Tesco Plc and Their Use of the International Marketing Mix - Term Paper Example

Tesco plc and their Use of the International Marketing Mix in their Overseas Operations This essay sets out to identify how Tesco plc has used the international marketing mix in its operations in the USA, India, South Korea and China and why these approaches have been taken. It provides a brief explanation of the international marketing mix and an overview of the global grocery market and Tesco’s place within that as an introduction to its overseas operations and its use of the international marketing mix. It then goes on to consider what changes, if any, Tesco might make to the international marketing mix over the next few years and why these changes are justified. The International Marketing Mix The traditional marketing mix is considered to be the 4 Ps – product, price, place and promotion. For service industries, a further 3 Ps were added (McGrath, 1986) – people, physical evidence and processes. For the purposes of this essay, the focus will be on the four Ps, with their international variations considered as they apply to Tesco later in the essay. Keegan and Green (2011, p.399) define a product as “a good, service, or idea with both tangible and intangible attributes that collectively create value for a buyer or user”. One of the key attributes associated with a product is branding, which can be useful for organisations extending operations overseas. Price is defined as “a function of the demand for the product as determined by the willingness and ability of customers to buy” (ibid, p.365). For international markets, consideration must be given to price floors, price ceilings and optimum pricing. Place is “the availability of a product or service in a location that is convenient to a potential customer” (ibid, p.399) although it can also include the when and how products and services are available as well. Promotion refers to “all forms of communication used by organisations to inform, remind, explain, persuade and influence the attitudes and buying behaviour of customers and others” (ibid, p.431) and includes a wide variety of options, all of which should be used to convey and reinforce a consistent message. Tesco plc and the Global Grocery Market Tesco plc a leading food and grocery retailer in the UK operating out of 4,331 stores in 14 countries worldwide: the UK, other European countries, the USA and Asia (Datamonitor 2010b p.15). It is one of the major retailers within the UK food industry, within which hypermarkets, supermarkets and discounters hold a 61.3% by value of the market (ibid p.10). Within the UK, Tesco is perceived to have reached the extent of its expansion, so is now seeking overseas expansion to increase its income streams and profits. Around 65% of Tesco’s selling space is outside the UK generating 22% of its profits (Datamonitor, 2010a, p.6). The company is able to leverage its international sourcing to provide an international product range within its stores. However, its Central European operations have a higher cost compared to competitors as Tesco’s model is capital intensive (ibid, p.10). The operations in South Korea, China and India are growing strongly, providing long terms opportunities (ibid, p.11). The omission of the USA from this report is interesting. In the global market, Tesco is placed fourth of leading companies, behind Wal-Mart, Metro AG and Carrefour SA (Datamonitor 2010d). The global market was worth $4,349.4bn in 2009 (ibid, p.9) with Europe accounting for 38.2% of the market, the Americas 34.6% and Asia-Pacific 27.1% (ibid, p.11) (the USA accounts for 19.8% - Datamonitor 2010c p.11). Tesco is present in all three of these, although their market share is not significant enough to be reported separately for either the USA or the Asia-Pacific. Tesco’s annual report (Tesco 2010) provides the following breakdown of operations: Region Revenue (Sales less VAT) £m Number of Stores Employees UK United Kingdom 38,558 2,482 287,669 EUROPE R. o. Ireland 2,282 119 14,158 Poland 1,942 336 23,655 Hungary 1,698 176 20,079 Czech Republic 1,287 136 12,949 Slovakia 891 81 8,105 Turkey 595 105 7,360 TOTALS 8,695 953 86,576 ASIA South Korea 4,162 305 22,739 Thailand 2,344 663 34,775 China 844 88 22,668 Malaysia 633 32 9,423 Japan 449 142 4,636 TOTALS 8,432 1,230 94,241 U S United States 349 145 3,246 Table 1: Tesco Operations 2010 (Source: Tesco Annual Report 2010 p.7) These figures are incomplete in some respects (see Tesco 2010 p.7 for details) but provide the overall picture of Tesco’s operations required for this analysis. Tesco and Product The product that Tesco delivers is provision of grocery shopping in various formats, from convenience stores to hypermarkets. Within each market, Tesco is establishing brands that provide a clearly identifiable marker for customers. In South Korea, the brand name being used is Homeplus; Thailand have Tesco Lotus; China is seeing the launch of a new concept, Tesco Lifespace; and in the US, Fresh and Easy. Tesco’s store types can also be considered brands and part of the product – Express, Metro, Superstore, Extra and Homeplus (Datamonitor 2010b). Otherwise, the Tesco name is the brand. The ClubCard has been successfully launched in seven overseas countries. The Tesco name is therefore of paramount importance to both domestic and overseas markets. (Tesco 2010) Global brand management is a relatively new phenomenon for organisations that has been growing in importance. Organisations established different brands in different countries and kept to those, but over time, brands have been consolidated. The UK was not happy to lose the Marathon in favour of the Snickers Bar, Jif became Cif and Oil of Ulay became Oil of Olay. Brands became international, primarily as a means of achieving economies of scale and scope for manufacturing processes (Eisingerich and Rubera 2010). But with this change there were potential problems as consumers may not see the relevance of the brand to themselves and if the brand is not seen to take account of cultural differences, then negative reactions can result (ibid, p.64). Brands that incorporate appreciation of cultural differences allow a higher degree of localisation, “which leads to more profitable customer relationships over time” (ibid, pp.64-65). Eisingerich and Rubera (2010) identified very specific differences between brand management approaches required in the UK to generate customer brand commitment, and those required in China, that arose from the different cultures, using Hofstede’s five cultural dimensions (De Pelsmacker et al, 2010) as assessment criteria. Brands “represent the consumers’ perceptions and feelings about a product and its performance” (Kotler and Armstrong, 2010, p.260) and for Tesco, with its reliance upon the company name as the brand, brand equity is key: any problems that result in the Tesco name becoming tarnished will destroy the brand in all regions. Brand equity is “the differential effect that knowing the brand name has on customer response to the product or its marketing” (ibid), representing the degree of brand loyalty customers have. For Tesco, a positive brand equity – customers developing positive feelings and close ties – is not only essential, but requires constant attention to avoid any possible scandals that might turn customers against the brand. Interestingly, Datamonitor (2010a, p. 11) report that, following the recent recession, where customers had switched to discount brands such as Lidl and Aldi, Tesco was the only leading player in the market not to regain its former market share and “trailed its competitors in gaining ... market share” (ibid), which implies that the brand in the UK is weakening, and that Tesco might be more reliant upon overseas operations in future. The Future Supporting the branding in the future is likely to require a clear communications strategy, rather than a change to the product offering per se. Tesco have a business model that works, both in national and overseas markets, so changing the product element of the mix would not be advisable, although this should be kept under review, especially as new overseas markets are entered. The cultural aspects associated with the products should continue to be tailored to the different markets, to maintain and reinforce the Tesco brand and enhance brand equity. The integrity of the brand must be monitored constantly to avoid anything that might change how the company is perceived. Nestle’s brand was compromised by unethical practices in countries where breastfeeding was the norm, and Nestle promoted baby formula as being superior (Albaum and Duerr 2008). The worst scenario is total destruction of the brand, something Gerald Ratner infamously achieved following a speech in 1991 in which he declared the products his jewellery chain sold were “crap” (Martin and Fellenz, 2010, p279). Despite much public relations activity, Ratner was dismissed in 1992 and the company was finally merged into another retail jewellery chain. It is highly unlikely that Sir Terence Leahy, Tesco’s CEO, would make a similar mistake, but care must be taken, as Tesco have much more to lose than Ratner’s did. Tesco and Price Pricing in a national market is not easy, but when considering a global organisation, it becomes extremely difficult to get right. Bradley (2005) identifies four general influences on international pricing: technology and competition, exchange rate movements, price co-ordination across markets and distribution channels and price escalation. In providing such a wide range of products, Tesco give themselves a substantial degree of manoeuvre as regards margins. But they still need to fit within the general pricing approach of the host nation, taking into account the relative wealth of the nation and its residents. Government policies can play a part here, imposing taxes for importers: the Australian government, for example, imposes nearly 50% of the product value as indirect taxation for wine imports, meaning new entrants will probably need to import a premium product to cover all costs rather than a mass-market product (Datamonitor, 2010e, p.15-16). The Chinese government is not known for its liberal stance on many things, meaning Tesco’s pricing policies will be subject to government scrutiny for their Chinese outlets and operations. Government taxation policies have an impact on how prices are set. In the USA, there are few government restrictions on trade, but the Internal Revenue Service is known for being extremely diligent in pursuing those it believes have infringed tax regulations, so as for China, Tesco will need to ensure full compliance with taxation laws in the USA. Taxation rates are frequently discussed by both governments and business organisations, with governments needing to generate income for the nation and businesses generating profits for shareholders. Rates in the UK are considered to be high in comparison with other nations, and there have frequently been calls for government to reduce them (Sikka, 2010), despite many schemes being available for firms with international operations to offset taxes from the different regions. Countries anxious to attract new businesses offer lower tax rates, causing existing businesses to change country of domicile to take advantage of them (Goodley 2010). Tesco are currently still based in the UK for tax purposes, but it is a possibility that, as their international operations expand, they might relocate to a less expensive regime. Customers, however, are not happy about tax avoidance, especially with extreme government cuts on the horizon, resulting in campaigns to compel UK-resident corporations to pay their fair share of tax, rather than taking advantage of loopholes (Gabbatt, 2010). Tesco have not been affected by these as yet, but need to take care that they are seen to pay their fair share of UK tax; any effective protests might impact the brand value and equity, compromising all operations, not just those in the UK. As Tesco are domiciled in the UK, they must declare their financial results in pounds sterling, requiring conversion from the various currencies. Exchange rates can cause such conversions to be volatile. They can also affect the prices of raw materials and foodstuffs, making price setting extremely difficult, especially if special offers are proposed. In the UK, Tesco have high amounts of buying power, and can dictate terms to their suppliers to guarantee the prices they pay, but for their overseas operations, they are not yet powerful enough to do this. UK prices might be used to subsidise overseas prices if exchange rate movements are in favour of the UK, while if the exchange rates favour overseas markets, prices might be used to subsidise the UK. Multiple price strategies are required for each market to take account of local conditions; they are also required to help smooth out the exchange rate movements (Bradley, 2005). Tesco tends to control its own supply chain, so is able to control prices to a greater extent. It also gives Tesco power to guarantee access to customers on their own terms. This helps keep prices low where needed. Setting up operations within a particular region (for example, South East Asia) allows transport costs to be kept down, with the ability to pass this on to customers or bolster margins. The Future With world trade still sluggish following the recent recession, and with many nations embarking on austerity programmes, the ability to set and control prices will be more difficult than usual as customers find they have less disposable income. Although Tesco sells food, an essential purchase, the margins are low. Tesco indicate that they are relying on non-food items to boost their profits (Tesco 2010 p.8). Tesco were also expecting an improving global economy, which is now questionable as the ripples from the global economic crisis are still appearing. The items that will sell are those that are essential, rather than those that are considered luxuries such as consumer durables. Tesco may need to revise its strategy in light of this, and adjust its pricing policy to match the changing global economy. Tesco and Place As with pricing decisions, there are several factors to consider when locating operations overseas. Hollensen (2008) identifies five: customer characteristics, nature of product, nature of demand/location, competition and legal regulations/local business practices. All human beings need food to survive, but the type of food will be determined by national culture and location. For Tesco, setting up operations overseas involves determining what the national diet looks like and whether or not they can supply this at a price that allows them to generate a profit. Expanding into Europe is relatively straightforward as most nations are now members of the EU and trade barriers are being removed for member states. Tesco set up their own supply chain beginning, where possible, with raw ingredients, and ending with their own distribution network. This can mean a long, wide supply channel width and intensive distribution strategies (ibid). Setting up in the USA, however, demands a different approach that takes account, not only of the customers’ requirements, but the location and type of competition. Wal-Mart is the largest retailer in the US, and they hold the lion’s share of the market (80.2% of the market by value is sold through hypermarkets, supermarkets and discounters: Datamonitor 2010c p.10). Tesco have admitted that they have had to start small, focusing on convenience stores rather than supermarkets (Keegan and Green, 2011, p.399) in this market. Their approach in South East Asia is more in line with their UK approach, in some instances, building shopping malls to ensure they get the type of store they want (Tesco, 2010, p.11). The locations of the different operations in South East Asia are relatively close together, enabling cheaper transport and easier supply networks. Tesco have a well integrated supply chain, with vertical and horizontal control at most points in the chain. Relationships with suppliers and partners who are not owned by Tesco are mutually beneficial: the exclusive franchising arrangement in India is a good example of this. Shoham et al (2008 p.120) identify management of the supply chain as being important, with “characteristics of firms’ relationships with their foreign representatives (coordination, support, autonomy, communications and control) and their impact on behavioural and performance outcomes” as key considerations. It is not clear how Tesco manage their supply chain, whether internal to the organisation or involving external agencies, but poor management is likely to result in poor distribution to retail outlets and unhappy customers. Oyedijo et al (2010) conducted research in Nigeria and discovered that organisational size actually had no bearing on firm behaviour and strategy relating to a global marketing orientation. Their findings indicated that it was the operating environment that affected the orientation of a firm. Thus when expanding into new markets and nations, Tesco cannot count on its size being relevant to the operating environment. It will certainly make it easier in terms of raising capital and setting up supply chain networks, but it seems that it does not actually affect their global orientation. This has implications for the selection of new markets for further expansion: the markets selected must be those that would be profitable regardless of Tesco’s size. Hernant et al (2007 p.912) studied how grocery retail stores could achieve high profitability across dissimilar areas and determined that such stores should be managed according to the prevailing conditions in the area of location rather than as the parent company might normally manage, as the critical success factors differ according to the competitive conditions. Tesco appear to have adopted this approach, by setting up their stores based on the local culture and attitudes to retailing. They are having problems in Japan, though, and have had to revamp the stores; the focus is on fresh foods, with features that the UK takes for granted generating interest (own brand labelled food, in-store bakery, wine range) (Tesco, 2010, p.12). The Future Tesco had predicted recovery for both the national and international markets. This has not happened to the degree expected, likely causing falls in revenues and profits. This may hamper further international expansion unless Tesco can obtain government grants or subsidies, or borrow funds at a reasonable rate of interest that is less than the anticipated rate of return. Different areas of the world are reacting in different ways to the lack of growth and recovery and some commentators expect a second round of bank failures which would drag the world economy into a further recession and possibly even a depression. New stores may prove to be a luxury that Tesco can no longer afford in the short term. A period of consolidation might prove a sensible strategy, perhaps reviewing the supply chain to identify where further efficiencies can be generated to maintain profit levels. Tesco and Promotion For a global organisation, integrated marketing communications seem essential. Given Tesco’s reliance on branding within each market, the message conveyed to all customers will need to be consistent, while also being tailored for local communities and cultures. Madhavaram et al (2005) investigated integrated marketing communications and brand identify as part of brand equity strategy, providing a conceptual strategy: Figure 1: IMC, Brand Identity and Brand Equity Framework (Source: Madhavaram et al, 2005, p.75) Applying this to Tesco’s marketing communications, it can be seen that Tesco have a brand identity-oriented culture – their three own-brand food lines (Finest, standard and Value) and the way the stores are branded and presented provide evidence of that. Sir Terence Leahy is supportive of the approach taken by Tesco, and it would be very unusual for any member of the board to disagree openly with the CEO. The internal market orientation stems from the use of the Tesco organisation to provide different resources and products for consumption in all operations. So it appears that the brand identity contact factors are in place. It is more difficult to judge the presence of the brand equity contact factors as overseas advertising is not easily available and would be presented in the language of the host nation, but if it is assumed that Tesco is focused on maintaining the value of its brand, then their marketing communications strategy will be designed to support this end. Thus, it would seem reasonable to assume that Tesco are applying this framework to their marketing communications to support the brand and establish positive relationships with consumers around the world. Promotions may not transfer well to different countries. The names of products, for example, can cause problems if native speakers of the relevant language are not available to provide advice and guidance on proposed product names. There are many humorous examples of differences in language resulting in unfortunate translations, including “We take your baggage and send it in all directions” which was displayed at Copenhagen Airport and might well have caused concern for travellers using the facility (Hollensen, 2008 pp.368/369), and for Asians, Pepsi’s “Come alive” tagline caused problems, as when it was translated, it suggested resurrecting the dead (Keegan and Green, 2011, p.444). Tesco are not reported to have made any such errors yet, which would suggest they are taking full and proper account of the local languages when their campaigns are put together. This provides an example of both a standardisation and adaptation approach to market communications. The message is the same, but how it is expressed is appropriate for the market in which it is to be conveyed. This will provide some economies of scale while ensuring that the locality of the message is never forgotten. It is in promotional activities that an organisation’s ethics are most obvious. Following the global economic crisis, corporate social responsibility and ethics are of greater importance to both governments and consumers as it is believed that the crisis was caused by an absence of ethical behaviour. De Pelsmacker et al (2010, p.608) define morals as “beliefs or principles that individuals hold concerning what is right and what is wrong” and these affect purchasing decisions and behaviour. They further define ethics as “principles that serve as operational guidelines for both individuals and organisations” (ibid) and indicate that ethics are not written down but involve the study and application of morality. As previously mentioned, Nestle fell foul of the ethics surrounding the feeding of new-born babies when they suggested that use of formula milk was superior to cultures where breastfeeding was the norm (Albaum and Duerr 2008). Tesco have, to date, not had too many problems with ethical dilemmas, although they have faced issues in connection with boardroom pay and the treatment of overseas workers. Following the global economic crisis, greater attention is focused on the pay of top executives of organisations. For Tesco, this appeared at their annual general meeting when the boardroom pay proposals put forward were rejected by shareholders (Kollewe et al, 2010). Another serious issue, the treatment of overseas and migrant workers, was brought to public attention in 2007 (Finch, 2007) when a small shareholder forced the matter onto the agenda of that year’s annual general meeting, demanding higher standards of treatment. Tesco are reported to have tried to keep the matter private. It continues to be an issue that attracts media attention. In 2009, it is reported that the annual general meeting that year was picketed by unions who were claiming workers were being “exploited” (The Guardian 2009). The Future Tesco needs to deal with key issues connected with integrated marketing communications, especially as the economy is less than stable at present. Ensuring that the different markets are considered in marketing communications is essential will reinforce the strength of the Tesco brand, generating goodwill towards it and increasing customer loyalty. Where ethics are concerned, the organisation needs to provide progress on the main issues that make the news, so that public relations improve and Tesco is seen to be a truly ethical organisation in all of its dealings with individuals, no matter where they are or what role they occupy. Conclusion Although the elements of the marketing mix have been addressed separately, it is impossible in the real world to do this. If a product is branded, then promotion is automatically involved as is pricing. Tesco’s product strategy combines elements of standardisation and customisation that allow them to enter different overseas markets, with varying degrees of success. Their pricing strategy may need review as it was originally predicated on a global recovery that is now rather shaky and may not happen. Customers face new pressures on their incomes and will be reviewing their spending patterns. As Tesco lost customers the last time this happened, they will need to take action to avoid it happening a second time. As far as continued international expansion is concerned, new stores may be better postponed with focus on a lean, efficient supply chain being created and maintained, to ensure that, when recovery actually arrives, the infrastructure is in place to support the renewed expansion. As all world markets are experiencing economic problems, some areas more than most (Europe is having serious issues with the Euro disguising substantial problems in some members’ economies), a more cautious approach to expansion is justified. In the area of promotion, the main problems stem from ethical issues and bad public relations, with issues being reported in the press that do not make Tesco look as if they care about their workers, wherever they are based. Some key elements that Tesco must consider go beyond the marketing mix, needing to be instilled throughout the organisation. Current issues such as corporate social responsibility, ethics and sustainability affect all aspects of the marketing mix and are likely to become more important in the future. The composition and execution of the marketing mix is a helpful framework for analysis, but should not be considered exhaustive. Tesco will need to work beyond the 4 Ps to continue their currently successful strategy. 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