Question

Tesco's failure in its initial acquisition of 134 operating grocery stores as with direct foreign investments in China can be attributed to at least two of the reasons outlined in Chapter 7 of the textbook (p. 109) re the failures of M & As. Tesco's initial investment in China was the acquisition of 134 operating grocery stores. Briefly discuss and apply your selected two reasons (from the list posted below) for Tesco's failure with direct ownership of stores and discuss what happened. Overestimation of the target's value, primarily caused by an overestimation of the growth and/or market potential Overestimation of the expected operating, financial, and/or managerial synergies Overbidding and overpayment Failure to undertake a thorough due diligence of the target (a rush to judgment) Failure to successfully integrate the target after the merger or acquisition (lack of follow-through)) What was the final outcome of this direct ownership of 134 grocery stores for Tesco? What was the cost?

Answer 1

Tesco's failure to crack the Chinese grocery market can be attribited to the following two reasons which we will discuss in brief:

1. Overestimation of expected operating, financial or managerial synergies:

Since Tesco was overconfident of its acquisition strategies, it overestimated its operating profits and market synergies. Failure to penetrate the market resulted in losses over subsequent years.

2. Failure to successfully integrate the target after acquisition:

Tesco read the chinese market wrong. It tried the same mantra for success which it had done in UK. As a result, it failed to realise that this was a different country and a completely different culture. Initially, it failed to locate its stores to better places where it could attract more customers at a relatively lower cost because rivals such as Wal mart had always taken that advantage by arriving before Tesco to the market. Introduction of the popular clubcard idea from UK also did not bring any change as chinese customers do not like to cling to a single shop and prefer to shop around. Secondly, it also faced strong local competitions with better supplier relations and knowledge of chinese buyers which it lacked and failed to acquire. It made them to conclude that a 1.3 billion market such as China's is too large and complicated to crack single handedly. They lacked the resources and had a bad timing. Partnering with local players to get an access to the local conditions is what they needed. As a result, years of operation losses followed. Trageted profit was never earned and it was forced to revise and redesign its strategies to penetrate the market.

The final outcome was that Tesco withdrew its name from the chinese market and instead has signed a joint venture deal with China resources enterprise where it will have only 20% stake. The nine year solo venture cost them around £1.5bn and this new joint venture will require them to pay million in fees. CRE has admitted that this joint venture will take 4 to 5 years to take off. It has already incurred its first annual loss of $102 mn in first 20 years in 2014.