Question

Tesco Exits South Korea

Tesco was founded in 1919 by Jack Cohen (Cohen), who invested his serviceman’s gratuity of £30 in a grocery stall. The first private label product introduced by Cohen was Tesco Tea. The name Tesco was a combination of the initials of the tea supplier TE Stockwell, and the first two letters of Cohen’s name. Tesco opened its first store in 1929 in Edgware, London. In 1947, Tesco Stores (Holdings) Limited was floated on the Stock Exchange with a share price of 25 pence and the first supermarket was opened in 1956 in Maldon, Essex, England. The first superstore was opened in 1968 in Crawley, West Sussex. In the 1960s, Tesco went on an expansion spree and acquired several store chains. The Retail Price Maintenance (RPM) Act in Britain prohibited large retailers from pricing goods below a price agreed upon by the suppliers. To overcome this obstacle to price reduction, Tesco introduced trading stamps. These were given to customers when they purchased products and could be traded for cash or other gifts. RPM was abolished in 1964, and from then on, Tesco was able to offer competitively priced products to its customers in a more direct manner. The first Tesco superstore, with an area of 90,000 square feet, was opened in 1967.

TESCO’S GLOBAL EXPANSION
Tesco’s global expansion began in 1979, when it entered Ireland by acquiring a 51% equity stake in ‘3 Guys stores’. In 1986, Tesco divested itself of the stores after it found that it could not sustain its operations in the country as customers were rejecting the British products that it sold. During the late 1980s and the early 1990s, Tesco examined the options available in the US and European countries after the British government introduced new regulations on ‘out-of-town’ stores. In December 1992, Tesco entered France by acquiring an 85% equity holding in Catteau supermarkets, which operated under the Cedico brand with 72 superstores, 7 hypermarkets, and 24 small stores. However, Tesco failed to sustain itself in the market due to competition from French retailers like Carrefour and Promodès. In 1995, a law was passed in France which prohibited the opening of new large retail stores. Moreover, the company failed to adapt its products to suit local tastes and lost market share. In 1996, in spite of investing an additional £ 300 million in France, sales in the country grew by a mere 1%. In the year 1997, Tesco sold its operations in France to Prom odes.

TESCO IN SOUTH KOREA
In the early 1990s, there was a growing demand from consumers in South Korea for a modern shopping experience owing to rapid economic growth and increasing disposable incomes. The government had adopted protectionist policies and the retail sector was not open for foreign direct investment (FDI). Tesco

entered South Korea in 1999 through a joint venture with Homeplus, a unit of the country’s biggest business group Samsung Corporation (Samsung). In the next few years, Tesco became the most successful international retailer in the country. Its success was attributed to its ability to localize its products and stores to appeal to the South Korean consumers; its operating through local management; and its strong presence through different store formats. South Korea went on to become Tesco’s most successful international business in terms of revenue. As of 2014, it operated d 140 hypermarkets, 609 supermarkets, and 326 convenience stores.

TESCO’S STRATEGIES IN SOUTH KOREA
Immediately after entering into the joint venture, Tesco went about upgrading the store layouts. The stores were modified to resemble department stores, which were spacious and clean. Tesco’s stores in Korea did not resemble its stores in the UK or in other European locations like Hungary, Poland, the Czech Republic, and Ireland.

CHANGES IN THE OPERATING ENVIRONMENT
In October 2012, when Tesco posted its first fall in profits in 20 years, the company also announced that its profits in South Korea would take a £ 100 million hit due to the "retail market development bill” that had been passed by the government in November 2010. However, changes in the operating environment in South Korea due to new laws that were enforced beginning 2010 to protect small retailers and merchants started to impact Tesco and other large retailers. These laws placed restrictions on the locations where supermarkets could be opened. The Distribution Industry Development Act passed in 2012 imposed restrictions on the time for which the stores could remain open and also specified that on two weekends every month the large retail stores should be closed. As most Koreans shopped during the weekends, these restrictions started to impact Tesco, which made losses in 2015. Under the impact of the global recession, the private spending in South Korea fell. Another factor that impacted Tesco in South Korea was its UK business, which was not doing well.

TESCO’S EXIT FROM SOUTH KOREA
After several months of speculation, Tesco sold its South Korean stores to Asian private equity firm MBK Partners for £4.2 billion on September 07, 2015. On September 07, 2015, Tesco PLC (Tesco), a British multinational grocery and general merchandise retailer, announced that it had sold its South Korean business, operated under the name Homeplus, for £4.2 billion to a consortium of companies led by MBK Partners, a South Korean buyout firm. The consortium included Canada Pension Plan Investment Board, Public Sector Pension Investment Board, and Temasek Holdings (Private) Limited.

Case study question
The extract above mentions changes in operating environment in which Tesco functions.

Discuss in this context, the nuances of a Task environment.

Answer 1

A task environment refers to various external factors that affects the performance of a company from attaining its goals. The external factors are the set of conditions that arises from suppliers, customers, distributors, stock market and competitors that directly influence an organization. Thus, a task environment helps in identifying the external environment that affects the success of a company. With reference to the given case of Tesco, the following are the various nuances that affected the company in its task environment

· During the global expansion and sales at Ireland, people were rejecting the British products sold by them, which is a customer reaction

· The British government imposed various restrictions on the out-of-town firms and thus they started investing in European countries and the US

· In France, the firm had to face competition from various companies like Carrefour.

· The firm was a success in South Korea as it wen about variations in the layout of the company at first.

· The operating environment however changed by 2010 and there were restrictions placed on where the superstores could be opened that lead to its exit from south Korea.

The various instances referred above gives a detailed description on how the external factors would influence a firm and the various nuances in the Task environment of a firm which is explained with respect to Tesco in this case study.