Aeon carrefour tesco and metro group are

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15GLOBAL LOGISTICS AND DISTRIBUTION

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CASE 15-1 PAST, CURRENT, AND FUTURE JOURNEY OF TESCO IN THE U.S. MARKET

Tesco is a British multinational grocery and general merchan- dise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest mea- sured by profits (after Wal-Mart).

In 2007, after years of studying the U.S. market, Tesco launched its Fresh & Easy Neighborhood Market concept in the United States. This was the first time Tesco entered an inter- national market organically rather than through acquisition or joint venture, thus representing potentially the most signifi- cant retail invasion of the U.S. market. Most of the company’s stores are from approximately 10,000 ft2 and are designed to offer high-quality, fresh food at competitive prices. As part of the convenience concept, stores have around 3,500 SKUs including chilled ready meals, snacks and salads, ready-to-heat prepared meals, baked goods, fresh produce, meat, poultry, seafood, juice, and coffee. Prepared foods account for around 10–15 percent of the product range, while private label prod- ucts account for around 50 percent of the lines. Fresh & Easy does not offer a loyalty card program despite the fact that loyalty cards are very popular with American shoppers.

In terms of store layout, Tesco’s Fresh & Easy does not fol- low the traditional “racetrack,” making the store layout feel much more European than American. Perishables and ready meals are positioned near the entrance while ambient and frozen (i.e., products with a longer shelf life) are placed toward the back of the store. Upon entering the store, customers are faced with a limited but impressive range of produce. The merchandising is strikingly similar to a Tesco Express in the United Kingdom where produce is generally placed near the store entrance.

Prepacked produce is common for Tesco but not for U.S. grocers. Organic products are featured throughout the store, primarily under the Fresh & Easy label. Eggs are merchan- dised the American way—in coolers—as opposed to being

placed on the shelf, as they are in Europe. Fresh & Easy products aim to be free from artificial coloring, flavoring, and preservatives. As a result, they tend to have a much shorter shelf life than products found in a typical U.S. supermarket. Perhaps as a sign of its British roots, Fresh & Easy offers a decent selection of cheddar cheese, and milk is 100 percent private label, a stark contrast to typical American chains.

The ambient section is both designed and merchandised in a very similar fashion to that of a warehouse club, with wide aisles, high ceilings, and natural lighting. Signage is used throughout the store to convey Fresh & Easy’s credentials as a sustainable retailer. Shoppers are encouraged to use the self-checkout; however, an attendant is always available to check out shoppers who do not wish to do self-checkouts. The aim of utilizing self-checkouts is to move customers through the store quickly and reduce staff costs.

Tesco has struggled in the U.S. market, forcing the com- pany to delay its plans to grow rapidly in California, Nevada, and Arizona. Three years later after its 2007 entrance, the company had around 175 stores in the United States but was still losing money. To mitigate these losses, in 2011, Tesco tested smaller-format stores in the U.S. market with a trial of a small number of stores at 3,000 ft2—branded as Fresh & Easy Express—that will allow the retailer to open in areas where there is insufficient space for larger formats. The plan to try a smaller-store format in the United States comes on the back of a successful push into the convenience-store format in the United Kingdom in recent years.

Recently, Tesco admitted that the 4-year-old chain in California, Arizona, and Nevada was making “slower progress” than planned. Only 30 out of 186 stores are prof- itable, while 118 are “very close,” Chief Financial Officer Laurie McIlwee said. Tesco would need 300 stores in the United States to break even. The revised expansion plan means Tesco’s Fresh & Easy will have just 230 stores by

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February 2013. Tesco needs to increase its scale in the United States to absorb the cost of running its own manufacturing and distribution center in California. Having fewer outlets than planned may impede its intention to break even.

Sources: www.planetretail.net; Kathy Gordon and Simon Zekaria, “Tesco to Test Smaller Stores In the U.S.,” Wall Street Journal, August 3, 2011; Sarah Shannon, “Tesco Reluctance to Commit to U.S. Dims Investor Outlook”, Bloomberg News, April 18, 2012; and Mark Potter, “Tesco to Outpace Growth at Global Rivals,” Reuters, February 16, 2011.

DISCUSSION QUESTIONS

1. Analyze Tesco’s retailing strategy in the United States. What do you think has gone wrong in its Fresh and Easy strategy? 2. Do you think the U.S. market loss is as a result of its U.S. retailing strategy? Or are there any more strategic issues? Please explain your answer. 3. Using your understanding about international retailing as described in this chapter, what would you suggest to Tesco’s chief officer in pursuing its international retail expansion?

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CASE 15-2 FRENCH RETAILER CARREFOUR: LOSES IN JAPAN BUT WINS IN CHINA?

For Western firms in general and, more recently, global retail- ers, in particular, succeeding in the Japanese market has always been challenging, and international business history abounds with stories of their struggles. Noted examples of global retail- ers that have faced difficulties in Japan include Wal-Mart affili- ate, Seiyu, and Germany’s Metro Group whereas U.K.’s Boots and French Sephora exited Japan just 2 years after entering it, which made the retailing industry sit up and take notice. The latest casualty of the-hard-to-please Japanese market is France’s Carrefour, the largest retailer in Europe and the second-largest in the world (after U.S.-based giant Wal-Mart) with worldwide sales of over 81.3 billion euros (2011). Car- refour operates 9,870 stores across 33 countries as of June 30, 2012. As of 2012, 43.7 percent of its sales came from its home country France, 26 percent from operations in other European countries, 19 percent from Latin America, while 10.2 percent came from Asia.

To start at the very beginning, Western retailers started eye- ing the Japanese market in the 1990s when the Japanese gov- ernment finally revoked its Large-Scale Stores Law that pre- vented foreign entry by retailers and when real estate prices in Japan started falling. At the dawn of the 21st century, several global retailers set up shop in Japan. These firms include Boots, Sephora, Wal-Mart, and finally U.K.’s Tesco in 2003. Carrefour made its entry into Japan in the year 2000 and initially opened four stores in cities such as Tokyo, Osaka, Saitama, and Hyogo, followed by four more in Kansai. At the time of its entry, it planned to have a total of around 15 stores by the end of the year 2003. But not only was it unable to reach that number, by the beginning of 2005, the company had started denying rumors that it was going to quit Japan only to exit the Japanese market a few months later. Industry experts claim that the low-price focus of firms like Carrefour and Wal-Mart does not meet the expectations of discerning Japanese consumers, who prefer better quality over lower price. Also, the establishment of specialized retailers and changes in consumption patterns has exacerbated the situation for foreign retailers.

Carrefour, which engages in all types of retailing with a focus on food retailing at competitive, low prices, runs stores in three main formats in foreign markets, namely hypermar- kets, supermarkets, and hard discounters with hypermarkets

being the largest in terms of floor area and stock and hard discounters being the smallest of the three formats. When Carrefour’s first few stores opened up in Japan, there were large spaces filled with piles of products that did not allow consumers to easily find an item they needed. Furthermore, according to some, Japanese consumers saw Carrefour as a French retailer and expected to see more French-style clothing and products. Tapping into this perception of their stores, Carrefour revamped its stores in Japan and brought in more French-made products, but even then it failed to carve a niche for itself in the mature Japanese market. On the supply side, Carrefour originally planned to source its products directly from manufacturers but with inadequate purchase orders, it was unable to secure purchase contracts directly from produc- ers. Thus, it was forced to approach wholesalers for products. However, it was unable to break through the tight-knit net- work between local suppliers and the home-grown Japanese supermarkets and therefore could not offer a wide range of products to its Japanese clients. Finally, motivated by a drop in worldwide revenues and unprofitable stores in Japan, 4 years after its entry into the market, Carrefour made the decision to sell off all its stores in Japan. Contenders for the acquisi- tion included many but ultimately Carrefour sold its stores to Japan’s largest retailer Aeon Co. Ltd. Now Carrefour Japan is run by Aeon Marché Co.

On the other hand, Carrefour’s experience in Mainland China has been very different, and it is now one of the top five retailers in the country. Carrefour entered China in 1995 with a store in Beijing, and by the year 2000 it had over 25 stores in 15 major cities in Mainland China. Since then, Carrefour has developed rapidly in this country. By Decem- ber 2012, Carrefour has opened its 215th store in mainland China. Sales in China reached 5 billion euros in 2011, repre- senting 61 percent of total sales in Asia and accounting for about 5 percent of total group revenue. In China, Carrefour’s formula of low prices, huge stores, and a high degree of localization seemed to have worked out so well so that it has now gone down in global management books as Carrefour’s Chinese success story. Moreover, Carrefour has decentralized store operations in China and also established the Carrefour China Institute for employee training.

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The company’s success in China in spite of periodical run-ins with protective Chinese regulatory authorities has come as both a surprise and an important lesson to global firms. China, like Japan, has not been an easy market for foreign firms to conduct business, given its varying cul- tures within the same country, the stark differences between lifestyles in urban cities as compared to those, number in provinces and its political set up. With China’s entry into the World Trade Organization (WTO) and spurred by Carrefour’s accomplishments in China, the company’s ambitious plans for

Sources: Carrefour.com home page; “Carrefour at the Crossroads,” Economist, October 22, 2005, p. 71; “Carrefour’s Expansion in China,” China Daily, August 12, 2008, and various other sources; and www.carrefour.com, accessed January 25, 2013.

the market include opening a store a month and investing more than $750 million in its stores in China. So, the company still has something to smile about!

DISCUSSION QUESTIONS

1. Do you think it was the right decision for Carrefour to leave Japan? Could it instead have adopted other strategies that per- haps would have led to a different outcome?

2. Since Carrefour is the second-largest retailer in the world, what are the implications of its pull-out from Japan for other global retailers such as Wal-Mart, which is struggling to survive?

3. Why did Carrefour exit Japan but succeed in China?

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CASE 15-3 WHICH DISTRIBUTOR TO CHOOSE IN COSTA RICA?

Not long ago, TransMotors (a disguised name), an American export management company that had a joint venture in China manufacturing motorcycles began to search for new distribu- tors in Central America. During previous years, TransMotors had been highly successful in South America and Africa locat- ing distributors for its line of basic transportation motorcy- cles. Using Honda technology, the Chinese motorcycles were proven to be of high quality and reliability. Most important, they sold for less than a third of the cost of the competing Japanese models.

The first stop in Central America was Costa Rica, the most prosperous country in the region. A growing economy and political stability provided the kind of market conditions that were optimal for successful sales: a rising lower middle-class that could now afford a dependable motorcycle for its trans- portation needs. Such a formula had worked very well in Colombia, Ethiopia, Venezuela, Burkina Faso, Argentina, South Africa, Brazil, Nigeria, Peru, and Cameroon. For Trans- Motors,likemostothersseekingtogainentryintohigh-growth, emerging markets, the key to success was selecting and recruit- ing the right kind of distributors for its products.

Robert Grosse, the executive in charge of developing the entry strategy for TransMotors, was able to locate two possi- ble distributors in Costa Rica. Full of pride because of success in the abovementioned markets and others, Grosse believed himself invincible when it came to identifying who would be the best representative for his company’s products.

Harvey Arbelaez, the first candidate for the Costa Rican distributor, was a young, upstart entrepreneur who had cut his teeth in the agriculture business—importing farm imple- ments and fertilizers. Arbelaez had built a nice network that covered the entire market in Costa Rica and was interested in the Chinese motorcycles because he felt they would comple- ment his existing product lines.

Jaime Alonso Gomez, the other candidate appeared to be the better fit. Gomez was one of the richest individuals

in the country and had made his fortune as the exclusive distributor of Honda cars, Scania trucks, and Komatsu heavy equipment. He had sold some Honda motorcycles in the past and was interested in getting back into the low-end transporta- tion business. To the U.S. executive, this appeared to be the logical choice.

When it came time to travel to San Jose to interview the two prospects, Grosse had as his goal the sale of 250 motorcycles a year for each of the first 3 years. According to his research, the annual sale of motorcycles for the entire country was approx- imately 2,700 units and growing nicely at a rate of 10 percent per year. The sale of 250 units annually would establish a foun- dation that could be leveraged down the road to build market share to ultimately 20–25 percent.

The first stop on the trip was at Arbelaez’s office. On a personal level, the two did not hit it off; although it was clear to Grosse that Arbelaez was wildly enthusiastic about the opportunity to offer the Chinese motorcycles throughout his network. Any positive feelings on the American execu- tive’s part soon evaporated, however, when the young man showed projections that the annual sale would be no more than 100 units for the first couple of years. Arbelaez said it would take a long while for the marketplace to adjust to a Chinese- branded product, but once it did, the potential would be tremendous. At this point, Grosse ended the conversation and told his counterpart, “I will take your plan under advise- ment.” Twenty minutes later, the American executive was dropped off by a taxi in front of the sparkling offices of the Honda/Scania/Komatsu distributor, Jaime Alonso Gomez.

Within an hour of their meeting, Grosse and Gomez agreed that the dealer would become the exclusive distributor for the Chinese motorcycles. It was clear that there existed the sales staff, service capability, financial resources, and knowledge of distribution to handle the motorcycles. And, if that wasn’t enough, the first order was to be 1,000 units—four times what the American executive thought it would be! Dinner that night

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was a celebration of the new relationship at San Jose’s most prestigious private club. All that was needed was an exclusive distribution agreement giving the Costa Rican sole rights for the Chinese motorcycles for 5 years. Then, once the agreement was in place, a revolving letter of credit would be opened to begin shipping the motorcycles in 125 unit increments over the first year.

After the exclusive agreement was consularized (i.e., authenticated by the consul) and notarized, the first 125 units were shipped from China to Costa Rica without incident. The letter of credit went smoothly and communication between the two firms was regular and efficient. However, everything changed when it came time to ship the next 125 units. To reini- tiate the revolving letter of credit a document was required from the distributor to the confirming bank. For more than a month the U.S. firm called, e-mailed, and faxed its exclusive distributor. The only individuals the Americans could get in touch with were administrative assistants who generated the same, pat answers. “He’s away on a trip … in a meeting … away from his desk.” With the second lot of motorcycles languish- ing at the dock in Shanghai and the other 700 units ready for production, pressure was building.

Unannounced, Grosse grabbed a plane and flew to San Jose to see what was going on. He took a taxi at the airport and went right to his new distributor’s office. Not surprising, his new dis- tributor was “in meetings all day and unavailable.” Nor were

Source: This case was provided by Professor Timothy J. Wilkinson of Montana State University based on Andrew R. Thomas and Timothy J. Wilkinson, “It’s the Distribution, Stupid!” Business Horizons, 48, 2005: 125–134.

any of the motorcycles or promotional material anywhere to be found on the showroom floor.

Distraught, the American executive took a cab to his hotel. During the 30-minute trip, he was startled to see so many small motorcycles on the streets of San Jose—something that was not the case during his last visit a few months earlier. Many of them were the models of one of his leading competitors from Taiwan.

After a couple of stiff drinks at the hotel bar, Grosse swallowed his pride and called Harvey Arbalaez, the young entrepreneur whom he had rejected earlier as the exclusive distributor. Half-expecting to be hung up on, the American executive was shocked when the young man agreed to join him for dinner to discuss what was happening with the motorcy- cles. Not gloating too much, the young Costa Rican showed pictures of TransMotors’ motorcycles still sitting in a bonded warehouse at the port. He further showed photos of a brand new motorcycle distribution company located in the heart of San Jose that was importing small motorcycles from Taiwan. Because of no competition, newspaper articles stated that sales of the Taiwanese products might exceed 500 units that year. In scanning the articles, Grosse recognized the last name of the distributor. The name was Gomez—turns out, he was the brother of the Honda guy.

DISCUSSION QUESTIONS

1. What mistakes did Robert Grosse make in selecting a distributor? 2. What steps should Robert Grosse have taken that could have helped in doing a better job in distributor selection?