According to the Australian Financial Review (2013), Tesco has agreed to form a 20/80 joint venture with China Resource Enterprises. This initiative occurs in the light of the declining retail environment in Europe and aims to combine Tesco’s 134 Chinese branches with 2,986 outlets from the China Resources Vanguard business. This deal will provide a strong platform for Tesco to enter the Chinese market and establish market leadership by improving its offering for customers within the region. Application
Tesco’s planned expansion in China is the direct result of the declining economic environment in Europe, which has lead to a dramatic shift in sociocultural spending patterns. This has impacted Tesco negatively as a 0.2% reduction in European private consumption from 2007 to 2011 (Roxburgh 2012) saw a £1 billion decrease in Tesco’s European sector revenue from 2009 to 2011 (Tesco 2009; Tesco 2011).
As a response, Tesco has initiated a strategic alliance with China Resource Enterprises in a bid to solidify its market position in China. This alliance greatly assists Tesco in overcoming cultural differences as Inkpen and Tsang (2005) explains that firms operating in culturally distant nations can leverage knowledge from local partners to better understand host markets.
This is important as the UK and China are dissimilar in a multitude of cultural dimensions (Hofstede 1984). Through this alliance, Tesco can overcome its liability of foreignness by utilizing the existing brand reputation of its partner since 45% of Chinese consumers display a high level of brand loyalty (Magni and Atsmon 2012), prevalent in a long term orientation focused culture.
This alliance furthermore allows Tesco to transform into a multi-format retailer (Australian Financial Review 2013), which is consistent with changing consumption preferences signified by the increasingly popularity of hypermarkets. This multi-purpose shopping location has subsequently become a staple for consumers with average growth rates of 20% per annum since 2003 (Herring et al. 2012). This changing sociocultural trend provides Tesco with a myriad of opportunities in China. Analysis
Tesco’s expansion strategy in China will provide numerous opportunities for growth. This stems from a mixture of Chinese economic and regulatory factors which contribute to an increasingly consumption-driven demographic. According to Woetzel, Li and Cheng (2012), regulatory initiatives on raising minimum wage levels have already increased disposable income per capita by 19.7% in 2012.
This combined with financial reforms aimed at increasing market competition will help expand private sector activity, in turn boosting employment and accelerating household income growths by 9% per annum. As a result of improving economic conditions, Woetzel, Li and Cheng predict national consumption to rise by 8% per annum and increase threefold from 30,000RMB in 2012 to 92,000RMB in 2030. These consumption patterns provide a myriad of sale opportunities for Tesco.
However these benefits are overshadowed by an aging population and a reduction in the available workforce. According to Atsmon et al. (2012), China is experiencing rising life expectancies and falling birth rates, and estimates the proportion of population over 65 will increase from 10% to 15% in the near future. This is problematic as Bongaarts (2004) states public pension benefits impose serious economic burdens on the working population and may lead to a rise in taxation. This factor is worsened by a reduction in the available working age population which according to Evans-Pritchard (2013) has already increased salaries by 16% annually in the past decade.
This may increase Tesco’s operating costs, which will reduce profitability. Although faced with an ageing population, Woetzel, Li and Cheng (2012) reveal that increasing government subsidies towards social security could strengthen China’s safety net. This combined with increasing urbanization and a rising middle class will spur consumption, counteracting the effects of an ageing population. Golley and Meng (2011) also provide evidence against labour shortages in China and state there is still an abundance of under-employed workers in rural regions. They argue unique Chinese institutions and policies have restricted migration into cities and regulatory reforms can see migrant workers double from 150 to 300 million, thereby negating significant salary increases.
Corporate Social Responsibility and SustainabilityTesco has recently introduced a variety of sustainability and ethical sourcing initiatives, reflecting an increased commitment towards CSR. However these programs were only initiated after negative publicity generated by Friends of Earth (2005), which accused Tesco of using their market power to reduce supplier prices and operating energy intensive facilities.
According to Becker-Olsen et al. (2006), this is a reactive rather than proactive strategy and confirms Piacentini et al.’s (2000) study, which exposed that being recognized as a socially responsible company was the main reason food retailers adopt CSR rather than philanthropic reasons. Consequently, Tesco’s CSR initiatives can only be classified as a CSR grasp on Freeman and Hasnaoui’s (2010) continuum as they are merely strategies that ensure competitiveness. Although superficial, these CSR initiatives do however set standards for competitors and can encourage future CSR advancements as firms compete to be recognized as the most socially responsible retailer.
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Hofstede, G. 1984, ‘Cultural dimensions in management and planning’, Asia Pacific journal of management, Vol. 1 no.2, pp. 81-99. Inkpen, A. C., & Tsang, E. W. 2005, ‘Social capital, networks, and knowledge transfer’, Academy of management review, Vol. 30, no. 1, pp.146-165.
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