The International Strategies of UK Supermarkets: The Possibility of Entering Africa
In the mid 1990s, saturation in Tesco supermarket’s domestic market compelled it to expand into overseas markets for sustaining its future growth within the international retail industry. It kicked off its global expansion strategy by venturing into the United States, Asia and Central Europe (Reuer 2004). Africa was not put into consideration in its expansion strategy primarily because of a number of factors such adverse economic situation, unfavorable business environment and political instability that existed in many African countries at that time. Nonetheless, in the past decade, a number of African countries have gained political stability, and some are experiencing rapid economic growth rates which enhance business climate for both local and international companies. This has created an enabling environment that has seen a rise in supermarkets in African cities, towns and even in poorer areas hence transforming the retail sector particularly in Eastern and Southern Africa in countries such as Kenya and South Africa (Roxburgh 2010). This favorable economic climate and a growth in middle-class in Africa play a significant role in attracting international supermarket chains such as Tesco PLC into the continent. The purpose of this paper is to discuss and emphasize the international strategies that supermarkets based in the United Kingdom can employ in their efforts to penetrate into African countries. The paper focuses largely on Tesco PLC and also discusses the economy of Africa and the type of business that UK supermarkets can operate other than supermarkets.
Tesco PLC is the largest supermarket chain in the entire United Kingdom having over 1,700 stores in the UK alone, and has roughly 2,318 stores globally. The company also sells its merchandise via online Tesco.com. Tesco’s strategy to explore new markets began in 1997, and this has so far been the foundation of success of its business. The company has had great expansion of operations with the opening of hundreds of stores in the last decade in international markets, and this has been made possible with the implementation of this strategy of exploring new markets. Of all the large supermarket chains in Britain including Sainsbury and Marks & Spencer, Tesco PLC is the only one which is pursuing international strategy (Chang 2005).
International business expansion strategies
There are a number of global business strategies that a UK supermarket chain such as Tesco PLC can utilize for international expansion particularly into the continent of Africa. They include the following: Foreign Direct Investment (FDI) – This is a method/strategy of international expansion whereby the supermarket chain can control interest in assets, property or companies oversees (Luo 2007). This strategy entails a higher level of commitment – equipment, finances and personnel transfers would occur. FDI normally requires substantial amounts of capital and therefore players are usually large corporations such as Tesco PLC. Typically, this strategy originates from a number of business arrangements including the following: (i) wholly owned subsidiaries: A subsidiary is simply a firm that is completely controlled and owned by the parent company. This is usually attained by establishing a new company or buying one that already exists. Tesco can penetrate the African continent by creating new companies therein which it would own and control or it could opt to buy a company that is already in existence; (ii) Joint ventures: This simply refers to part ownership of another company with other partners and business. They all share contributions such a capital, equipment as well as personnel (Barkema, Bell & Pennings 2006). For the case of Tesco, it can employ this strategy as it seeks to penetrate into African countries by having part ownership of reputable supermarket companies on the continent together with other business and partners; (iii) Strategic alliances: This typically involves arrangements between two or more business organizations that have a common business goal. Strategic alliances are usually formed because parties have the willingness to work together, but do not wish to form a separate business (Arnold 2003). Using this method, Tesco can combine forces with at least two other UK business organizations or supermarket chains with a common business objective of expanding into the African continent.
Apart from FDI, another international strategy is Management Contracts – Management contracts simply refer to agreements whereby one company offers technical expertise, managerial assistance or specialized services to another company. Typically, the firm that provides the service normally gets a percentage of sales or a flat fee. This form of business expansion opens up new markets in which the company that provides assistance could operate within, while providing capital inlay. By effectively employing this international expansion strategy, Tesco can engage in managerial contract with supermarket companies in African countries, provide specialized services, managerial assistance or technical expertise to these businesses for a percentage of sales or a flat fee. This would be very imperative for Tesco’s expansion into new markets within the continent of Africa.
The third likely international strategy for a company like Tesco PLC is licensing and franchising – Licensing refers to an arrangement whereby a company seals the right to use intellectual property to another company (Shepeherd & Katz 2005). The intellectual property involved here includes such things as work methods, designs, patents, copyrights and technology. This form of business expansion helps to minimize risk and expenditure. The licensor would learn about this new market without having to invest much effort and time. However, drawbacks include loss of control which includes geographic distribution as well as quality standards. On the other hand, franchising refers to an arrangement whereby one company supplies another business with intellectual property as well as ongoing support. It provides the franchisor with more control with regard to the sale of its products. However, strict guidelines exists which have to be followed or else there would be a loss of franchising license. This technique is advantageous in the sense that there are generally low risks and low costs in penetrating and entering new markets, access to cultural knowledge from managers, maintenance of product service and consistency as well as arranged favorable deals with suppliers. Tesco can effectively act as a franchisor in its effort to penetrate the African continent by supplying other companies with both intellectual property and an ongoing support.
Fourth strategy is setting ambitious goals. Using this crucial strategy, Tesco can aim to generate at least 32% of its revenue in Africa within a specific period of time for instance three to five years. Having proper plans of expanding into African countries is imperative in ensuring success of the expansion drive. Having ambitious goals will enable the business to aggressively penetrate the new market in Africa, gain market share and reap substantial profits in its operations there. The fifth involves the company going multilingual. Although a business organization can easily get by in several countries using the English language, it can have an advantage if it hires staff members who speak the local language (Bartlett & Ghoshal 2009). Since indigenous and local languages are still very much used as official languages in roughly all African countries, it would be imperative for Tesco to put this into consideration in its expansion drive into the continent. As it opens new chains in Africa, the company would have to recruit employees who are conversant with the local languages in the different African countries. This would make the company to easily identify with the locals – something that could translate into increased sales and customer loyalty. Sixth strategy is sourcing globally. As the company enters the African market, it would be essential to price the items at a price that the target customers would easily afford. In order to keep the prices competitive enough to sell in Africa, Tesco would have to spend some time searching for the best deals on food items and other products that it would be retailing in, from local farmers and factories there and in other African countries, like South Africa, Kenya, Egypt or Nigeria.
Another strategy involves building on the company’s existing knowledge base – When setting up a subsidiary in an overseas country; the first principle is to establish the venture basing on what the corporation already knows (Vermeulen 2008). This simply implies that the company should make an effort to reduce everything that is new regarding a venture, on top of the new situation created by the fact that the business venture is happening in a foreign and strange country. Once Tesco begins operating in African countries as it intends to, it would encounter a number of challenges/things including infrastructure challenges, language barriers, cultural differences, legislative and institutional differences, competitors with a dissimilar repertoire and dissimilar consumer preferences. Collectively, these things form the liability of foreignness; a business which is foreign has a fundamental disadvantage in comparison to its local rivals who know all these things. As such, if Tesco or any other firm wishes to thrash its competitors, it would require something for instance, some skill, resource or competence that would help it to surmount the liability of foreignness. Thus, when a Tesco seeks to enter Africa, it has to identify its strongest competitive advantage then select the African country where this can best be applied (Vermeulen 2008). In penetrating Africa, it is sensible that Tesco first has to expand in the supermarket business since this is its core business. It is only subsequent to getting to know how to operate effectively within its core business in the new African nation with all its idiosyncrasies, can the company begin to conquer adjoining markets. Once Tesco learns how to operate supermarkets in Africa that is when it could move into online ordering as well as business-to-business deliveries.
Another strategy involves mergers and acquisitions (M&A) – Generally, merging and acquiring a business entails the combining of assets, including brands and infrastructure, and getting access to potentially new customers and markets. Acquisition is a quick method through which Tesco can use to enter a new market in Africa, since it would do so simply by acquiring an already established firm. In this way, Tesco can take advantage of channels of distribution, management experience, a qualified labor force, an established brand name/reputation and local knowledge. Through acquisition, the company can also acquire customers (Adamson 2007). When Tesco buys another supermarket firm in Africa in its expansion drive, it will get to integrate not just brand awareness, but also market momentum and market presence. Acquisition is most importantly vital to remove barriers to entry since the company will simply acquire a company which had an established presence. Nevertheless, an acquisition is expensive and entails big risks. Integrating the acquired company in an African country could be hampered by cultural differences. Additionally, cultural differences could also result in coordination and communication problems (Bruner 2004). Moreover, company acquisition might lead to resistance in the African country’s market particularly if the business is considered as part of the heritage of that country. Through merging the individual company’s strengths, the operation that merges has the potential of spurring growth, increase the market share, and when it is part of the acquisition strategy, it initiates a firm to an entire new business area (Tompkins International 2013).
Mergers and acquisitions by supermarket chains such as Tesco would require significant investments as well as a high involvement in the target African countries. Other complexities and risks, for instance, UK, which is the country of the acquirer, differs with African countries of the target in economic and political environment, national laws, accounting rules, culture and tax (Yesilyurt 2013). Nonetheless, the increasing merger and acquisition activities combined with the significant investments as well as complexity involved with mergers and acquisitions raise the questions as to whether they are worthwhile or not (Sudarsanam, Holl, & Salami 2006).
The final strategy involves identifying and analyzing their strengths, weaknesses, opportunities and threats (SWOT). For a company such as Tesco PLC, its SWOT is as follows: Strengths – strong brand name, strong performance of its online portal Tesco.com and market presence. Weaknesses – weak inventory turnover and high dependence on Europe and UK. Opportunities – Opportunities in Africa and other international markets, growth of nonfood items, increasing online shopping in the UK, and develop additional services. Threats – Stiff competition globally, increasing food prices in Britain, and increased minimum wages in Britain (Datamonitor 2004). The company can maximize its strengths such as strong brand name and market presence, and its opportunities for instance opportunities in Africa, to effectively penetrate the continent of Africa and obtain a crucial market share there.
Africa’s economy and type of business they can do other than supermarkets
In Africa, supermarkets are extending into poor neighborhoods of big towns and cities. By means of format adaptation and efficient procurement systems, this trend in the continent is supermarkets to the poor – a diffusion and extension of supermarkets away from simply luxury high-end niches to being mass market merchandisers. Supermarkets in Africa continue to take over nearly all dynamic segments of the food retail markets – the fast growing metropolitan areas where people have high incomes.
Africa consists of roughly 900 million people and the most populous countries are Nigeria, Ethiopia, Egypt and South Africa. After the continent’s economy rebounded from the worldwide financial crisis, its performance in 2011 was affected to some extent by the North Africa uprisings (Hawkins 2013). Nevertheless, investment companies consider Africa as having some of the most promising opportunities in the world for sharp economic growth. The five most promising Sub-Saharan African countries that multinationals such as Tesco can take advantage of their potential economic growth include Nigeria, South Africa, Angola, Ethiopia and Ghana (Nelson 2013).
Nigeria is a crucial market largely because of its huge population base which exceeds 150 million, and also because of its petroleum business. South Africa, being Africa’s leading economy serves as the economic powerhouse of the continent by supplying services, goods as well as investments to other African countries. Angola should be eyed by Tesco because of its rapidly expanding infrastructure and fast growing economy which is a result of oil exports. Ethiopia also has a promising future and it has a huge market which could drive integration and economic growth in the region of Horn of Africa. Its economic growth has been primarily stimulated by hydroelectric power which has enabled it to export to its neighbors such as Sudan and Kenya. The country is also experiencing large-scale government investment in areas such as infrastructure, industrialization and agriculture (Hawkins 2013). As a promising country, Ghana is one of the rapidly expanding economies worldwide whose economic growth is mainly based on its oil production. It has also undergone economic and political reforms in the past two decades which have bolstered the nation’s long-term economic prospects as well as sustainability. These five Sub-Saharan African countries should be the key targets for a corporation such as Tesco that have intentions of penetrating the continent.
Other than being restricted to operating supermarkets only, UK supermarkets that establish their presence in Africa can also engage themselves in other lucrative business ventures. Some of these other businesses include e-commerce, which is the ability to offer services and goods through the web (Meier & Aitamer 2010). Tesco PLC can do e-commerce business by offering online shopping in the African countries that it would be operating in, for instance in South Africa or Nigeria, where majority of the populace and potential customers are computer literate and have easy access to the internet. Upon purchasing a product online, it should be delivered to the customer as promptly as possible.
Conclusion
Tesco PLC is the largest retailer in Britain and one of the biggest food retailers worldwide. International expansion is generally about smart preparation as well as a carefully planned execution, and this includes identifying the right strategies that would facilitate the expansion. Tesco’s international expansion into Africa can be an enticing and a highly lucrative venture, but only if it does it the right way. If the company does not make plans for tax exposures, business model changes, as well as international corporate structure beforehand, then it would be setting itself up for an uphill battle at best and failure at worst. So thinking about international expansion into Africa in advance is very essential.
There are a number of international strategies that UK supermarkets such as Tesco PLC can take as they penetrate into African countries in their expansion drives. The first one is Foreign Direct Investment (FDI), which is a strategy of international expansion whereby the business can control interest in assets, property or companies oversee. This strategy entails a higher level of commitment and generally requires substantial amounts of capital and therefore, players are usually large corporations such as Tesco. FDI strategy typically emanates from three arrangements. The first is wholly owned subsidiaries, which is commonly attained by establishing a new company or buying one that already exists. The second arrangement is Joint ventures, which implies part ownership of another company with other partners and another business. Lastly is Strategic alliances, and this involves arrangements between two or more firms that have a common business goal. The second international strategy is Management Contracts (MC), and these are agreements in which a company offers technical expertise, managerial assistance or specialized services to another company. The firm that provides the service gets a percentage of sales or a flat fee. Third strategy is licensing and franchising. Licensing refers to an arrangement whereby a company seals the right to use intellectual property to another company whereas franchising is whereby a company supplies another business with intellectual property as well as ongoing support.
Fourth is having ambitious goals which would enable the business to aggressively penetrate the new market in Africa, gain market share and reap substantial profits in its operations there. Fifth involves mergers and acquisitions. In general, merging and acquiring a business entails the combining of assets, including brands and infrastructure, and getting access to potentially new customers and markets. Acquisition is a quick method through which Tesco can use to enter a new market in Africa, since it would do so simply by acquiring an already established firm. Another crucial strategy entails identifying and analyzing strengths, weaknesses, opportunities and threats (SWOT). Tesco can exploit its strengths such as strong brand name and market presence, and its opportunities for instance opportunities in Africa, to effectively penetrate the continent of Africa and obtain a crucial market share there.
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