Tesco PLC's entry mode in the Slovenian retail market

Table of Contents

Plagiarism Declaration

Table of Figures

List of Abbreviations

1. Executive Summary

2. Introduction

3. MNE Analysis

4. Industry Analysis

5. Country analysis

6. Regional Organization

7. Mode of Entry analysis and recommendation

Bibliography

Table of Figures

Figure 1: Financial Highlights

Figure 2: European Results H1 2012/2013

Figure 3: Drivers of degree of rivalry in der global retailing industry

Figure 4: Slovenia - key fundamentals

Figure 5: Evolution of GDP growth in Slovenia

Figure 6: Economic growth

Figure 7: Proportion of motorways compared to the total road network

List of Abbreviations

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1. Executive Summary

This paper examines Tesco PLC’s entry in the Slovenian retail market.

When evaluating the positives and negatives, the greenfield strategy is seemingly more risky due to cost and time constraints compared to acquisition. The most suitable strategy for a large company to enter Slovenia’s trade would be to usurp a current retailer, due to it being a relatively small country. Using acquired knowledge of customer and consumer habits in foreign countries facilitates entering Slovenian retail. Moreover, Tesco PLC has the required assets for expanding and continuing Tesco’s multinational strategy.

Slovenia is an attractive opportunity for foreign companies to put investment into, as the risk factor is low because of steady governmental regulations and stability within the economy. The country owns a fast growing IT sector which is an advantage and opportunity for Tesco PLC regarding its e-commerce, in addition to the sporadic increase of internet users. Slovenia has had constant GDP growth rates of 3.5 %, which indicates stability in economic growth.

The European Union as a regional organisation may have had its difficulties during the debt crisis, but it still contributes to international trade and investment. The European Union’s policies mean that there are no trade barriers or infrastructural problems. Economic growth and stable GDP rates are given and Tesco PLC has already experiences with foreign investments in the European Union.

Current retail industry has weak buyer and supplier power, with less threat of entry from new companies to the larger corporations and almost no substitutes indicate Tesco PLC’s opportunities. In contrast, the highly competitive rivalry that is threatening trade is competitors forcing them to a pricing war.

When choosing between the greenfield strategy and acquisition, the most feasible mode of entering the Slovenian retail market through foreign direct investment would be an acquisition for Tesco PLC.

2. Introduction

Slovenia was chosen as the host market because of its “geographical advantage, multiple languages, cultural diversity, excellent infrastructure and cost-effective support functions [which] give it a cutting edge for big and small international companies seeking entry into the markets of east and south-east Europe” (Marketline, 2012a, p.24). As chronicled on its website Tesco is already operating in several foreign countries. It is to analyse Tesco’s external and internal environment that leads to the choice of the market entry mode.

Firstly, Tesco PLC is to analyse due to a SWOT' analysis. Secondly, an in-depth study of the global and Slovenian retail industry by using Porter’s five forces^{[1] [2]} framework. Thirdly, Slovenia and the European Union are to analyse by using the PEST^[3] framework. Finally, the entry mode will be discussed.

3. MNE Analysis

Tesco PLC^[4] is with 6,612 outlets worldwide with 3,045 UK stores one of the largest retailers worldwide and trading in over 14 countries (Tesco, 2012a).

Figure 1 highlights Tesco’s key figures which indicate a growth comparing to last year.

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Figure 1: Financial Highlights Source: Tesco, 2012e

As publicised on its website, “Tesco operates in 14 markets across Europe, Asia and North America. Regarding Europe they operate in Czech Republic, Hungary, Ireland, Poland, Slovakia and Turkey” (Tesco, 2012b).

The International Business Times (2012) states that sales in Europe were despite the Euro crisis increasing and Philip Clarke, Tesco’s chief executive added that “against the backdrop of continuing uncertainty in the Eurozone, it is pleasing to see that our businesses have largely sustained their performance” (International Business Times, 2012). For this reason, Tesco can draw on its positive experiences in entering a new market and running business in a European country. This is confirmed by the figures in figure 2.

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Figure 2: European Results H1 2012/2013 Source: Tesco, 2012e

Corporate Social Responsibility is defined as “the set of obligations an organization undertakes to protect and enhance the society in which it functions” (Griffin and Pustay, 2013, p.149). Consequentially Tesco’s core value is “to create value for customers to earn their lifetime loyalty” by monitoring its “Key Performance

Indicators” (Tesco, 2012c). These indicators reflect on responsible behaviour of the company in terms of positive treatment of; suppliers and buyers, the environment, its customers, local communities and its current and future employees. Measuring the process and success of its approaches helps Tesco identify how well it performs and remain true to its core values. Golob, Jancic and Lah (2009) argue that transparent pricing and social responsibility play a significant role for Slovenian consumers. This is indicative of an opportunity for Tesco to match their strategy with Slovenian expectations. In addition Tesco refers to a “strong, fair, mutually-beneficial and long­term partnerships with suppliers” that emphasises its efforts in trying to achieve an efficient and sustainable supply chain (Tesco, 2012d).

According to Datamonitor’s (2011a) Tesco’s strengths are its “sustainable business model through diversification and value oriented retailing” (Datamonitor, 2011a, p.5), its “focus on developing non-food categories” (Datamonitor, 2011a, p.6) and “complementing retailing services” (Datamonitor, 2011a, p.7).

“Thus, international diversification helps Tesco to reduce its business risk as well as facilitate growth through operations in growth markets. Additionally, value oriented retailing builds on customer loyalty and helps sustain revenue growth even during difficult economic times” (Datamonitor, 2011a, p.6).

“Tesco is expanding retailing services globally to leverage on opportunities in other markets as well. These services will drive margins and also will contribute to revenues incrementally” (Datamonitor, 2011a, p.8).

Furthermore, Tesco’s clubcard helps gain and consolidate customer loyalty. According to the website (Tesco, 2012d) the clubcard is now available “in twelve Tesco markets: UK, Ireland, Poland, Hungary, Czech Republic, Slovakia, Korea, China, Thailand, Malaysia, India and Turkey”.

Moreover, as Supply Chain Standard (2012) publicised, one of Tesco’s competitive advantage are its supply chain skills. Tesco expanded its Knowledge Hub programme to increase and to develop the collaboration with its suppliers. “Through the hub, Tesco and its suppliers can explore challenges and opportunities between events, with suppliers sharing know-how and experience, sourcing information and learning through online discussions, forums, meetings and presentations” (Supply Chain Standard, 2012). Knowledge sharing and fast collaboration can reduce costs and Tesco benefits from higher profits.

Referring Datamonitor (2011a) Tesco’s weakness is losing its customers. There is a slight decline of elderly consumers.

“Tesco has been unable to retain customers in its UK market in the recent times. According to Verdict, the retail arm of Datamonitor, percentage of all consumers who use Tesco decreased for the first time in 2010 since 2003. The percentage was 53.1% in 2010 compared with 56.2% in 2009. Additionally, the percentage of all supermarket shoppers who used Tesco for making their purchase was 60.4% in 2010 compared with 62.8% in 2009 (Datamonitor, 2011a, p.8). This weakness can be removed by supplying its clubcard and concentrating on transparent pricing.

Its opportunities are the “growing use of online retail channel for making purchases” (Datamonitor, 2011a, p.9).

Marketwatch (2010) argues “Tesco's growing online presence will enable the company to reach new customers, save infrastructure costs, and earn better margins” (Marketwatch, 2010, p.93).

Moreover its “strong private label portfolio enables the company to effectively differentiate” (Datamonitor, 2011a, p.9).

Tesco’s largest threat is the competitive rivalry within the supermarket industry (Datamonitor, 2011a) that is specified in the following chapter.

Not on only the demographic change (Datamonitor, 2011a) but also the recession’s impact in case of less income and grown unemployment (Marketwatch, 2010) threaten Tesco in an unlikely way.

4. Industry Analysis

The industry in which Tesco is operating is the retail sector (Okoeber, 2009). The retail sector is defined as “the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers attempt to sell those same quantities of products to consumers” (Retail Industry, 2012).

Firstly, the global retail industry will be focused on. Secondly, there is a closer look on the Slovenian retail industry.

Datamonitor (2011b) suggests a restraint impact of buyer power. “There are a large amount of customers within the global retailing industry, giving consumers low buying power because the loss of one consumer has very little impact on revenue” (Datamonitor, 2011b, p.14).

As well as mentioned before “supplier power is assessed as moderate” (Datamonitor, 2011b, p.15). Due to a large quantity of suppliers, retailers have the opportunity to switch them - which keeps the retailers in a favourable position. “On the other hand, many suppliers have strong brands which some retailers must stock in order to compete and keep up with consumer demand, this acts to increase supplier power somewhat” (Datamonitor, 2011b, p.15).

Datamonitor (2011b) argues that the key determinant for new entrants is investing a lot of money in establishing their brand by advertising and marketing campaigns. Additionally they have to develop their own market investigation to analyse the needs of their potential consumers. Despite the fact that entering the market via online retailing is much easier than a physical store, the current incumbents have already set up an online supply as well. Present retailers have set up “high sales volumes and economies of scale” (Datamonitor, 2011b, p.16). Therefore the threat of entry is relatively small.

“There are no real substitutes to the retailing industry group, however the segments within the group may act as substitutes to one another, for example department stores may be a possible substitute for general merchandising stores or online retailing may be a substitute for general merchandisers. Overall, there is a moderate threat of substitutes (Datamonitor, 2011b, p.17).

According to Datamonitor (2011b) the leading companies for global retailing are the Metro AG, Tesco PLC, Wal-Mart Stores Inc. and Carrefour S.A. As shown in figure 3 there are a strong number of players as well as their similarity.

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^[1] “Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis” (Babatunde, Adebisi, 2012,

^[2] p.25).

“The five forces are the threats posed by competitive rivalry, powerful buyers, powerful suppliers, potential new entrants, and substitute products” (Dobbs, 20l2, p.22).

^[3] “PEST is the acronym used for describing the Political, Economical, Social-Cultural, and Technological factors that affect the organization. The external environments consist of variables opportunities and threats that are outside the organization and not typically within the short-run control of the top management” (Babatunde, Adebisi, 2012, p.25).

^[4] Further on it is named Tesco.