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Analysis of Tesco to enter Vietnamese supermarket

Table of Content

1 Introduction .......................................................................................................................... 2

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

2.1 SWOT ........................................................................................................................... 2

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

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

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

3 Tesco in Asia........................................................................................................................ 9

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

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

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

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

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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

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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.

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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.

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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

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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

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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.

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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

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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.

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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

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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.

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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

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3.3 Performance in FY 2013

Actual rates Constant rates

£m growth growth

*Exc. Japan

Asia sales £12,317m 5.90% 6.10%

Asia revenue (exc. VAT, exc. impact of IFRIC

13) £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

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

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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.

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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

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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

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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

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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