VideoTesco's international expansion had already begun before Higginson's arrival. That included stakes in Polish and Hungarian supermarket chains, and acquisitions of department stores from America's Kmart in Slovakia and the Czech Republic. It had also entered France following a £175.6m deal to buy Etablissements Catteau and, a few months before Higginson joined, agreed to pay £630m for 109 of Associated British Foods' retail stores across Ireland.
But cracks in the strategy were beginning to appear. Higginson recalls that it was at his first board meeting that the company decided to sell Catteau. The difficulty of obtaining planning permission for new hypermarkets in France pushed up the price of acquisitions and meant that Tesco struggled to grow the business organically. It bailed out with a £250m sale to French group Promodes in 1997, and thanks to rising asset prices, it was able to recover its full investment.
Globe Trotting
The team did not allow disappointments such as the French failure to dampen its enthusiasm for growing overseas. The board knew that it had to sell goods other than food in markets other than Britain to continue growing. As the finance chief puts it, "selling food to 60m people on a small island in the North Atlantic was going to be limiting."
In the late 1990s, the group's hypermarkets across Europe helped to boost sales from the region by almost 25% to £1.3 billion, and increase operating profits by 26% to £48m in fiscal 1999. Furthermore, starting in 1998, Tesco opened stores across Asia. Over a six-year period, the group entered Thailand, Taiwan, South Korea, Malaysia, Japan and China.
In 1999, the company told analysts that its small international business would make a £160m profit within three years. At the time, Tesco's supermarkets in central Europe were in the black while its fledgling Asian stores were losing money. For Higginson, making promises about their future performance broke the rules. "I always had that mantra that if you give them a date, don't give them a number; if you give them a number, don't give them a date," he cautions today.
Tesco gave them both — and delivered. In fiscal 2003, its European and Asian businesses made a £212m operating profit. By 2007, that more than doubled, to £565m, while the company's dominance in its domestic market continued. Not that it was always plain sailing. In 2005, the company offloaded Taiwanese stores and sites worth €132m in an asset swap with rival Carrefour, taking on the French firm's stores in the Czech Republic and Slovakia, a deal that fuelled speculation in the press that Tesco found it couldn't compete against the incumbent French group in Taiwan.
But for the most part, its strategy has been a success. Today Tesco has shops in 12 countries outside the UK. The international business is larger than the UK business in terms of selling space and generates turnover of more than £11 billion, helping the group to become the third-largest food retailer in the world behind Wal-Mart and Carrefour. And while the European and Asian businesses account for just 25% or so of the company's sales, Higginson adds that they make up about 40% of its growth.
That could be important. Concerns about consumer confidence in Britain and the impact of any downturn or even recession on Tesco's UK business might mean that the international division is called on to support the domestic operation. "The strategy, in a sense, has spent ten years waiting for this moment," Higginson says.
Tesco Organic
Higginson and colleagues have learned several lessons about international openings that they can bring to bear on the US launch. The first is that size matters. Tesco built its UK business on supermarkets, but needed to turn to larger hypermarkets to compete on the Continent and to give it the physical shop-floor space to branch away from selling only food. Tesco's strategy for the US is a variation on that theme — the stores themselves may be smaller than national giants, but what they lack in size, they will make up in sheer numbers, hence the rapid consecutive launches in the autumn.
Another lesson concerns how the company enters a new market. Tesco — like many companies — has used three routes into new markets. It buys a business, as it did in Ireland; it sets up a partnership with a local company, such as the hypermarket-development business it formed in South Korea with conglomerate Samsung; or it starts from scratch, as it did in Taiwan and is doing in the US.
The third route isn't always easy, concedes Higginson. It takes a long time to achieve scale, and early supply chains are "relatively inefficient," he says. But he adds that there are often good reasons for going it alone — "although it takes you a while to get up to profitability, the sums involved are not huge by comparison to an acquisition."
American Dream
Whichever the route, the ultimate focus is on organic growth. In a low-margin, capital-intensive business such as Tesco's, that's crucial. "We have a lot of capital invested in each store and margins are 5p to 6p for every pound, which are not high by any industry standards," Higginson says. "So making a return is a fine line, and the difference between building your own store — which might cost you 30% to 40% of the sales — compared to acquiring a store — which might cost you 70% or 80% of the sales — is often the difference between whether you make a good return or you don't."
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