs of the customers. Also creating brands like Tesco value or Tesco finest that is targeted to desired group of people that can afford it to buy in Tesco. In addition there is still opportunity to develop Tesco brand in Asia and other international markets. Threats: One big threat that Tesco faces is the takeover of Asda by Wal-Mart. The reason this is a threat is because Wal-Mart is the largest Global Competitor and therefore has the necessary skills, resources experience and funds to cause Tesco problems. A major threat to Tesco current strategies of expansion is the government and the Monopoly and mergers commission. Also there is a Growing public concern and annoyance that Tesco is threatening the smaller retailer. The smaller shops are disappearing due to the growth of supermarkets and this is annoying some people. So there is a social and legal implication as well. 4

2.2

Resource based view UK Plan to ‘Build a Better Tesco’ on track with improvements made to the offer and more to come in 2013/14; Year-on-year profit performance reflects UK reinvestment; Strong progress in the online grocery business with sales growing by 12.8%; Growing the portfolio of businesses by investing in WE7, Mobcast, Giraffe, Harris + Hoole and Euphorium

Asia Regulatory challenges in South Korea held back profit growth; Successfully launched online grocery businesses in Thailand and Malaysia; Expanded the convenience store business in Thailand to over 1,115 stores; As one of the world’s largest retailers, with over 530,000 colleagues, Tesco serves millions of customers a week in their stores and online. Europe Customers affected by severe economic conditions; Slovakia and Hungary proved more resilient; successfully launched online grocery businesses, now in all of the Central European markets

5

Key enablers The core elements of the business model have six key enablers – including, for example, leveraging Group skill and scale and innovating the offer – which maximise the potential of the core activities and ensure that what they do is sustainable. Transferring know-how, new systems and processes around the Group has become a regular part of how they do things based on the principle of ‘invent once, deploy everywhere’. As the leadership group – which numbers over 500 directors – gains even more experience in multiple markets, new technologies and approaches can be introduced quickly and cost-effectively. Loyalty and own-label programmes, format expertise and online trading platforms are all current examples of Tesco leveraging Group skill and scale. As keeping pace with changing consumer shopping patterns – what they buy, how, where and when they shop – becomes ever more demanding, staying close to the customers means that they are well-placed to see and to grasp the opportunities to innovate. For example, they spend a lot of time applying new technology in-store so that they can improve the shopping experience for customers. 2.3

PELST analysis

Political factors: Now Tesco is operating business in 14 courtiers all over the world, so its performance may be influenced by the local legislative and political conditions. Employment laws specified by local government must be followed in order to avoid legal hurdles. Most of the governments encourage the organizations to provide employment for local candidates so that local people can be benefited more. All kinds of jobs like low-paid, highly flexible, more skilled, highly-paid and local based jobs are available in stores like Tesco. Tesco employed different 6

categories of people like students, elderly workers and disabled people for low labor rates. Tesco followed the employment legislation and other laws properly in every country where it has stores. Economical Factors: Demand for a product in market, price of the product and profits of an organization depends on the economic factors like interest, inflation rates and local unemployment levels. Organizations cannot have control on these economic factors, but it can show adverse effect on organization performance. Tesco is still completely depending on UK market even though it has stores in different countries, which mean if UK market collapsed or affected by any economic factors, Tesco will be in greater amount of risks. Social Factors: Demographic changes and change in customer behaviors, attitudes are the important social factors which can show effect on business. As Tesco is into food business it has to examine the customers constantly, because today every customer is choosing healthy and tasty food items. Tesco understood the recent social changes and included non-food items in their sales list, thus it attracted more number of customers in the market. Technological factors: Importing new technologies into business can be an advantage for organization as well as customer. In Tesco, using of advanced technologies improved customer satisfaction. Technologies used in most of the Tesco stores are: Electronic shelf labelling; Electronic Point of Sale; Radio Frequency Identification; Electronic Fund transfer system; Self check-out machines. Customer can feel more convenient as product is readily available to them. The above mentioned technologies helped Tesco in improving the stocking and distribution processes. 7

Legal factor: Tesco performance is directly affected by some of the laws specified by governments. For example, Food Retailing Commission enforced to use standard pricing for products. That means retailers must not change the prices without any notice and it should not demand the payment from suppliers. Most of the companies try to change product prices regularly in order to attract customers towards them and to hold its position in market. Tesco reduced prices on promoted products where as other product prices increased so that it implemented politically correct pricing laws. Environmental factors: Organizations must take the social responsibility while developing products. Cutting wastage while product manufacturing, decreasing the usage of resources and reducing environmental damage are the important specifications to be followed by companies like Tesco. 2.4

Porter 5 forces model

Threat of new entrants: The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda, Sainsbury's and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. So the possibility of new entrants in the supermarket is very low. Bargaining Power of Suppliers: This force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing their business to the large 8

supermarkets. Therefore, this consolidates further leading positions of stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match. In return, UK based suppliers are also threatened by the growing ability of large retailers to source their products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and suppliers. Bargaining Power of Customers: Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco's famous loyalty card - Clubcard remains the most successful customer retention strategy that significantly increases the profitability of Tesco's business. In meeting customer needs, customizing services, ensuring low prices, better choices, and constant flow of in-store promotions enables brands like Tesco to control and retain their customer base. Threat of Substitutes: General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. Tesco has taken the issue seriously. In this case Tesco along with other company like Asda and Sainsbury's are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres.

9

Intensity of competitive rivalry: The grocery environment has seen a very significant growth in the size and market dominance of the larger players, with greater store size, increased retailer concentration, and the utilisation of a range of formats. This highly competitive market has fostered an accelerated level of development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain and build market share. Tesco has so far responded well initiating more products with much better price to dominate the market.

3

Tesco in Asia

3.1

Supermarket revolution

The supermarket revolution in Asia has been driven by the same factors as in other regions: on the demand side by income growth and urbanization and on the supply side by foreign direct in- vestment (FDI), format diversification to meet consumer segment needs, competitive domestic investments, and procurement sys- tem modernization to drive down costs. However, several things were different in Asia. Especially for third-wave countries— China, India, and Vietnam—the trends have been more intense and more rapid. The third-wave countries in Asia also have active state involvement in economic development. In China and Vietnam, and to lesser extent India, state investment in modern retail provided a major initial fillip to the revolution. Although supermarkets in other regions eventually moved from the initial urban base to rural markets and from the initial offering of mainly processed foods and staples into fresh produce, in Asia, especially in the third-wave countries, these transitions have been accelerated. Modern retail, either in modern- private or state variants, has adapted to formats to penetrate rural areas, sometimes (as in India) combining with services for farmers. Relative to the United 10

States and Latin America, Asian supermarkets have already started to penetrate fresh produce markets, perhaps because of the special importance this has for Asian consumers. The combination of rapid retail transformation and supply-side constraints requires combining modernization of procurement systems in ways done in other regions (distribution centers and networks, preferred supplier systems, use of dedicated wholesalers, and private standards) and adaptation to traditional supply chains, involving development of relations with wholesale markets. Beyond this dual approach is the gradual introduction of innovative procurement system and supply chain modernization “solutions” by agribusiness companies, sometimes in company with government and donors, such as with rural business plat- forms and hubs 3.2

Motives and Objectives

With a population of more than 3.2 billion, Asia offers enormous opportunity; Tesco has thus established strong foundations in key markets.

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Thus, Tesco businesses in Asia will make a significant contribution to the company targeted improvement in Group ROCE.

12

13

Key message 

Opportunity: Asia – with its large and growing popu lation and increasingly prosperous consumers – will be a powerful driver of long term growth and returns for Tesco



Scale: We’ve built sophisticated and profitable businesses of scale in three markets – Korea, Thailand and Malaysia



Growth: The corporation has significant growth opportunities in Tesco three leading Asian markets but with China and India they have growth opportunity on a completely new scale



Foundations: In the largest Asian market – China – w e have laid strong foundations on which they are developing a business for long term profitable growth



Property: A strong property strategy helps us succeed in Tesco three leading Asian markets. In China the Life space malls will help Tesco achieve the vision of becoming the Best Retailer in China and will also create significant value from property development



People: Tesco has strong teams in all The corporation Asian businesses with a good mix of local expertise and international experience. The new Asian Academy shows the commitment to developing the people 14

3.3

Performance in FY 2013 Actual rates

Constant rates

£m

growth

growth

£12,317m

5.90%

6.10%

£11,479m

6.00%

6.20%

Asia trading profit

£661m

-10.30%

-9.80%

Trading margin (trading profit/revenue)

5.76%

(105)bp

(102)bp

*Exc. Japan Asia sales Asia revenue (exc. VAT, exc. impact of IFRIC 13)

Total sales in Asia increased by 6.1% at constant rates, with a good overall performance, benefiting from a strong contribution from Thailand – held back by the impact of regulatory restrictions on opening hours in Korea. These restrictions led to a decline in trading profit for the region as a whole. Thailand continues to be one of Tesco strongest international businesses and the corporation has made good progress throughout the year. Following on from the success of the first Asian hypermarket refit to Tesco Extra format in Tesco Rama IV store in Bangkok in 2011, they now have eight Extra stores trading, including the first 5K Extra. Tesco took another step towards multichannel leadership in the market with the launch of online grocery home shopping in Bangkok in February and the convenience business continues to prove popular with Thai consumers – They now have over 1,115 Express stores trading, with plans for a further 340 in the year ahead. The impact of the regulations restricting shopping hours in Korea was broadly in line with the guidance of £(100)m, with significant levels of Sunday store closures throughout 15

the second half and considerable uncertainty in the market impacting operations even when stores were able to open. Following the passing of legislation in January this year, the situation seems more certain, with more consistent store closures expected on alternate Sundays. With the extension of 24-hour trading restrictions to between midnight and 10.00am and increased credit card interchange fees, they expect a maximum incremental impact of £40m in 2013/14, as they face the full year effect of the regulations. As they described at the start of the year, they have adopted a more cautious stance in China. Tesco still see an excess amount of new space being opened in the market – ahead of customer demand – and they have moderated the pace of development accordingly. Tesco opened just 12 new stores this year and closed five underperforming stores as part of the increased focus on the three strongest regions. China remains a strategically important market for Tesco. This year they plan to open 2.8m square feet of net new selling area in Asia overall, in addition to continued roll-out of the grocery dotcom operations.

4

Vietnamese supermarket industry

4.1

Overview

Table 1 is to compare the performance of Vietnam supermarket industry to those of other countries in Asia.

16

Retail market in Vietnam is growing at the remarkable progress, far exceeding many other economies in the world, behind only India and Russia. This area received a lot of investment from abroad, and the market is firmly established with the opening of many trading centers and larger stores. The retail market in Vietnam can be roughly divided into six types of modern distribution with specific characteristics, including hypermarkets, supermarkets, commercial centers, shopping centers, convenience stores and specialty supermarkets. 

Hypermarket is expansive retail facility which encompasses a large number of types of products - both groceries and non-groceries items. Examples of hypermarkets are Loblaw and Superstore (Canada), Fred Meyer, Meijer and Super Kmart (US), Asda and Tesco (UK), Carrefour and NTUC Fairprice (Singapore), to name a few. In Vietnam, Big C is the only brand name of hypermarkets. Metro Cash & Carry stores give the impression of hypermarkets but are not. Metro’s clients are mostly industry and wholesalers while hypermarkets’ are final customers.

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

Supermarket, whose retail price is a bit higher compared with a hypermarket, is better fitted for weekly shopper. Some of the most famous supermarket names in Vietnam are: Intimex, Co.opmart, Fivimart and Citimart. Supermarkets in Vietnam offer more or less similar goods and services. Some offer frequent buyer card, with which you earn points to get deduction on the following purchase.



Department stores sell luxurious items such as brand-name clothes, shoes and high class electronic devices. Parkson and Diamond Plaza are two most popular department stores in HCM City, while in Hanoi City there are Vincom, Trang Tien Plaza, Grand Plaza, the Manor and the most recent one- Parkson.



Shopping malls are relatively new concept in Vietnam, which may include a hypermarket, a supermarket, a department store, a cinema and special stores. Lotte Mart in HCMC’s District 7 can be qualified as a shopping mall, and there’s also one Lotte Mart being built in Hanoi. Convenience stores serve daily demand for sundry items, and can be found in all streets. You can easily get water bottle or other petty items such as toilet paper, shampoo, tissue and you-name-it.



Convenience stores in Vietnam are competing with roadside stalls and traditional markets; Co.opFood stores, under the Saigon Co.op store system, G7 Mart and Shop & Go can be listed as convenience stores. However, it is the no-name convenience stores that still make up the majority of the Vietnamese retail market.

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4.2

Drivers of Change of the Retail Industry in Vietnam

The government’s control: As representatives of the Ministry of Industry and Trade, the Ministry is developing the master plan to develop Vietnam's trade 2009-2015 and orientation to 2025 "with the aim of developing infrastructure systems in a reasonable period of 2009 -2015 material to create an environment more favorable than, more civilized and more modern, improved business environment, market development, including planning the retail market. Set targets retail sales growth over 18% in the period 2010-2015 and increased to the highest level is over 20% per year in subsequent years. With government support and favorable consumer confidence will open new perspective for retailers in Vietnam. Traditional retail channels will continue to dominate the market, but government decision to allow 100% entry to foreign retailers under WTO commitment will lead modern retail to realize unrealistic growth (RNOS, 2009). Consumer behaviour: Shoppers have preferred convenient hours and locations, outstanding services as and reasonable prices. It is reason why retailers compete in seeking convenient premises and high quality and stable source of goods. The boom of FDI in Vietnam: The market of 86 billion of population is a big pie that many foreign investors keep their eyes on. This was clearly evident in the activities of many players as they prepared for the foreign invasion by aiming to offer better service, improve product quality, implementing more marketing activities and strengthening relationships with local partners. In the next period, many prospects will come to Vietnam's retail market. The reason is that when consumers have passed the psychology of “tighten consuming" in the time of economic 19

crisis (VOV News, 2010). Government support and favorable consumer confidence will result in positive outlook for retailers in Vietnam. Traditional retail channels will continue to dominate the market, but government decision to allow 100% entry to foreign retailers under WTO commitment will lead modern retail to realize unrealistic growth. The new trend for the retail market will be consolidations through an increasing pace of mergers (SIS International Research, 2010). Though, over 70 percent of Vietnam’s population lives in rural areas, retailers have not been able to enter this market. Domestic retailers intend to expand into rural markets by establishing effective distribution channels. Key factors that will contribute to their success include location, supply, and the number of buyers.

5

Entry mode for Tesco in Vietnam The joint venture approach is proposed for Tesco as market entry mode to Vietnam. This type

to market entry is well-known to provide essential knowledge concerning customers, regulations and contacts, especially within “particularistic” business environments. It is identified three kinds of joint venture suitable for Tesco within Vietnam: (1) official joint venture; (2) unofficial joint venture; and (3) renting joint venture. First, the official joint venture was established overseas retailer’s formally contributing capital to set up a third company with a local partner. This approach has worked well, not only the cases of Big C (Cora) and Seiyu supermarkets in the “transitional” stage, but also in the “globalisation” stage, when the JV approach became less of a pre-requisite for market entry, with the likes of Lottemart, Circle K, Big C, SPAR and Familymart employing the strategy. However, such arrangements often led to

20

relations with numerous local partners and at times led to rather convoluted forms of ownership that are clear from one example in the emergence of Vindemia’s partners. Second, operators within Vietnam may have pursued unofficial joint ventures. Given the unregulated nature of such developments, precise details are difficult to obtain – however, our research has suggested that some retailers strategically rented areas in trade centres owned by domestic companies and opened outlets without receiving the official permission of the relevant authority. In the case of the Big C store in the Go Vap District of HCMC, the authorities confirmed that they would not provide a licence for a 100 per cent-owned foreign company. Consequently, a Big C unit was developed, in all but name, as the store was covered by the name of the trade centre owned by a local enterprise. The Big C website did not list this unit until at the end of 2009 when regulations were relaxed. Third, operators have pursued joint ventures within Vietnam through the initial rental of stores with the short-term use of a partner’s store fascia before later changing their name to a preferred retail brand – an approach undertaken by Hong Kong based retailer, Dairy Farm. In July 2006, Dairy Farm received licences to operate stores in Vietnam as a wholly foreign-owned company. Singapore’s Giant South Asia Investment Pte, a member of Dairy Farm International Holding Limited, set up a company named Giant South Asia (Vietnam) Ltd. with investment capital of US$5 million to establish a chain of stores on the existing premises of Citimart supermarkets. The company was allowed to upgrade and manage three Citimart supermarkets in HCMC, one in Can Tho City and another in Kien Giang province. However, the company was not permitted to expand to other brands beyond the Citimart fascia. The first outlet was opened in 21

Ho Chi Minh City in August with 10,000 SKUs, of which 90 per cent were domestic. Such a strategy provided an essential foothold within the market prior to regulatory relaxation that will enable the retailer to develop its own Wellcome brand and leverage its competencies in the market. However, by the end of 2010, the retailer still only operated three supermarkets under the Wellcome banner. The case of Metro Group is also notable given its approach to entering the market via a 100 per cent owned “cash & carry” operation that nominally required customers to be wholesale purchasers. However, this investment did not have the right to import directly into Vietnam.

6

International competitive strategy

22