Tesco and Retrenchment

Tesco and retrenchment - not two terms that are often (if ever) found together - until now. Lots in the reports in the media about Tesco’s decision to put its poorly performing Japanese business up for sale. This article in the Guardian even uses the term “retrenchment” - perfect material for an A2 business studies lesson or discussion!

Why is Tesco taking this move? Simply because it has not been able to establish a sufficient scale and market share to enable it to remain competitive in a country which has been notoriously difficult for foreign retailers to succeed.

In the words of Tesco’s new CEO Philip Clarke:

“Having made considerable efforts in Japan, we have concluded that we cannot build a sufficiently scalable business”

Tesco has built a portfolio of 129 stores in Japan - mainly in the Tokyo area and has 4,000 staff. It first entered Japan in 2003 when it made an acquisition of a discount supermarket chain (CTwo Network). The returns on the Japanese investment have not been adequate. Tesco’s sales in Japan have been weak, with growth well below Tesco’s outlets in nearby South Korea and Thailand which have performed much better.

The FT analysts commented on the decision by noting that the Japanese supermarket industry is fiercely competitive and, overall, unprofitable even for the largest operators. Looks like a smart move by Clarke. A retrenchment in one part of the growing global operation, perhaps to allow greater focus and investment on better opportunities.

As the Guardian points out, this is a bold strategic decision by the new CEO. Earlier in 2011, Clarke “set the scene for a major shakeup [in Tesco international growth strategy] by promising to improve returns from its overseas investments.”

Will Tesco’s huge investment in the Fresh n’ Easy concept in the USA be next for this retrenchment strategy. Watch closely.