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Tesco Case Study Geography For Kids

Executive Summary

South Koreans have amongst the longest working hours in the world, with young, upwardly mobile executives often too busy to go shopping for grocery at a traditional store. The UK's giant retailer, Tesco, sought to turn this disadvantage to its benefit. It introduced "virtual stores", which are essentially a display of products on walls of metro stations and bus stops. Commuters, especially the tech-savvy, ultra-busy lot, could scan the QR codes of the products on display with their smartphones, and place their orders even as they waited for their trains or buses. This case study looks at how Tesco "virtually" created a new market based on a country's lifestyle.

In 2011, when domestic sales of the UK's retail giant Tesco slumped, it fell back on its second-largest market, Asia, which accounted for 30 per cent of its total profit. Tesco's success in Asia, and specifically in South Korea - currently its largest market outside the UK - is based on its ability to adapt to the local consumer.

Tesco's expansion into Asia has been an important focus for the company since the late 1990s. Following its acquisition of Thailand's Lotus in May 1998, the company announced a 142-million investment in South Korea in March 1999 by partnering with Samsung to develop hypermarkets. Through its tie-up with Samsung, Tesco made a localisation effort to adapt its Homeplus stores to the local consumer.

The latest example of this localisation was the launch in 2011 of its first virtual store, located in a Seoul subway station, an idea based on the observation that the typical Seoul commuter did not have the time to shop at her nearest brick-and-mortar Homeplus store.

The Virtual Store

The virtual stores are set up in public spaces, most often in subways and bus stops with high foot traffic and frequented daily by tech-savvy commuters. This is how such stores work:

- Interested customers download the Homeplus app into their smartphones.

- They then use their smartphones to scan the QR codes of the products they want to purchase. The posters in the virtual stores are designed to resemble the actual aisles and shelves of a regular Tesco store, making the experience very user-friendly.

- The scanned products are stored in the customers' online shopping basket, who pay online once their order is completed. Homeplus reported that the majority of the orders are placed at 10 am and 4 pm, when people are commuting to and from work.

- Customers schedule a time for home delivery. Same-day delivery is the norm, so that customers can get their products by the time they get back home from work.

The virtual store has been a huge success with commuters and drove over 900,000 app downloads in less than one year, making the Homeplus app the most popular shopping app in South Korea. Online sales increased 130 per cent since the introduction of the virtual stores and registered app users increased by 76 per cent. In February 2012, Tesco Homeplus announced it was extending the virtual store concept to 20 new locations across the country. Today, there are 22 Homeplus virtual stores in South Korea, and the brand is the country's No. 1 online retailer.

Understanding the Consumer

South Korea, a country of around 50 million people, is the fourth-largest economy in Asia and the 12th largest in the world. Compared to other Asian countries, South Koreans generally have higher levels of education, higher average household income, and better living standards. Over the past few decades, the country has built itself up with its largest resource - people - and has achieved rapid economic growth through exports of manufactured goods. It is now a major producer of automobiles, electronics, steel and high-technology products such as digital monitors, mobile phones, and semiconductors.

Over the past decade, South Korea has advanced tremendously and has been shaped by constant innovation, technology and westernisation. In today's world, shopping habits and behaviour of South Korean consumers are impacted by several key factors.

Extensive use of technology/connectivity: According to a report by McKinsey & Co., South Korea is one of the most advanced countries in terms of broadband penetration, and has more than 10 million smartphone users. In other words, one in five South Koreans use a smartphone. Additionally, according to Nielsen, households in South Korea are making six per cent fewer shopping trips. When they do shop for products, an increasing number of South Koreans go online.

Long working hours/busy lifestyle: Although the average annual hours worked per person in South Korea is declining, the country still comes out top among OECD countries with 2,193 hours. This is perhaps unsurprising, as the work ethic and lifestyle of South Koreans get shaped at a young age. According to the BBC, South Korean parents spend thousands of pounds a year on after-school tuition on an industrial scale. There are just under 100,000 hagwons or private academies in South Korea and around three-quarters of Korean children attend them.

Travel time on public transportation: South Koreans spend a significant amount of time on public transportation, predominantly between home and work. What has helped is that public transportation is reliable and inexpensive, and is the fastest and most efficient way to get around.

The introduction of Tesco's virtual stores in subways made use of time spent by commuters waiting for public transportation, allowing buyers to use the little time they have available for grocery shopping. Not only did this change the way buyers shopped, it also increased the potential market for Tesco. These buyers may not have otherwise had time to go grocery shopping between their personal and professional lives, opting to buy take-out instead.

All of this implies that grocery customers in South Korea are more time-poor and less price-sensitive. They value convenience and technology to accommodate their busy lifestyle.

Tesco's Value Proposition

Buying on the move: Tesco's virtual stores in subways made use of time spent by commuters waiting for public transportation (Image Courtesy : Lildoremi.org)

Globally, Tesco's customers are price-driven buyers who look for value and/or convenience. According to its corporate website, Tesco's customers care about the following areas: (1) price and value (2) multichannel and convenience, and (3) trust. Typically, therefore, the company's value proposition is to provide customers with the products that they want at a low price. Tesco executes this proposition through multiple channels, including hypermarkets, grocery stores, convenience stores and online. When Tesco first entered South Korea, it offered this value proposition for the local customer: to provide the variety of products that the South Korean customer wants at a low cost in a beautiful store environment.

As the economy progressed and South Koreans invested more time and money into their careers and high-tech devices, Tesco adapted its value proposition to fit its on-the-go customers. By introducing the virtual store, Tesco Homeplus is able to execute its new localised value proposition: provide the variety of products that the customer wants in a convenient location and at a low cost.

In South Korea, it can be argued that Tesco's customer values multichannel options (for example, online and mobile), and convenience much more than price. According to a March 2013 research from MasterCard, around 40 per cent of online shoppers in South Korea used their smartphones to make a purchase in the previous three months.

Image-value-experience Triangle

In addition to the virtual store's strong value proposition, Homeplus has also developed a strong image and experience that mutually reinforce this value proposition. The Homeplus virtual stores attract their customers through their quick, tech-savvy, and cool image. They sell to their customer by offering the value of extreme convenience that the customer requires. And they are able to keep their customers by offering them the satisfying experience of easy-to-use technology, on-time delivery and quality products.

Given that the South Korean on-the-go customer places much greater value on convenience than on low prices, Tesco Homeplus may have been enticed to increase product prices through their virtual store channel. However, we believe that Homeplus decided not to increase prices in order to maintain its overall Homeplus value proposition, which hinges on providing desired products at low prices.

Key Learnings

This case study highlights important learnings that can be applied, generally, to other businesses:

Customer-based marketing: A "real-world" application of the new marketing paradigm, in which the process starts with the consumer and his or her needs, as opposed to with the product.

Customer segmentation: When you enter a new market/geography, companies need to understand and analyse consumer behaviour trends, including shopping habits and purchasing behaviour, to identify who the valued customers are and how they behave.

Adaptation of value proposition: If the needs, attitudes and lifestyle of the company's "value customer" are different in the new market/geography, the company needs to adapt its value proposition and value network across the entire supply chain.

Power of technology in traditional industries: Technology has a disruptive power in traditional industries, such as retailing. In this case, the predominance of smartphones in Korea allowed Tesco to boost its revenues through an innovative approach.

Innovative marketing: The way marketing can be used innovatively to target captured audiences (such as commuters waiting for the next train in a station).

Brand Extension: One option that Tesco Homeplus may have considered in order to take advantage of is to create a new brand for the virtual stores that would have remained independent from the Homeplus brand and, therefore, limited the risk to the Homeplus brand by increasing prices.



Nirmalya Kumar, visiting professor of Marketing, London Business School

"Despite Tesco's many problems, it has been a leader in developing multichannel solutions"

Nirmalya Kumar

Visiting Professor of Marketing, London Business School, and Member, Group Executive Council, Tata Sons

One of the most dramatic changes in retailing over the past two decades is its rapid globalisation. As a result, what used to be a local, unsophisticated, "mom and pop" business is being transformed into a global and technology-intensive growth sector. In support of this thesis, consider premier global retailing brand names - such as ALDI, Body Shop, H&M, IKEA, Marks & Spencer, Toys R Us, Walmart, and Zara - who are adorning the streets of several countries. They combine their finely-tuned value proposition with superior retailing skills, global sourcing, and access to capital to create value for both their customers and shareholders. Going international is one of the primary growth strategies available to a retailer when its domestic market is saturated.

Despite the popularity of globalisation in retailing, most retailers are still struggling to develop competencies to succeed in global markets. To what extent should the "original" format and merchandise be adapted is a major issue. Walmart learnt this the hard way when its initial entry into China had the wrong merchandise. On the other hand, Mexican customers were disappointed when they did not find enough imported US merchandise in the Walmart stores. Toys R Us has learnt that there are differences in consumption patterns. The Japanese demand electronic toys, other Asian consumers demand educational toys, Europeans favour traditional toys, while American kids prefer television- and movie-endorsed toys.

The Tesco case in South Korea demonstrates that despite the company's many problems, it has been a leader in developing multichannel solutions. With consumers preferring the convenience and selection of e-commerce, traditional brick-and-mortar retailers are challenged to address how to serve this customer profitably. The home-delivery option is much valued by consumers but cannot be as profitable as the traditional store. Therein lies the dilemma.


Nandini Chopra, MD, Corporate Finance Group, Alvarez & Marsal India

"Virtual stores would offer the convenience of online retail and the experience of brickand-mortar stores"

Nandini Chopra

MD, Corporate Finance Group, Alvarez & Marsal India

Virtual retail, such as Tesco Homeplus in South Korea, is an innovative concept that has witnessed success in various forms across developed markets. Today, we can be optimistic about the acceptance of new concepts by Indian consumers with the recent success of e-commerce and increasing penetration of smartphones - online shoppers have grown to 35 million from 8 million in 2012, and smartphone users have climbed four-fold to over 110 mn in the same period. A virtual store would offer consumers the 'convenience' of online retail and the 'experience' of brick-and-mortar stores. However, we can expect significant challenges in implementation in India.

The target segment would be very niche - young, urban, middle class, time-strapped, convenience seekers, whose needs are fulfilled by either neighbourhood mom-and-pop stores, or e-commerce sites like BigBasket.com and LocalBanya.com. To reach this niche target consumer with virtual stores would be different in every Indian city. Mass public transport transit areas, such as local train stations in Mumbai, are unlikely to be successful given the high traffic and quick movement, while tier-I city airports may be ideal given the audience and transit time.

Also, common areas in residential, commercial and shopping complexes could potentially thrive.

The success of virtual retail would also hinge on a strong back-end for order fulfilment and a supply chain enabling timely delivery. An extension by online retailers or organised neighbourhood retail chains such as Godrej's Natures Basket or Reliance Fresh, who have an existing set up could prove successful. However, such a concept may not be viable on a standalone basis. A hybrid model could be a marketplace aggregator who could use the existing kirana stores for delivery.

As the concept is fascinating to consumers, virtual stores could see acceptance largely for top-up or impulse purchases.

(This case study is from the Aditya Birla India Centre of London Business School)


A FORLORN shop facing a dusty car park in one of the poorest parts of Phoenix, Arizona, is an inauspicious place to start a closely watched experiment in global retailing. Yet this is where Tesco, Britain's biggest supermarket group, will seek to establish its beachhead in the world's richest grocery market.

Later this year Tesco will open at least 21 stores in this arid city and plenty more—it will not say how many—in Las Vegas, San Diego and Los Angeles. It plans to pepper some of America's fastest-growing states with Fresh & Easy local groceries at a rate of three a week. Tesco has identified as many as 100 sites to begin its £250m a year ($500m) campaign. Rumour has it that a new warehouse just east of Los Angeles could alone supply some 400 stores.

By American retailing standards, Tesco is merely dipping a toe in the ocean. Even so, the consequences could be enormous. Tesco is a formidable retailer, having transformed itself from Britain's third-ranked supermarket by sales to the third-largest in the world, after America's Wal-Mart and France's Carrefour (see table). As it has done so, Tesco's share of the grocery market in Britain has climbed above 30% and, like Wal-Mart in America, it has begun to face criticism of its market power.

That is one reason why Tesco has to venture abroad. Another became clear this week, when the company reported how sales growth at its British stores slowed sharply in the first quarter, because of subdued consumer spending and increased competition. It shares fell by almost 5% on the news. But this was compensated for by international sales, which grew by 25%. Tesco is expanding in places like eastern Europe and China, where it tailors supermarkets to local conditions.

In America it is trying something completely different. The operation is veiled in secrecy and furtiveness—Tesco is anxious not to tip its hand to competitors. When it tested the layout of a mock store in Santa Monica, it did so hidden from view in a warehouse. It stocked the shelves with food shipped in from America's East Coast and people were told it was just a film set.

The secrecy and the speed with which Tesco is expected to open its new stores points to the risks. If Tesco gambles small and wins, competitors will have time to copy it before it reaches critical mass. Placing a big bet is more dangerous, but it may be the best way to exploit a model that can be scaled up rapidly into thousands of stores across a market that rewards innovation like no other. “In retailing there aren't huge barriers to entry,” says Sir Terry Leahy, Tesco's chief executive. “That's one of the reasons you can't hang around and trial this thing. You have to launch and go.”

Some people have already decided to bet on Tesco's success. Last year Warren Buffett, one of America's most successful investors, revealed that his Berkshire Hathaway company had bought almost 3% of Tesco to become one of its largest shareholders. Mr Buffett admires careful planning and Tesco has done plenty of that.

Into their cupboards

The company has spent years gathering detailed information on every aspect of American life. Most retailers would think they had done their homework after the usual focus groups and surveys, but Tesco went much further. Researchers, including a small cohort of top executives, spent two weeks living with 60 American families. They poked around in their kitchen cupboards, watched them cook and followed them as they shopped. “They'd been studying the city for about a year before they came to us,” says Scott Motley, who works for the city of Phoenix, which with the Greater Phoenix Economic Council helped Tesco find places to put stores.

Even the stores seem part of a grander plan to keep gathering data. Take the patchwork of districts where Tesco plans to build some of the first. In central Phoenix it has chosen some of the poorest parts of town. Families living within a mile of one store have a median annual income of just $37,500 (against about $44,000 for America as a whole). In nearby Chandler, a middle-class area, it will be building its stores within reach of the city's richest inhabitants. There, median incomes run to about $93,000. This torrent of comparative data is central to the plan: Tesco is setting out to change the way Americans shop and eat.

As in most retail markets, American stores are splitting into those that sell luxury goods and those that sell cheap ones. Both Whole Foods Market (luxury) and Wal-Mart (cheap) are among America's fastest-growing stores (although they have slowed down a bit recently). Retailers catering to the mid-market such as Kroger, Safeway and Albertson, three of America's biggest grocers, have been squeezed. They come under pressure to cut prices and margins when Wal-Mart moves into the area. And they are simultaneously pressed to invest in swanky wood-effect polished floors and sumptuous fresh-produce displays to stop their richer customers decamping for posher places.

Social shoppers

Tesco's offering in America will swim against this tide. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.

Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen's, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy's would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).

Does size matter? In America's lightly regulated supermarket industry, most shoppers in all but the deepest backwoods live just a few minutes' drive from a large supermarket. The chances are the store has acres of parking, is open all night and has a good selection of whatever you might need: prescription medicines, dog food and piping-hot meals that have been cooked in the store.

Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. “The typical American convenience-store consumer would be Homer Simpson,” says Ira Kalish, a retailing expert at Deloitte, an accounting firm. “No one has done convenience and quality food together.”

As for products, Tesco's second innovation will be a range of preservative-free “ready meals” that are familiar to British consumers yet barely exist in large parts of America. “There's a big hole in the American market,” says Rajiv Lal, of Harvard Business School. “American supermarkets have not been innovative with prepared foods. You can't eat them more than three days in the week without eating the same stuff. But I suspect there are people in Britain who live off prepared meals from Marks & Spencer for three weeks on end.”

So why have British supermarkets led America's in easy meals? Generals like to say that amateurs study tactics and professionals study logistics. The same is true for retailing. In trying to compete with discount retailers such as Wal-Mart and Costco in a large country with good roads and cheap land that lends itself to big-box retailing, America's supermarkets have concentrated mainly on trying to take costs out of their supply chains. Labour is also cheaper in America. This has encouraged supermarkets to make two sorts of food: that which lasts long because it has been dried, canned, frozen or otherwise preserved, and that which is prepared from raw ingredients on site.

Sandwiches to ready meals

British supermarkets, in contrast, operate on a small, crowded island with restrictive planning laws. Whereas American stores are good at moving goods hundreds of miles and keeping them cheap, British retailers specialise in regular, frequent deliveries to heaving city-centre stores. Their supply chains are more sophisticated because they have to be. Stores can be so small that they have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon.

Expensive labour and a shortage of space have encouraged British retailers to seek economies of scale from centralised food preparation. Rather than cooking on site, they make a wide range of meals that can last for a couple of days. These are not just staples such as macaroni cheese or lasagne. A typical London supermarket now stocks more than 50 different meals, including treats such as organic beef in wine, Keralan prawn curry and Asian noodles with vegetables.

Although some British supermarkets have done a better job at seizing the top of the market and others the bottom, none has surpassed Tesco at concocting a wide enough range of meals to suit every taste. Once, Tesco was stuck downmarket selling cheap fodder to working-class mums. Now its market share is almost as large as the combined share of its two closest rivals: Asda, which is owned by Wal-Mart, and J. Sainsbury.

Tesco's rise is at least partly thanks to its knack of quickly responding to trends. It was the first of Britain's big supermarkets to embrace convenience stores. And it has been a clever innovator with its supply chain. Take, for example, its introduction of trucks with internal partitions for frozen, chilled and ordinary goods. As simple as the idea sounds, Tesco could thus replace three deliveries with one, which made it possible to sell groceries profitably in small stores at supermarket prices.

But Tesco's biggest innovation has been in the way it collects and uses customer data from its Clubcard, a loyalty programme. Many retailers use clubs to provide nothing more sophisticated than a discount to customers as they pay for their goods. Because rivals can easily match this, it reduces profit margins for all, says Deloitte's Mr Kalish.

The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase to build one of the world's largest databases. This finds correlations between purchases, allowing Tesco to finely tune the product range in each store. Sales of pickled vegetables, for instance, may suggest Polish immigrants have moved in, prompting it to stock barszcz, meatballs and sauerkraut.

As a result, its stores in Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour. Its stores in London's wealthiest parts, meanwhile, are stocked with ripe organic avocados, dainty packs of mange tout and steaks in fancy sauces.

Tesco's database also provides insights into how customers see the company. When it revealed that families were not buying nappies or other baby supplies in their weekly shop, further research showed they were instead paying some 20% more to buy these items at nearby Boots pharmacies because they trusted the Boots brand when it came to looking after their babies. So Tesco began a baby club, offering advice on pregnancy and mothering. Within two years almost four of every ten expectant parents in Britain were members and the firm had seized almost a quarter of the mother and baby market, according to “Scoring Points”, a book on the Clubcard scheme.

Some quirky correlations also pop out of the data. Take the fact that families buying baby wipes also buy more beer, mainly because fathers of young children have less time to go to the pub. Tesco's response: mailing families with infants discount coupons for toys and beer.

Tesco's entry into America will be “a wake-up call to the rest of the supermarket industry, including us,” says David Lannon, president of the North Atlantic Region for Whole Foods Market. “Tesco is better than the major supermarkets in the US. They're cleverer and more efficiently run.”

That does not mean that the British model will be easy to transfer. At least one reason behind the success of Tesco's convenience stores is public transport. Many are near, or sometimes even inside, underground and railway stations, making it easy for commuters to pop into a store to grab a meal on their way home.

Public transport also seems to shape consumer behaviour in two other ways. The first is that it encourages many small shopping trips, because purchases have to be carried. This in turn prompts consumers to favour perishable produce over frozen. The second is that it discourages the purchase of hot meals, either of the sort sold in many American supermarkets or fast-food outlets. Some, however, worry that this accident of British geography may have coloured Tesco's view of the ready meals it is proposing to sell through its Fresh & Easy stores in America.

Feeding the kids

Will America's soccer moms be as willing to stop their cars to grab a ready meal on the way home as British mums are when they jump off the Tube? Tesco thinks they will. For a start, worries about obesity have spawned more interest in healthy eating in America. Demand for organic products is soaring—even Wal-Mart has introduced them. Whole Foods Market has revolutionised the way fresh produce is sold in America, partly by stealing some merchandising tactics from the clothing industry, such as the use of stage lighting and arranging fresh fruit and vegetables into complementary blocks of colour.

...to build a giant databaseptpx

Tesco is also reacting to environmentalism by presenting itself as both healthy and green. Its distribution centre will have the largest solar-panel roof in California, its stores will use low-energy LED lighting and its refrigerated trucks are designed to use less fuel.

Tesco is optimistic that shopping habits in America point its way. “When you look at Americans, they shop more frequently than British people and they have to shop around many more retailers, because no one retailer gives them what they want,” says Sir Terry. “The opportunity [for us] is that they will shop less often if they get more of what they want in one place.”

Yet for all Tesco's confidence, few retailers have successfully broken into a mature grocery market in a developed country. Sainsbury's, Marks & Spencer and Carrefour are among the many European retailers that have tried their luck in America and walked away in frustration. This is in part because food retailing, with a few exceptions, is still a local industry. Laxman Narasimhan and Tim McGuire, of McKinsey, a consulting firm, reckon that economies of scale in grocery retailing, such as distribution and advertising, are mostly local. “A 40% market share in one market is far more profitable than 10% shares in four markets,” says Mr McGuire.

And unlike the world of clothing, where a global consumer culture has created global brands such as Zara, Gap and H&M each with thousands of stores across the world, the internationalisation of grocery retailing is constrained by the way that food tastes and shopping habits differ vastly from country to country.

Until recently few retailers had been good at changing their offering to take account of so many foreign quirks while still enjoying the benefits and efficiencies of being big. This is especially true of American retailers, which have grown fast at home by finding a format that works and then rapidly cloning it. But they too have often stumbled abroad: for instance, Wal-Mart had to give up in Germany. “Europeans are better at this because they benefit from their history of colonisation,” reckons Harvard's Mr Lal. “They have learned the lesson that you have to let the local people run the local business; that you can collect the taxes but you don't run the local administration.”

Even if Tesco has read the American market correctly, it will still face stiff competition from two sources. The first is from American supermarkets which will try to copy Tesco's ideas, despite having supply chains that are poorly configured for doing so. Some are already trying to get ahead: Ralphs, a chain owned by Kroger, recently opened a new store in Irvine, California, as part of a concept it calls Fresh Fare. The other source of competition is the thousands of fast-food outlets dotted across the areas it is trying to enter. As convenient as the new Fresh & Easy outlets will be, it is still hard to beat a drive-through window if you want a quick meal.

“Clearly it's high risk,” agrees Sir Terry. “But we've carefully balanced the risk. If it fails it's embarrassing. It might show up in my career [and] it'll cost an amount of money that's easily affordable by Tesco—call it £1 billion if you like. If it succeeds then it's transformational.”

This article appeared in the Briefing section of the print edition