The Association of Business Executives International Business Case Study Tesco Plc

8/2/2019 The Association of Business Executives International Business Case Study Tesco Plc.

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The Association of Business Executives

QCF

International Business Case Study

Tesco plc29 November 2011, Afternoon

This is an open-book examination and you may consult any previously prepared written

material or texts during the examination.

Only answers that are written during the examination in the answer book supplied by theexamination centre will be marked.

6IBCS1211 ABE 2011 J/601/2793

6IBCS1211


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Notes

l As in real life, anomalies may be found in this Case Study. Please simply state your

assumptions where necessary when answering questions. ABE is not in a position toanswer queries on Case data. Candidates are tested on their overall understanding

of the Case and its key issues, not on minor details. There are no catch questions orhidden agendas.

l After the publication of the Case Study, subsequent developments may occur. Theexamination is based on the published Case Study, and students who do not mention

such developments will not be penalised. However, students may consider suchdevelopments in their answers if they wish.


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6IBCS1211 3 [Turn over

Tesco plc

Tesco plc is a global grocery and general merchandising retailer headquartered in the UnitedKingdom. It is the third-largest retailer in the world measured by revenues and the second-largestmeasured by prot. It has stores in 14 countries across Asia, Europe and North America and is thegrocery market leader in the UK (where it has a market share o around 30%).

Tesco plc has come a long way since its humble beginnings in 1919. It is currently the leadinggrocery chain in the UK with a sizeable amount o sales in non-ood items such as clothingand electrical goods. In a sense, it is a victim o its own success, and its high market share hasled to regular calls or its market power in the UK to be curbed. Any such limitation will greatlyaect Tescos sales and prot growth. This threat has led Tesco to ocus more on developing itsinternational business, a development that began at the beginning o the 21st century. Its mainglobal competitors are the US-based chain Walmart and the Carreour organisation, based inFrance.

In the UK the various operations are operated as sub-brands under the main umbrella brand oTesco, as shown below:

l Tesco Extra - these are larger, mainly out-o-town hypermarkets that stock nearly all oTescos product ranges.

l Tesco Superstores - Tesco superstores are standard large supermarkets, stocking groceriesand a much smaller range o non-ood goods than Tesco Extra stores.

l Tesco Metro - these are smaller stores between Tesco Superstores and Tesco Expressstores. They are mainly located in city centres, the inner city and on the main streets otowns.

l Tesco Express - these are neighbourhood convenience shops, stocking mainly ood with an

emphasis on higher-margin products (due to small store size, and the necessity to maximiserevenue per square oot) alongside everyday essentials. They are ound in busy city centredistricts, small shopping precincts in residential areas, small towns and on Esso petrol stationorecourts.

l Tesco Homeplus - these are stores that oer all o Tescos ranges (except ood) inwarehouse-style units in retail parks.

There are other outlets which are operated under the One Stop and Dobbies identities. One Stopis a chain o convenience stores that was purchased in 2002 and Dobbies is a chain o gardencentres (outlets which sell products or the garden), which Tesco purchased in 2007. These two

businesses (One Stop and Dobbies) are the only exceptions in the UK to Tescos normal strategyo house name /umbrella branding. Appendix One shows the numbers and the size o each storecategory.


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The History of Tesco

Jack Cohen ounded Tesco in 1919 when he began to sell surplus groceries rom a stall at WellStreet Market, Hackney, in the East End o London (ironically, the market is now much smallerthan in those days; a large Tesco Metro store now sits on the site). The Tesco brand rst appearedin 1924, Tesco was foated on the London Stock Exchange in 1947 as Tesco Stores (Holdings)Limited. The rst Tesco sel-service store opened in 1956 in St. Albans, Hertordshire (Tesco was

not the rst organisation to open a sel-service store in the UK).

During the 1950s and the 1960s, Tesco grew both organically and also through acquisition until itowned more than 800 stores, mostly in the southern hal o England.

Jack Cohens business motto was pile it high and sell it cheap and this was the key element oTescos strategy in the 1960s and 1970s. A major sales promotional tool at the time was the use oa scheme based upon giving Green Shield Stamps to urther increase customer loyalty. However,in a massive repositioning o its business in 1977, it stopped issuing stamps and instead cut itsprices by 25% overnight.

In May 1987, Tesco completed its hostile takeover o the Hilliards chain o 40 supermarkets in theNorth o England or 220 million as part o its strategy o becoming a national chain instead obeing perceived as a southern chain.In 1994, the company took over the well-respected Scottish supermarket chain William Low, whichoperated 57 stores. This paved the way or Tesco to expand its presence in Scotland, where it wasweaker than in England.

In 1995, Tesco introduced a loyalty card, branded Clubcard and, later, an Internet shoppingservice known as Tesco Direct. This incorporated a printed catalogue enabling customers to orderrom a vast range o non-ood merchandise. As o November 2006, Tesco was the only oodretailer to make online shopping protable.

In 1996, the typeace o the logo was changed to the current version with stripe refectionsunderneath, whilst the corporate ont used or store signage was changed rom the amiliartypewriter ont that had been used since the 1970s. Sir Terry Leahy assumed the role o ChieExecutive on 21 February 1997.On 21 March 1997, Tesco purchased the retail arm o Associated British Foods, which consistedo grocery stores in the Republic o Ireland and Northern Ireland, plus associated businesses, or640 million. The deal was approved by the European Commission. This acquisition gave Tesco asignicant presence in the Republic o Ireland and also a larger presence in Northern Ireland thanone o its main UK rivals, Sainsburys.

In 1997, Tesco and Esso (the UK business o Exxon Mobil) created a business alliance thatincluded several petrol lling stations on lease rom Esso, with Tesco operating the attached storesunder the Express ormat. In turn, Esso operates the orecourts and sells their uel via the Tescostore. Two hundred Tesco/Esso stores now exist across the UK.

In July 2001, Tesco became involved in Internet grocery retailing in the USA when it obtained a35% stake in GroceryWorks. In 2002, Tesco purchased 13 HIT hypermarkets in Poland. It alsomade a major move into the UK convenience store market sector with its purchase o T & SStores, owner o 870 convenience stores in the UK.In October 2003, the company launched a UK telecoms division, comprising mobile and home

phone services, to complement its existing Internet service provider business. 2003 also sawurther international expansion when Tesco purchased the C Two-Network in Japan and acquireda majority stake in the Turkish supermarket chain Kipa.


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In January 2004, Tesco acquired Adminstore, owner o 45 Cullens, Europa, and Harts conveniencestores in and around London, which urther strengthened its presence in this sector. In August 2004,it also launched a broadband service.

In late 2005, Tesco acquired 21 Saeway/BP petrol lling station stores.

In September 2005, Tesco announced that it was selling its operations in Taiwan to Carreour and

purchasing Carreours stores in the Czech Republic and Slovakia. Both companies stated thatthey were concentrating their eorts in countries where they had strong market positions.In mid-2006, Tesco purchased an 80% stake in Casinos Leader Price discount supermarkets inPoland.

In 2007, Tesco took part in a joint venture with the telecoms company O2 to orm Tesco Mobile.Tesco continued to be a major advertiser on television and a television ad campaign eaturingthe Spice Girls was used in Christmas 2007. The Spice Girls were reportedly paid 5 million(US$10 million) to appear in the campaign.

In April 2010, Tesco negotiated a deal to become the ocial England team sponsor or theduration o the ootball World Cup, which was estimated to have cost Tesco US$4 million.

Tesco continues to bring eective solutions to the marketplace and, in February 2011, itannounced that, as well as using home delivery or Tesco Direct products, it would set up a systemwhereby customers can collect their orders rom the large Tesco stores (see Appendix Two).

Tesco has, or many years, produced solid nancial perormances and is one o the mostsuccessul UK companies (the nancial results are shown in Appendices Three, Four and Five).

Tesco Corporate Strategy

Tesco has successully appealed to many, i not all, segments o its market. One element o the

strategy has been Tescos use o its own-brand products, including the up-market Finest brand,which competes with retailers such as Marks and Spencer, the mid-range Tesco brand and thelow-price Value brand, encompassing several product categories such as ood and beveragewhich, together with low priced suppliers labels, enable Tesco to compete with the so-called harddiscounters such as Lidl and Netto. It also has been successul in providing customers with homeproducts and clothing. Other products such as mobile telecoms and nancial services (insuranceand banking) complete the range.

Beginning in 1997, when Sir Terry Leahy took over as CEO, Tesco began marketing itsel usingthe phrase The Tesco Way to describe the companys core purposes, values, principles andgoals. This phrase became the standard marketing speak or Tesco as it expanded domestically

and internationally under Leahys leadership, implying a shit by the company to ocus on people,both customers and employees.

A core part o the Tesco expansion strategy has been its innovative use o technology. It was oneo the rst to install sel-service tills and use cameras to reduce queues. The way that Tesco hasbeen able to introduce changes successully, particularly in both the number and structure o itsworkorce, is clear testimony to the excellent quality o its management, and this fexibility enablesTesco to constantly evolve in line with changes in its trading environment. This can be contrastedwith the problems that Sainsburys aced in trying to introduce new point o sale systems in the late1990s.

Tescos main advertising slogan is Every little helps. This simple advertising phrase in act

serves as a quasi mission statement and gives the company and its large workorce, the majorityo whom are part-time, a broad guide on how to deliver excellent customer service. The Tesco


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compares avourably with Marks and Spencers 1.51% but unavourably with Sainsburys 7.02%. Inhis role as chie executive o The Work Foundation, Will Hutton has praised Tesco or leading thedebate on corporate responsibility (see Appendix Six).

The ollowing extract rom Tescos 2011 annual report gives an insight into Tescos CSR policies:

Communities are at the heart o what we do and we have established a leadership role on

climate change. Our achievements this year include:

Caring for the environment. We have exceeded our target to reduce carbon emissions rom

our baseline portolio o buildings by 5.5% compared to 2009/10. In total we have ootprintedover 1,000 products, and carbon labelled over 500 products in store and online in the UK. We

have also continued our carbon labelling programme in South Korea.

Actively supporting local communities. We have exceeded our 2010 target o donatingat least 1% o pre-tax profts to charities and good causes, donating 1.8%. We have also

exceeded our target to raise 7m or charity through sta and customer undraising: in theUK alone, we raised 7.2m or our nominated Charity o the Year. Since the start o our

computers and sports or schools schemes, we have given 170m worth o equipment toschools in the UK alone. We work with Marys Meals to provide daily meals to over 4,000

school children in Malawi, India, Kenya and Thailand.

Buying and selling products responsibly. Under our Trading Fairly programme we nowhave our own experts in China, Bangladesh and South Arica working directly with local

suppliers to tackle labour issues. We have increased sales o local products in the UK to1bn. We are co-leading a project across the consumer goods industry to achieve zero net

deorestation by 2020.

Giving customers healthy choices. We have 100% nutrition labelling o eligible own-brandood lines in all our markets. In Thailand, around 4 million people participated in an aerobics

competition, a Walkathon and ootball clinics. In the UK, around one million primary schoolchildren ran in the Great School Run and over 740,000 children have taken part in the F.A.

(Football Association) Skills Programme.

Creating good jobs and careers. We have increased the total number o sta in the Groupby 21,000. Our basic hourly rate o pay or a customer assistant in the UK is 7% higher

than our three largest ood retail competitors. Also in the UK, 216,000 sta shared a totalo 105.5m through our Shares in Success scheme in 2010, and we opened a record eight

Regeneration Partnership stores this year.

Inevitably an organisation the size o Tesco attracts controversy. In 2009, Tesco used the phrase

Change or Good in its advertising, which is trademarked by Unice or charity use but not orcommercial or retail use. This prompted Unice to say, It is the rst time in Unices history that acommercial entity has purposely set out to capitalise on one o our campaigns and subsequentlydamage an income stream which several o our programmes or children are dependent on. Theywent on to call on the public, ...who have childrens welare at heart, to consider careully who theysupport when making consumer choices. (See Appendix Seven or urther details.)

Leadership in Tesco

In 2010, Sir Terry Leahy (the CEO) announced that he was to retire. His replacement, anotherinternal appointment, was Phillip Clarke. The key question is whether an internal appointment willgive the organisation the necessary international perspective/leadership that say someone like Luc

Vandevilt gave at M & S between 2000 and 2004. This is thought to be important especially orEuropean markets.


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However Phillip Clarke, who has been with Tesco all his working life, has experienced at rst handthe transformation of Tesco to become the worlds third largest retailer. After gaining a universitydegree, Phillip Clarke joined the Tesco Management Programme, which provided him with aperfect platform to work his way to the top of the organisation. Previously, he had direct and overallresponsibility for the supply chain and information technology parts of the business. His expertisegained in IT is thought by many to show Tescos determination to take on Walmart, who are verygood at using IT to maximise efciency in all aspects of the business.

More recently, he became responsible for the businesses outside of the UK, leading Tescos entryinto China and the United States with the opening of the Fresh and Easy stores.

Commenting on the appointment of Mr. Clarke a leading retail analyst, Rahul Sharma, from theorganisation Neev Capital, believes that Mr. Clarke needs to sharpen the Tesco price image onceagain and should also be more open to the idea of recruiting external talent.

The Global Grocery - Mass Retailer Market

The global grocery market is dominated by three organisations who have expressed internationalambitions - Carrefour, Walmart and Tesco. Alongside these, there are the so-called hard discountstores of Aldi, Lidl, Leader Price and Netto, who operate from smaller outlets with a restrictedrange of products, particularly in non-food items. When entering a foreign country, there is likely tobe signicant competition from domestic operators, such as exists in Germany and Spain.

Carrefour

With over 450,000 employees, Carrefour, based in France, is one of the worlds largest privatesector employers. It is seen as a pioneering entrant in countries such as Brazil (1975) and China(1995). The group currently operates in three major markets: Europe, Latin America and Asia, witha presence in 34 countries. Over 57% of group turnover derives from outside France. The groupsees strong potential for further international growth, particularly in such large markets as China,

Brazil, Indonesia, Poland and Turkey. Their stores operate under many different brands, oftenreecting the local situation. In 2009, the company had annual sales of 85.9 billion euros. Althougha major presence globally, it is not the largest retailer in France, being ranked second behind theLeclerc group.

Tesco

Tesco currently operates in 14 countries. The property division of Tesco has establishedsuccessful shopping mall businesses in South Korea, Thailand, Malaysia, Central Europe andChina.


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Tesco International Results: 52 weeks ended 26 February 2011

million at actual exchange rates

United

KingdomAsia

Rest of

Europe

United

States

Tesco

BankTotal

Revenue 40,117 10,241 9,159 495 919 60,931Trading prot/(loss) 2,504 570 527 (186) 264 3,679

Walmart

Sam Walton opened the rst Walmart store in 1962 in the US. He had previous experience ofregional discount stores. Expansion was comparatively slow until Walmart launched its shares onthe New York Stock Market in 1972 and, within 8 years, the number of stores had grown to 276across 11 US states. In 1983, the rst Sams Club members warehouse store opened. By the endof the 1980s, there were 1,402 stores and 123 Sams Club locations. Its rst real global initiativeoutside North America was the purchase of the Asda grocery chain in the United Kingdom in 1998.

The company has more than 9,000 outlets, trading under 60 different banners in over 15 countriesglobally. The organisation employs over 2.1 million people, many of whom are part-time. Thecompany views its people not simply as employees, but as associates. In 2010, total salesamounted to over $421 billion.

Sam Walton died in 1992, but his philosophy of giving customers what they want still underpins themission of the company. His main goal was to save people money to help them live better, and thishas been translated globally into an internal productivity programme known as every day low cost(EDLC) which means every day low prices (EDLP) for its customers.

International Sales versus Domestic Sales

Store Group International Domestic

Carrefour 57% 43%

Tesco 30% 70%

Walmart 30% 70%

Number of Outlets by Region

Region Carrefour - 2009 Tesco - 2010 Walmart - 2010

Asia 718 1,424 747

Europe 13,237 3,894 386

North America nil 164 6,468

Central & South America 1,365 nil 1,381

Middle East 23 nil nil

Africa 72 nil nil

Australia/New Zealand nil nil nil


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Future Issues

In addition to the impact o the PESTLE actors, there are specic issues regarding internationalretailing.

The key question is: can retailing based upon grocery/ood become a truly globalised brand and, iso, how can Tesco achieve this?

A recent independent study identied some key actors in determining the strategy or internationaldevelopment or organisations such as Tesco, Carreour and Walmart. These are:

1. The degree o sophistication/development in the supply chain.2. The level o economic development in terms o the degree o car ownership, levels o

urbanisation and disposable income ater key costs such as housing expenses have beentaken into account.

3. The availability o suitable retail sites, notably out o town locations.4. The attitudes within the local culture towards customer service.5. The opportunity to use CSR activities to build relationships with local and national

communities.6. The availability o suitable local managers.

There are problems acing development in countries such as India and many Arican nations wherethere are signicant, and very remote, rural populations. These problems will require imaginativesolutions, as illustrated by the initiative undertaken by leading global brands in India to ensuremaximum distribution (Appendix Eight).

For Tesco, the ocus o uture plans will be on how to repeat the successul UK strategy globally,and to what extent a standardised approach can be used.

Rahul Sharma rom Neev Capital, among others, stresses that Tesco needs to go global.

He believes that growth opportunities in Tescos domestic UK market are limited because ocompetition and the act that population growth is not at the rate that would be needed to enableTescos prots to continue to grow at their current rate.

Although Tesco has enjoyed success in most o its international operations, it is still to break evenon its US operations.


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APPENDIx ONE

Tesco outlets by type in the United Kingdom - 2011

Format Number Total

area (m)

Percentage

of space

Tesco Extra 212 1,400,885 41.08%Tesco Superstores 470 1,297,112 38.04%

Tesco Metro 186 194,632 5.73%

Tesco Express 1,285 272,392 7.99%

One Stop 521 74,044 2.04%

Tesco Homeplus 13 51,468 1.53%

Dobbies 28 121,053 3.57%

Total 2,715 3,411,586 100%

Source : Tesco Preliminary Results 2011


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APPENDI TWO

Tesco Direct looks at click-and-collect

By Neil Crave

26 February 2011

Tesco is considering a plan to allow customers to pick up their internet orders from its vast networkof convenience stores. The strategy would see the supermarket giant drop off orders from its non-grocery site Tesco Direct to about 1,400 Express and Metro stores through its existing deliverynetwork.

This could effectively cut out the need for the chain to rely on Royal Mail and signicantly reducethe cost of delivery.

Discussions about the project are understood to be at an early stage, but Tesco last yearseparately began trials of a grocery service commonly known as click-and-collect.

Analysts said the plan for non-grocery items would require limited reorganisation in its shops todrop off packages and provide space to store orders, but would otherwise require little investmentby Tesco.

The last mile is seen as a key barrier for home delivery, said supermarket analyst Clive Black atstockbroker Shore Capital.

A lot of people might be persuaded to order online if they could turn up to a local store rather thanwait for hours at home until the delivery arrives.

Tesco declined to comment. However, click-and-collect operations are becoming increasingly

popular with shoppers and retailers.

Black said Sainsburys, which has about 400 convenience stores, is likely to watch closely anydevelopments at Tesco.

Several other retailers have begun to encroach on the territory traditionally seen as the preserve ofcatalogue retailer Argos.

Marks & Spencer operates a collect service called Shop Your Way, while John Lewis last yearbegan allowing shoppers to pick up orders from its sister chain Waitrose.

Tesco has also launched Argos* style catalogue service desks in some of its large Extra stores.

* Argos is a retailer of non-food products such as toys and electrical goods that sells its goodsthrough catalogues with customers placing and collecting orders from outlets which are smallerthan traditional retail outlets because there is no need to display the goods.

Source: Mail Online 26/02/2011


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APPENDI THREE

Summary of Tesco Financial Performance

52 weeks to 26th February 2011

Increase vs 2010

Group sales (inc. VAT) 67,573m 8.1%Group revenue (exc. VAT) 60,931m 7.1%Group trading prot 3,679m 7.8%Underlying prot before tax 3,813m 12.3%Group prot before tax 3,535m 11.3%Underlying diluted earnings per share 35.72p 10.8%

Dividend per share 14.46p 10.8%Net debt 6.8bn Down 1.1bnReturn on capital employed 12.9% Up 0.8%

Source: Tesco Preliminary Results 2011


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APPENDIX FOUR

Tesco plc - Group Balance Sheet - million

2011 2010

Non-current assets

Goodwill and other intangible assets 4,338 4,177

Property, plant and equipment 24,398 24,203

Investment property 1,863 1,731

Investments in joint ventures and associates 316 152

Other investments 1,108 863

Loans and advances to customers 2,127 1,844

Derivative nancial instruments 1,139 1,250

Deferred tax assets 48 38

Total 35,337 34,258

Current assets

Inventories 3,162 2,729

Trade and other receivables 2,314 1,888Loans and advances to customers 2,514 2,268

Loans and advances to banks and other nancial assets 404 144

Derivative nancial instruments 148 224

Current tax assets 4 6

Short-term investments 1,022 1,314

Cash and cash equivalents 1,870 2,819

Sub total 11,438 11,392

Non-current assets classied as held for sale 431 373

Total 11,869 11,765

Current liabilities

Trade and other payables (10,484) (9,442)

Financial liabilities

- Borrowings (1,386) (1,529)

- Derivative nancial instruments and other liabilities (255) (146)

Customer deposits (5,074) (4,357)

Deposits by banks (36) (30)

Current tax liabilities (432) (472)

Provisions (64) (39)

Sub total (17,731) (16,015)

Net current liabilities (5,862) (4,250)

Non-current liabilitiesFinancial liabilities

- Borrowings (9,689) (11,744)

- Derivative nancial instruments and other liabilities (600) (776)

Post-employment benet obligations (1,356) (1,840)

Deferred tax liabilities (1,094) (795)

Provisions (113) (172)

Sub total (12,852) (15,327)

Net assets 16,623 14,681



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APPENDIX FIVE

Tesco plc Group Income Statement

52 weeks ended 26 February 2011

2011

m

2010

m

Continuing Operations

Revenue (sales excluding VAT)

60,931 56,910

Cost of sales 55,871 52,303

Gross Prot 5,060 4,607

Administrative expenses (1,676) (1,527)

Prot arising on property related items 427 377

Operating prot 3,811 3,457

Share of post-tax prots on joint ventures and associates 57 33Finance income 150 265

Finance costs (483) (579)

Prot before tax 3,535 3,176

Taxation (864) (840)

Prot for the year 2,671 2,336

Earnings per share 33.10p 29.33p

Dividends per share 14.46p 13.05p



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APPENDI SI

10 May 2006

Tesco is leading the debate about what corporate responsibility means, says The Work

Foundation

Welcoming the launch of Tescos new community programme, Will Hutton, chief executive of TheWork Foundation, today said:

The Work Foundation commends Tesco for leading the debate about how big business shouldinteract with society. Its 10 commitments put some detail on the aspiration of many leadingbusinesses to be a good neighbour.

Too often, corporate responsibility has existed at the level of rhetoric, while employers havestruggled to spell out how it will change the way business is done. It has thus become easy to paintit as pure spin.

Sir Terry Leahy has today broken with this tradition with a series of substantial pledges. TheWork Foundation hopes that this programme acts as a tipping point for the development of newcorporate sustainability initiatives among organisations. We hope it encourages other businessesto think in practical terms about a companys obligations beyond keeping shareholders satised.The Tesco plan looks good on paper; time will tell what effect it has on our lives as consumers andcitizens.

Source: The Work Foundation


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APPENDIx SEVEN

Article by Louise McBride - Irish Times - Sunday July 26 2009

Supermarket giant Tesco in Ireland is reusing to pull (withdraw) the adverts or its latest pricecutting campaign - despite complaints rom the childrens charity Unice Ireland.

Tesco last month launched its 100m Change or Good campaign, which involves a nationwideroll-out o price cuts recently introduced in its border town stores - much to the annoyance oUnice, which has been running a charity campaign under the same name since 1987.

Under Unices Change or Good campaign, passengers on long-haul fights are asked to donateany oreign currency to the childrens charity. The campaign, which involves a partnership with theIrish airline, Aer Lingus, has raised over 6.8m or Unice since 1997.

Its a short-term campaign that we are running in Ireland. The two campaigns are completelyseparate, said a spokesman or Tesco.

Unice, however, said: it is the rst time in Unices history that a commercial entity has purposelyset out to capitalise on one o our campaigns.

We ail to understand why a company with a multi-million euro advertising budget nds itnecessary to use a childrens charity slogan which we have spent years developing, said MelanieVerwoerd, executive director with Unice.

Source: Irish Times 26 July 2009


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APPENDI EIGHT

The Big Brands reaching Rural India

Lawan is a long way from nowhere. The remote village is dry, hot and dusty. It is still morning,but the sun is already burning. Only the brave venture out into the harsh, radiating heat. Glowingbarbs of white sunlight bounce off the small, mud-brick buildings. The closest market to this village

is nearly 40km away. The best way to get there is on a slow-moving tractor. These are not idealconditions for a spot of shopping in rural Rajasthan.

Reaching rural India

For many years, rural India has been a somewhat untapped market for consumer goods andservices companies. Big and small, Indian and foreign, many have tried to set up shop, but fewhave had lasting success. Hundreds of millions of Indians call rural and remote India home. Manyof them live and work in tiny, obscure, off-the-map villages.

In recent years, the big consumer goods companies that produce everything from toothpaste tocrisps have established a presence in small and mid-sized towns and districts. However, few havebeen able to establish direct contact with villages of 5,000 people or less.

United Villages, a new rural supply company operating in Jaipur in Rajasthan, believes it can ll thegap in rural Indias supply chain and get big brands to even the smallest of villages.

The company claims that by combining the use of existing infrastructure with rural marketing andwireless applications, it can turn a $7.4bn opportunity into a rural retail reality.

Chintan Bakshi, co-founder and chief operating ofcer of United Villages, says that multi-brandrms like Hindustan Unilever are able to reach out to rural India through rural-facing incentives andschemes. However, for small and mid-sized companies, the economics of operating in rural India

do not, at present, make good business sense. The outsourcing of distribution by big companiesmeans that smaller areas that fall outside targeted districts or regions are seldom tapped aspotential sales areas.

Experts have long said that technology will play a critical role in getting products, services andassistance to remote India. If done correctly, many argue, it could open up a potential consumermarket of hundreds of millions of people. And not least, connect big brands with the smallest ofvillages, all at the push of a button.

Hard work

For nine months, United Villages has been operating in rural areas around Jaipur in Rajasthan. Sofar, it has built a distribution network that caters to more than 700 rural retailers.

The company says the concept is simple: eld staff take orders from retailers, wire them via amobile application to a central warehouse, and products are delivered to local corner shops andstores, neatly packed in boxes. This, they say, is modern-day door-to-door service.

Mr. Bakshi says the proliferation of mobile phones in rural India has made providing a service likethis possible. Furthermore, reliable phone connections and networks have made establishing amobile supply network in Rajasthan relatively easy. However, doing business in remote areas, hewarns, is far from easy.


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Mr. Bakshi claims that one of the biggest challenges is hiring and retaining staff with good localknowledge and an ability to incentivise the use of new products and make bigger sales.

Mahesh Sharma, a United Villages representative, travels from shop to shop in Lawan village, alittle over an hour away from Jaipur. He says at rst, retailers hesitate to buy new products and tostock unknown items on their shelves. But he adds that once they get used to the system, retailersbegin to appreciate its benets.

According to the rms own research, retailers in Indian villages with a population of less than10,000 people usually have to leave their immediate areas to procure 81% of their stock.

Mr Sharma says that before United Villages began its mobile supply operations in rural Jaipur,retailers had to shut their shops and travel 30 to 40km to the nearest market to get supplies.

That, he says, used to waste valuable time and lead to a loss of sales. Now, he claims, vendorscan have products delivered right to their doorstep in a cost-effective manner that makesoperational sense.

Retailers such as Vinod Kumar Vati from Baswa village say it takes a lot to convince ruralconsumers of the benets of trying something new.

Checking inventory lists in his small corner store in a quiet, cramped lane, Mr. Vati says hiscustomers like to stick to what they know.

Be it cleaning powder or sweets, he says his customers insist on product guarantees. Doingbusiness in rural India, face to face or through mobile technology, is all about building trust andsustainable relationships on the ground.

Sales representatives and retailers agree that it may be some time before the consumptionpatterns of rural India begin to look like those of the countrys big cities.

However, mobile technology may be the rst step towards opening up potentially large andlucrative pockets of consumers to big retail business.

Connecting the masses

In recent years, the race to reach rural India has picked up pace.

Companies big and small, as well as government-driven programmes, have been moving deeperinto the countrys hinterland in a bid to generate more business and connect customers, vendorsand industries together via mobile technology.

From real-time mobile phone alerts updating farmers on the price of crops, to businesscorrespondents taking portable banking to rural households, mobile technology is being used tounlock a potentially large and lucrative consumer base.

However, when it comes to bridging gaps in the rural retail supply chain, United Villages claimsit is not facing any direct competition. Mr. Bakshi says that some micronance rms have pilotedsimilar concepts in South India, but so far, United Villages hold a unique place in the countrysretail landscape.

Mr. Bakshi insists that demand is not a problem, but bottlenecks in the supply system are.


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Big plans

It is still early days for United Villages, but the company already has big plans for expansion.

By the end of the year, Mr Bakshi hopes to have four operational hubs dotted across Rajasthan.Using them as bases to supply rural areas, United Villages aims to reach out to around 36,000small retailers across the state.

This, he adds, could then pave the way for expansion of the mobile retail model into surroundingstates.

There is a growing desire among people in rural India to be part of the countrys modernisationprocess, which includes the provision of modern goods and services.

Experts claim that if mobile technology in rural India remains progressive and accessible, and ifsupply networks on the ground are built to last, more big brands may nd themselves doing bigbusiness in places they may not have endeavoured, or thought, to visit before

Source: BBC 27 March 2011

BBC MMI


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APPENDI NINE

Location of Stores/Operations for Carrefour, Tesco and Walmart

X = commercial presence

Country Carrefour Tesco Walmart

Argentina X X

Brazil X XBelgium X

Canada X

Chile X

China X X X

Columbia X

Costa Rica X

Cyprus X

Czech Republic X X

Dominican Republic X

Egypt XEl Salvador X

France X

Greece X

Guatemala X

Honduras X

Hungary X X

India X X

Indonesia X

Iraq X

Ireland (Republic of) X

Italy XJapan X X

Malaysia X X

Mexico X

Nicaragua X

Poland X X

Portugal X

Romania X

Qatar X

Slovakia X X X

Singapore X

Saudi Arabia X

South Korea X

Spain X

Sultanate of Oman X

Taiwan X

Thailand X

Tunisia X

Turkey X

United Arab Emirates X

United Kingdom X X

United States X X

Source: Companies Annual Reports


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Documents

The Association of Business Executives International Business Case Study Tesco Plc