Lessons from Tesco’s Failure in the United States of America

Introduction

Tesco is a multinational retailer which deals with groceries and general merchandise. It is headquartered in the United Kingdom. It is the largest retailer in the United Kingdom and the third-largest in the world measured by its gross revenues (khan, 2014). The company has over 6,500 stores worldwide in diverse countries. However, one country proved to be difficult for the giant retailer to operate in. This is the United States of America. This paper will focus on the case study of this retailer in its operation in the US and the business collapse it experienced in that market. It will further analyze the causes of its failure and the possible ways it could have been utilized to survive in the US (Wood, Wrigley, & Coe, 2015). The paper will then give recommendations to similar businesses and a conclusion.

Analysis of Tesco’s Failure

Theory of Absolute Advantage

Various theories can explain the failure of Tesco in the US market. The theory of absolute advantage suggests that a company should ensure the reduction of its cost of production (Schumacher, 2012). This is to capitalize on other areas to give the brand a competitive advantage in the market.

Companies that ensure reduced production costs have the advantage of funding other functions like expansion and marketing to win over competitors (Seretis & Tsaliki, 2015). Tesco’s marketing activities in the US were not as effective as required. One of the reasons the brand did not succeed in the market is its poor brand equity performance (Geoghegan, 2011).

Country Similarity Theory

The country similarity theory is another powerful model companies consider in their internationalizing strategies (Verter, 2015). This theory focuses more on the similarity of different markets regarding brand preferences and consumer trends. The UK market where Tesco is located is characterized by consumers who prefer small but frequent shopping.  The United States market, on the other hand, prefers to do bulky shopping, which is less frequent compared to the United Kingdom. Tesco launched its business in the US using the model for frequent walking purchases, assuming the similarity of such a market with the UK. Therefore this led to failure (Landon, 2019).

Global Strategic Rivalry Model

The Global Strategic Rivalry Model is another theory that can explain the failure of the Tesco retailer (Frynas & Mallahi, 2015). This theory is based on a company’s competitiveness in a new market. It suggests that internationalising companies should develop strategies to place them better in the new market against the competition. Companies should do enough market research before entering a new market to have the required information to formulate competitive strategies.

The US market is characterized by large retail grocery and general merchandise stores due to the consumer preference for making large-scale purchases, and most of them drive to shop. Tesco’s stores in the United States were located within walking distance of residential areas targeting walk-in customers who make frequent purchases. The stores were relatively small compared to the competition and, therefore, did not give the average busy American the convenience to shop for large-scale groceries and general merchandise and to drive to the shop. This contributed to the failure of the business.

Focusing on the global strategic rivalry model, too, Tesco did not focus on a few stores to learn the market as a pilot test (Pulka, Ramli, & Mohamad, 2018). Instead, the company went ahead and opened several stores across different states. It could be difficult to develop strategies to cope with the market with already established numerous stores. This led to the company calling it off the US market.

Recommendations

The theory of absolute advantage clearly explains the importance of managing the cost of production to increase the other functions of the business that bring strategic advantage in a new market. Therefore, the Tesco Company should have ensured the reduced cost of opening new stores and channeled such funds into research that would help the marketing team understand the market they were getting into. The reduced cost of production would also help the company to increase its marketing campaigns to gain more popularity against its peers and overall brand equity. Therefore, Companies planning to internationalize their business need to learn heavily from this theory for a successful mission in foreign nations.

In its mission to the United States of America, Tesco should have compared and contrasted the United Kingdom and the United States markets. This would have given them insights into which business model to use in the new market. Analysis of the new market in terms of consumer preferences vis-a-vis the United Kingdom would help Tesco shape a more reliable business model to thrive in the United States of America (Lowe, George, & Alexy, 2012). Businesses should be aware that to endure the internalization of operations, they need to learn to adopt different models for different markets supported by research. This will ensure the customers are not inconvenienced, and the business thrives with minimal challenges.

Based on the theory of global strategic rivalry, Tesco should have conducted enough research to obtain insights that would help the business to gain a competitive advantage over its rivals. The business would also have invested little in opening a few piloting stores to help them understand the market well. They would then develop strategies from the lessons learned to make the few stores productive. Then Tesco would roll out the introduction of multiple other stores in the United States of America. This would eventually see the company having a smooth internationalization in that country. Therefore, companies should embrace market research to gain insights needed to develop business strategies to win over rivals.

Tesco should have also introduced large stores in the new market, a strategy widely used by grocery stores in the US. This model caters to the needs of driving customers who consider buying bulk products with less frequent visits. This description is of the common US customer.

Conclusion

The above analysis shows how important it is for businesses to take heed of the theories of international business while internationalizing. A little ignorance could see businesses lose large sums of money and fail to establish foreign markets. Therefore, it is vital for businesses planning to internationalize to consider such theories for a successful mission in a new market.

References

Frynas, J. G., & Mallahi, K. (2015). Global Strategic Management. Oxford: Oxford University Press.

Geoghegan, T. (2011, May 5). Why is Tesco Struggling in the US? Retrieved August 6, 2020, from BBC: https://www.bbc.com/news/magazine-13190124

Khan, M. (2014). CUSTOMER SATISFACTION, A LADDER TO CUSTOMER LOYALTY IN A SUPERMARKETSUPERMARKET. London: University of West London.

Landon, F. A. (2019, April 24). Why Tesco failed in the US. Retrieved August 6, 2020, from Global Marketing Professor: https://globalmarketingprofessor.com/why-tesco-failed-in-the-u-s/

Lowe, M., George, G., & Alexy, O. (2012). Organizational identity and capability development in internationalization: transference, splicing,, and enhanced imitation in Tesco’s US market entry. Journal of Economic Geography 12 (2012), 1021–1054.

Pulka, B. M., Ramli, A., & Mohamad, A. (2018). Examining the Moderating Role of External Environment on the Firms’ Resources and Performance of SMEs in Nigeria: A Pilot Study. IOSR Journal of Business and Management (IOSR-JBM) Volume 20, Issue 11. Ver.III, 20-26.

Schumacher, R. (2012). Adam Smith’s Theory of Absolute Advantage and the Use of Doxography in the History of Economics. Erasmus Journal for Philosophy and Economics, Volume 5, Issue 2, Autumn 2012, 54-80.

Seretis, S. A., & Tsaliki, P. V. (2015). Absolute Advantage and International Trade: Evidence from Four Euro-zone Economies. Review of Radical Political Economics 2015 Union for Radical, 1-14.

Verter, N. (2015). The Application of International Trade Theories to Agriculture. Mediterranean Journal of Social Sciences Vol 6 No 6 S4, 209-219.

Wood, S., Wrigley, N., & Coe, N. M. (2015). Capital Discipline and Financial Market Relations in Retail Globalization: Insights from the Case of Tesco plc. Journal of Economic Geography (November 2015)., 1-46.