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Analysis of Internationalisation Strategy Tesco and Lidl Essay

Question 1:

Globalisation has, in the last few decades, been one of the dominant trends in retailing. Retailers around the globe are striving for higher global market shares. The food retailing industry which has an oligopolistic market, especially, has strong competition although, with a few large firms dominating the market. Among them Tesco and Lidl are one of the major European retailers. Tesco is the UK’s largest retailer with 28.7% market share, which is 11% more than its closest rival, ASDA (Statista.com, 2015), and is the 5th largest retailer in the world (Deloitte, 2015). And Lidl is the main retail chain (accounting for more than 70% of its sales) of Schwarz group, which is the 4th largest retailer in the world (Deloitte, 2015). Both of these firms are based in Europe with Tesco being a British firm and Lidl a German.

These firms are similar not only in their revenues and market shares but also in the generic strategy they have adopted. In terms of business operation, both firms follow Porter’s cost leadership strategy. However, Tesco also incorporates the differentiation strategy (Baroto et al., 2012), hence pursuing a hybrid strategy combining the two, while Lidl solely follows the no-frills cost leadership strategy (Geppert et al., 2015). Both these firms have internationalized in different countries around the globe. Lidl has mainly focused its internationalisation in the European markets, while Tesco, in addition to expanding in different eastern European countries, has also started its operations in drastically different markets such as South Korea, China, India and The USA.

However, they have followed different strategies in their modes of entry into foreign markets, with different levels of success. The decision to and the outcome of internationalisation for these two firms have depended on different factors like government regulation, availability of the factors of production, their business operation strategy and so on. One of the main criteria for internationalisation for firms is to possess some sort of competitive advantage, in order to overcome the threats and difficulties usually associated with entering into a new foreign market (Vernon 1966). Lidl being a discounter has a huge advantage in terms of price compared to other supermarkets and hypermarkets. As a result of its no-frills strategy, Lidl can significantly reduce costs in different stages of its logistics and supply chain. Entering into a new country has a lot of challenges and firm size is one of the things a firm must consider when choosing a country for internationalisation. If the firm does not have significant market share in its domestic market, it will find it difficult to maintain its operations in foreign markets. In Lidl’s case, they have built a very strong domestic market and therefore, had a strong foundation for further expansion to foreign markets.

From Lidl’s previous Foreign Direct Investments, it is evident that that the firm has adopted both acquisition strategy as well as Greenfield investment. However, it has mostly focused on Greenfield investments (Nayak, 2011). Greenfield investment, which entails starting the operations from scratch, gives firms more freedom in selecting their business strategy in terms of choosing suppliers and managing logistics etc. This market entry strategy allows firms to fully utilize their company-specific advantages (Ando, 2005). One of the reasons Lidl chooses this strategy as their international mode of entry, is because of its consistency with their business model. Lidl, like other hard discounters, follows a global standardised strategy (Bartlett & Ghoshal, 1989), where majority of the decisions are made by the corporate headquarters, in things like variation of product assortment, design of store outlets or policies and procedures and there is very little localisation (Geppert,2015). This allows Lidl to implement its own strategic model into a new business in a foreign market.

However, in addition to centralizing the strategic aspect of the business, they also centralize some physical aspects of it. “A global retail strategy relies on standardization to achieve economies of scale and of replication. This means that in different countries similar product lines, distribution system, communication, service level and store design are used” (McGoldrick 2002). Lidl’s business strategy includes a standardized supply chain which allows it to efficiently operate its business in different countries and also provides an economies of scale. Upon entering a foreign market, they set up regional distribution centres (RDCs) to service a significant number of their stores in a certain region. They source their products (except perishables) through their headquarters in Germany and those products are distributed through the RDCs to their respective regional stores. Each of the RDC is linked to a regional management headquarters and they supply around 60 and 120 stores (Geppert, 2011). Through this kind of horizontal FDI, Lidl operates in its foreign markets just as it does in its domestic market. Also, the fact that Lidl has expanded into countries that are geographically closer makes this strategy and business model very effective.

This strategy is also consistent with the gravity model of bilateral trade which states that volume of trade is inversely proportional to the distance between the countries and directly proportional to the size of the economies. Lidl’s operating countries are geographically closer to each other and they, as a result, incur less transaction costs, which allows a discounter like Lidl, to adhere to its cost leadership strategy in its foreign markets as well. Moreover, Germany’s central location in Europe as well as it being the largest economy in Europe increases the prospect and efficiency of trade. Furthermore, due to Lidl’s choice of internationalisation strategy, factor abundance plays an integral role, especially in terms of land and space. Greenfield investment requires land to build new stores or the availability of already built stores.

“Discounters’ stores are standardized not only in neighbouring markets, but worldwide, which allows for efficient in-store processes” (Warschun, 2011). Therefore, Lidl which follows a similar standardization strategy, requires specific sizes of land and stores in different parts of the country it wants to expand to. An exception in this case is Sweden, which is geographically a bit farther relative to other countries. Lidl, establishing a Greenfield investment, built their own warehouse in South West of Sweden, however, the warehouse was still served by the same logistics firm used by Lidl in Germany, Pape (Nyberg, 2007). This still allowed for the standard distribution process to be implemented, as Pape is already familiar with Lidl’s business model and distribution modes.

Government policies, in both domestic and foreign markets, also have a significant effect on food retailers and their decision to internationalise. In 1968, a retail planning policy was devised in Germany in order to protect the small stores by limiting the size of stores outside city centres and special zones (Geppert et.al, 2015). This helped discount stores like Lidl by stopping bigger competitors from introducing huge supermarkets and hypermarkets. As a result, Lidl gained a significant portion of the market share in the German food retailing market. This strong position in their domestic market meant they had the resources and the motivation to expand into other markets and a strong domestic presence also benefits Lidl’s centralised business model. Since then, Lidl has expanded rapidly, mostly in European markets, and the number of Lidl stores in Lidl’s major operating countries can be seen from the table below.

The table above shows that the total number of stores Lidl had in 2011 in its foreign markets is three times its number of stores in Germany, its domestic market. This shows that Lidl’s endeavours in foreign markets have been successful as majority of their international efforts have resulted in a profit. Lidl doesn’t publish country-by country profit figures, although, its turnover in the UK in 2012, which was £202 million, increasing by around 40% in the five years since the recession hit (Gibb, 2013), shows that it is making a profit. In 2012, Lidl’s overall profits were up by 37% (Kantarretail, 2012). This can partly be attributed to the recession, because of which the demand for cheaper discounted goods increased, however, it can also be attributed to Lidl’s mode of entry into new markets and its business strategy which takes into account the local culture of the community and country in its foreign markets. For example: Lidl locally sources its perishable food products in the UK locally and uses it as its marketing strategy to attract local consumers and to create a friendly brand image.

Similarly to Lidl, Tesco also has a very strong presence in its domestic market as it is the market leader in the UK. Being among the top five retailers in the world, Tesco has stores in various countries in Asia and Europe. After achieving rapid growth and gaining the highest market share in the UK, the move to enter foreign markets was part of Tesco’s disciplined international growth strategy (Tesco Annual Report, 2014). Tesco has also adopted Horizontal Foreign Direct Investment in most of its international expansions, usually acquiring existing retailers in foreign markets and implementing its own business strategy like undercutting competitors and introducing own brand products and its club card scheme and so on (corporatewatch.org, 2004). For example: Tesco’s acquisition of American company K-mart’s stores in Czech Republic in 1996 (tescoplc.com) and it currently has more than 300 stores there (Tescopoly.org) Tesco’s first attempts at internationalisation were not very successful as their acquisitions of relatively small supermarket chains in Ireland and France were divested soon after acquisition (Geppert et al., 2011).

Tesco, then changed their strategy in acquisitions by acquiring larger foreign firms rather than smaller ones. In addition to the acquisition of K-mart in 1996, they acquired 26 S-Mart stores in Hungary in 1995, and ventured into the Irish market again in 1997, this time acquiring the market leader Associated British Food (ABF) (Geppert et al. 2011). As they grew Tesco has favoured large hypermarkets for its international stores rather than supermarkets, since in most countries it is easier to get planning permission for these than it is in the UK. (corporatewatch.org, 2004). One of Tesco’s main strategy in internationalisation has been to understand the market and operate in accordance with the local shopping culture to build better relationship with the consumers as well as suppliers. This is much easier to achieve in choosing acquisitions or joint ventures than through Greenfield investments.

Through acquisitions, as a result of the knowledge of local customs and associations on part of the acquired firm, the investing firm can take advantage of pre-existing business network with suppliers and distribution chains. It also takes over the brands (in some cases), the reputation and the existing market share of the acquired firm and this can result in a stronger market presence very quickly (Marinescu & Constantin, 2008). Therefore, using an entry strategy suitable with a lot of market research, Tesco has had success in its foreign expansion in European markets. Some examples include its operations in Hungary, where they strongly focus on local suppliers and 85% of their sales are through local products and In India where they operate a scheme to donate to local charities and organisations (tescoplc.com). The following table with Tesco’s number of stores in 2011, shows that unlike Lidl, Tesco has more stores in its home market compared to all of its international investments and the proportion of sales is higher in its domestic market as well since it brings in about two thirds of its total revenues from its home market (Thomas et al., 2013).

Contrary to its success in the European markets, Tesco has recently suffered some major setbacks in internationalisation in Asian markets like Japan and China, and the US. Tesco entered the US market in 2007 and instead of using their tried and tested approach of acquisitions or joint ventures, they preferred to adopt a different strategy and entered the market by establishing a new wholly owned subsidiary as a Greenfield investment. This meant that they did not possess the local knowledge about the market and consumer behaviour. In addition, they initially filled their management positions with mostly British expats instead of hiring locally (Silverthorne, 2010). Competing as a new business in a highly oligopolistic market requires a strong strategy and considerable market research and knowledge about the consumer base so, a lack of that meant Tesco could not entice American consumers. Moreover, their timing of internationalisation was also unfortunate as recession had seriously effected Tesco’s chosen states of California, Nevada and Arizona.

Tesco is estimated to have made more than £1 billion in accumulated loss (Finch & Walsh, 2012). Similarly, also in China in 2013, Tesco had to fold its unprofitable business into a state-run company as a minority partner; this was attributed to a difficulty foreign companies like Tesco, have in negotiating with suppliers and regulators in a fast-growing but tricky market. Furthermore, Tesco also withdrew from the Japanese market in 2012 in a “move that follows decisions to… focus on investing in its British home market” (Thomas et al., 2013). Tesco’s exit from Taiwan can be credited to low factor abundance, as all the most attractive sites for expansion already been developed or were held under future development option by Carrefour, who had been a well-established retailer in the country. In addition, the highly complex land ownership system was a hindrance for Tesco’s as it obstructed the transfer its skills in site location analysis and property development (Lowe & Wrigley, 2010). However, Tesco has had success in Asia, with Thailand, and South Korea, which is its largest foreign market.

Tesco outperformed its global rivals Wal-Mart and Carrefour in South Korea and they were forced to exit the market leaving Tesco as the dominant international retailer there (Lowe & Wrigley, 2010). Tesco had entered both South Korea and Thailand through joint ventures rather than acquisition, this key difference helped the firm massively as the partnerships with local firms offered Tesco the knowledge of local business/regulatory conditions and consumer culture, plus it provided the opportunity to build upon the ‘local’ appeal, especially in South Korea where Tesco had partnered with Samsung and the use of the name, Samsung-Tesco, proved to be vital (Lowe & Wrigley, 2010). Tesco’s failures in internationalization in some of the Asian and the American markets does show to some extent that geographical distance might have played a part even though the size of the economies involved were quite large. The culture of these markets were very different and as per Krugman’s love of variety model, individuals’ tastes are even more diverse, and Tesco could not adapt to these vastly different markets. In these kind of markets, a joint venture, like it adopted in its Korean and Thai markets, seemed to be the preferable option.

Comparing and analysing the strategies of Tesco and Lidl’s shows that, in order to have a successful internationalisation and subsequently continue to have a strong foreign market, the firms must be strong in its domestic market. Both firms use different primary strategy to enter into foreign markets but their internationalisation strategy suits their respective business strategy, as Tesco’s opts for quick growth and seeks to be a market leader in all of its markets usually by acquiring large existing retailers, while Lidl opts for greenfield investments in order to maintain its cost leadership and utilize its standardized supply and distribution chains. Both firms use Horizontal FDI, which does decrease international trade as their services are usually aimed at host country, however, individual governments welcome Horizontal FDI as it boosts the local economy by providing jobs as well as increases competition.

In Tesco’s case, it has recently turned its focus on its home market, as it has been losing market share in the UK and two thirds of its revenue come from the UK, however Lidl is growing more internationally and plans to open more stores in its already existing international markets like the UK (Butler, 2014). The world is very small now, especially with the ability to replicate technology easily and the power to move freely between countries. However, the strategies these two forms have used and their effectiveness in different countries show that, although there are fewer differences in consumer cultures and market structures, these differences still matter and play an important role in the success and failure of firms.

The ability of a firm to understand the consumer culture is key when it comes to internationalisation. Furthermore, the gravity model does hold to an extent even in the case of internationalisation of firms, as evident from Tesco’s failure to penetrate most Asian markets they entered compared to their successes in most European markets they ventured into. Tesco’s success in Thailand and Korea shows that a Joint venture with a locally established company would be the ideal mode of entry into risky markets. And a firm’s Internationalisation strategy must also be consistent with its business strategy in order to have a consistent growth in the foreign market after a successful entry.

Baroto, M. B., Abdullah, M. M. B. and Wan, H. L. (2012) ‘Hybrid Strategy: A New Strategy for Competitive Advantage’, International Journal of Business and Management, 7. doi: 10.5539/ijbm.v7n20p120. Bartlett C.A., Ghoshal, S. (1989): Managing across Borders. The Transnational Solution. Boston., Mass: Harvard Business School press Butler, S. (2014a) ‘Lidl launches £220m UK store expansion programme’, The Guardian, 27 June. Available at: http://www.theguardian.com/business/2014/jun/27/lidl-launches-store-expansion-programme (Accessed: 7 April 2015). Corporate Watch (2004) Tesco Plc, Corporate Watch. Available at: http://www.corporatewatch.org.uk/company-profiles/tesco-plc#international (Accessed: 9 April 2015). Deloitte (2014) http://www2.deloitte.com/content/dam/Deloitte/tw/Documents/consumer-business/tw-cb-retailing2014-en.pdf, Deloitte. Available at: http://www2.deloitte.com/content/dam/Deloitte/tw/Documents/consumer-business/tw-cb-retailing2014-en.pdf (Accessed: 8 April 2015). Finch, J. and Walsh, F. (2012) ‘Tesco’s American dream over as US retreat confirmed’, The Guardian, 5 December. Available at: http://www.theguardian.com/business/2012/dec/05/tesco-american-dream-retreat-us-fresh-easy (Accessed: 6 April 2015). Geppert, M., Williams, K. and Wortmann, M. (2014) ‘Micro-political game playing in Lidl: A comparison of store-level employment relations’, European Journal of Industrial Relations. doi: 10.1177/0959680114544015. Geppert, M., Wortmann, M., Czarzasty, J., Kağnicioğlu, D., Kohler, H.-D., Rückert, Y., Royle, T., Uçkan, B. and Williams, K. (2011) Work and Employment Relations of European Multinational Grocery Retailers – Discounters and Hypermarkets. Hans-Böckler-Stiftung. Available at: http://www.boeckler.de/pdf_fof/S-2009-317-1-1.pdf (Accessed: 6

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