The Opportunities of Food Retailer Tesco Expanding into Mumbai of India - Essay Example

? Investigate and Evaluate the Opportunities of Food Retailer Tesco Expending into Mumbai of India Table of Contents Table of Contents 2 The Analysis3 Strategy Development 12 Implementation 15 Critical Reflection 16 References 17 Bibliography 21 The Analysis With the rapid development of information & technology, world is getting smaller day by day. There have been large developments in the field of communication technology and transportation system as well. Advanced information technology, modern transportation system, new opportunities in the market and lesser trade barriers have fostered international marketing to the highest level in the recent past (Kleindl, 2006, p.5). According to Czinkota and Ronkainen (2007) international marketing can be portrayed as a process of planning and carrying out transaction across the national boundaries, in order to create an exchange and to satisfy the needs of the organization. The forms of international marketing are generally export-import trade, wholly owned subsidiaries, joint ventures, licensing, management contracts and turnkey operations. This study aims to evaluate the opportunities of food retailer Tesco expending into Mumbai, India. In other words, the objective of the study is to uncover the opportunity for food retailer Tesco to setup its business in Mumbai. Tesco PLC, the UK based multinational general merchandise and grocery retailer is presently headquartered at Cheshunt, Hertfordshire, England (Yahoo Finance, 2012). It was founded by Jack Cohen in the year 1919. Based on its strong performance and determination, the company has been able to achieve colossal success in a short span of time. The company is considered as one of the largest retailers of the world. Tesco is the second largest retailer in terms of net profit, just after Walmart, and the third largest retailer in terms of revenue, just after Carrefour and Walmart. The company has operation in 14 countries of the world and has employee strength of 5, 00,000 people (Tescoplc, 2012). Tesco PLC is listed at the London Stock Exchange. With staggering revenue of ?64.539 billion in 2012, the company now operates with electronic items, clothing, book retailing, furniture, petrol, software, telecom services, financial services, music download and DVD rental. Earlier the company used to position itself as a company which sells in large quantity and at low price. However the company has repositioned itself as a company that appeals to a mass customer through its wide range of products and value. The strategy paid off to a large extent as Tesco was successful in setting up 2000 stores more from the period of 1990 to 2005. Figure 1- Countries Where Tesco Operates (Source: DeadAnarchistPhil, 2012) With depressing economic environment, people are moving towards cheaper and value products. Some of the established players of Mumbai grocery retail industry such as Reliance Fresh, Aditya Birla’s MORE, Big Bazar, Metro Cash & Carry, and Marks & Spencer among others. (Source: Sood and Jashnani, 2012) Considering the present market conditions, the only way a company can earn profit is by satisfying the customers. Therefore proper segmenting and targeting the customers have become an indispensible task. In order to segment a market, companies need to consider factors such as psychographic aspect, demographic aspect, geographic aspect and behavioural aspect (Lao, 1998, p.114). According to the reports, the current strategy of the company is developed to compliment the vision, address the changing needs of the consumers and to satisfy the global nature of the company’s business. The strategy of the company is to create highly valued brands and customers with a variety of choice. This strategy helps the company to target customers from different segments of the society (Tescoplc, 2012). In addition, it also allows the company to realise economies of scale in the field of marketing and production. Moreover Tesco has the ability to sell products at a low price and therefore the company should deem catering to the segment that it caters to in other parts as well. The table below will illustrate the products of the company and the target audience. Products Target Segment Meat, Egg, Fish, Cream, Cheese These products are targeted to the mass. Dry Foods such as Burger These products are aimed to the teen agers. Although, Tesco has a huge variety of products and has presence in large number of business divisions, this report will focus only on the food retailing division. Now since the food of one country differs from another country, the company needs to modify its product strategy to some extent. A good product strategy can be also responsible for a company’s growth. Therefore it is important to conduct a country analysis, in order to assess the political, social, legal, technological, economical and environmental actors. Since the food retailing division will be highlighted, this analysis will also help the company to determine the food preferences. If we consider the international perspective of a business, according to eminent author such as Hollensen (2007), one of the practical reasons, which forces a company to expand internationally is the ‘managerial urge’, the author defined the term as ‘a reflection of general entrepreneurial motivation of a desire for continuous growth and market expansions’. In addition Czinkota and Ronkainen (1995) stated that a firm depends upon proactive and reactive motives to enter into an international market. The proactive factors are profit and growth goals, managerial motives, foreign market opportunities, economies of scale, and tax benefits. On the other hand reactive motives are competitive pressures, saturated and small domestic market, overproduction, unsolicited foreign orders, extended seasonal product sale, and immediacy to international customer. In the recent past, Tesco has shown urge to cater to the international segment by entering into countries such as Thailand, Malaysia and Slovakia among others. The company also proposes to enter Italy and Portugal along with India (Tescopoly, n.d.). Figure 2 – Tesco (Source: Tescopoly, n.d.) For India, initially they have chosen Mumbai. Now, through the use of analytical tools such as ‘PESTEL analysis’ in-depth analysis of the city will be carried out The total population of India is around as of March 01, 2011 (latest census) is 1,21,01,93,422 and Maharashtra (Mumbai is the capital of Maharashtra) embraces 11, 23, 72,972 of the total population of the country (Censusindia, 2011). Even in the global context, Mumbai holds a top position in terms of the total number of residents. Mumbai is also considered as the economical capital of India. Most of the India based MNCs, have their headquarters at Mumbai. Moreover most of the overseas companies, which enter the India soil, at first, target Mumbai to get the initiation. Hence it can be stated that, Mumbai has a vibrant economy and has a colossal population base (Archidev, 2004). Regarding the food retail industry, “Mumbaikers” (term used for the people leaving in Mumbai) continues to have feast through foods. The city has large disposable income and the industry is presently witnessing extraordinary changes. The overall retail industry of India is currently valued at USD 396 billion. With low price offerings, availability of all ingredients under one roof and gracious ambience offers a great experience to the consumers. Studies reveal that the middle class population of India has adapted to the situation very quickly. Strong income growth, shifting pattern of demographics, and changing lifestyle have been the strongest factors. According to the present trends, the industry is likely to witness 12 % growth annually. The study also reflects that by the year 2015, the food retail industry of India will turn out to be a staggering US $ 574 billion business (Deloitte, 2011). India is the biggest democracy of the World. It has a federal republic Government. The retail food industry, especially a retail food company from overseas, has to depend on the government to a large extent. Only in the last year, the Indian government has allowed 51 % FDI which makes favourable condition to those who wants to operate in the Indian soil (Gupta, 2012, p.6). Regarding Mumbai, the political scenario is somewhat turbulent. Throughout the year there are some issue with which the government is dealing with, or the common people have to deal with the government. However the impact of those issues on the business is very much less. In the recent past activities such as 26/11 Mumbai attack, 2005 Mumbai train blast etc. raised concern over the security of the city. Apart from that the taxation policy of the country is well structured, and there are less trade regulations in the city. Despite of the fact, India is a developing country Mumbai possibly is the most developed city of the country. It is also known as the financial capital of India. The largest share trading centre of the country is also located in Mumbai. The income levels of Mumbai are high in comparison to the other metro cities of India. In addition, the disposable income is also high. The film industry of India (commonly known as Bollywood) is also controlled from this city. Hence from an overall point of view Mumbai has a stable economic condition (Mehta, 2006). Changes in the social trends of a city can impact a business. The social factors describe the attributes of the place, where the company operates. It takes into account the literacy rate, demographic features, population mobility and beliefs and values of the society. Mumbai is a city, where people from different parts of world come either to do business or job. The major religions are Hindu, Muslim, Christian, Sikhs and Buddhism. Hence, it is a multicultural society and embraces strong diversity. Thus for a Tesco to operate successfully in Mumbai, it needs to offer products that suits the need of diverse population. Technology plays an important role in retail food industry. Activities related to inventory management, customer database management, queue management, billing etc. are all done with the help of information technology. In Mumbai, the information technology industry is well developed and IT companies from different parts of the world are operating in this city. Since food is a perishable product, environmental aspect is significant. Mumbai is located along the cost of Arabian Sea. As it is a coastal area, the temperature lies between 18 0 C -38 0 C throughout the year. The legal aspect highlights the legal environment in which a company operate. From the last few decades there have been hardly any major legal changes in the country. It can be stated that the legal framework of the country was well structured. Figure 3 – External Environmental Factors (Source: Businessmate, n.d.) In the meantime, it is also important to analyse the industry of the target country in which the firm is presently operating. Industry analysis helps us to uncover several aspects of the industry. For example, the different forces of the industry are uncovered. Porter’s five forces model will be used in this context to accomplish the study. Additionally, this model also helps to understand the business situation and attractiveness of the industry on a whole. The industry analysis of the retail food industry will be done in the context of Mumbai. The five forces of industry analysis are bargaining power of suppliers, bargaining power of buyers, competitive rivalry, threat of substitute products and threat of new entrants. Bargaining power of suppliers: - The bargaining power of the supplier refers to the ability of the suppliers to bargain and increase the production cost. The supplier powers are high when limited suppliers are present in the market. The suppliers in this industry are provider of different packaged foods and IT service providers. Since there are lot of food suppliers in Mumbai, the bargaining power of the suppliers are moderate. Bargaining power of buyers: The bargaining power of buyer refers to the ability of the consumers to reduce the price of the commodities through the process of bargaining. However in some cases sellers are forced to reduce the prices of the goods due to immense competition from the existing players of the industry. The retail food industry in Mumbai is extremely competitive with the presence of established players and large number of substitutes thereby making the bargaining power of the buyers high. Competitive Rivalry: - There are large numbers of player who operate in the retail of industry of Mumbai. Some of the established players are Reliance Fresh, Aditya Birla’s MORE, Big Bazar, Metro Cash & Carry, and Marks & Spencer among others. In addition there are plenty of other local food retailers which almost offers the same ambience ad same price. Thus, considering these factors it can be stated that the competitive rivalry is high. Threat of Substitute products: The substitutes in this business are the small retail outlets that sell food products. Such outlets are almost present in every corner of Mumbai. Moreover since the city comprises of people from different section of the society, there are only 20-25 % population who considers departmental store as the best alternative. The remaining 75 % still buy food products from the normal grocery outlets. Hence the threat of substitutes is also high. Threat of new entrants: The threat of new entrants is about the chances of a new player entering the industry and giving stiff competition to the existing players (Porter, 1998). In the context of retail food industry, the bargaining power is moderate. This is primarily because of the fact that, this industry needs In its home country, the company has large number of suppliers and for that the cost of production are reduced substantially. This also facilitates the company to offer products at a cheaper price to its customers. However in India the company has to adopt different strategy as the industry is fairly competitive. Figure 4 – Industry Forces (Source: Porter, 1998) Although the city does not have big names such as Walmart or Target Corporation, but still other local giants may offer immense competition to Tesco. To add to that, the government of India has already allowed Foreign Direct Investment (FDI) and this raises the possibility of global players to enter the Indian market. Furthermore, if reports are to be believed, Walmart has already shown interest to enter the Indian market. Such happenings will further raise the competition level of the industry. Nevertheless, the Indian market has space for all owing to the large population. The market also has the potential to offer growth to this industry. Therefore, despite strong completion and unfavourable political scenario, Tesco should enter Mumbai to carry out operation. To uncover those opportunities, SWOT analysis of the company needs to be accomplished. A SWOT analysis needs to be carried out to assess the external and internal factors of the company (Williams, Champion and Hall, 2011, p.108). The analysis will be principally employed to evaluate the internal environment of Tesco PLC and to underpin its external weaknesses. However, SWOT analysis will be accomplished from the standpoint of strategic management and international marketing (Pehlchen, 2007, p.28). The four factors of SWOT in the context of are presented below:- Strengths The company has strong financial position. Rich history. Strong brand name (Davidson, 2008) The company sells wide range of products to the customers Cheap price Opportunities The company has the opportunity to witness growth in the non-food products International expansion Also has the opportunity to enter the online segment of selling products Weakness The biggest weakness of the company is the high dependence on the UK market. Poor standing regarding corporate social responsibility which created negative impact in the society. The company is highly exposed to political and macroeconomic difficulties in some of the areas of its operation. Focus on a particular segment is getting difficult. Threats Intense competition Political opposition is some places High bargaining power of buyers Strategy Development It is important to consider all the possible modes of entry, whenever a company is considering international expansion. In general, the possible modes of entry are joint venture, franchising, exporting, licensing and foreign direct investment. In this context eminent scholars such as Johnson and Alon (2005) portrayed that the entry mode of a firm is not dependent on its wish, rather it depends upon the external factors ad internal factors. The internal factors are company’s age and size, prior experience in managing the firm’s foreign operation, brand name and value, and its expertise level. On the other hand the external factors are level of political jeopardy associated with the target nation, and other external factors. Similarly in this context Zekiri and Angelova (2011) pointed out that an organization must assess the potential factors and the market in choosing the entry mode. The factors emphasized by the authors are political and legal factors, culture, market size and potential, economical and technological factors, risk, and barriers of entry in the target country. Aspects Tesco PLC Score Internal factor International Exposure Operates in 14 countries around the world. Internationalization (High Exposure) Size of the Firm As of 2012, the company had 6,351 stores. The total revenue was ?64.539 billion. Internationalization (Huge Resources) External Factors Intensity of Competition Strong competition and presence of established players such as Reliance, Marks & Spencer. Externalization (High intensity of Competition) Socio cultural aspect Large Culture and societal differences between Europe and Asia. Externalization (High Cultural Differences) Country risk uncertainty Politically and Economically Stable city Internationalization Intended mode characteristics Control Low control mechanism, due to external variability Externalization Risk Averse Strong financial resources Internationalization Score Internationalization (Table 3: - Factors Impacting Foreign market entry mode) From the above study it is clear that the company has bright chances of success, if they expand to the Mumbai market. Most of the factors are favourable for the company. There have been many retailers around the world who have attempted and failed to get establishment in the foreign countries. However there are some retailers also who have achieved huge success in the overseas market. Similarly Tesco has also engrossed considerable amount of attention due to its ambitious overseas strategy. According to the reports, the company is highly dependent upon the emerging markets for its future growth. Thus, Mumbai has been chosen, as it also one of the cities which is currently undergoing large transformation in terms of its growth and development. Moreover the market is potential and can offer the company large sales volumes (Child, 2002). The study of Hollensen (2007) hierarchical model also entails that Tesco has many favourable factors in the form of positive political and economical condition, strong financial condition and prior experience in international market. Nevertheless there are few negative points as well. It comes in the form of low control mechanism, large cultural differences and huge geographical distance. Therefore a direct investment will not be relevant of Tesco in Mumbai. Moreover the company needs to control the operation, expertise and decision making process. In addition, to safeguard the trade secrets it is necessary to control the entire process. In this context the best alternative for the company to enter Mumbai is wholly owned subsidiary. A wholly owned subsidiary is a partly or completely owned company by another company, known as the holding company. This initiative will allow Tesco to control all its operation and defend the trade secret. The key strategy of the company lies in cost saving and selling the products at a cheaper rate. The success of the company also depends on this strategy to a large extent (Fabnomics, 2011). Having a wholly owned subsidiary will also let the company to trade directly with the suppliers from India. The production will also remain consistent with the demand and logistics strategy will also remain steady. Furthermore dealing directly with the suppliers and ordering at a large volume along with cheap labour cost, Tesco will be able to sell its products at a low cost. Finally, in order to compete in a market that highly competitive, Tesco needs to adopt a strategy that provides them with competitive advantage. Porter (1985) motioned that for a company to achieve competitive advantage, it must consider either among the three strategies. 1. Cost Leadership strategy: - The prime intention of cost leadership strategy is about remaining lowest cost provider (Clark and eHow, n.d.). 2. Differentiation strategy: - Differentiation strategy depends on the non-price factors. A firm embraces differentiation strategy by wide range of products and services (Hitt, Ireland and Hoskisson, 2008, p.117). 3. Focus strategy: - Through focus strategy organizations look to caters to a niche market segment (Enz, 2009). In this context low cost strategy can be effective and can offer the company competitive advantage. With this strategy the company will be able to position itself as company that offers low price and high value for products. Implementation According to Lauck-Dunlop (2008) it is important to consider all the 7p’s (product, price, place, promotion, people, process and evidence) of marketing mix to evaluate the implementation of a new strategy. However some authors also argue that, due to rapid globalization, implementation must be standardized, as the needs and demands of the customers are getting synchronized. This strategy although suits for product such as electronic items, clothing, and other non perishable items. For foods, the situation is different, as the taste and preference of food items differ from one country to the other. There are substantial difference between the British cuisine and Indian cuisine. It is basically a reflection of the culture of a country. For instance, religion has great influence on the pattern of cuisine and as India is Hindu dominated country and UK is a Christian dominated country, differences are bound to occur. British cuisine generally comprises of simple items mixed with delicious sauces and creams. It is also famous for Christmas dinner and cakes. Some of the significant British foods are fish, meat, egg, butter, cream, and cheese. On the contrary, Indian cuisine is famous for spices. Although the ingredients such as fish, meat and egg are same but the mixture of spices are different. Spices in India are also responsible for making the dishes unique. Hence, the product strategy of Tesco must give more attention to Indian spices. In its origin country or in the European countries Tesco mainly sells packaged food and dry foods such as bread, pizzas, mushrooms etc. On the other hand in Mumbai, especially products such as sandwiches, kebabs, pav (bread) etc. are popular (Ray and Srinivas, 2012). Therefore the company should consider making the local taste available in their store. The pricing strategy needs to formulate in such a way that it easily influence customers. Mumbaikers looks for cheaper products and therefore depending on its competitive advantage the company can use penetrative pricing to gain the initial marker share. As the key success factor of the company lie in its low cost production, the company will therefore not face much issue in implementing this strategy. Now when it comes to promotion, Tesco mainly uses various media to promote its products. Starting from television advertisements and magazine advertisement to social media advertisement, the company promotes through all the available channels. In Mumbai to be effective, the company must promote through television, newspaper, social media and flyers. Television is a favourite among the Mumbaikers and it also has mass reach. Apart from that Tesco can also sponsor cricketing events in India, which will give colossal exposure to the company. Cricket is considered as a religion in India, therefore the company should take the opportunity to get closer to its target audience. Finally, regarding the places of operation, it must target big shopping arcades, industrial areas, and city centres where the company can open its exclusive stores. The implementation can be done by carrying out a pilot study. The pilot study can be accomplished in some selective areas of Mumbai. If the results are positive, the company can move for a large scale operation. Critical Reflection The study was about the expansion of Tesco PLC in Mumbai, India. For that reason the report has analyzed the city and the Indian food industry thoroughly. The external environmental analysis of Mumbai reflected that, the city has few political issues and security concerns, but despite of that Mumbai is politically stable. The economy is also booming in Mumbai, which can offer great advantages to the firm. Other external factors are also stable are not likely to undergo any major change with few decades. The analysis of the industry enlightened that, retail food industry is extremely competitive and Tesco needs to have competitive advantage to operate successfully. This can be achieved through low cost strategy. Finally, the marketing mix revealed that the product strategy needs to be reformed largely as there are vast differences between the UK and Indian cuisine. In addition, promotional aspect also needs to be changed in order to reach the target segment. Hence considering all the facts and findings, external business environment of Mumbai, internal strengths of Tesco, it can be concluded that the company should enter Mumbai, through wholly owned subsidiary mode to gain control and operate effectively in the market places of Mumbai, India. References Alon, I., 2005. Service Franchising: A Global Perspective. New York: Springer. Archidev, 2004. Demographics. [online] Available at: [Accessed 29 November 2012]. Businessmate, No Date. What is the PESTEL Framework. 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