October 21, 2005

Talk with Tesco International CEO Philip Clarke

Philip Clarke, Tesco International CEO (photo: Mark Mackenzie)
Philip Clarke: "We don't just plant flags"
Philip Clarke, Asia, Europe & IT director at Tesco Plc, works for a global retailer which arrived relatively late on the international playing field.

Since the mid-90s, the UK's leading grocer has more than made up for lost time with multiple entries in eastern Europe and south-east Asia.

Last year, international operations in Asia and Europe were added to Phil Clarke's managerial responsibilities. The 45-year-old Tesco veteran first started work for the company in 1974.

After college, he rose through the ranks to become a store manager, product buyer, marketer and, as from 1998, a board member responsible for the group's supply chain and IT operations.

Recently, this down-to-earth Liverpudlian has exited Taiwan. Could this be the harbinger of a major realignment overseas?

INTERVIEW


Mr. Clarke, why did Tesco exit Taiwan in exchange for Carrefour’s Czech and Slovak stores?


Despite our local team’s best efforts, the performance in Taiwan hasn’t matched our expectations. Originally we thought it would be easy to get economies of scale, but it wasn’t.

We also entered the market in the middle of a recession. Moreover, the store swap was an innovative way for two retail groups to play to their individual strengths.

Could you exit any further countries?

No, we don’t face such problems in any of our other foreign markets.

But aren’t you having trouble in Poland?

We have been very pleased with the performance in Poland. In July 2002 we doubled our size there via the acquisition of "Hit". It simply took some time to consolidate something on that scale.

Would you consider extending your strong base in eastern Europe into Russia, Rumania and Bulgaria?

We don’t have any plans at the moment to enter any of these countries. We only moved into China, Turkey and Japan relatively recently. All this takes a lot of resources and time to develop. We don’t want to have too many countries where we’re trying to build at once.

Under what type of conditions would an acquisition in the USA be in the best interests of your shareholders?

We’ve been visiting the USA for 20 years or more, and we never say never. However, China, Japan and Turkey are all big countries with great growth opportunities, so there’s not necessarily a strategic need.

We’re busy growing these countries rather than planting lots of flags around the world.

To what extent do you regard Aldi and Lidl as a threat to your business in the UK?

We take all competitors seriously. They may stock 1,200 lines, and we may stock 40,000. The 1,200 lines they stock appeal to a certain type of customer, whereas our job is to appeal to all customers.

But doesn’t matching their prices on major commodity items hurt your bottom line?

Only if we didn’t develop the products well and buy them well. They have scale in their home markets; we have scale in the UK.

How did you react to Wal-Mart CEO Lee Scott’s demands for a government enquiry into your UK market share?

We were amused at the biggest company in the world demanding that the UK government make an enquiry into our market share. I think he looked at the adverse press he was getting in the US and for some reason decided to pick on us.

Tesco has also been increasingly criticised for its market share in the media.

We are the largest private employer in the country and affect a lot of people’s lives so it is natural that they will question us. The 30.8 per cent figure quoted in the media represents our share of supermarket retailing only.

According to TNS, we have 20 per cent of the UK grocery market and a mere 13 per cent of the total retail market. Do not forget that retailing in the UK is fiercely competitive. 90 per cent of the British have a choice of at least three supermarkets in their local area.

Within less than a ten-minute drive, many can choose between a Tesco, J. Sainsbury, Morrisons, Waitrose, Asda, Somerfield, various cooperatives and a number of independents. At the end of the day, however, the reason why we are successful is because people choose to shop with us.

The average customer doesn’t care about market share. Customers vote with their feet, and, if we don’t do a good job, then they’ll go elsewhere.

Does it concern you as an international retailer with global aspirations that you are market leader in a home country which makes up only 3 per cent of the world’s GDP?

The UK is also one of the most competitive and advanced retailing markets in the world. We were able to take our expertise from the UK and build what are now successful businesses overseas.

We are still young internationally, but are seeing strong growth. We already have market-leading positions in five countries outside the UK and are confident that we have the skill and capacity to become market leader in the rest.

How long must investors wait before Tesco’s international operations make UK-type returns?

We only went international some ten years ago and are already in ten countries, excluding Taiwan. Our returns are growing, and our lead countries already exceed our targets. Investors recognise the increase in both sales and earnings.

Are you happy with your size and scale vis-à-vis such global competitors as Wal-Mart, Carrefour and Metro?

In the end, it isn’t global scale that will get you to win internationally. Instead, you need skill and local scale in each specific country. Therefore, we work hard on exporting our skills from the UK to other countries.

Abroad, we do as much as we can in a similar way to the UK on things like the supply chain, IT, processes and marketing. We also allow the local store to be different where it matters, i.e., in serving the customers.

We are proud of the fact that only 67 ex-patriots work in the whole of our international division. If you look at our competitors, some will have that many in one single country.

Are you considering expanding your store portfolio to include discount outlets?

We already regard ourselves as a mass market discount retailer. What makes the hypermarket appealing is that it has got everything the consumer requires for everyday needs, but at discount prices.

If it didn’t do that, it would be a department store on one level, and not as many people would visit.

Why have you started to introduce smaller hypermarkets abroad?

It is part of our strategy to be a multi-format retailer. As the opportunities for building larger hypermarkets start to dry up in some countries, we are then able to open in-fill stores of around 3,000 m², as, for instance, in Hungary, Thailand and Malaysia.

So when we first enter a country we start with large hypermarkets. Then, when we’ve got some scale, we put in a centralized supply chain with our own distribution centres.

This reduces the amount of direct deliveries and makes our model more competitive so that we can then begin to operate compact hypermarkets profitably.

Don’t compact stores also reduce your economies of scale?

No. They require less capital because they are smaller and require lower sales levels to make them profitable. Also we can put them into towns which bigger hypermarkets can’t service.

A 10,000 m² hypermarket might need 45,000 people in its catchment area in order to be profitable, but a 3,000 m² compact store could be put in a town with only 25,000 people.

In fact, once our systems are up-and-running, we can introduce much smaller stores and still make good returns. For instance, in up-country Thailand we have “Value” stores which can achieve our target on returns in towns of only 12,000 people.

We have even started to introduce our 300 m² “Express” stores into both Korea and Thailand.

What is the one most important factor in making a success of international expansion?

It’s not just a question of building stores; you’ve got to trade them. You have to have stores that give you like-for-like sales growth. This is not always possible because there are often so many new competitors coming into the market.

That’s why I like nothing better than being in the stores and getting excited about how our people on site are managing to get more sales from existing stores. Hands-on is the name of the game, and it’s a great game.
 
  
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 42, 21.10.2005


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