Tesco Plc: Chinese Market Entry

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Table of Contents

Introduction
The Company
The Macroeconomic Situation
Porter’s five factor framework for competition
Competitive strategies
Reference List

Introduction

Research data from 2011 to 2013 reveals a rather interesting trend in the past 2 years wherein consumer spending has decreased within the U.K., U.S. and Europe yet has significantly increased within China and other Asian countries.

Some financial analysts have connected such an occurrence with the current popularity of Asia as an outsourcing destination thereby resulting in positive economic benefits for the local economy.

Since consumer demand within Tesco’s traditional markets has been waning, it thus necessitates the debate as to whether the company should think of expanding into international markets such as those in Asia (particularly China) in order to take advantage of this market opportunity.

It is based on this that this paper will explore the current problems within traditional markets for expansion such as the U.S. and will delve into the advantages found in new markets in Asia such as China.

The Company

Tesco is the world’s 3rd largest retailer with numerous stores located in international locations such as the U.K., Europe and Asia. It controls 30% of the U.K. grocery market and is poised to compete directly with the likes of Wal-Mart in terms of profitability and the number of stores the company has.

The Macroeconomic Situation

Examining Current Consumer Markets for Expansion

Ever since the 2008 financial crisis, the current U.S. consumer market has stagnated even until the final month of 2012.

While there are signs of recovery in some sectors, the fact remains that reliance on government aid programs is still at an all time high resulting in a market that seems far to unstable and poor in consumer demand to actually expand into (Aliber 2012, pp. 52-56).

The fact is that the scaling back of operations within the U.S. combined with slow economic growth is indicative of a deterioration of consumer spending which makes establishing more Tesco locations within the country far from ideal since it is unlikely that consumers would continue to patronize the products of the company which are priced at a mid to high range as compared to local competitors such as Wal-Mart and Costco which have far cheaper brand name goods (Morris 2012, pp. 20-22).

Not only that, there is a significant degree of market saturation within the U.S. wherein super stores such as Wal-Mart, Walgreens and Costco would make it difficult, if not impossible, for Tesco to establish a sufficient enough foothold for market penetration.

A similar situation can be seen in Europe at the present where countries such as Greece, Spain, Ireland, Italy, France and Germany had also been adversely affected with issues such as Greece’s sovereign debt issue, Spain’s housing crisis, the near collapse of the Irish banking system as well as political turmoil in Italy.

All of these factors have translated into decreased levels of consumer spending which would not bode well for any subsequent expansion of Tesco into these locations.

With low consumer spending and an atmosphere of economic uncertainty which pervades the domestic market within the aforementioned countries, any attempt to expand into such areas would result in wasteful operational costs for Tesco such as storage, utilities, taxes, worker salaries and employee benefits with no guarantee that it would be able to obtain a significant portion of the local consumer market share.

The fact is the current consumer market situation within the U.S. and Europe is not conducive towards sales and, as such, the company should look towards other markets for expansion.

One possible avenue of approach is to shift resources towards foreign markets which have not been as adversely affected by the current economic downturn and focus efforts there instead of in cathartic local markets.

Examining the Chinese Market

From 1990 to the present, China’s economy has grown to such an extent that it is now ranked as the second largest economy in the world in terms of manufacturing capability and local consumer demand (Hong 2012, pp. 561-577).

The outsourcing industry in particular has contributed to this rise with hundreds of international brands and retailers relocating their factories to China in order to take advantage of the cheaper corporate tax rates and low cost of labor (Hong 2012, pp. 561-577).

Not only that, China’s success has resulted in the creation of a prevalent upper and middle class whose spending habits have been increasing as of late and is increasingly oriented towards consuming various types of western goods and resources.

In fact, based on the study of Hong (2012) the sale of goods from the west (particularly from Europe) has been increasing exponentially within the country with numerous brands clamoring to penetrate into the Chinese market (Hong 2012, pp. 561-577).

This has resulted in an unprecedented level of demand for Western goods and brands making the Chinese market an ideal location for the expansion of numerous established brands within the U.S. and Europe.

When taking into consideration the decrease in consumer spending within the U.S. and European market and the unprecedented level of demand within China marked by increased consumer spending, it becomes immediately obvious that Tesco should expand its operations into the Chinese market.

Porter’s five factor framework for competition

Substitute Threat

When examining the possibility of substitute threats, what must be understood is that a large percentage of Tesco’s own stock actually comes from manufacturers that are located within China and several parts of Asia. This presents a considerable dilemma since such products can easily be obtained from local suppliers at a quarter of the cost.

In order to resolve such an issue, it is recommended that the stocks within the store focus more on high end goods from European manufacturers (Villar, Di & Segev 2012, pp. 341-349).

The reasoning behind this is connected to the influx of the “newly rich” within China and their preference for branded Western goods which they consider as superior to local products.

By focusing on the sale of high end goods, the company will be able to distinguish itself from other local stores and become a hub for wealthy Chinese consumers to shop for their everyday needs (Villar, Di & Segev 2012, pp. 341-349).

Entry Threats

Entry threats for the company come in the form of the ease of entry into the local Chinese market for both domestic and foreign competitors. While the country’s lax regulatory measures would make it easy for Tesco to setup shop within the country, the same ease of entry can also work against it.

Since it would take time to develop a loyal consumer base, Tesco would not have the capacity to be able to control the market. Not only that, due to the presence of a plethora of suppliers within China that normally supply some of the largest retail establishments within the U.S., this ensures that Tesco cannot compete in terms of cheaper prices or having a more diverse product lineup.

Rivalry

One possible threat faced by the company comes in the form of the production of local Chinese companies of not only cheaper products but cheaper services as well.

What must be understood is that there is a certain degree of technology stealing being done by local Chinese companies wherein the processes, brand style and means of production brought in by foreign companies are in effect copied, replicated and utilized by Chinese based companies and then subsequently appear in markets rivaling their original counterparts yet being marked at barely 1/3rd of the cost (Rules of the game 2008, pp. 4-5)

China has increasingly learned from various foreign businesses that had established themselves within the Chinese market resulting in the proliferation of not only copycat manufacturing companies but also copycat service industries as well.

Several of these companies have actually entered into various international markets (i.e. Latin America, the Middle East, and South East Asia) and subsequently challenged the market share of the companies that they copied.

They do this by presenting the same type of product and service yet at an invariably lower cost which companies at times cannot match. This presents itself as a considerable threat to Tesco’s market position in several of its key future markets within China and, as such, does not bode well for the company.

Supplier Power

What must also be taken into consideration is the fact that due to the low cost of doing business in China local manufacturers that copied the technologies and processes of companies that had outsourced to China were able to undercut prices resulting in situation where more international consumers chose to buy from these new companies due to the relatively lower prices for the same product.

The Economist (2004) states that it was the culmination of these events that brought about the development of a new Chinese upper class composed of businessmen and entrepreneurs that increased local demand for high end real estate development as well as high class foreign goods (Safe as houses, 2004: 41).

In the short term, Tesco may be able to utilize brand and product leverage to distinguish itself from local competitors, however, over the long term it is possible that local entrepreneurs may copy the store’s layout and provide cheaper imitation goods of Tesco’s products resulting in a loss of consumers and profit.

Buyer Power

To better understand the current wage situation within China, an analysis of the study of Wang & Gunderson (2012) was conducted in order see the difference between wages of a British worker and a Chinese worker.

It was shown that the average Chinese minimum wage consisted of 2,000 to 4,000 a month (190 and 380 pounds when converted using current exchange rate data) (Wang & Gunderson 2012, pp. 860-876).

Considering the fact that the average salary of a worker in the U.K.’s manufacturing industry is 2,000 pounds, the gap seen represents a considerable salary problem given the type of goods that the company normally stocks.

For Tesco, the wages of local Chinese workers are far too low given the company’s predilection to stock mid-range to high end products (Wang & Gunderson 2012, pp. 860-876).

Thus, a vast majority of local Chinese consumers are more likely to patronize small local establishments that source their products from local sources as compared to shopping at Tesco with its massive international supply chain.

This is further evidence that if the company is to expand into China, it would need to focus on the rich and middle class since the lower class within China have barely enough money to afford the company’s products (Wang & Gunderson 2012, pp. 860-876).

Competitive strategies

Distribution and Sales Strategy

At first, it would be necessary to increase people’s awareness about the vending machine concept. This news could be spread through social networks within China which is the least expensive method of promoting the product and attracting customers.

Additionally, fliers could be distributed in the venues where the shopping centers will be built and will act as the main distribution channels for the company (Ataman, Van Heerde & Mela 2010, pp. 866-882). Overall, the main advantage of this approach is that it will allow the company to increase its customer base within a short time.

Furthermore, word-of-mouth can also greatly benefit the venture as this communication channel will become particularly important at the initial stages when customers are not aware of the products on offer.

In order to implement this aspect of the project, the company will need to form alliances with local media outlets and consumer groups in order to increase the amount of “hype” associated with the opening of a Tesco store.

Development Plan

The key element that needs to be considered at the start-up of this kind of a business is which location would be the most suitable for the business’s needs. Based on this, sites with a great quantity of pedestrian traffic would be essential in order to obtain adequate levels of revenue.

Widespread locations for positioning a successful Tesco location would be within the cities of Beijing, Shanghai, Guangdong and Hong Kong due to the high concentrations of upper and middle class consumers within such regions (Michael 2007, pp. 20-23).

Analysis on the company’s operating exposure

In the case of China, Tesco actually exposes itself to a considerable level of operating exposure wherein in the next 3 years as the property bubble of the country “pops”, this would result in a considerable devaluation of the Yuan which would negatively impact the company.

Management of operating exposure

The best way of managing this level of exposure is to focus on its supply chain wherein it would focus on minimizing the amount of products in storage and maximizing the sale of easy to move products.

By ensuring that products only arrive when they are needed rather than storing them, this enables the company to be more flexible and minimize its financial losses once the property bubble pops.

Summary and conclusion

Based on what has been presented in this report, it can be seen that entering into the Chinese market comes with both advantages and disadvantages.

Disadvantages come in the form of considerable local competition while advantages come in the form of a newly wealthy middle and upper class within the country that have a considerable demand for western goods and brands.

Reference List

Aliber, RZ 2012, ‘Great Recession or Mini-Depression?’, Wilson Quarterly, vol. 36, no.1, pp. 52-56, via EBSCO database.

Ataman, M, Van Heerde, H, & Mela, C 2010, ‘The Long-Term Effect of Marketing Strategy on Brand Sales’, Journal Of Marketing Research (JMR), vol. 47, no. 5, pp. 866-882, Business Source Premier , via EBSCO database.

Hong, C 2012, ‘Trade liberalization, wages, and specialization in China’, Journal Of The Japanese & International Economies, vol. 26, no. 4, pp. 561-577, via EBSCO database.

Michael, DC 2007, ‘The Sales and Distribution Revolution’, China Business Review, vol. 34, no. 5, pp. 20-23, Business Source Premier, via EBSCO database.

Morris, CR 2012, ‘Boom Times Ahead?’, Commonweal, vol.129, no. 15, pp. 20-22, Literary Reference Center, via EBSCO database.

Mucha, T, & Scheffler, M 2006, ‘FROM THE GROUND UP’, Crain’s Chicago Business, vol. 29, no. 26, p. 18, MasterFILE Premier, via EBSCO database.

‘Rules of the game’ 2008, Business China, vol. 34, no. 10, pp. 4-5, Business Source Premier, via EBSCO database.

‘Safe as houses’ 2004, Economist, vol. 371, no. 8377, p. 41, MasterFILE Premier, via EBSCO database.

Villar, M, Di, A, & Segev, S 2012, ‘Chinese and American perceptions of foreign-name brands’, Journal Of Product & Brand Management, vol. 21, no. 5, pp. 341-349, Business Source Premier, via EBSCO database.

Wang, J, & Gunderson, M 2012, ‘Minimum wage effects on employment and wages: dif-in-dif estimates from eastern China’, International Journal Of Manpower, vol. 33,no. 8, pp. 860-876, Business Source Premier, via EBSCO database.

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