International Journal of Retail & Distribution Management: Article Information

International Journal of Retail & Distribution Management
Retail multinational learning: a case study of Tesco

Mark Palmer,
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Distribution Management, Vol. 33 Issue: 1, pp.23-48, https://doi.org/10.1108/09590550510577110
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Retail
Retail multinational learning: multinational
a case study of Tesco learning
Mark Palmer
Aston Business School, Aston University, Birmingham, UK 23
Abstract
Purpose – This article examines the internationalisation of Tesco and extracts the salient lessons
learned from this process.
Design/methodology/approach – This research draws on a dataset of 62 in-depth interviews with
key executives, sell- and buy-side analysts and corporate advisers at the leading investment banks in
the City of London to detail the experiences of Tesco’s European expansion.
Findings – The case study of Tesco illuminates a number of different dimensions of the company’s
international experience. It offers some new insights into learning in international distribution
environments such as the idea that learning is facilitated by uncertainty or “shocks” in the
international retail marketplace; the size of the domestic market may inhibit change and so disable
international learning; and learning is not necessarily facilitated by step-by-step incremental
approaches to expansion.
Research limitations/implications – The paper explores learning from a rather broad
perspective, although it is hoped that these parameters can be used to raise a new set of more
detailed priorities for future research on international retail learning. It is also recognised that the data
gathered for this case study focus on Tesco’s European operations.
Practical implications – This paper raises a number of interesting issues such as whether the
extremities of the business may be a more appropriate place for management to experiment and test
new retail innovations, and the extent to which retailers take self-reflection seriously.
Originality/value – The paper applies a new theoretical learning perspective to capture the variety
of experiences during the internationalisation process, thus addressing a major gap in our
understanding of the whole internationalisation process.
Keywords Learning, International business, Retailers, Multinational companies
Paper type Case study
Introduction
International retailers frequently emphasise the cognitive aspects of the retail
internationalisation process. Examples of this abound but include Tesco’s utilisation of
embedded research teams within Japanese families to monitor consumption behaviour
prior to their acquisition of the Japanese C Two chain in 2003. Within the international
retail literature, however, there has been limited detailed empirical or conceptual
research on international retail learning (Clarke and Rimmer, 1997). Thus, although
learning has played an important role in shaping the way retail companies behave in
practice, comparatively few studies actually address international retail learning. An
absence of detailed empirical or conceptual research on international retail learning is
I would like to thank Dr Barry Quinn at the University of Ulster for his thorough critiques of my International Journal of Retail &
Distribution Management
ideas on an early draft of this work. This paper has developed out of doctoral work supported by Vol. 33 No. 1, 2005
Sainsbury’s. I am also grateful for the assistance of British Stores & Shops Association and, in pp. 23-48
q Emerald Group Publishing Limited
particular, The George Spencer Trust under individual Research Awards. 0959-0552
DOI 10.1108/09590550510577110
IJRDM therefore a major gap in our understanding of the whole internationalisation process. It
33,1 is contended that important insights and valuable lessons have been learned by
retailers from their own successful international forays as well as the visible success of
other companies in the international marketplace. Not all international retail operations
have been successful however, and the difficult and highly contested process of scaling
back of retailing operations to remedy mistakes may also result in an equally valuable
24 learning process for international retailers (see Palmer 2000, 2002a, b).
A number of researchers have called for research to re-examine the ways in which
retailer internationalisation has been conceptualised (Dawson, 2001; Howard and
Dragun, 2002). The recent critiques of Wrigley (2000), Burt and Sparks (2001) and Burt
et al. (2002) suggest that the existing conceptualisations neither adequately capture the
multiplicity and difficulties in the retail internationalisation process, nor sufficiently
explain the variety of approaches to internationalisation being used by retailers.
Various explanations of the retail internationalisation process are emerging, but one
viable and promising line of enquiry is the area of international retail learning. Notable
in this respect is Clarke and Rimmer’s (1997) analysis of Daimaru’s (a Japanese

department store) investment in a new outlet in Melbourne, Australia, which provided
an initial step towards understanding the cognitive aspects of the international retail
investment process. Indeed, this research has drawn a number of important lessons
learned from retail market entry and development.
Despite the value of this initial research, and although the international retail
learning process itself and the outcomes are occasionally referred to in the literature
(see Treadgold, 1991; Alexander and Myers, 2000; Evans et al., 2000; Vida, 2000;
Dawson, 2001; Arnold, 2002), its conceptualisation and analysis remains largely
under-theorised and under-developed. What is required, according to Clarke and
Rimmer (1997), is a research approach that explores “the way in which a retail firm
reflects on individual decisions it has made, and how this might influence their
perceptions and actions”. From this perspective, it is critical to understand
international retail experiences through reflection and analysis, and to identify what
has been learned from the internationalisation process. Furthermore, while some
researchers in the field have indicated that experience is important for many aspects of
market entry and development (Treadgold, 1991; Williams, 1991a, b; Evans et al., 2000;
Doherty, 2000) it is clear that these studies do not provide detailed empirical or
conceptual understanding of this complex learning phenomenon. For example, this
work does not directly deal with the questions: What are the components of this
experience? What lessons can be drawn from this experience? How does this
experience shape or inform the decision-making process of the international retailer? It
would therefore appear that the international retail literature is less developed in
considering what retailers have learned from their experience of internationalising
store operations. This paper aims to probe these issues by providing a more extended
debate and considered analysis of the concept of international retail learning within the
context of Tesco’s internationalisation process.
It should be noted that it is outside the scope of this paper to present a review of the
international retail literature (see the excellent reviews by Alexander (1997); Alexander
and Myers (2000); and Burt et al. (2003)). This would increase the length of the paper
substantially while the theoretical background on international retail learning has
previously been laid out in detail elsewhere (see Palmer and Quinn, 2005). In this paper,
the discussion will mainly pertain to the empirical case study findings of Tesco. The Retail
paper begins by briefly positioning the case findings by way of a conceptual multinational
framework put forward by Palmer and Quinn (2005) on international retail learning.
More detailed discussion of this framework can be found in Palmer and Quinn (2005). learning
Following this, an overview of the methodology is put forward. The main part of the
paper presents the case findings of Tesco and the paper will conclude with a discussion
of the key findings. 25
International retail learning framework

Palmer and Quinn’s (2005) recent work provides a useful conceptual framework for
examining the studies to date on international retail learning. Drawing on the broader
management literature on organisational learning and international retailing, Palmer
and Quinn (2005) synthesised the various components of international retail learning
(see Figure 1). The broad components of Figure 1 frame a series of research questions
for studying international retail learning and these include:

.
What do retail internationalists identify as the most important lessons learned
from their experience of internationalising retail operations?
.
To what degree has this knowledge been absorbed by the internationalising
retail company?
.
What is the locus of international retail learning diffusion or transfer?
.
What are the outcomes from the lessons learned and how do these shape the
future decision-making and learning behaviour of the retailer?
For the purposes of this paper, the aim is to explore the dimensions of international
retail experience and how these shape or inform the strategic decision-making process
of the retailer. Thus it does not provide an in-depth analysis of the other components of
this framework in relation to the international activities of Tesco. The experiences of
Tesco are essentially conceptualised under three main broad dimensions. These
Figure 1.
A framework of
international retail
learning
IJRDM dimensions make a distinction between the internal corporate and the wider external
33,1 view of international retail experience. The first critical area refers to the internal
strategic processes. The second theme concerns the external strategic processes. This
includes the interactive aspects of the retailers’ international environment. The third
dimension considers the internal operational functions. These dimensions are
especially important when conceptualising experience and interpreting Tesco’s
26 international learning in this paper. The paper now turns its attention to the
methodology of the study and this section will briefly outline the details of the primary
research undertaken.
Methodology
This study employed an interpretative, qualitative methodology to examine the
international retail learning. The single case approach has been an increasingly popular
methodology within the retail internationalisation literature of late, and it has enabled
various authors to provide some very important new insights into the subject area
(Sparks, 1995; Shackleton, 1996a, b; Clarke and Rimmer, 1997; Wrigley, 2000).
Furthermore, field research that involves investigating the views and opinions of
organisations directly and indirectly involved in the decision-making process is
receiving increasing support within the literature (Shackleton, 1996a, b; Sparks, 1996;
Palmer, 2002a, b; Palmer and Quinn, 2003). These authors have highlighted the
limitations of relying solely on the views of the case company under investigation and
have highlighted the insights into the retailer internationalisation process that can
derive from surveying a diverse variety of organisations and stakeholders involved in
the process. Stakeholder parties in the retail internationalisation process should
therefore not be underestimated. Indeed it may be argued that a strong interdependence
exists between investment banks and firms with respect to advising retail executives on
strategy, structure, and international retail operations. Eliciting the views of investment
bankers would therefore allow the research to gain access to the tacit knowledge and
practical know-how gathered through years of experience through the direct interaction
with the company via research, consulting and advisory services utilised by retail
executives. Multiple and independent sources of evidence, including market research
reports, company profiles, financial statements and so on were also used to corroborate
the interview data and, by so doing, develop convergent lines of inquiry (Yin, 1994).
The case of Tesco was chosen for three reasons. First, the transformation underway
in Britain’s largest retailer has been profound, while its growth has been one of most
consistent amongst its international peers (1995-2002), with estimated sales rising to
e45.9 billion in 2003. Indicative of the scale of its international ambitions, Tesco
unveiled one of the most radical and ambitious internationalisation programmes that
that would involve the development of 200 hypermarkets in Europe and Asia,
generating GB£10 billion sales per annum by 2004 and which, in proportional terms,
would be equivalent to that of UK-based food retailers, ASDA and J. Sainsbury sales
combined. This strategy, however, has been overshadowed by Wal-Mart’s $10.6 billion
takeover of ASDA in the UK and has gone largely unnoticed in the academic literature.
Second, despite the scale and growth of Tesco’s internationalisation, the focus of many
researchers has been on the international activity of US retailer, Wal-Mart (Arnold and
Fernie, 2000; Palmer, 2000; Burt and Sparks, 2001; Hallsworth and Clarke, 2001; Fernie
and Arnold, 2002), or Sainsbury’s capital investment in the US market (Shackleton,
1996a, b, 1998; Wrigley, 1997a, b, 1998; Muskett, 2000). Only modest attention has been Retail
attributed to Tesco in the academic literature (see Palmer, 2002b for a recent example). multinational
Tesco’s success abroad therefore remains an under-emphasised case within the
contemporary academic literature. Third, internationalisation has been a major aspect learning
of the strategy of Tesco over the years. Significantly though, not all of Tesco’s
international operations have been successful and this has resulted in some form of
divestment. It is argued that divestment is a highly visible case of where learning is 27
likely to have taken place.
A total of 62 interviews were undertaken during 1999 and 2000 with the leading
food sector buy- and sell-side analysts, and international retail merger and acquisition
specialists (i.e. those within the corporate strategy unit in the corporate finance division
of investment banks) and senior executives of the retailer under investigation. In
planning the interviews, particular attention was given to the danger of the
interviewees presenting biased views and opinions (see Palmer and Sparks (2004) for a
wider discussion of the limitations of this method). This research used “convergent
in-depth interviewing” (Dick, 1990 cited in Carson et al., 2001). In short, it is an in-depth
interviewing method that allows the researcher to develop, clarify, verify and refine the
core issues of the interview protocol. It consists of a number of interviews in which the
procedure is both structured and unstructured. During the early stages the content of
the interview is unstructured and flexible during which the interviewee tells a story
about key events or episodes and what they have learned about their experiences from
these events. The process used in the interview then becomes more structured as the
interviewer converges in specific issues of the research problem and to disprove the
emerging explanations of the data (Carson et al., 2001). The length of the interviews
typically varied from half-an-hour to three-and-half-hours. Rather than concentrating
on one or two aspects of the dimensions of Tesco’s international learning, the interview
protocol explored learning initially from a broad perspective. In line with the
arguments put forward by other researchers (Hallsworth, 1992; Clarke and Hallsworth,
1994; Clarke and Rimmer, 1997; Burt and Sparks, 2001, Dawson, 2001) a broader
perspective may be necessary so that these parameters can be used to raise a new set of
more detailed priorities for research on international retail learning. That is to say, each
lesson is not necessarily an end in itself, but an entry point for a wider discussion. Data
collection and analysis were simultaneous. Analysing data involved categorising and
triangulating the evidence from the multiple perspectives, and the presentation of
findings largely followed the most recent interview protocol. However, it should be
noted that the analysis of learning is not easily defined in terms of beginning or end
points and this research identified extreme situations and critical incidents which were
transparently observable for data collection. Moreover, Tesco’s experiences were not
assessed by any quantitative measurement of the amount of learning occurred, but
rather by reference to the content of these experiences and the impacts that such
learning had on the outcome or trajectory of international expansion.
The paper now reports the findings from the in-depth interviews. The key themes
from the findings are discussed in the sections that follow. Excerpts from the in-depth
interviews are used throughout the findings section in order to illuminate and
contextualise relevant themes. For confidentiality reasons, the identities of respondents
will not be disclosed during the remainder of this paper. This case study will be largely
formatted in the same way as the dimensions outlined in the framework. The data
IJRDM gathered for this case study focus on Tesco’s European operations. While Tesco’s
33,1 investment activities in Asia are strategically important, it is argued that the most
insightful aspects of the company’s international investment and divestment activities
occurred in the European market. The findings proceed with an initial overview of the
case company’s international developments. The main body of findings follows this,
and directly examines the lessons learned by Tesco from the internationalisation of
28 retail operations and their impact on the future trajectory of international operations.
Tesco’s international background

This section provides an overview of the markets chosen by Tesco. The company
initially expanded into the geographically close markets of Ireland and France. Tesco’s
initial international foray was in 1979 when they purchased 51 per cent of Albert
Gubay’s Three Guys operation for GB£4 million in the neighbouring market of the
Republic of Ireland. This expansion proved to be immature given the structural
capacity for expansion and the relative strength of the company within their domestic
market at the time of the initial international foray. This untimely venture abroad was
summed up by one sell-side analyst:
The perceived success (or otherwise) of their early venture abroad would have been
considered insignificant to the company’s fortunes at home, and as a result, this largely
undermined the company’s (perceived) efforts in the eyes of the financial markets as being a
peripheral and/or even a distraction to the core UK business.
The continued realignment, focus and momentum of the company in the UK market
provided the context in which internationalisation had taken “a secondary position” in
the company’s corporate development agenda. Tesco subsequently divested the Three
Guys operations to the Dublin-based supermarket company H. Williams in 1986.
Towards the end of the 1980s, the company embarked on research efforts into possible
international growth options and these primarily centred on the US market, but also
covered several European countries. The company spent several years investigating
the North American market during the late 1980s and early 1990s.
The product of this research effort was the company’s move into the French market.
Tesco’s first foray into mainland Europe with the acquisition of the medium-sized
supermarket chain Catteau in December 1992 was intended to be the company’s
springboard to international expansion and serve as a platform for European growth in
particular. The company’s rationale at the time for acquiring a small regional chain
was that they were going to build Catteau into a national chain in France. Tesco
acquired an effective 85 per cent holding, leaving 15 per cent of the ownership in the
hands of management as part of an incentive scheme. According to the analysts’
research at the time, the company was attracted by Catteau’s good record and high
profitability. Group turnover of the chain in 1991 was GB£340 million and over 80 per
cent of this revenue came from retailing (Catteau also had wholesaling and franchise
activities). Management felt that Catteau’s impressive net profitability reflected the
economies gained from a tight geographical clustering of stores and the strong
centralised cost controls, and as a result, the financial markets were largely supportive:
At the time the financial markets pointed out that Tesco had done all the classic right things
– the lesson learned from UK retailers’ forays overseas has been that it is vital to buy a
successful business rather than a “turnaround” situation and retain strong local management.
By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Retail
Catteau, and later in 1997 would completely withdraw from France. For much of this multinational
early expansion, the company focused on structurally mature markets, but with more
recent expansion the company has been more disposed toward emerging markets (see learning
Table I).
The third phase of the company’s international expansion was in 1995, when
management acquired the Global supermarket chain in Hungary for GB£15 million. 29
This did not represent a particularly expensive entry, and indeed, this was reflected in
the poor quality of the assets purchased – in total 43 small stores. The intention of the
company was not to trade the stores in the long-term, but rather to secure a foothold in
the market and learn from these businesses, while later building a larger hypermarket
business based on their experiences. Using the Hungarian acquisition as a foothold in
eastern Europe, the company subsequently acquired Savia SA in Poland for
GB£8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired
for relatively little financial consideration and designed to secure a foothold in the
Polish market for Tesco from which to develop a hypermarket business. In 1996 the
company entered the Czech Republic and Slovakia through the acquisition of Kmart for
GB£77 million, acquiring a portfolio of 13 stores with an average selling space of
72,000 ft2. Essentially the Kmart business geographically was an in-fill acquisition
between Tesco’s Polish and Hungarian investments.
Tesco also re-entered the Irish market with the acquisition of ABF’s Irish food
retailing business for GB£630 million in 1997. Following the ABF acquisition, the
company secured their position as the largest food retailer in Ireland with 109
supermarkets and annual sales of GB£1.23billion. And in addition Tesco captured 17.5
per cent of the market in Northern Ireland and 19.4 per cent in the Republic securing
number one position in both markets.
The initial move into Asia, and the Thailand market in particular, came in May 1998
with the purchase of a 75 per cent majority controlling stake in Lotus, a chain of 13
hypermarkets which cost GB£111 million for the equity – assuming GB£89 million as
their share of Lotus’s debt. Lotus’ previous owner, Thai CP Group (a major agricultural
supplier in the region) retained a 17 per cent stake, with SHV Makro holding the
remaining 8 per cent. Tesco subsequently entered South Korea. In March 1999, Tesco
formed a joint venture with Samsung, one of South Korea’s largest conglomerates, into
Year Country Method of entry
1979 Ireland Acquisition of The Three Guys chain

1992 France Acquisition of Catteau
1994 Hungary Acquisition of 51 per cent of Global
1994 Czech Republic/Slovakia Acquisition of K-Mart business
1998 Thailand Acquisition of 75 per cent share of Lotus
1999 South Korea Partnership with Samsung (81 per cent)
2000 Taiwan Acquisition of one Makro store
2001 Malaysia Joint venture with Sime Darby Bhd (Tesco share 70 per cent)
2002 Poland Acquisition of HIT hypermarket from Dohle Gruppe
2003 Japan Acquisition of the C Two (C2) Table I.
Tesco’s international
Source: Not disclosed expansion
IJRDM which the company invested GB£80 million in cash. Later that year the company
33,1 increased their share of the joint venture from 51 per cent to 81 per cent at a cost of a
further GB£30 million.
Tesco further developed operations in the region when they entered Malaysia in
early 2002. In a similar structure to the other Asian operations, the Malaysian
operation, Tesco Stores (Malaysia) Sdn Bhd, was established as a joint venture with a
30 local company Sime Darby Behad. Tesco would own 70 per cent of the equity, but the
operation would be under local control. Tesco later entered Japan during July 2003.
Dimensions of Tesco’s international retail experience

This section provides an overview of the various dimensions of Tesco’s international
retail experience emerging from the in-depth interviews. Important lessons learned are
extracted from the company’s international retail experiences.
Internal strategic processes

Market selection experience. Tesco’s internationalisation raises several questions
regarding the nature of their market selection decision experiences. Tesco’s
decision-making process highlights the contrasting motivational structures that
underpin the various paths towards international markets which eventually led to
different spatial behaviours. In qualitative terms, the interviewees highlighted a
number of important characteristics of Tesco’s market selection decisions:
.
Retaining spatial focus is more important than capitalising on small-scale
opportunities in diverse markets.
. Competition from local retailers in their chosen markets is virtually non-existent.
.
Dynamics for the international retailers are relatively level (which is not the case
in Latin America where Carrefour has operated for almost 20 years).
.
Capitalised on opportunistic events unfolding within the existing portfolio of
international retail markets.
Tesco’s expansion was spatially characterised as being largely regional in nature and
less global oriented. Cautiously, Tesco had decided to dominate the smaller central
European markets that were unlikely to attract much attention from the large retail
multinational peers such as Carrefour and Wal-Mart who preferred to focus on the
larger markets. The company incrementally entered markets rather than entering
several markets at the same time, limiting the large start-up losses as one executive
explained:
What is important to us is not the number of countries we are present in but rather that we
attain, and/or sustain number one or two position in each of these countries. The aim is to
balance the global scale that comes from Tesco with the local strength of being a market
leader. Market position gives you market share, which in turn gives you scale, which in
theory, should allow you to have the lowest cost base, best buyers, best offers to customers,
therefore the best revenues, earnings and dividend growth. That is why retail multinationals
aim for leadership in markets and strong regional presence. It’s a virtual circle.
The importance of due diligence processes in foreign markets and/or target’s
operations is repeatedly inferred from the company’s executives and the corporate
advisors. During the interviews, the company’s management suggested that initial
phase of expansion via international acquisitions placed too much emphasis on Retail
opportunism: multinational
Organic growth is, in your hands, acquisition-driven, consolidation is not. Acquisition-driven learning
consolidation is opportunistic, particularly with businesses that are privately owned. It’s not
something that is easily predictable. We are not blind to acquisition opportunities, but the
nature of the opportunities and when they present themselves is anybody’s guess. Organic
store-by-store development allows for a much more strategic approach to internationalisation. 31
In turn, this would result in the management placing greater emphasis on store-by-store
development that allowed the company to become more strategic in terms of their
selection of markets, procurement, distribution and store locations. Based on this
evidence, it was apparent that the nature of the market selection decisions would be
shaped by the mode of entry used and whether or not opportunities existed.
Entry mode experience. Tesco used a combination of multinational entry mode
strategies within one country. As previously discussed, Tesco entered the central and
eastern Europe by acquiring a relatively small chain of convenience stores in Hungary, a

supermarket business in Poland and a department store chain in the Czech Republic and
Slovakia (see Table II). It was certainly unusual for such a large public company to become
involved in these operations, and even competitors at the time questioned the logic of their
approach. However, the use of “seed acquisitions” with a view to develop knowledge of the
market before expanding organically through store-by-store development allowed Tesco to
minimise their own human and financial capital in the face of potential economic and
political uncertainty. Some of these small stores would later be closed down and replaced
by large hypermarkets nearby. Although Tesco faced criticism and, indeed, pressure from
the financial markets, there are sometimes compelling reasons for retaining a small
operating presence in a foreign market where international competitors are already
established. First, the small presence would facilitate the implementation of an acquisition
strategy by securing the necessary contacts and networks into foreign retailers and local
suppliers, especially considering the challenges associated with family owned and
controlled chains. Second, retaining a direct and small operating presence in a competitors’
major market would lead to important insights into the competitive behavioural dynamics
of competition that otherwise would not be possible without a direct presence. During the
interviews, management made this point:
The reality is that you are not going to learn everything until you either open a store or
purchase a chain in the new market.
Price Sq.
(GB£ No. of footage
Country Acquisition Date million) stores (million)
Hungary Global June 1994 13.4 43 0.1

Poland Savia November 1995 8.0 36 0.2
Czech Republic and Slovakia K-Mart March 1996 77.0 13 1.0
Thailand Lotus March 1999 200.0 13 1.6 Table II.
South Korea Homeplus April 1999 80.0 2 0.2 International acquisitions
Poland HIT July 2002 386 15 NK by Tesco in emerging
Source: Not disclosed markets
IJRDM Small experiential or pilot stores were an integral part of initial learning phase of
expansion, while later might be seen as surplus to requirements to international
33,1 expansion, and consequently divested.
Indeed, after an initial period of understanding these store practices, management
decided that the primary development comprised the hypermarket format. The
development of the new hypermarket format was primarily driven through two pilot
32 stores. Despite a relatively cautious approach to market selection, Tesco rather
ambitiously developed a completely new format in a distant market – a format,
moreover, which had not been tested in the domestic market. This approach allowed the
company to experiment and radically depart from their existing domestic supermarket
format and extend the non-food merchandise content of their international store
operations. Tesco’s entry mode experience did not mirror the experiences adopted by
manufacturing companies. In the broader international literature Chang’s (1995)
findings showed that when Japanese electronic firms first acquired an international
business, they did so in one in which they had a strong competitive advantage in order
to reduce the risk of failure. In stark contrast Tesco entered new markets by acquiring
relatively weak target firms or by launching into areas where they were less strong in
terms of a distinct competitive advantage. Tesco’s initial forays into Ireland and
Czechoslovakia clearly illustrate this point. In Ireland, difficulty with post integration
led to the realisation that these “turnaround” cases were disproportionately demanding
for management resources, and in the Czechoslovakia Tesco moved into non-food
merchandise lines by acquiring the Kmart department stores.
Divestment experience. What surfaced as a main theme from the findings was the
intense learning process during international retail divestments. The findings
indicated that failure or partial failure during the internationalisation process had a
marked effect on the future trajectory of Tesco’s international expansion. The strategic
effect of Tesco’s divestment in France and Ireland has resulted in the firm now
ensuring that they establish a strong market-leading position in new markets. For
example, Tesco’s aggregate market share in Hungary and Poland is over 40 per cent.
The advantages of a dominant market position for learning lie in the success that such
a position implies. A strong market position can obscure relatively small mistakes,
whereas for small-scale operations such mistakes might prove to be fatal.
The Catteau divestment experience resulted in an equally valuable learning process
for Tesco. Sell-side analysts suggested that Tesco delayed essential corporate
divestment and reconfiguration even under intense pressure when it emerged that the
French operations were experiencing difficulties. The company found themselves
locked into the business through various exit clauses – out-manoeuvred by Catteau’s
management – bidding competitors and the investment banks facilitating the
completion of the divestment:
Tesco have learned that advisors can advise but that’s all. Don’t trust any investment bank.
The management were misguided and ill-advised with Catteau in France. There’s no question
that the management of Catteau are to blame. International retailers should never trust
anybody they are buying assets from.
It was clear that Tesco’s management learned from this experience by improving the
techniques to prevent the commingling of the management lock-ins and sunk costs,
which made divestments very difficult, in terms of future acquisition due diligence
processes. While the idea that continuous dissatisfaction from failure may seem
particularly useful to initiate learning (Butler et al., 1991; Barwise, 1997; Arino and Retail
de la Torre, 1998), it remains difficult in practice. The acquisition of Catteau for Tesco
and the subsequent years (i.e.1992-1997) marked a continuous process of management
multinational
dissatisfaction with the French operations. This dissatisfaction generated negative learning
press commentary, but also weakened management and investor confidence and visibly
undermined the strategic credibility of the company. The company’s most high profile
divestment had led to management evaluating progressive store-by-store expansion not 33
with a view of proactively developing an exit strategy in the planning and due diligence
phase of expansion as the following management viewpoint suggests:
. . . but with a view to our investment being underpinned by assets. Now that comes back to
my point about the long-term liability of assets. If you are in a market where the currency
devalues and the asset value diminishes in this unstable environment – that is a due diligence
mistake. Rather retail multinationals must invest in assets which are underpinned by asset
value rather than nebulous goodwill in the context of organic growth.
In central and eastern Europe the company divested approximately 20 small-scale

stores while recouping the initial investment. Again, by way of illustration,
management commented:
If you acquire good assets, then you can exit without losing money. Now that may seem an
obvious thing to say but in our desire to generate pace in our development programme we
allow that to let us compromise on the quality of assets that we are providing. We would
never build a second rate store in a second rate location. I think we have benefited from the
fact we acquired small store operations internationally. This has helped us understand more
about the market and given us a step on the ladder. Some have argued that it was chaos, but
we feel it has helped us on the people side in particular. Moving forward I think it’s less
important because we have the experience.
Contrary to what is commonly emphasised in the literature, learning does not need to
be exclusively related to difficulties or problems, it may also refer to what has gone
right in a firm. For example, in later years success of the new hypermarket concept has
played an important role for the continuity of the learning processes of Tesco’s
internationalisation process.
Locus of control experience. In the early phases of international development Tesco
did not have a clear idea of the corporate model in which to transfer their core
competencies. Retaining the essence of the UK company’s core competencies was
problematic given the local spatial nature of food retailing and the lack of awareness of
the Tesco brand name. Several analysts noted that when Tesco acquired Catteau in
France they did not fully understand how they would integrate and control the
business. Put differently, whether or not they were trying to replicate themselves
focusing on corporate brand, format adoption and culture or using a financial holding
company structure. One sell-side analyst stated that:
The life cycle argument is that initially there is logic being a holding company. However,
eventually the company will have to add value. Tesco were caught in the middle and unsure
which worked best. This was compounded by the view that the cycle for international
retailers was getting shorter with emphasis of adding value immediately after the acquisition.
This led to indecision with the Catteau acquisition. For example, the company
experimented with integrating some brands under the Tesco brand but then decided to
retain the local brand. These mistakes made Tesco establish a clearer idea regarding
IJRDM how and why their international businesses would succeed or fail. Tesco underwent a
33,1 gradual withdrawal from a number of local tasks, while at the same time
re-establishing ownership of important central functions. Following their second entry
into Ireland, the company had a much clearer vision. Even though the Irish
government insisted Tesco retain a regional headquarters, the company were
determined that they would adopt a more industrial corporate model. However, as
34 several analysts pointed out:
To replicate and duplicate identity across the world puts more pressure on the business, tends to
be much slower – replicating product offers, merchandising policies, staff training, culture, etc.
These early mistakes provided a firmer setting within which subsequent strategic
decisions could be addressed more confidently. Learning how to strike a sustainable
balance between the two was an important lesson learned by Tesco.
Experience with learning structures and processes. Ascertaining whether a firm
possesses an intent to learn is an important factor influencing their learning behaviour
(Tsang, 1999). Intention relates to commitment. On the surface it appears that Tesco
possessed a learning intent, however, it is questionable whether this learning genuinely
went beyond the “official corporate line” at least in the early phases of
internationalisation. When management were asked to discuss the structures and
processes through which the international learning was disseminated back to the UK
market, critically there appeared to be no planned, structured, nor systematic
mechanisms or formal processes for capitalising on this learning. The company’s
acquisition of Catteau in France did not prove to be the platform from which to inspire
experimentation abroad. Nevertheless, the next phase of the company’s expansion into
central and eastern Europe coincided with the company’s ambition to broaden their
non-food merchandise in the UK market. The impetus was then on the diffusion of
what the company had learned from developing a new format which accommodated
non-food items in the overseas markets. This had a catalysing effect. Over time, the
company began to employ personnel whose sole responsibility was to transfer the
hypermarket format learnings back to the UK from central and eastern Europe. These
learning agents represented a new dimension in the company’s organisational
structure, but there were difficulties in this process as management highlighted:
The learning challenge following on from this is how do management then transfer those
learnings to the home market and explain to the headquarters that they don’t know
everything, there is a better way of doing it. A new product, process – that is culturally
incredibly difficult to implement. This is extremely difficult to understand and teach the
domestic market.
According to the sell-side analysts, these problems were much more acute in the
aggressively industrial approach adopted by Tesco than the looser federal approach
which emphasises the role of the international firm as a “vehicle” for investment.
External strategic processes

With regard to what had been learned by Tesco from the external strategic processes, a
number of key themes emerged from the in-depth interviews.
Competitor orientation experience. At the corporate level, the findings suggest that
Tesco learned particularly valuable lessons when faced with abrupt competitive shifts,
to new circumstances, and responses from other retail multinationals. Specifically,
Tesco were faced with hard decisions centring on whether they should participate in Retail
the consolidation process (as a consolidator or consolidatee), knowing that the multinational
valuations placed on acquisition targets were over-priced, and there would be a distinct
possibility of losing strategic control. One sell-side analyst summed up the pressure: learning
In going it alone, Tesco would be making a huge strategic call. If wrong, the business would
be seriously disadvantaged and would eventually lose their independence. If right, their
vision would be second to none, and management would be regarded as one of the best in the 35
world.
Despite their relatively strong position against UK competition, the consequences of
Tesco’s relatively weak position against much larger and more experienced
international peers were profound:
.
acquisitions outside the UK may prove highly dilutive;
.
the size of possible acquisitions are effectively reduced;
.
a merger with a large European retailer would leave Tesco as the junior partner;
and
.
Tesco is more vulnerable to an aggressive bid.
Tesco resisted such pressures and decided to pursue international expansion
independently through organic store-by-store expansion – albeit much more
aggressively than had hitherto been the case (i.e. the development of 200
hypermarkets over four years). During what was rapidly emerging as one of the
most intense periods of retail merger-and acquisition-driven internationalisation, the
growing sense of unease among analysts began to surface about the long-term
endurance of Tesco internationally. However, management held their nerve – the
speculative scenarios which had been envisaged in the early 2000s (see Wrigley (2002)
for example) pointing towards a series of mergers and acquisitions at both the global
and local level failed to materialise. Instead, quite remarkably, the immediate years
following 2000 saw relatively little consolidation whatsoever. Through a series of
competitive adjustments including exploiting the benefits conferred by the scale of
their UK operations, it seems that Tesco’s strategy paid off – and, importantly,
deterred any hostile takeover bids. While the strategic effects of this intense period are
difficult to determine analysts suggested that this period of vulnerability for Tesco led
to a greater realisation of the strategic necessity of the company’s international
operations in ensuring the long-term future of the company.
At the local competitive spatial level, Tesco adjusted operational retailing aspects,
sometimes with minor modifications and at other times ensuring fundamental
transformation of the format during the internationalisation process. Both buy- and
sell-side analysts believed that this international juncture was an area where
companies could learn and experiment at the extremities of the company:
It will offer a company which is open to change the opportunity to observe and adopt best
practice and apply it throughout the totality of their organisation. It will see Tesco competing
directly with some of the best food retailers, notably the French hypermarket operators.
In central Europe and Asia, Tesco is competing directly with some of the best food retailers in
the world, notably Carrefour, Auchan, and Ahold. As a result, Tesco is having to learn how to
merchandise non-food departments and how to hone their merchandising skills.
IJRDM The above quotations serve to draw out how much of the learning takes place as the
33,1 expansion unfolds and the competitive situation evolves rather than simply with prior
market knowledge. In other words, as the company faces novel situations and makes
small mistakes through trial-and-error expanding, management form more realistic
perceptions of the foreign market. The need for learning-by-doing at the local spatial
level indicates that learning from the internationalisation process will often be a
36 gradual, reiterative process (Alexander, 1997).
External regulatory experience. Faced with the inevitable prospect of different
degrees of regulatory constrains in dissimilar international retail markets, Tesco
generated negative publicity and commentary in both the Irish and French markets.
The contrasting cultural nuances were particularly apparent in the different ways of
conducting business concerning the management of the planning process. In Ireland, in
the context of an unclear planning policy frame, the company attempted to impose a
process that had been utilised in the UK:
They [Tesco] underestimated how the planning process in Ireland worked at two levels. First,
they underestimated the extent of local networks and contacts in the property industry. They
didn’t have enough agents and advisors. There was very much a local way of doing things,
which relied on who you know as much as how much you know. Second, there is a different
decision-making process, slightly opaque series of planning policy guidance and framework.
There was no independent planning inspectorate, with a lot of years experience in
determining planning proposals for new stores.
When Tesco announced several proposals for new store development in Ireland and
there was little guidance with regard to planning, this led to several years of
independent planning and formalised inquiries. Although Tesco had been actively
addressing the legitimate concerns of customers, suppliers and small retailers in these
markets, it is clear that the company failed, at least initially, to communicate and
negate the concerns that the local authorities and other stakeholders adequately. The
strategic effect of this is difficult to determine in more recent expansion, but with
experience, rather than conceiving of regulation simply as fait accompli in international
markets and emerging markets in particular, Tesco embarked on a public relation
campaign that would attempt to influence important regulatory decisions in their
favour. In marked contrast to the early phase of development, Tesco noticeably
changed by becoming proactive in enhancing their credibility and reputation in new
markets with national and local governments as well as providing new opportunities
for local suppliers to export produce. As a significant measure of the company’s
commitment to internationalisation, upon Tesco’s entry into the Irish food retail
market, management were willing to enter into an agreement with the government
which meant that Tesco had to adhere to a number of promises and guarantees
including operating an autonomous head office, retaining existing employees and the
sourcing of Irish products.
Internal regulatory experience. Tesco learned from the importance of involving
major shareholders during the internationalisation process. Tesco required the support
and guidance of the financial institutions and, indeed, this forced them to invent
communications and governance processes in order to stay informed of institutional
investor concerns and perspectives. Arguably, Tesco’s initial cautionary approach
towards internationalisation was attributable to the restraints placed on the company
by their shareholders’ expectations. According to management, at the time of Tesco’s
first high profile, albeit small international acquisition, the gist of the financial Retail
analysts’ perceptions towards Tesco’s internationalisation was that the capital multinational
markets inhibited or constrained Tesco’s international expansion:
learning
Tesco wanted to do a deal in France in the mid-1990s but were prohibited at the time by the
City. They wanted special dividends and share buy-back options and didn’t want to take the
risk of them going abroad.
37
Serious questions were being asked by the financial analysts concerning the financial
requirements and the pressures to sustain international growth. However, over time,
the question from the financial analysts then became how rapid Tesco should expand
internationally rather than whether or not they should actually internationalise. One
sell-side analyst’s report at the time succinctly put it:
The only question is the “haste” with which it is pursued and whether shareholders get a
parallel sight of the cash through the dividend. In the context of Catteau, Tesco seems to be
taking it reasonably slowly; it certainly is delivering a progressive pay out.
As previously discussed, Tesco came under intense scrutiny and found themselves
subject of speculation of takeover bids during the mid to late 1990s. To combat this
Tesco embarked upon a number of investor relations initiatives. Some, as reported in
the press at the time, interpreted Tesco’s emphasis on overseas expansion as “a coded
plea to re-rate the shares and put it in a stronger position to take part in the
international acquisition-driven consolidation process” (Osborne, 1999), so that the
company would not become increasingly marginalised in the acquisition-driven
consolidation process. Management were obviously concerned about the company’s
valuation during this period relative to their international peers and deputy chairman
David Reid (cited in Riera, 2000) suggested as much:
People should be concerned if share prices are lower over here, as there is a possibility that
the whole UK food retail industry could be owned by foreign competition.
Unfortunately for Tesco, these efforts were interpreted as a one-off public relations (PR)
exercise. The findings tentatively suggest that a one-off PR campaign for its own stake,
in the context of intense consolidation pressures, will not be positively interpreted by
the financial markets. Instead, it was interpreted as a coded plea to re-rate the shares
and put the retail multinational in a stronger position to take part in the international
acquisition-driven consolidation process, rather than an open and meaningful ongoing
dialogue between the financial institutions and Tesco. Tesco’s message was not being
effectively relayed to investors – in part, because analysts were placing excessive
weight on the company’s past international (in)experience and this obscured the
prospects for prospective earning power from future international investments.
Internal operational functions

Human capital experience. Another theme emerging from the interviews was that
Tesco’s management greatly underestimated the management capital required for
international expansion. A significant measure of the company’s attitude towards
human resource capacity is reflected in the following statement by one advisor:
Probably every retailer that I have worked with within Europe on an international project has
underestimated the amount of time that is required from senior people in the business to
IJRDM make a relatively small venture in a new market work. Retailers must be prepared to commit
senior management, or director levels . . . often two years into the new venture they will
33,1 become very frustrated that the venture hasn’t grown into the third leg of the business. They
must put their best people behind internationalisation and allow them to “champion” this
expansion and drive it forward.
Investment in human capital, whether at the managerial level or store level, to handle
38 international expansion constituted a significant lesson learned by Tesco. To achieve
the necessary pace and scale of international operations Tesco have had to invest
significantly in human capital, not least because the scale of the internationalisation
programme significantly depleted the existing management resources. The strategic
effect of this under investment in human capital for Tesco was that they acquired a
number of small-scale businesses in Central and Eastern Europe as a substitute for
their lack international experience and local knowledge. The size of Tesco’s retail
operations in their domestic market were a vital component in establishing successful
international operations. By virtue of this size, Tesco had greater availability of capital
and human resources for areas such as store management, site location analysts,
marketing and financial personnel, supporting and sustaining international operations.
Reflecting on this issue one buy-side analyst made the following point:
The biggest lesson of all is a human resource lesson. Where do you get experienced
international management? While Carrefour and Ahold have considerable management
depth and breadth, relatively new internationalists have less human resources.
Also of increasing importance for the less experienced retail multinationals was the
advisory support from external firms such as investment banks, management and
property consultants and even manufacturers. The investment banking advisory
support intensified when Tesco expanded via merger and acquisitions, making
possible a deepening of the knowledge transfer process, closely co-ordinating the
activities with the investment banks, and expanding the learning process outside the
boundaries of the company. Investment banks can therefore act as an agent for
transferring knowledge regarding the dynamics in other international markets – in
effect accelerating the learning curve for a less experienced retail multinational.
Investment banks can be involved at any stage in the internationalisation process as
one advisor explained:
We are not retailers but we can provide comprehensive information, which facilitates the
retailers’ learning and helps to narrow down the potential options.
These networks also extend beyond the financial institutions. One important
dimension for sustaining the company’s aggressive expansion programme has been
the close relationship with their largest supplier, Procter and Gamble. For example,
Tesco utilised Procter and Gamble to fund an international field trip so that the
executives got an insight into retailing practices in Asia.
Financial capital experience. Progressive international expansion is likely to result in
the deterioration of the financial profile. From 1995 onwards, the conditions for
international expansion were far more capital intensive. These costs were principally
driven by the rising valuation (acquisition multiples) placed on acquisition targets,
which, during the wave of acquisitions, broke decisively beyond historical ranges. On
top of that, costs were exacerbated by the increasing sophistication of in-store retail
environments which, even within the emerging markets, required additional levels of Retail
capital investment as well as broader, supporting investments in information multinational
technology (IT) systems, distribution/logistics infrastructures and supply chain
management. Developing markets have attracted considerably more international learning
competitors, resulting in a virtuous cycle of heavy capital investment. One sell-side
analyst commented that for Tesco:
[. . .] the Polish market is developing at such a pace that in order to win custom, the in-store
39
environment needs to be highly sophisticated from the outset – especially in the highly
competitive cities such as Warsaw.
Additional external sources of financing were therefore often required to supplement
international growth. Tesco relied on external funding both in the form of debt and
equity from the financial institutions. A key factor for Tesco, however, was the size of
their cash generating domestic markets, which allowed them to invest with confidence
in international emerging markets. In 2002, for example, Tesco financed the HIT
acquisition in Poland (estimated £386 million) from trading rather than incurring debt,
benefiting from the cash generating strength of their core UK business. Critical
post-integration investments were also supported from earnings from the UK business.
Underlying Tesco’s international programme was a relatively strong domestic
position, which was in stark contrast to their main rival in the UK, Sainsbury’s.
Sainsbury’s international expansion became more difficult in the face of opponents,
who slowly undermined the company’s international aspirations with resounding
attacks on their under performing core business. Many buy- and sell-side analysts that
have followed this line of reasoning:
On the back of poor domestic expansion, retail multinationals should not plan on any foreign
acquisitions as this will only accelerate the demise of the current domestic operations. To
wield power across markets, a retail multinational must have some measure of strength in
their domestic market. In other words, retail multinationals with under performing or
insignificant positions in their domestic market will not have sufficient financial or human
resources to fully implement their international strategy.
If you are struggling in your domestic market, what credibility do you have that you can
manage a business in another country?
At the Global Institute of Grocery Distribution conference in early 2000, Tesco’s
management stressed that they would not make the same mistakes as Sainsbury’s in
their domestic and international operations. It is clear that management learned a
considerable amount from Sainsbury internationalisation process, and briefly pointed
to Sainsbury’s under investment in the domestic market.
Marketing and communications. The experiences of Tesco highlight some
important lessons concerning international marketing and communication issues. In
the international retailing literature, Lord et al. (1989) have noted how multinational
retailer expansion can often be a PR disaster – sometimes confrontational and
controversial; leading to conflict with other retailers and suppliers, but also between
the financial markets and the retail multinational (see also Wrigley, 2000). It is clear
from the case findings that Tesco suffered from negative publicity in a number of
ways. At the investor-retailer level, Tesco’s fiduciary responsibilities were often
strained due to ineffectual and disjointed marketing communication programmes. A
IJRDM lack of PR activity during the early phase of internationalisation placed Tesco at a
33,1 slight disadvantage, for their international peers wasted few opportunities to play
gently on some of the financial markets’ concerns regarding Tesco’s international
expansion. One sell-side analyst made this point:
One of the biggest risks of international expansion is to the reputation of the retail
multinational. When a company’s international reputation is questioned, valuation collapses,
40 and as a consequence, management can’t make further acquisitions. Then management
spend all of their time on the back foot trying to build credibility rather than growing the
international business.
Serious questions were being asked of Tesco in this regard, but management defended
their position explaining that:
PR skills play a part in the way some of these perceptions get blown up. If pressed, we would
say that the other retail multinationals are better at “talking up” their story than Tesco, which
tends to take the old fashioned view that the results should speak for themselves.
Tesco experienced a chain of PR mishap after mishap, which undermined consumer

confidence and excessively weakened their customer-friendly image in foreign markets
notably in the Republic of Ireland. Perhaps within a larger and culturally dissimilar
market, Tesco may not have survived these mistakes in the face of larger and
well-established incumbents. Yet by the late 1990s, the company were forced to embark
on an intensive PR campaign. Analysts postulated that the main reason for the
intensification in PR was a direct result of management feeling more confident in
making larger international profits than initially intended for the early phase of their
international expansion, or, as a direct result of the pressures surrounding the
acquisition-driven consolidation process, which could threaten the strategic credibility
of the firm if Tesco remained unresponsive to the consolidation pressures. What
emerges from this evidence is the importance of an evolutionary marketing strategy
within different competitive contexts. Tesco’s retail marketing mix decisions have
been characterised by trial-and-error behaviour where different possibilities are
explored and thus the decisions taken are largely evolutionary in different cultures. In
addition, the company began experimenting with a new type of hypermarket format
that contained a larger element of non-food stock keeping units. Management
succinctly captured the essence of experimentation in a new market:
I think it’s easier to develop new entrepreneurial formats in a new environment than it is in
your existing market where your business is successful. The biggest barrier to change is
success. If you have a successful business that does things in a particular way, stepping
outside the box and doing something in a very different way always appears high risk. Why
take the back off a watch when it’s ticking. When you don’t have the watch, the quality of
your thinking will be much wider, management will challenge things much more in an
apparently risk environment with no baggage than you will in the UK. If you look at the
development of our hypermarket in the UK, it has been much more pedestrian in terms of
small steps because it has been based around a highly successful format that already exists.
So why change? You actually need to be in an environment where you can afford to change
because you have nothing to lose.
As the above quotation suggests, retail innovation is facilitated by “shocks” or
uncertainty in the international investment process. The danger facing companies
pursuing a progressive step-by-step development model is that ideas may be
inappropriately dismissed or overlooked simply because they did not work in the Retail
domestic market and the success and size of the domestic operations creates a barrier multinational
to change and innovation. This raises some issues associated with the benefits of a
more aggressive and ambitious international programme undertaken by Tesco. learning
Global sourcing and supply chain experience. The capacity for cross-border sourcing
is generally seen as one of the long-term “strategic” justifications for cross-border
consolidation in food retailing (Wrigley, 2002; Palmer, 2002a). Extracting longer-term 41
synergies and greater co-ordination across borders – including the move towards price
harmonisation – was increasingly being used as justification for international retail
acquisitions. For Tesco, global sourcing was largely played down. Instead, the
company emphasised that the debate concerning sourcing efforts did not shift the
emphasis away from their core competencies, which were considered more important
within the international landscape. In principle, Tesco believed that a competitive
advantage rests more on the outcomes of learning to improve local merchandising
methods, systems and processes than simply on a cost advantage in the distribution of
standardised goods. There have been a number of strategic outcomes. First, Tesco
have deliberately strived to occupy the top three position in all of their international
markets. Tesco have performed less well and in some instances exited the market
where they could not reach a sufficiently critical size. For example, management cited
this as a reason for their divestment of Catteau in the French market. Second, Tesco’s
actual sourcing efforts within the broader international context also shows several
visible attempts by the company to aggregate scale across multiple markets and
establishing pan-regional presence in contiguous markets. Third, attempts to
re-organise their global sourcing activities practises by establishing buying centres
in emerging markets to develop the product range. Tesco has encouraged local food
suppliers to develop retail brands, under the Tesco own brand. On the one hand, this
prohibited the degree of global sourcing efforts, but on the other, it has substantially
improved the overall diversity of the company’s product mix which was increasingly
being exported into other international markets.
Discussion
As Tesco accumulates knowledge while internationalising, important insights and
lessons have been learned from stimuli internal and external to the company. By
reflecting on these different learning experiences, particularly when contextualised
within detailed single case-level research, various dimensions of retailer
internationalisation have emerged. In spatial terms, it appears that Tesco
concentrated their efforts with more experience on dissimilar markets in key regions
or clusters aiming to achieve a market leading position. One explanation for this
activity may be that as Tesco accumulated more experience they recognised the
importance of local and regional scale economies for achieving profitability. In other
words, retaining spatial focus was therefore more important than capitalising on
opportunities in diverse markets. The decision of selecting a particular market may
depend as much on the availability of suitable acquisition targets and the conditions of
potential sellers as it does on the attractiveness of the market (Dawson, 2001). For
Tesco, market selection was thus entangled with entry mode choice. Evidently,
acquisition-driven expansion had been a form of “postrationalised opportunism” where
both management and the financial institutions partisan to the acquisition rationalise
IJRDM the acquisition after it is accepted by the other company. Market selection decisions
33,1 mirrored this opportunistically-driven behaviour. In this respect, the main lesson that
Tesco had learned is that they must be in a position to quickly take advantage of
unexpected events (threats or opportunities). How Tesco dealt with unexpected
successes, miscalculations, mistakes and serendipity was of critical importance to the
international operations succeeding. The preceding evidence of Tesco also suggests
42 that acquisitions have proved to be an important prism for learning. On several
occasions Tesco used small-scale, nothing-to-lose acquisitions to minimise their own
human and financial capital in the face of potential economic and political uncertainty
in developing markets and to accumulate local market knowledge. These acquisitions
have provided Tesco with invaluable experiential opportunities to be “surprised” by
the marketplace and so to learn. The case evidence revealed that a willingness to
experiment and feedback input on the results from local store managers and expatriate
managers is a meaningful lesson.
The case of Tesco also indicates that the internationalisation process of retail
multinationals is not always a progressive and straightforward process (Alexander and
Quinn, 2002; Burt et al., 2002, 2003; Mellahi et al., 2002). The findings add new insights
into the complexity of the international retail divestment process. It appears that Tesco
had learned rather valuable lessons from their own divestment experiences, while other
retailers’ international market withdrawals provided an opportunity to observe overt
behaviour. From the Catteau experience, Tesco became locked into an inappropriate
acquisition through various acquisition-related contractual (earn-out) clauses with
Catteau’s management which in turn prohibited a swift and timely exit. A lack of
experience as an internationalist was visible in the Republic of Ireland when faced with
the task rejuvenating, re-branding and re-launching relatively weak store operations as
well. While it is true that such operations offer undeniable opportunities to improve the
operations, Tesco later recognised that, in reality, these “turnaround” acquisitions were
disproportionately demanding of critical management’s time and resources.
Apart from underestimating the level of effort required for these “turnaround”
operations, Tesco painfully learned from employing an inappropriate corporate model
in the French market. Alexander and Myers (2000) have remarked that the differences
between ethnocentric (centralised) and geocentric (decentralised) operating structures
will impact the international learning process. Tesco viewed their early international
moves abroad as a business extension and a redirection of free cash flow – effectively
limiting organisational learning opportunities. From the mid-1990s onwards however,
publicly-listed retailers had come under intense pressure from their shareholders to
demonstrate where and how value could be added to the international operations. This
had a catalysing effect. A lack of clarity in this respect would have severely
undermined the strategic credibility of the retail multinational and inevitably placed
financial cost of capital restrictions (Palmer, 2002a). Tesco were initially unclear and
less confident about the most appropriate corporate model with which to proceed.
Effectively, Tesco passed through a number of iterations of organisational structure
before finally adopting a hybrid structure between centralised and decentralised
operations, before ultimately adopting an aggressively industrial model. Perhaps more
importantly, the initial experiences of Tesco’s control capabilities have proved that it is
impossible successfully to adopt both corporate models simultaneously.
What is clear from an analysis of the findings regarding learning structures and Retail
processes is that an organisational-led learning multinational goes beyond the “official multinational
corporate line” that executives may use to justify minority entry positions or failures in
new markets and deliberately establishes systematic internal learning processes to learning
support international learning. Within the context of international retail expansion in
Europe, Alexander (1997) suggested that retailers have lacked systematic internal
processes to support their decisions with respect to appropriate host market strategies. 43
The present study would largely support his findings at least as far as the development
of internal learning structures is concerned. It is proposed that innovations and
continuous improvements are more successfully absorbed by the proactive
formalisation and development of internal learning mechanisms. The formalisation
and development processes for learning were seemingly rather fortuitous insofar as
market expansion into eastern Europe coincided with their ambition to broaden the
non-food merchandise in the UK. The impetus was then on the diffusion of what the
company had learned from developing a new format which accommodated non-food
items in the overseas markets.

By considering Tesco’s competitive behavioural dynamics within the context of the
strategic international moves it was apparent that retail multinationals are frequently
engaged in exchange of threats at the corporate spatial level. At the corporate level,
learning takes place at a much faster pace, often precipitated by a catalysing event in
the retail environment which could fundamentally alter the strategic authority of the
company and ultimately investors’ evaluation of the company’s worth. An illustration
of a catalysing event was Wal-Mart’s entry into Germany which dramatically changed
the status quo and the structural competitive dynamics for European retailers and
Tesco in particular (see Palmer, 2000; Arnold and Fernie, 2000; Burt and Sparks, 2001;
Fernie and Arnold, 2002). At the local spatial level, intense competitive rivalry for
securing regional market share also existed. At this interface, retailers learned from
each other, particularly with respect to competitive responses from in-store and
supply-chain initiatives. It is proposed that much of this learning takes place as the
expansion unfolds and the competitive situation evolves. This learning-by-doing
activity indicates that learning at the local spatial level will be a gradual and reiterative
process. Experience has taught Tesco to adjust to the deregulatory/regulatory related
spatial pressures, but also covertly shape rather than respond to regulatory
frameworks to obtain their desired spatial outcomes in international markets. A
regulatory lesson, particularly in emerging markets, was the importance of investment
in developing and maintaining good political relationships, while embarking on PR
campaigns to facilitate the expansion efforts in new markets among stakeholders.
It is evident from the findings that from the mid-1990s onwards, publicly-listed
retailers have come under intense pressure from their shareholders to internationalise.
On the institutional front, the findings appear to suggest that shareholders insist that
retail multinationals deliver not just instant sales growth from their foreign ventures
but also substantial cross-border synergies and thus more profits. By definition, these
synergies can only flow through an industrial or “global category killer” model (see
Wrigley, 2002). It is concluded, therefore, that those employing a federal structure
model will realise the economic benefits of internationalisation immediately, while the
industrially aggressive multinationals will take longer to realise tangible cross-border
economies, although such synergies will be higher in the long-term. Higher integration
IJRDM risks therefore exist and serious miscalculations or mistakes may weaken the retail
33,1 multinational’s confidence and generate negative press commentary which, in turn,
may eventually undermine the strategic credibility of the expansion efforts elsewhere.
A lack of experience and of familiarity with conditions in foreign markets created
considerable strain on Tesco’s human capital resources. This situation is somewhat
different from the large fast-moving consumer goods (fmcg) manufacturers such as
44 Procter and Gamble and Unilever where the management ethos has grown up as a
function, or by virtue of being international companies and overseas posts became
important in the long run rather than a stepping stone back to a more senior position at
home. Within Tesco, the international division was very much a tradition of a ‘stepping
stone’ to a more senior position in the home market. Thus, while Tesco invested large
amounts of financial capital in their international operations, management
underestimated the requirement of human resources. The established international
retail literature does not emphasise the importance of the human capital issue in the
implementation of an international retail strategy. The current findings make a
significant contribution to the established literature in that they illustrate that an

international retailing financial-human capital gap may exist during the retail
internationalisation process. That is, for Tesco the process of reaching the necessary
pace and scale of international operations, together with the desire to outmanoeuvre
competitors, resulted in a medium-term oversupply (or overhang) in the financial capital
employed and a shortfall in the human resources employed. The immediate effect of this
“gap” was immense pressure on the firm’s recruitment processes. The strategic effect of
this under investment in human resources is subsequent investments in “management
accretive” acquisitions where the retail multinational immediately acquires strong
management thereby reducing demands on managers in the domestic business.
The findings of this study also highlight some important lessons concerning
international marketing and communication-related issues. The findings suggest that
at both the investor-retailer and the consumer-retailer interface, relationships were
often strained due to ineffectual and disjointed marketing communications efforts.
Surprisingly there was a conspicuous lack of action addressing negative rumours and
this ineffectual and disjointed communication undermined both investor and consumer
confidence. The strategic effect of this was that Tesco’s credibility was undermined
and that, as a consequence, they encountered difficulties at later stages in the
development process in terms of either seeking further commitment from investors or
planning permission for new investment from government regulators. The findings
illustrated that customers can be easily alienated by changes in fasciae, assortments,
store layouts or pricing following the post integration period (Shackleton, 1996a, b,
1998). During this critical period, the retail multinational may unintentionally
disenfranchise customers that may make it more difficult to achieve post-integration
synergies, and even weaken comparable sales performance.
The present study identified fundamental movements of Tesco to reduce the price
differential between markets of sourced merchandise in their favour during the retail
internationalisation process. The findings suggest that the financial institutions and
other investors believed that there were global-scale advantages and disadvantages.
Even under duress from the financial institutions, Tesco assumptions on global scale
were similar to both Jackson’s (1976) and Williams’s (1992) studies who felt that local
know-how could alleviate deficiencies of a lack of scale and any other competitive
sourcing-related disadvantages. However, it should be noted that investment bankers Retail
may be over optimistic in estimating the power asymmetries, while management may multinational
play down the scale of this activity for disclosure reasons. Therefore, in attempting to
ascertain the reality, it is possible to assume that the de facto power rests somewhere learning
between these standpoints. It is concluded that it is equally important to have scale at
the local and global level. In this regard, Tesco could draw financially on their domestic
operations and other international cash generative retail operations while their costs 45
were still being borne out in new markets but results had not been obtained. The
present study also found that stronger local and global retailer-supplier partnerships
were increasingly critical for Tesco operating across different markets where
distribution and logistics vary considerably from market-to-market. The findings
suggest that initially the manufacturers realigned and re-organised their
organisational structures in order to support their leading brands fully. The impact
of Tesco’s internationalisation has dramatically altered the retailer-supplier dynamics
in strengthening and weakening relationships, and recovering and terminating
relationships in other circumstances.
Conclusion
There has been a marked acceleration in the scale of international investment during
the 1990s and as the process of internationalisation gathers pace, it is vitally important
to understand what retailers have learned from their experiences. The aim of the paper
was to provide an expository overview of one company’s experiences of
internationalisation, however it is anticipated that the findings arising from the
study will help to develop understanding of the subject area in general. It has been
shown that the concept of “learning” provides an important conceptual framework and
a new perspective for reinterpreting, re-evaluating and refining the existing literature
on retailer internationalisation. Such learning accounts necessarily are richer and
deeper but less elegant than success-failure dichotomies. The preceding case study of
Tesco illustrates a number of different dimensions of the company’s international
experience. Many important lessons have been learned by Tesco during the course of
their internationalisation process, enhancing the adaptability and responsiveness of
the company. Tesco has undoubtedly experienced several “shocks” in the marketplace
– and as result the company was much more vigilant and willing to experiment, learn
and react to the unexpected during later phases of expansion. How far Tesco could, or
would, apply the lessons learned from their experiences for future expansion is largely
dependent on the company’s capacity to identify the sources of international learning
in different contexts, absorb and institutionalise this knowledge. In some
circumstances, it has also been shown that the company did not learn from their
experience, even with the benefit of hindsight.
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Prentice-Hall Canada, Scarborough.
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Quarterly, Vol. 54, Winter, pp. 60-6.
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Wrigley, N. and Currah, A. (2003), “The stresses of retail internationalisation: lessons from Royal
Ahold’s experience in Latin America”, International Review of Retail, Distribution and
Consumer Research, Vol. 13 No. 3, pp. 221-43.
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Retail multinational learning: a case study of Tesco

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in this respect is Clarke and Rimmer’s (1997) analysis of Daimaru’s (a Japanese

International retail learning framework

for studying international retail learning and these include:

Tesco’s international background

Year Country Method of entry

1979 Ireland Acquisition of The Three Guys chain

Dimensions of Tesco’s international retail experience

Internal strategic processes

eastern Europe by acquiring a relatively small chain of convenience stores in Hungary, a

Hungary Global June 1994 13.4 43 0.1

In central and eastern Europe the company divested approximately 20 small-scale

External strategic processes

Internal operational functions

Tesco experienced a chain of PR mishap after mishap, which undermined consumer

items in the overseas markets.

significant contribution to the established literature in that they illustrate that an

relationships in other circumstances.

Distribution and Consumer Research, Vol. 12 No. 2, pp. 191-219.

process: a study of multinational retailer expansion”, unpublished PhD thesis, Faculty of

Management 45:1, 90-118. [Abstract] [Full Text] [PDF]

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