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International Retail Restructuring and Divestment: The Experience of Tesco

Article  in  Journal of Marketing Management · November 2004

DOI: 10.1362/0267257042405213 · Source: OAI

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Journal of Marketing Management 2004, 20, 1075-1105

International Retail Restructuring and

Mark Palmer1 Divestment: The Experience of Tesco
A key purpose of this study is to explore the lessons
learned from international retail divestment and market
withdrawal experiences. Drawing on 33 in-depth
interviews with leading investment banks and key retail
executives at Tesco, the study investigates the company’s
international restructuring and divestment activities in
Ireland and France during the mid -1980s and 1990s. It
has been demonstrated that, despite the progressive
merger and acquisition wave sweeping through the
corporate retail landscape recently, international retail
divestment is quite widespread. The main conclusion from
this study is that Tesco originally did not envisage
Aston Business School divestment or de-internationalisation as part of the
original internationalisation strategy process in either the
acquisition of Three Guys in Ireland or Catteau in France.
There was no appreciation from Tesco during their early
period of expansion of the fact that exit pressures might
arise during the course of market entry. In this regard, the
case study provides insights into the relationship between
investment and divestment within the context of
international retail restructuring. The case evidence also
demonstrates the positive impact of the Three Guys and
Catteau divestments which helped management to refocus
and rejuvenate the company’s internationalisation
process.

Keywords: Retailing, internationalisation, restructuring, divestment,

learning, Tesco.

Introduction

Corporate restructuring is an important feature of international retailing

activity. The widespread corporate restructuring taking place during the
1990s was largely associated with international retail mergers and
acquisitions (Wrigley 1999; Palmer and Quinn 2001; Burt and Limmack 2001).

1Correspondence: Dr. Mark Palmer, Aston Business School, Aston University, Aston
Triangle, Birmingham, B4 7ET, Phone: +44 (0) 1213593611, Fax: +44 (0)121359 6470,
E-mail: m.j.palmer@aston.ac.uk
ISSN0267-257X/2004/9-10/01075 + 30 £8.00/0 ©Westburn Publishers Ltd.
1076 Mark Palmer

Indeed, in the fiscal period between 1995 and 2000, Goldman Sachs (2000)
estimated that $53,985 billion worth of cross-border retail merger and
acquisition transactions took place. Throughout this period, retailers have
employed progressive expansive strategies allowing for rapid growth during
a wave of international restructuring and consolidation. For example,
between 1999 and 2002 Ahold doubled their sales from €33 billion to €66
billion through growth largely driven by internationalisation. Equally
important, but much less acknowledged in the literature is the process of
divestment that may arise from these expansive international retail
strategies. It is contended that divestment plays an integral part of retailers’
international expansion in practice, that is, internationalisation does not
always follow an upward growth trajectory, and that the success of the
retailers’ foreign operations rests mainly on management reflecting on the
mistakes of the past and subsequently redirecting the retail firm towards
more successful routes for expansion.
Much of the international retail literature has been on investment rather
than the restructuring and divestment of international operations (Alexander
and Quinn 2002). The gap in the literature is even more surprising given that
many of the early retail internationalists found it difficult to establish
operations in foreign markets, and consequently, this resulted in
international retail divestments. During this time, a relatively small number
research studies report the most prolific cases where early international retail
attempts led to the partial or complete withdrawal of operations from
international markets (Lord et al. 1989; Treadgold 1990; Burt 1991; Knee
1993). For instance, Treadgold (1990) cited a number of examples of
international retail divestments including the collapse of the UK specialist
retailer Sock Shop. Their difficulties, which ultimately brought down the
whole company, were due to the company over-reaching themselves
financially and managerially in attempting to establish a rapid presence in
the US market. This literature largely interpreted divestment as a negative
outcome of international failure, without really exploring the positive
broader restructuring processes and learning involved.
Several conceptual frameworks have considered the nature of how the
retail firm’s experience develops incrementally over time (Treadgold 1991a;
Clarke and Rimmer 1997; Vida 2000). This literature has drawn implicit
assumptions that retailers will travel through a learning curve and thus
improve their performance with the accumulated knowledge of international
experiences, without really exploring the nature of this learning. It is
contended that international restructuring and divestment processes may
trigger and create the basis for learning for international retailers. This paper
seeks to explore a gap in this literature in respect to understanding the
learning from retailers’ divestment and market withdrawal experiences.
 International Retail Divestment 1077

Specifically, it explores Tesco’s restructuring and divestment activity in

Ireland and France during the mid -1980s and 1990s and the subsequent
lessons learned from these international retail divestment experiences.
The paper begins with a review of previous research on divestment.
Particular reference is made here to the broader business literature.
Following this, the methodology employed in the present study is explained
and the findings presented. The study is based on in-depth, semi-structured
interviews with the financial institutions as well as retail executives, and
elicits their views and perceptions of Tesco’s international retail divestment
and the lessons learned from this divestment process. The paper concludes
with a discussion of the key findings arising from the research and
suggestions for further research studies.

Divestment: Interpreting Practice and Past Studies

Much of the international retail literature has focused on the successful

activities of international retailers rather than on those firms who have
experienced the need to scale down their international interests, with a view
to either progressive divestment or further expansive activity in the future
(Alexander 1997; Alexander and Quinn 2002). And yet, there are several
examples in the contemporary retail environment where retail multinationals
have restructured and divested their operations. Table I illustrates the level
of contemporary international retail divestments taking place during a
relatively progressive period of expansion for food retail multinationals in
the 1990s and early 2000s.
These exploratory cases confirm the relatively high level of divestment
among retail multinationals during a period of international retail
restructuring. An exploratory analysis of the divestment activities of retail
multinationals over this time also reveals a marked difference in the nature
of this activity notably between forced (involuntary) and deliberate
(voluntary) international retail divestments. From this perspective, the
investment and restructuring undertaken by retailers may lead to
unexpected divestments. A case in point is that of UK-based food retailer,
Sainsbury’s, forced exit from the US-based Giant Landover. Sainsbury’s
found themselves in a vulnerable position as the minority stakeholder after
Ahold acquired the majority stakeholding. By contrast, the divestment
decisions made by Carrefour, the French multinational, suggest that the
company deliberately opted to divest their operations.
The divestment activities of internationalising retailers have preceded the
theoretical contribution of the international retail literature. Despite playing
an integral part of internationalisation, few studies actually examine the
international retail divestment process (Alexander and Quinn 2002; Burt et
 1078 Mark Palmer

Table I: Contemporary Cases of Retail Multinational Divestments

Retail
Year Multinational Divestment Nature Description
1996 Carrefour Erteco Strategic/ Divested 51 discount stores in Italy but
proactive continued with hypermarket format.
1997 Tesco Catteau Strategic/ Divested Catteau to Promodes in 1996
proactive
1998 Sainsbury’s Giant Forced/ Ahold forced Sainsbury’s into a
reactive minority position. Sainsbury’s exited in
1998.
1999 Ahold Tops Strategic/ Complete divestment of 40
proactive supermarkets and withdrawal from
China.
1999 Ahold Supermarket Strategic/ Complete divestment of 14
stores proactive supermarkets and withdrawal from
Singapore.
2000 Rewe Budgens Forced/ REWE divested Budgens to the Irish
reactive Musgrave Group in 2000. Financial
details undisclosed.
2000 Carrefour Hypermarket Strategic/ Divested stores in Hong Kong.
stores proactive Complete withdrawal from the market
after 2 years in the market.
2001 Carrefour Picard Strategic/ Carrefour divested their holdings in
Surgeles proactive Picard Surgeles to a consortium of
investors led by Candover, Chevrillon
et Associés, the members of Picard's
founding family and the principal
executives of the company.
2001 Sainsbury’s Supermarket Strategic/ In March 2001, Sainsbury's divested
stores proactive their stake in 96 outlets in Egypt. In
addition to over a dozen Sainsbury's
stores, Sainsbury’s divested stakes in
51 government franchised Al Ahram
2000 shops, 36 Edge supermarkets and
five ABC supermarkets.
2001 Marks & Brooks Strategic/ Divested Brooks Brothers for $225m in
Spencer Brothers proactive cash in November 2001 after initially
paying $750m in 1988.
2001 Delhaize Delvita Forced/ Divested 8 Delvita stores in the Czech
reactive and Slovak Republics in 2001.
2001 Carrefour Metro Strategic/ Carrefour divested to Metro their 20
proactive percent stake in Metro France in 2002.

Cont/…..
 International Retail Divestment 1079

Retail
Year Multinational Divestment Nature Description
2001 Metro Carrefour Strategic/ Metro sold to Carrefour their 20
proactive percent stake in the companies
operating the first five Carrefour
hypermarkets in Italy in 2002.
2001 Carrefour Hypermarket Strategic/ Ordered by the regulatory authorities
stores proactive following merger with Promodes.
2002 Intermarche Supermarket Strategic/ Partially exited Italy in mid 2002.
stores proactive
2002 Marks & Kings Strategic/ Divested 28 stores in the US in July
Spencer proactive 2002 to D’Agostino Supermarkets for
US$160 million in cash.
2002 Dohne Hit Strategic/ Divested Hit in Poland to Tesco in
Handelgruppe proactive 2002.
Service GmbH
2002 Jeronimo 5 Jumbo Strategic/ In March 2002 Jeronimo Martins
Martins hypermarkets proactive divested several stores in Poland and
Brazil in order to cover debts. Ahold’s
Polish subsidiary Ahold Polska
acquired five Jumbo hypermarkets for
€20 million.
2002 Rewe 11 Billa stores Strategic/ Divested 11 Billa stores to ISMS a
Handelgruppe proactive subsidiary of Auchan.
2002 Ahold Superdiplo Forced/ Divested majority stake (75 percent) in
reactive Suprdiplo Maroc to Morccan rival
Hyper/SA for an undisclosed sum.

al. 2002). Within the broader literature, and within the context of
manufacturing firms, the subject of corporate divestment has been examined
under the following broad research areas: the patterns of divestment activity
and market withdrawal(s) (Hoskisson et al. 1994; Benito and Welch 1997;
Dunne et al. 1998); the influences and reasons for divestment(s) and market
withdrawal(s) (Torneden and Boddewyn 1974; Grunberg 1979 1981;
Duhaime and Grant 1984; McDermott 1989; Benito 1997; Bergh 1997); the
process and firm’s response to divestment(s) and market withdrawal(s)
(Gilmour 1973; Boddewyn 1976 1979 1983 1985; Harrigan 1980; Ghertman
1987; McDermott 1989; Burgelman 1994). With reference to the divestment
themes discussed in this literature, an important distinction is made by a
number of researchers (Bowman and Singh 1993; Young et al. 2001) between
the different forms of restructuring and divestment areas:

(i) financial restructuring (changes in governance structures, firms’

relationships with shareholders and the financial markets),
1080 Mark Palmer

(ii) portfolio restructuring (mergers, acquisitions, alliances and joint

ventures),
(iii) organisational restructuring (changes in the company structures,
processes or personnel), and;
(iv) spatial dimensions of restructuring (territorial changes throughout
the company’s international operations).

Financial Restructuring
The broader literature on divestment during financial restructuring has
mainly examined the effects on share prices of divestment decisions
(Montgomery et al. 1984; Afshar, et al. 1992; Markides and Berg 1992;
Padmanabham 1993; Mezer et al. 1994; Siegfield and Evans 1994). This
research found support that divestment for its own sake, in a context of a
generally poor trading performance, will not be positively interpreted by the
financial markets. Clark and Wrigley (1997) argue that this body of research
treat exit as a sequence of related strategic decisions, and discuss the
economic logic rather than the behavioural logic behind exit decisions.
Wrigley’s (1999) research examined the impact of the financial leveraging in
the US food retail industry and found that restructuring and divestment
were reactive measures for highly geared retailers paying down debt
payments.

Portfolio Restructuring
Several other contributions to the divestment literature have taken a
strategic portfolio restructuring perspective. Harrigan (1980) examines
divestment through the lens of the product life cycle approach, and argues
that divestment is one of several strategic options for declining industries.
These studies view exit from a portfolio perspective; that is, a company can
be regarded as a portfolio of assets, products and activities, which should be
continuously under review (Chow and Hamilton 1993). Empirically,
however, these studies focus on the reason for divestment rather than issues
relating to the learning outcomes of the divestment process which help shape
the future trajectory of the firm’s development.

Organisational Restructuring
A recent study by Burt et al. (2002) attempted to advance knowledge in
the area by exploring the organisational context of divestment related to
changes in company structures, processes and personnel. Burt et al’s., (2002)
examination of the strategy of Marks and Spencer over a 30 year period
provided significant insights into the remarkable organisational change
which eventually led to the complete withdrawal from all international retail
markets. Apart from the international restructuring and divestment
 International Retail Divestment 1081

activities, the whole company underwent a radical transformation which

included: the re-organisation of profit centres into UK retailing, overseas
retailing, and financial services. Stores were also reclassified from geographic
division to four store types including department stores, regional centres,
high (main) street, and small stores; the creation of a marketing function,
forcing the company to become more proactive and market driven; and the
development of a more balanced sourcing policy of buying British goods.

Spatial Restructuring
Empirical studies have also explored the relationship between divestment
and the geographical dimensions of competitive space (Evans 1996;
Alexander and Quinn 2002; Wood 2002). Based on the entry of Canadian
retailers into the United States, Evans (1996) found that 56 percent of all
Canadian retailers ultimately exited the market. Alexander and Quinn (2002)
examined two cases of international divestment activity namely, Arcadia and
Marks and Spencer. Their study found that withdrawal from the
international market does not always occur because of any inherent
weakness in the international capabilities of the retailer. For example, while
Marks and Spencer had difficulties with several international markets,
Alexander and Quinn’s (2002) argued that problems in the domestic market
ultimately resulted in the complete withdrawal from all international
markets. The recent analysis by Wrigley (1999) and Wood (2002) of the
relationship between regulatory frameworks and the regional restructuring
strategies of US supermarket and department store retailers during the 1990s
demonstrated that neglecting the strategic spatial dimensions of acquisition
due diligence is likely to result in unnecessary divestment. Whether in British
or US studies, one common theme emerging from the literature is that
divestment is an integral part of the retail internationalisation process.
A number of researchers argue that periods of discontinuities or
retrenchment may hold more important lessons and indicate less easily
identifiable critical issues than periods of ‘normal activity’ (Alexander 1997;
Alexander and Quinn 2002; Wrigley and Lowe 2002). Interest in the subject
of learning within the context of the divestment process has been revived
more recently with the work of Benito (1997) and Thorne (2001) and this
research has started to embrace and re-evaluate divestment as a valuable and
positive part of learning and company development. It is clear that there is
still only limited understanding of the context under which international
retail divestment occurs. The paper presents research addressing this topic.

Methodology

The attention given to international retail divestment is not altogether

surprising since it would appear that previous research has been constrained
1082 Mark Palmer

by the difficulty in getting data or securing access to management to discuss

divestment. And even if access is obtained, divestments are often regarded as
an admission of failure, and companies tend, therefore, to treat them with
secrecy (Benito 1997). Much of the empirical work into international
divestment within the context of manufacturing firms has employed survey-
based methodology (Duhaime and Grant 1984; Schardy 1991). Given the
paucity of research studies on the area of retail divestment, this study
employed an interpretative, qualitative methodology to examine one
company’s divestment and learning experiences. Attention was given to
planning the interviews so that the interviewees did not simply reiterate the
positive ‘official corporate line’ on divestment (Sparks 1996b; Palmer and
Quinn 2001). To safeguard against this, this study did not solely rely on the
views of management alone as interviews were also held with the broader
network of sell-side analysts, buy-side analysts and merger and acquisition
specialists within the financial institutions that were actively involved in
Tesco’s international restructuring and divestment activities in Ireland and
France during the mid -1980s and 1990s. The main data collection method
was a series of in-depth interviews with the leading financial institutions and
the management of the case study under investigation. Interviews were
carried out with the financial institutions and subsequently the data
generated was used to raise important issues directly with management
during 1999 and 2000. In total, 30 in-depth interviews were undertaken with
the financial institutions and 3 in-depth discussions with senior retail
executives of the case company under investigation. Total interview time
with the financial institutions and the retail executives ranged between 40
and 180 minutes in length. The findings from the in-depth interviews are
excerpted extensively throughout the case findings in order to illuminate and
contextualise relevant themes. This information is supplemented with
secondary research written by the analysts and other commentators at the
time of the divestments. The identities of the analysts and the executives
have been concealed to maintain confidentiality.
The paper now reports the findings from the in-depth interviews with
both key analysts in the City of London and retail executives of Tesco. The
interviews sought to explore two key areas: first, understanding the
restructuring context in which the divestment of Tesco’s international
operations occurred, especially the financial institutions’ attitudes towards
international retail divestment and; second, the important lessons learned
from the Tesco’s divestment process. A brief overview of the background to
Tesco now follows.
 International Retail Divestment 1083

Findings

Case Background
Over the last three decades, Tesco has grown significantly in the UK food
retail market. During the 1970s, under the directorship of Ian MacLaurin,
Tesco dramatically improved their price image by reducing prices across a
large range of products, while at the same time, centralising buying and
distribution structures. Having improved the price image, the company then
increased the average size of their stores in order to encompass much
broader ranges, more choice and services during the 1980s. In mid –1993,
‘Tesco Value’, an aggressive price campaign, was launched and this marked
a new juncture in the company’s strategic development. Fundamentally, it
established the company’s long-term market position of maintaining a
balance between quality and value. Throughout this period, these combined
initiatives propelled Tesco into the number one position in UK food retailing.
Indeed, between 1988 and 1998, the company almost doubled their UK
market share from 8 percent to 15.8 percent, outpacing their UK rivals
(Goldman Sachs 1999 2000), at a time of approaching superstore saturation
and major restructuring of the British grocery market (Wrigley 1987 1991
1992 1994; Burt and Sparks 1994; Sparks 1995 1996a).
Tesco’s initial international foray was in the late 1970s with the acquisition
of the Albert Gubay’s Three Guys operation in the neighbouring market of
the Republic of Ireland. As shown in Table II, a small group of retailers
operating in the food retail sector including Ahold, Carrefour and Metro
were also establishing an international presence over this time. A short time
after divesting their operations in Ireland in 1986, Tesco began to undertake a
new international research process. The product of this research effort was
the company’s move into the French market. The acquisition of the French
based medium-sized supermarket chain Catteau was intended to be the
company’s springboard to international expansion and serve as a platform
for European growth in particular. After several years Tesco decided to
withdraw from this market. As shown in Table III, the company broadened
the scope of their international research efforts by focusing on the emerging
regions of central and eastern Europe as well as Asia. A number of years later
in 1998, the company announced one of the most radical and ambitious
international plans that would involve the development of 200 hypermarkets
in central and eastern Europe and Asia, generating GB£10 billion sales per
annum by 2004 (Salomon Smith Barney 1999).
1084 Mark Palmer

Table II: Selected Investment Destinations of Food Retail International

Expansion 1968-2003(a)
Retailer Tesco Ahold Carrefour Metro
Country U.K. The Netherlands France Germany
Argentina -- 1998 1982 --
Austria -- -- 1976 1972
Belgium -- -- 1969 1970
Brazil -- 1996 1975 --
China -- 1996 1995 1996
Chile -- 1998 1998 --
Columbia -- 1998 1998 --
Czech Republic 1996 1991 1998 1996
& Slovakia
Denmark -- -- -- 1971
France 1992 -- -- 1971
Hong Kong -- -- 1996 --
Hungary 1995 -- -- 1994
Indonesia -- -- 1998 --
Ireland 1979 -- -- --
Italy -- -- 1993 1972
Japan 2003 -- 2000 --
Malaysia 2002 -- 1994 --
Mexico -- -- 1994 --
Morocco -- 2001 -- 1991
The Netherlands -- -- -- 1968
Poland 1995 1992 1997 1998
Portugal -- 1992 1992 1990
Singapore -- 1996 1997 --
South Korea 1999 -- 1996 2002
Spain -- 1973 1973 1972
Switzerland -- -- 2001 1994
Taiwan 2000 -- 1986 --
Thailand 1999 1997 1994 --
Turkey -- -- 1993 1990
UK -- -- 1992 1971
USA -- 1977 1985 --
Uruguay -- 1998 1998 --
Note: (a) Table II shows the main investment destinations for internationalising food-based
retailers. These countries were chosen to enable a temporal and spatial comparison between
Tesco’s internationalisation and other food-based internationalists.
 International Retail Divestment 1085

Table III: The Chronological Market Diversification of Tesco

Management Complete or
‘earn-out’ Partial
Incentive Withdrawal
Country Entered Entry Mode and Description Scheme (Year)
Ireland (a) 1979 Majority stakeholding No 1986
acquisition in Three Guys
France 1992 Majority stakeholding Yes 1997
acquisition in Catteau
Hungary 1994 Majority stakeholding No
acquisition in the Global
supermarket chain
Poland (b) 1995 Majority stakeholding No
acquisition in Savia SA
Czech 1996 Majority stakeholding No
Republic & acquisition in K-Mart stores
Slovakia
Thailand 1999 Majority stakeholding No
acquisition in Lotus
South Korea 1999 Store-by-store development No
through a joint venture with
Samsung
Taiwan 2000 Store-by-store development No
through a joint venture with
Sime Darby
Malaysia 2002 Store-by-store development No
through a joint venture with
Sime Darby Sdn Bhd.
Japan 2003 Majority stakeholding No
acquisition of the C Two-
Network in the Tokyo area.
Notes:
(a) In 1997 Tesco re-entered the Irish market with the majority acquisition of ABF for GB£630
million. Tesco purchased the largest food retailer in Ireland with 109 supermarkets and annual
sales of GB£1.23billion.
(b) In 2000 Tesco also acquired the “Hit” chain of hypermarkets in Poland. This acquisition
added 13 hypermarkets to the Polish business which propelled them into a market leading
position.

Having briefly discussed the background of Tesco and their international

background, the next section reports in more detail the main learning issues
developed from the interviews with analysts and the management of Tesco.
This data is collated, collaborated with secondary data, and organised under
Tesco’s restructuring and divestment in Ireland and France.
1086 Mark Palmer

Restructuring and Divestment in Ireland

Tesco first entered Ireland in 1978 by purchasing 51 percent of Albert
Gubay’s Three Guys operation for GB£4 million. However, this initial
international foray proved to be too hasty given the structural capacity for
expansion and the relative strength of the company within their domestic
market at the time. This untimely venture abroad was summed up by one
analyst:

“The perceived success (or otherwise) of Tesco’s early venture abroad

would have been considered insignificant in comparison to the company’s
fortunes at home, and as a result, this largely undermined the company’s
(perceived) international efforts in the eyes of the financial markets as
being a peripheral or even a distraction to the core UK business”.

Several analysts even suggested that there were conciliatory positions

adopted by the Irish government, and thus corporate incentives to facilitate
British-based retailers to enter the market during this time. It is argued that,
during the late 1970s, the UK Labour government was proactively
encouraging British-based companies to go abroad as the following
viewpoint suggests:

“The decision to internationalise was concerned with political

expediency. The rationale for Tesco to enter the Irish market when
they did was certainly not the right one”.

In this way, the company adopted a largely reactive opportunistic stance.

The continued realignment, focus and momentum of Tesco in the UK market
provided the context in which internationalisation had taken ‘a secondary
position’ in the company’s corporate development agenda. Towards this end,
Tesco were initially unsure of the best corporate model in which to strike a
balance between control and autonomy. This led to indecision with the Three
Guys acquisition. For example, the company experimented with integrating
some brands under the Tesco brand but then decided to retain the local
brand. By early 1986 the rumours abounded that Tesco was poised to divest
their operations in the Irish market. It was no surprise, then, when Tesco
announced that they had divested the Irish operations to the local H
Williams supermarket company for approximately GB£17 million which,
according to one commentator at the time, represented a substantial financial
loss for Tesco with cumulative losses amounting to IR£6 million (Parker
1986). Even though Tesco had grown their share of the Irish grocery market
by 10 percent, the company found the market much too difficult with
management pointing to the ‘adverse trading conditions’. The exit costs
associated with the divestment of assets suggest that the withdrawal was
 International Retail Divestment 1087

forced. A number of important insights are inferred from Parker’s (1986)

research on the company’s early experiences notably:

(i) Business extension. Tesco’s management treated their Irish

operations as an extension to the domestic UK business. This was
evident in the company’s distribution and procurement
infrastructure where they simply shipped goods in from Britain,
and did not encourage nor fully engage with local suppliers in the
market.
(ii) Inappropriate store positioning. The Three Guys was a discount
operation selling a limited range of foodstuffs from wooden pallets
and open cardboard boxes in warehouse-like stores. This
contrasted with the trading style of Tesco in Britain at the time
(Parker 1986). Even though the company embarked on extensive
remodelling and repositioning initiatives, these efforts remained
ineffectual because the locations were unsuitable for a more up
market position.
(iii) Inaccurate locational assessments. Local management
underestimated local market demographics by building edge of
town supercenters on greenfield sites in a country with the lowest
density of population in the European Union, low car ownership
and where shopping, other than in the major cities, was
traditionally concentrated in town areas.
(iv) Endless public relation disasters. Consumer mistrust was fuelled
largely by endless criticism for the company’s conspicuous lack of
support for Irish products.
(v) Insufficient local scale. The company market share was relatively
small in comparison to their main competitors of Dunnes Stores
and Quinnsworth who accounted for approximately 22 percent
and 20 percent of the Irish grocery market respectively. This
disadvantage was further compounded by ongoing ‘price wars’,
which significantly reduced operating margins, leading to trading
losses. In 1979-80 these amounted to GB£1.3 million.

Apart from the problems with Three Guys, the difficulties were not entirely
international related but also reflected wider considerations of the market
trends and competitively driven retail restructuring taking place in Tesco’s
domestic food retail market. The late 1980s saw a period of vigorous
structural change in the UK food retailing, where competitive pressures had
been reaching a critical point (Wrigley 1987, 1991) and over this period
serious questions were being asked by the financial analysts concerning
Tesco’s ability to step up their expansion programme in the UK. Yet in spite
1088 Mark Palmer

of Tesco’s early unsuccessful efforts, the company successfully re-entered the

market with the acquisition of ABF’s Irish food retailing business for GB£630
million in 1997. This re-entry shortly followed the successful counter bid for
William Low in Scotland in 1994 (Sparks 1995 1996a). At the time, the gist of
the sell-side analysts’ reservations were neatly summarised by one leading
brokerage report:

“This looks a high price in relation to net assets of GB£170 million and
the requirement for additional capital investment of GB£100 million.
Although we have reservations about the quality of the store portfolio
and Tesco’s previous failure in the market, but this is countered by
the lack of strong competitors in this market”.

Following the ABF acquisition, the company secured the largest food retailer
position in Ireland with 109 supermarkets and annual sales of GB£1.23
billion. It was widely suggested in the press at the time that management
were intent upon rectifying their previous experiences within this market. To
that end, the Three Guys and ABF acquisitions were distinctively different.
An essential corporate restructuring and repositioning would be necessary in
order to realise synergies with the ABF acquisition, but significantly the
company retained local regional infrastructure in Northern Ireland as well as
a separate head office in the Republic of Ireland. It was not simply a business
extension. With their acquisition of ABF, Tesco captured 17.5 percent of the
market in Northern Ireland and 19.4 percent in the Republic securing
number one position in both markets. This position brought a considerable
degree of local scale from which to successfully compete with local
incumbents.
Unlike Tesco’s first acquisition in Ireland, management also set about
making changes in order to make the subsidiary a more value creating
acquisition, and in particular, management began to place greater
importance on the transfer of knowledge between the regional offices in
Northern Ireland and the Republic of Ireland, but also between the
headquarters in the UK and the Irish regional offices. The greater emphasis
on transferring knowledge and information was appreciated by analysts and
the financial markets in general. The main fascia consisted of Quinnsworth
(57 stores) and Crazy Prices (18 stores) in the Republic; Stewarts (19 stores)
and Crazy Prices (9 stores) in Northern Ireland as well as 6 stores under
different names trade in the North. Significantly, the average store size of
20,000 square foot was sufficiently large to capitalise on their knowledge of
operating similar stores in the UK market. The company invested GB£76
million in restructuring, refurbishing and re-branding the stores under the
Tesco banner, changing the layout, merchandise balance as well as
introducing new services and enhanced facilities. These included new store
 International Retail Divestment 1089

layouts, wider aisles, in-store bakeries and extended hours within the first 18
months after the take-over, though these changes were more cautiously
made in the Republic of Ireland than was the case in Northern Ireland. In
spite of Tesco’s cautious approach, the company experienced a chain of
public relations mishap-after-mishap in the Republic of Ireland and evidently
did not learn from their previous mistakes during their first entry into the
market which happen to concern similar issues. These mistakes included:

(i) A bizarre legal wrangle surrounding women workers which

prohibited women from wearing trousers.
(ii) An admittance by the company that some employees were refused
their usual payment of weekly wages without warning.
(iii) Researchers from RGDATA, an independent retailer’s
organisation, claimed to have found instances of over charging in
Tesco stores. The main problem was said to be the failure to pass
on offer reductions to customers.
(iv) Failure on the part of the company to fully reimburse customers.

In March 1999, the company again faced an angry reaction from customers
when researchers from RGDATA, an independent organisation, claimed to
have found instances of overcharging in Tesco stores. The evidence
presented by RGDATA resulted in The Director of Consumers Affairs
proceeding with legal prosecution against Tesco for this overcharging. This
led to a GB£3,800 fine and the company later admitted to ‘larger than usual
number of price inaccuracies’ in their stores with the mistakes being ascribed
to the implementation of new technologies. Once again these mishaps
continued to sully Tesco’s reputation in the Irish market and in this respect it
is possible to deduce that Tesco failed to learn from their earlier PR
experiences in the market.

Restructuring and Divestment in France

In December 1992, Tesco announced that they planned to enter France.
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. The
financial markets perceived push or reactive motivational factors for Tesco’s
initial foray into France and this was neatly captured at the time by one
leading brokerage report:

“Tesco bravely chose the same day as interim results announcement from
Asda (18 Dec, 92) to announce a move into the French food retailing, thus
exposing the group to the charge that slowing UK growth prospects (as
evidenced by the pressure from the renaissance of Asda) were forcing
Tesco to look overseas for expansion.”
1090 Mark Palmer

Regardless of the timing of the acquisition, Tesco made it clear that they had
been looking at potential overseas food retail acquisitions for some years, not
least in the US market. Catteau had been identified as a ‘good strategic fit’ in
1989, but serious discussions did not begin between management until early
1992. It was also apparent from the interviews with management and the
corporate advisors that the company was particularly cautious in their efforts
to secure entry into the French market. Indeed, Tesco’s Board of Directors
rejected another acquisition proposal put forward by several advisors prior
to the Catteau acquisition. After all this expansion would help build and
shape the company’s international reputation as well as subsequent
international moves in Europe. This caution meant that the purchase was
subject to a final review of the results for the year to December 1992 and
completion was not due until June 1993. Tesco acquired an effective 85
percent holding, leaving 15 percent of the ownership in the hands of
management as part of a management incentive ‘earn-out’ scheme. The
agreement valued Catteau at Ffr 1,475 million (or GB£176 million at the then
exchange rate), and the up-front consideration was Ffr, 1,261 million (or
GB£150 million) paid in cash.

Table IV: The Financial Performance of Catteau Prior to Tesco’s Take-over

Year ended December 1987 1988 1989 1990 1991

(FFr million)
Turnover excluding Tax 1,795 2,011 2,436 2,695 2,867
Depreciation 30 41 55 74 77
Operating Profit 71 104 128 158 168
Profit after Interest 67 95 117 133 139
Profit Sharing and Exceptionals 6 14 10 13 13
Profit before Taxation 61 81 107 120 126
Taxation 29 36 44 48 49
Profit after Taxation 32 45 63 72 77
Net Assets 127 174 373 448 548
Operating Margin (%) 4.0 5.2 5.3 5.9 5.9
Source: Not Disclosed.
Notes:
(a) 1990 and 1991 figures are consolidated.
(b) 1987-89 are parent company only.
(c) For 1989-1991 the convertible bond of FFr 111 million is involved in net assets.

According to the analysts’ research at the time, Tesco was also attracted by
Catteau’s good record and high profitability. Group turnover of the Catteau
business in 1991 was GB£340 million and over 80 percent of this revenue
came from retailing (Catteau also had wholesaling and franchise activities).
 International Retail Divestment 1091

Indeed, as shown in Table IV, prior to the acquisition, Catteau was growing
sales but also profitability significantly. 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
thus, 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 turn
around situation and retain strong local management.”

Retrospectively, however, some analysts felt that Catteau’s management

managed the business for a sale in the years leading up to the Tesco deal and
this would eventually undermine the efforts of Tesco to either improve or
divest the operations. A number of sell-side analysts made the following
points:

“Tesco bought a business in France that had relatively high prices in

comparison to their competitors. So for Tesco to become much more price
competitive the company had to lower prices. Tesco then had to follow up
the Catteau acquisition with another acquisition within the next year. And
unfortunately Tesco procrastinated.”

“Did they know there was a constraint on building new stores? Tesco
would find difficulty growing the operations. The gross margins were
quite large because management raised prices prior to the sale in order to
make their bottom line look better. They couldn’t exit through various
management earn-out lock-ins. It took them three years to work out they
were robbed and needed to sell out.”

While Tesco’s management admitted that it was difficult to expand gross

margin profitability they defended their original position:

“That is frightfully insulting to the Board of Directors at the time.

Everybody knows when a family business decides it wants to sell they
will manage the business for sale. It is to be expected. I don’t think that
was an issue.”

The stores varied in terms of size, format and fascia. There were 90 stores of
three broad formats - 63 Cedico edge of town supermarkets with an average
size of approximately 13,000 square foot, 25 Cedimarche town centre
convenience stores with an average size of approximately 6,500 square foot,
1092 Mark Palmer

and two Hyper Cedico hypermarkets that were 41,000 square foot in size.
These hypermarkets accounted for 15 percent of retail turnover, but
management dismissed this as the main attraction for Tesco.
As far as management were concerned, the positive aspects of the
acquisition were often overlooked by analysts, reinforcing the point that the
company’s first two years were relatively free from mistakes other than being
unfortunate enough to buy the business at the top of the French economic
cycle, but as one analyst put it ‘was that why it came up for sale?’ However,
the evidence suggested that it was not that straightforward. The retirement at
the end of the second year of the two elder Catteau brothers was planned by
the company but the departure of one of their sons whom had operational
control was not planned. After a year Tesco recruited their own finance
executive and ‘exported’ another key executive from the UK. One sell-side
analyst argued that:

“Our experiences of Catteau when we visited it a year following the

acquisition was of a business perhaps lacking a depth of management (as
is often the case in family companies). It was clear that Tesco were
uncertain of the best corporate structure moving forward internationally.
Relatively few stores were actually integrated.”

Indeed, several corporate advisors witnessed vigorous debates between

management which invariably led to abrupt shifts and changes in the
corporate control and support mechanisms for the French operations. As
previously discussed, the company’s rationale for acquiring Catteau at the
time stated that they were ‘going to build this regional chain into a national
chain’. But something much more significant had also occurred by mid 1995
when it was clear that this strategy would be difficult to implement given the
consolidating nature of the market in which the company found themselves.
Meanwhile, rumours emerged of Wal-Mart’s interest in a number of targets
across Europe. Prior to the emerging acquisition-driven consolidation in the
French market, analysts were pressing for Tesco to add a further block of
between 20-30 stores (approximately a GB£50 million investment), but this
did not occur. Because of Tesco’s lack of international experience, analysts
felt that Catteau was not ready to be used as a base for doubling or trebling
the presence by a full public company take-over. Even when Tesco were in a
position to act as ‘white knight’ and rescue Docks de France in the summer of
1996, management could not reach agreement with their institutional
shareholders and as a result a bid did not emerge. Auchan eventually
acquired the French public company Docks de France in a very aggressive
hostile take-over. Perhaps more fundamental, Wal-Mart’s sudden move into
Germany in 1997 with the acquisitions of the German chains Wertkauf and
 International Retail Divestment 1093

Interspar strategically exposed Tesco: a dynamic which affected overall

investor interest and the valuations of all retailers across Europe. Other
retailers including France’s Auchan, Carrefour and Casino were moving
rapidly along similar acquisition trajectories adding several companies
including Euromarche, Rallye and Franprix to their domestic market
portfolio (Dobson Consulting 1999). And with that process ongoing, Tesco’s
inherent limitations were increasingly evident - unable to initiate changes
and drive through essential corporate activity in the face of exigent
conditions. In fact, the failed attempt to build support amongst shareholders
for a bid for Docks de France marked the end of Tesco’s efforts to expand
and build upon their foothold in France and soon after the company
instructed an investment bank to find a buyer for the chain. Nonetheless, the
divestment process was not a straightforward event. One analyst reflected on
Tesco’s protracted divestment process, and highlighted three important
lessons learned specifically from the divestment process of Catteau:

“There are three levels. Firstly, how the deal was structured. This will
depend on the whether acquirer has absolute control. Do they have a ‘put’
or ‘call’ option on ownership? Secondly, if the retailer is not going into
the deal with a very strong market position, what is the cost, timing, and
sequencing of investments or acquisitions that is going to be required in
order to achieve leadership with sufficient sales to attain scale economies
relevant to the competition. And who’s going to do that? Will it be the
local player or the corporate player and what are their options on that
when they have to take those decisions. Finally, if it’s going wrong, what
are the costs of exit – are these a set of assets that could add value to
another competitor or are you going to be stuck with the assets because
frankly they’re not worth having. Therefore, the foreign retailer must
develop a relationship with would-be buyers. Significantly, the
relationship between Tesco and would-be French buyers was sullied.”

There were several explanations as to why Tesco divested Catteau’s

operations, but with experience, the company improved the techniques to
prevent the commingling of the management lock-ins that made divestment
more difficult. Management were asked to explain the most important factor
that had led to the decision of Tesco to divest. The critical factor seemed to be
the excessive management time needed to operate the business, and indeed,
the divestment occurred within months of a key management change namely
Terry Leahy’s appointment as CEO of the company. Even though Tesco
readily accepted that the French market was consolidating management
could not find a suitable target willing to sell:
1094 Mark Palmer

“The price of retailers became too expensive to the point where

shareholders would revolt and be up in arms about dilution. “

It took almost three years for Tesco to divest the business and reports
suggested that Catteau was eventually sold to Promodes for an GB£8 million
loss (Osborne 1999). Within the context of the financial market pressures,
Tesco continued to be dogged by their experience of Catteau during the late
1990s with opponents indicating that they had failed to exploit any growth
out of the company:

“When they sold the business it had the lowest sales per square foot of
any retailer in France. The Catteau family was a problem as well. They
required lock-ins. Indeed, Tesco were lucky to get out. Earn-out
consideration prevented management exiting the business swiftly since
that would have meant breaching the original agreed contract. Tesco had
two options: Wait or re-negotiate a new deal. The latter would have been
a ransom situation so Tesco opted for the former.”

Tescos’ experiences with Catteau show that despite success in their domestic
market, the company found it difficult to circumvent legislative issues and
competitive manoeuvrings. In Kuiper’s (1999) interview with the company’s
CEO, Terry Leahy not surprisingly expressed the view that:

“We bought Catteau as a stepping stone to a much larger business in

France. At the time we were not able to buy businesses on the returns we
wanted. So we decided to withdraw. It was very straightforward. Either
further expansion or withdrawal was required. There is no point in
staying on a bridgehead. It did not make sense to our shareholders, so it
was a legitimate move.”

By the end of the decade, following the divestment of Catteau Tesco’s

management and analysts were reflecting on the foray:

“Tesco were penalised very heavily for acquiring Catteau in France, but
they were right to internationalise, but made the wrong acquisition. The
City said it was too expensive and they were not going to go anywhere
and subsequently they were right. But the point is that the Tesco failed to
realise that the financial markets would eventually adjust and begin to
examine the long-term growth potential from internationalisation.”

And yet a number of corporate advisors suggested that, by the late 1990s,
Tesco’s overriding wish was to be back in France, recognising the company
 International Retail Divestment 1095

required broader European scale, and signalling that they wanted dialogue
with the French-based retailer, Auchan. However, the likelihood of the
company re-entering the market in the early 2000s was unlikely given the
relatively high valuations of the retailers in the French market. Against the
emerging landscape of pan-European consolidation, the analysts were
questioning the logic behind the company’s divestment of Catteau:

“I don’t know whether it was wise for them to pull out of France –
strategically. I suspect they are considering very strongly re-entering this
market again. I suspect the Finance Director is sounding support with
institutional shareholders.”

The company’s high profile divestments have led to management developing

a progressive store-by-store expansion in central and eastern Europe
incorporating an exit strategy in the due diligence phase of expansion to
facilitate, where appropriate, a swift and timely market or company exit.

Discussion

It is evident form this study that the divestment of international store

operations is a particularly important aspect of the overall development of
Tesco’s international strategy, where divestment had a marked effect on the
future trajectory of Tesco’s international expansion. However, assessing the
relationship between the ‘mistakes’ made and the response of the firm is not
a simple cause/effect relationship. That is, what is learned may not
necessarily be reflected in overt behaviour. This may even be the case when a
firm learns that it has made a mistake in a previous decision and would like
to react differently in the future but similar situations have not arisen. The
management of the company felt that they had gained invaluable experience
from the divestment decisions to prevent future mistakes in the course of an
international expansion. This was evident when Tesco re-entered the
Republic of Ireland in 1997 following the acquisition of ABF when Tesco
avoided making several strategic mistakes of the past. Table V summarises
the dimensions of divestment and the salient lessons learned from the
divestment of Three Guys and Catteau.

Strategic Competitive Behaviour

In considering divestment more broadly, Tesco’s initial move can be
interpreted against the activities of a small group of retailers operating in the
food retail sector including Ahold, Carrefour and Metro which began to
expand into international markets during the late 1960s and early 1970s. In
this respect Tesco’s move had not been unique or unrepresentative of the
search by food retailers elsewhere in Europe for sites and space at a time of
regulatory developments (Dawson 1979).
 1096 Mark Palmer

Table V: Themes Emerging From Tesco’s International Divestment

Experiences

COUNTRY IRELAND FRANCE

‘Mistakes’ Strategic ‘Mistakes’ resulting in Strategic responses
DIMENSION OF resulting in responses to market withdrawal to divestment
DIVESTMENT market withdrawal divestment and exit:
LEARNING and exit: Case example of
Case example of Catteau (1997)
Three Guys (1986)
Strategic Acquisition process Initially refocused Insufficient due diligence. Shift in focus away from
competitive driven by political expansion in the French incumbents had mature markets towards
behaviour expediency and domestic UK market. been moving into the emerging markets of
pressure. neighbouring markets due central and eastern
to planning constraints in Europe with limited
France. regulatory constraints.

Relationship Store portfolio and Minimized capital High gross margins Acquired several small
between market infrastructure required requirements by undermined efforts to stores with a view to
entry and exit significant capital subsequently improve or exit business. observe the market.
investment. purchasing ABF, a Subsequently exited
Cumulative losses market leader, which small stores and built
amounting to IR£6 had been much more hypermarkets in the
million. successful. market.
Exit strategy Did not envisage Continued to ignore Continued to ignore exit in Proactively developed an
divestment and exit possibilities the pre- entry stage of exit strategy in the due
therefore had no arising during market entry. Reactive diligence phase of
contingency exit international decision processes of the analysis of potential
strategies. expansion. costs, timing and acquisition targets.
sequencing of investments. Acquired small stores
with the intention of
exiting.

Managerial Treated international Following the Distractions in the UK The implications of their
commitment operations as a acquisition of ABF market undermined the relatively slow
‘business extension’ of in 1998, the level of commitment international beginnings
the UK market. company retained required for international has been a much more
the local regional expansion. aggressive and ambitious
infrastructure in expansion programme
Northern Ireland as with the CEO, Terry
well as a separate Leahy, centrally involved
headquarters in the in the strategic decision-
Republic of Ireland. making process.

Marketing No public relations/ Following the Undersold the benefits of Adopted, where possible,
communications community initiatives acquisition of ABF internationalisation to the a more stakeholder
and reputation with customers or in 1998, the financial institutions and marketing orientated
suppliers. company’s post other investors. Credibility approach during
integration plans was undermined reducing internationalisation
were more the company’s versatility. incorporating consumers
cautiously in the target market, the
implemented in the financial institutions and
Republic of Ireland. other investors as well as
global and local
suppliers.
 International Retail Divestment 1097

At the company level, nevertheless, the case evidence suggested that Tesco’s
first international investment decision had been untimely, not least because
of the ‘political’ influence associated with the decision. At the time of the
Three Guys divestment, there had been strong evidence of mounting
concerns over the pressures exerted by their UK competitors. Evidently
domestic pressures forced Tesco into a fundamental decision.
Notwithstanding the strategic and operational difficulties arising from the
Three Guys operations, international expansion was not possible and so a
complete strategic withdrawal from the whole market was the only
alternative to the decline of the Three Guys operations or even a forced exit.
Based on the case findings, it is a moot point whether Catteau represented an
appropriate strategic move where there was realistic and achievable
synergistic potential given the company’s international (in)experience. The
takeover of Wm Low by Tesco after a bidding war with J Sainsbury in
Scotland in 1994, along with the subsequent restructuring and post
integration activities clearly constrained human and capital resources. With
rumours of Wal-Mart’s imminent arrival into the European marketplace and
with Catteau struggling to hold market share in the consolidating
marketplace, divestment followed. In hindsight, however, it is questionable
whether the complete withdrawal from the market was required or whether
remaining as a minority stakeholder in the business would have been more
appropriate for learning and possibly facilitating re-entry at a later stage. The
strategic response of the Catteau divestment has been a shift away from the
structurally mature markets towards the emerging markets of central and
eastern Europe where there are relatively few regulatory constraints.

Relationship between Market Entry and Exit

The preceding case investigation of Tesco’s international activities provide
some important insights into the relationship between international
investment and divestment. The divestment decisions did not exist in
isolation. Rather, the particular divestment decisions were linked to the
investment decision process. In contrast to the reported findings of
Burgelman’s (1994) study, neither the senior managers nor the analysts
believed that strategic exit was a natural part of the investment decision and
competing in an international market in the early phases of expansion.
Analysts suggested that Tesco delayed essential corporate divestment of
Catteau even under intense pressure from the financial markets. This would
suggest that Tesco originally did not envisage divestment or de-
internationalisation as part of the original internationalisation strategy
process. It was clear that Tesco’s management had learned from their
experience of Catteau by improving the techniques to prevent the
commingling of the management lock-ins and sunk costs which made
1098 Mark Palmer

divestment very difficult and costly. In responding to these mistakes, during

the course of entry into central and eastern Europe, Tesco acquired several
small stores and established two pilot hypermarkets with a view to observe
market behaviour. After a period of reflection, the company subsequently
exited the small stores and announced one of the most radical hypermarket
development programmes undertaken by any retailer. Fundamental in this
process was that investment would be underpinned by acquiring sites on a
store-by-store basis rather than absorbing or amortizing charges for
goodwill.

Exit Strategy
Some analysts felt that Tesco could have avoided the mistakes they made
in France by exercising more market and company due diligence before
committing themselves to the acquisition. As part of this due diligence
process, it is necessary to consider prospective acquirers if the operations
need to be divested. In this regard, Tesco’s experience provides a small, but
illustrative example of where the success of a divestment is dependent on
swiftly transferring the business to an appropriate buyer. For example,
although Tesco had reached an agreement with their institutional
shareholders, the company could not find sufficient buyers for the Catteau
chain. A successful exit, therefore, rests upon key stakeholders in a wide
range of firms balancing the risks of acquiring divested operations. Evidently
Tesco had learned to view exit barriers as entry barriers and, ultimately, as
part of the due diligence process in the analysis of market entry. The current
finding would therefore support the broad body of economic theory that
sunk costs have been viewed as forming barriers to both exit and entry
(Clark and Wrigley 1997).

Managerial Commitment
A critical factor of divestment seemed to be the excessively
disproportionate amount of management time needed to operate the
business. This was certainly the case when Tesco first entered Ireland with
the Three Guys acquisition against the context of growth possibilities in the
UK. When additional financial and human resources were required to
address the many difficulties Tesco experienced with Three Guys,
internationalisation was not a strategic priority for management at the time.
When Tesco returned to the Irish market in 1997, circumstances had changed
significantly with internationalisation strategically placed at the centre of the
company’s overall vision. Similarly, the impact of the management change
upon the speed of divestment is most evident in the case of Catteau. Indeed
in the case of Tesco the critical divestments occurred within months of a key
management change namely Terry Leahy’s appointment as CEO of the
 International Retail Divestment 1099

company. This experience would support the broader management literature

which highlights the importance of a ‘new man’ in the divestment decision
(Gilmour 1973; Boddewyn 1976; Burgelman 1994). The implications of their
relatively slow international beginnings had been a much more aggressive
and ambitious expansion programme with the CEO, Terry Leahy, centrally
involved in the strategic decision-making process.

Marketing Communications and Reputation

A conspicuous lack of public relations management during the early
phase of internationalisation placed Tesco at a slight disadvantage in Ireland
and France, for their international peers wasted few opportunities to gently
play on some of the financial markets’ concerns regarding the company’s
international expansion. Tesco experienced a chain of PR mishap-after-
mishap which undermined consumer confidence and excessively weakened
their customer friendly image. Surprisingly there was a conspicuous lack of
action addressing negative rumours and this ineffectual and disjointed
communication further undermined both investor and consumer confidence.
Indeed, a number of studies have linked public relations disasters with
Tesco’s previous divestment (Parker 1986; Lord et al. 1989). Tescos’
experiences with Catteau also illustrate how a retail company can become
locked into an inappropriate corporate strategy, delaying essential
divestment, even though structural transformation is required. That is, even
though Tesco understood the structure of the transformation required,
management were unable to either take full control and ownership of the
exigent situation without damaging their international reputation. The
strategic effect of this was that Tesco’s international credibility was
undermined and that, as a consequence, the company 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 host government regulators. In subsequent years, the
company adopted, where possible, a more stakeholder marketing orientated
approach during internationalisation incorporating consumers and
community groups in the target market, the financial institutions and other
investors as well as global and local suppliers.

Conclusion

This work represents an interesting counterbalance to most of the previous

work on the growth of retailer internationalisation. By examining past cases
of international retail divestment it is possible to reflect on the causes that
contribute to divestment and hence future actions may be influenced
accordingly. It has been demonstrated that, despite the progressive merger
1100 Mark Palmer

and acquisition wave sweeping through the corporate retail landscape

recently, international retail divestment has been quite widespread. The
preceding case investigation of Tesco’s international activities provide some
important insights into international retail divestment. The scope and nature
of divestment activities in both Ireland and France were distinctively
different, yet at the same time it is also apparent from the divestment cases
that there were a number of similarities. The main conclusion from this
study is that Tesco originally did not envisage divestment or de-
internationalisation as part of the original internationalisation strategy
process in either the acquisition of Three Guys in Ireland or Catteau in
France. There was no appreciation from Tesco during their early period of
expansion of the fact that exit pressures might arise during the course of
market entry. In this regard, the case study provides insights into the
relationship between investment and divestment within the context of
international corporate restructuring. The case evidence also demonstrates
the positive impact of the Three Guys and Catteau divestments which helped
management to refocus and rejuvenate the company’s internationalisation
process.
Investigating events such as divestment is difficult due to the particularly
sensitive and even confidential nature of this activity. Moreover, divestments
may be erased from company history with little, if any, reference given to
these events in corporate literature. Non disclosure practices may also be
enforced prohibiting access to key informants in both the retail
multinationals and the financial institutions. Therefore innovative
methodologies must be employed in order to go beyond the ‘official
corporate line’ and surface explanations of executives for the discovery of
actual, as opposed to stated, realities during the retail internationalisation
process. The triangulation of the views and opinions of a number of different
stakeholders involved the international retail restructuring and divestment
processes may provide a more accurate portrayal of what actually happens.
This study demonstrated that corporate finance advisors, analysts and
management consultants are active contributors to the international retail
restructuring and divestment processes. In developing further understanding
of this area, a number of areas could be researched under the following
broad themes including: an exploration of the range of retail divestment
activities from small-scale site disposals to the complete large-scale
withdrawal from all international markets and the different conditions under
which this divestment is more appropriate or likely to occur; the reasons for
international divestment incorporating the role and influence of the financial
institutions alongside other stakeholders such as local governments in the
divestment process; and the financial and human capital dimensions that are
entwined in the divestment process prohibiting the immediate disposal of
 International Retail Divestment 1101

international retail and distribution operations. Future research studies

which explore the spatial dimensions as well as the scale and scope of the
international retail divestment process would significantly strengthen
research in this area. A second line of enquiry could explore the nature of
learning within an international retail context. Fundamental in this paper
was the role of learning within the context of international retail restructuring
and divestment. There have been comparatively few attempts to explore the
learning dimensions of strategic decision-making at the corporate level and
the relation of these to the broader corporate interactions during the retail
internationalisation process. Future research may investigate more broadly
the concept of international retail learning and the lessons retailers have
actually learned from their experiences of internationalising retail operations.

Acknowledgements

This paper has developed out of doctoral work supported by Sainsbury’s.

The author is also grateful for the assistance of British Stores & Shops
Association and, in particular, The George Spencer Trust under a 2000
individual Research Award. The author is indebted to the food retail analysts
at the leading investment banks and the management of Tesco who kindly
participated in this research.
The author acknowledges with grateful thanks the constructive and useful
comments provided by Dr Barry Quinn at the University of Ulster and two
anonymous referees on an early draft of this work.

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About the Author

Mark Palmer is a Lecturer in Marketing at Aston Business School. His

research explores the internationalisation process of large, multinational
retail companies and the involvement of investment banks in this process.
His research has been funded by Sainsbury’s plc and the George Spencer
Fellowship Trust in conjunction with the British Shops and Stores
Association (BSSA). Prior to moving to Aston Business School, Mark was
employed as a Market Research analyst at a small Cambridgeshire based
company in the software industry.

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