Tesco's Globalization Strategies and its Success in South Korea

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Case Details:

Case Code : BSTR242
Case Length : 20 Pages
Period : 1995-2006
Organization : Tesco
Pub Date : 2006
Teaching Note :Not Available
Countries : South Korea
Themes : Globalization | International Business
Industry : Retail

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

Tesco's success in the country was of key importance in light of the fact that other leading global retailers operating in South Korea including Carrefour⁷ and Wal-Mart⁸ had exited the market as they were unable to achieve the expected levels of growth in the country. According to Na Hong Seok, analyst with Good Morning Shinhan Securities, Seoul, "In contrast to Wal-Mart, the British retailer Tesco is a remarkable case of succeeding in localizing."⁹

Background Note

Tesco was founded in 1919 by Jack Cohen (Cohen), who invested his serviceman's gratuity of £30 in a grocery stall. The first private label product introduced by Cohen was Tesco Tea. The name Tesco was a combination of the initials of the tea supplier TE Stockwell, and the first two letters of Cohen's name.

Tesco opened its first store in 1929 in Edgware, London. In 1947, Tesco Stores (Holdings) Limited was floated on the Stock Exchange with a share price of 25 pence and the first supermarket¹⁰ was opened in 1956 in Maldon, Essex. The first superstore¹¹ was opened in 1968 in Crawley, West Sussex. In the 1960s, Tesco went on an expansion spree and acquired several store chains.

The Retail Price Maintenance (RPM) Act¹² in Britain prohibited large retailers from pricing goods below a price agreed upon by the suppliers. To overcome this obstacle to price reduction, Tesco introduced trading stamps. These were given to customers when they purchased products and could be traded for cash or other gifts. RPM was abolished in 1964, and from then on, Tesco was able to offer competitively priced products to its customers in a direct manner. The first Tesco superstore, with an area of 90,000 square feet, was opened in 1967.

The company's driving force was the idea: 'Pile it high and sell it cheap.' Though this strategy helped it to attract a large number of customers, it also served to brand it as a store for middle class customers giving it a low-end image. By the 1970s, shoppers no longer found Tesco's 'Pile it high, sell it cheap' strategy appealing. People were getting richer and were looking for more expensive and luxury items. Tesco's fortunes took a turn for the worse and the expression "doing a Tesco,"came to be considered an equivalent to failure. Tesco's image took a further beating when the Imperial Tobacco Company which had considered acquiring Tesco as a part of its diversification strategy, did not go ahead with the deal as it felt that Tesco might damage its image...

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7] France-based Carrefour is the second largest retailer in the world and operates globally through its 12,217 stores, including franchised stores. For the year ending December 2005, Carrefour generated revenues of US$ 94.45 billion and profits of US$ 1.78 billion. The company entered the South Korean market in 1996 and exited in 2006, by selling its operations to a local retailer E.Land.

8] US-based Wal-Mart is the largest retailer in the world with revenues of US$ 315.65 billion in the financial year 2005. Wal-Mart exited from South Korea by selling its 16 stores to Shinsegae for 825 billion Won after recording a loss of 9.9 billion Won in 2005. Wal-Mart had entered the Korean market in 1998.

9] Choe Sang-Hun, "Wal-Mart Selling Stores and Leaving South Korea,"The New York Times, May 23, 2006.

10] A supermarket is a store that sells a wide variety of food. Most supermarkets also sell a variety of other household products that are consumed regularly, such as household cleaning products, medicines, and clothes. Some sell a much wider range of non-food products.

11] A superstore is a superlative name for a large department store. Usually associated with large chains, a superstore sells a wide range of products from toys and electronics to clothing and groceries and even furniture, sporting goods, and automotive supplies.

12] The act allowed suppliers to fix the prices of goods, and retailers were not allowed to sell the goods at lower prices.