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Retail multinational learning: a case study of Tesco

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Author(s)

Mark Palmer, Aston Business School, Aston University, Birmingham, UK

Abstract

Purpose – This article examines the internationalisation of Tesco and extracts the salient lessons learned from th
is process. Design/methodology/approach – This research draws on a dataset of 62 in‐depth interviews with key
executives, sell‐ and buy‐side analysts and corporate advisers at the leading investment banks in the City of Lon
don to detail the experiences of Tesco's European expansion. Findings – The case study of Tesco illuminates a n
umber of different dimensions of the company's international experience. It offers some new insights into learni
ng in international distribution environments such as the idea that learning is facilitated by uncertainty or “shock
s” in the international retail marketplace; the size of the domestic market may inhibit change and so disable inter
national learning; and learning is not necessarily facilitated by step‐by‐step incremental approaches to expansion
. Research limitations/implications – The paper explores learning from a rather broad perspective, although it is
hoped that these parameters can be used to raise a new set of more detailed priorities for future research on inter
national retail learning. It is also recognised that the data gathered for this case study focus on Tesco's European
operations. Practical implications – This paper raises a number of interesting issues such as whether the extremit
ies of the business may be a more appropriate place for management to experiment and test new retail innovatio
ns, and the extent to which retailers take self‐reflection seriously. Originality/value – The paper applies a new th
eoretical learning perspective to capture the variety of experiences during the internationalisation process, thus a
ddressing a major gap in our understanding of the whole internationalisation process.
Keywords

Learning, International business, Retailers, Multinational companies

Article

Introduction
International retailers frequently emphasise the cognitive aspects of the retail internationalisation process. Exam
ples of this abound but include Tesco's utilisation of embedded research teams within Japanese families to monit
or consumption behaviour prior to their acquisition of the Japanese C Two chain in 2003. Within the internation
al retail literature, however, there has been limited detailed empirical or conceptual research on international reta
il learning (Clarke and Rimmer, 1997). Thus, although learning has played an important role in shaping the way
retail companies behave in practice, comparatively few studies actually address international retail learning. An
absence of detailed empirical or conceptual research on international retail learning is therefore a major gap in o
ur understanding of the whole internationalisation process. It is contended that important insights and valuable l
essons have been learned by retailers from their own successful international forays as well as the visible succes
s of other companies in the international marketplace. Not all international retail operations have been successfu
l however, and the difficult and highly contested process of scaling back of retailing operations to remedy mista
kes may also result in an equally valuable learning process for international retailers (see Palmer 2000, 2002a, b)
.

A number of researchers have called for research to re‐examine the ways in which retailer internationalisation h
as been conceptualised (Dawson, 2001; Howard and Dragun, 2002). The recent critiques of Wrigley (2000), Bur
t and Sparks (2001) and Burt et al. (2002) suggest that the existing conceptualisations neither adequately capture
the multiplicity and difficulties in the retail internationalisation process, nor sufficiently explain the variety of a
pproaches to internationalisation being used by retailers. Various explanations of the retail internationalisation p
rocess are emerging, but one viable and promising line of enquiry is the area of international retail learning. Not
able in this respect is Clarke and Rimmer's (1997) analysis of Daimaru's (a Japanese department store) investme
nt in a new outlet in Melbourne, Australia, which provided an initial step towards understanding the cognitive as
pects of the international retail investment process. Indeed, this research has drawn a number of important lesso
ns learned from retail market entry and development.

Despite the value of this initial research, and although the international retail learning process itself and the outc
omes are occasionally referred to in the literature (see Treadgold, 1991; Alexander and Myers, 2000; Evans et al
., 2000; Vida, 2000; Dawson, 2001; Arnold, 2002), its conceptualisation and analysis remains largely under‐theo
rised and under‐developed. What is required, according to Clarke and Rimmer (1997), is a research approach tha
t explores “the way in which a retail firm reflects on individual decisions it has made, and how this might influe
nce their perceptions and actions”. From this perspective, it is critical to understand international retail experienc
es through reflection and analysis, and to identify what has been learned from the internationalisation process. F
urthermore, while some researchers in the field have indicated that experience is important for many aspects of
market entry and development (Treadgold, 1991; Williams, 1991a, b; Evans et al., 2000; Doherty, 2000) it is cle
ar that these studies do not provide detailed empirical or conceptual understanding of this complex learning phe
nomenon. For example, this work does not directly deal with the questions: What are the components of this exp
erience? What lessons can be drawn from this experience? How does this experience shape or inform the decisio
n‐making process of the international retailer? It would therefore appear that the international retail literature is l
ess developed in considering what retailers have learned from their experience of internationalising store operati
ons. This paper aims to probe these issues by providing a more extended debate and considered analysis of the c
oncept of international retail learning within the context of Tesco's internationalisation process.

It should be noted that it is outside the scope of this paper to present a review of the international retail literature
(see the excellent reviews by Alexander (1997); Alexander and Myers (2000); and Burt et al. (2003)). This wou
ld increase the length of the paper substantially while the theoretical background on international retail learning
has previously been laid out in detail elsewhere (see Palmer and Quinn, 2005). In this paper, the discussion will
mainly pertain to the empirical case study findings of Tesco. The paper begins by briefly positioning the case fin
dings by way of a conceptual framework put forward by Palmer and Quinn (2005) on international retail learnin
g. More detailed discussion of this framework can be found in Palmer and Quinn (2005). Following this, an over
view of the methodology is put forward. The main part of the paper presents the case findings of Tesco and the
paper will conclude with a discussion of the key findings.

International retail learning framework

Palmer and Quinn's (2005) recent work provides a useful conceptual framework for examining the studies to dat
e on international retail learning. Drawing on the broader management literature on organisational learning and i
nternational retailing, Palmer and Quinn (2005) synthesised the various components of international retail learni
ng (see Figure 1). The broad components of Figure 1 frame a series of research questions for studying internatio
nal retail learning and these include:

•
What do retail internationalists identify as the most important lessons learned from their experience of internatio
nalising retail operations?

•
To what degree has this knowledge been absorbed by the internationalising retail company?

•
What is the locus of international retail learning diffusion or transfer?

•
What are the outcomes from the lessons learned and how do these shape the future decision‐making and learnin
g behaviour of the retailer?

For the purposes of this paper, the aim is to explore the dimensions of international retail experience and how th
ese shape or inform the strategic decision‐making process of the retailer. Thus it does not provide an in‐depth an
alysis of the other components of this framework in relation to the international activities of Tesco. The experien
ces of Tesco are essentially conceptualised under three main broad dimensions. These dimensions make a distin
ction between the internal corporate and the wider external view of international retail experience. The first criti
cal area refers to the internal strategic processes. The second theme concerns the external strategic processes. Th
is includes the interactive aspects of the retailers’ international environment. The third dimension considers the i
nternal operational functions. These dimensions are especially important when conceptualising experience and i
nterpreting Tesco's international learning in this paper. The paper now turns its attention to the methodology of t
he study and this section will briefly outline the details of the primary research undertaken.
Methodology
This study employed an interpretative, qualitative methodology to examine the international retail learning. The
single case approach has been an increasingly popular methodology within the retail internationalisation literatur
e of late, and it has enabled various authors to provide some very important new insights into the subject area (S
parks, 1995; Shackleton, 1996a, b; Clarke and Rimmer, 1997; Wrigley, 2000). Furthermore, field research that i
nvolves investigating the views and opinions of organisations directly and indirectly involved in the decision‐ma
king process is receiving increasing support within the literature (Shackleton, 1996a, b; Sparks, 1996; Palmer, 2
002a, b; Palmer and Quinn, 2003). These authors have highlighted the limitations of relying solely on the views
of the case company under investigation and have highlighted the insights into the retailer internationalisation pr
ocess that can derive from surveying a diverse variety of organisations and stakeholders involved in the process.
Stakeholder parties in the retail internationalisation process should therefore not be underestimated. Indeed it m
ay be argued that a strong interdependence exists between investment banks and firms with respect to advising r
etail executives on strategy, structure, and international retail operations. Eliciting the views of investment bank
ers would therefore allow the research to gain access to the tacit knowledge and practical know‐how gathered th
rough years of experience through the direct interaction with the company via research, consulting and advisory
services utilised by retail executives. Multiple and independent sources of evidence, including market research r
eports, company profiles, financial statements and so on were also used to corroborate the interview data and, by
so doing, develop convergent lines of inquiry (Yin, 1994).

The case of Tesco was chosen for three reasons. First, the transformation underway in Britain's largest retailer h
as been profound, while its growth has been one of most consistent amongst its international peers (1995‐2002),
with estimated sales rising to €45.9 billion in 2003. Indicative of the scale of its international ambitions, Tesco u
nveiled one of the most radical and ambitious internationalisation programmes that that would involve the devel
opment of 200 hypermarkets in Europe and Asia, generating GB£10 billion sales per annum by 2004 and which,
in proportional terms, would be equivalent to that of UK‐based food retailers, ASDA and J. Sainsbury sales co
mbined. This strategy, however, has been overshadowed by Wal‐Mart's $10.6 billion takeover of ASDA in the
UK and has gone largely unnoticed in the academic literature. Second, despite the scale and growth of Tesco's in
ternationalisation, the focus of many researchers has been on the international activity of US retailer, Wal‐Mart (
Arnold and Fernie, 2000; Palmer, 2000; Burt and Sparks, 2001; Hallsworth and Clarke, 2001; Fernie and Arnold
, 2002), or Sainsbury's capital investment in the US market (Shackleton, 1996a, b, 1998; Wrigley, 1997a, b, 199
8; Muskett, 2000). Only modest attention has been attributed to Tesco in the academic literature (see Palmer, 20
02b for a recent example). Tesco's success abroad therefore remains an under‐emphasised case within the conte
mporary academic literature. Third, internationalisation has been a major aspect of the strategy of Tesco over th
e years. Significantly though, not all of Tesco's international operations have been successful and this has resulte
d in some form of divestment. It is argued that divestment is a highly visible case of where learning is likely to h
ave taken place.

A total of 62 interviews were undertaken during 1999 and 2000 with the leading food sector buy‐ and sell‐side a
nalysts, and international retail merger and acquisition specialists (i.e. those within the corporate strategy unit in
the corporate finance division of investment banks) and senior executives of the retailer under investigation. In p
lanning the interviews, particular attention was given to the danger of the interviewees presenting biased views a
nd opinions (see Palmer and Sparks (2004) for a wider discussion of the limitations of this method). This researc
h used “convergent in‐depth interviewing” (Dick, 1990 cited in Carson et al., 2001). In short, it is an in‐depth int
erviewing method that allows the researcher to develop, clarify, verify and refine the core issues of the interview
protocol. It consists of a number of interviews in which the procedure is both structured and unstructured. Durin
g the early stages the content of the interview is unstructured and flexible during which the interviewee tells a st
ory about key events or episodes and what they have learned about their experiences from these events. The pro
cess used in the interview then becomes more structured as the interviewer converges in specific issues of the re
search problem and to disprove the emerging explanations of the data (Carson et al., 2001). The length of the int
erviews typically varied from half‐an‐hour to three‐and‐half‐hours. Rather than concentrating on one or two asp
ects of the dimensions of Tesco's international learning, the interview protocol explored learning initially from a
broad perspective. In line with the arguments put forward by other researchers (Hallsworth, 1992; Clarke and H
allsworth, 1994; Clarke and Rimmer, 1997; Burt and Sparks, 2001, Dawson, 2001) a broader perspective may b
e necessary so that these parameters can be used to raise a new set of more detailed priorities for research on inte
rnational retail learning. That is to say, each lesson is not necessarily an end in itself, but an entry point for a wid
er discussion. Data collection and analysis were simultaneous. Analysing data involved categorising and triangul
ating the evidence from the multiple perspectives, and the presentation of findings largely followed the most rec
ent interview protocol. However, it should be noted that the analysis of learning is not easily defined in terms of
beginning or end points and this research identified extreme situations and critical incidents which were transpar
ently observable for data collection. Moreover, Tesco's experiences were not assessed by any quantitative measu
rement of the amount of learning occurred, but rather by reference to the content of these experiences and the im
pacts that such learning had on the outcome or trajectory of international expansion.

The paper now reports the findings from the in‐depth interviews. The key themes from the findings are discusse
d in the sections that follow. Excerpts from the in‐depth interviews are used throughout the findings section in or
der to illuminate and contextualise relevant themes. For confidentiality reasons, the identities of respondents wil
l not be disclosed during the remainder of this paper. This case study will be largely formatted in the same way a
s the dimensions outlined in the framework. The data gathered for this case study focus on Tesco's European op
erations. While Tesco's investment activities in Asia are strategically important, it is argued that the most insight
ful aspects of the company's international investment and divestment activities occurred in the European market.
The findings proceed with an initial overview of the case company's international developments. The main bod
y of findings follows this, and directly examines the lessons learned by Tesco from the internationalisation of ret
ail operations and their impact on the future trajectory of international operations.

Tesco's international background

This section provides an overview of the markets chosen by Tesco. The company initially expanded into the geo
graphically close markets of Ireland and France. Tesco's initial international foray was in 1979 when they purch
ased 51 per cent of Albert Gubay's Three Guys operation for GB£4 million in the neighbouring market of the Re
public of Ireland. This expansion proved to be immature given the structural capacity for expansion and the relat
ive strength of the company within their domestic market at the time of the initial international foray. This untim
ely venture abroad was summed up by one sell‐side analyst:

The perceived success (or otherwise) of their early venture abroad would have been considered insignificant to t
he company's fortunes at home, and as a result, this largely undermined the company's (perceived) efforts in the
eyes of the financial markets as being a peripheral and/or even a distraction to the core UK business.

The continued realignment, focus and momentum of the company in the UK market provided the context in whi
ch internationalisation had taken “a secondary position” in the company's corporate development agenda. Tesco
subsequently divested the Three Guys operations to the Dublin‐based supermarket company H. Williams in 198
6. Towards the end of the 1980s, the company embarked on research efforts into possible international growth o
ptions and these primarily centred on the US market, but also covered several European countries. The company
spent several years investigating the North American market during the late 1980s and early 1990s.

The product of this research effort was the company's move into the French market. Tesco's first foray into main
land Europe with the acquisition of the medium‐sized supermarket chain Catteau in December 1992 was intende
d to be the company's springboard to international expansion and serve as a platform for European growth in par
ticular. The company's rationale at the time for acquiring a small regional chain was that they were going to buil
d Catteau into a national chain in France. Tesco acquired an effective 85 per cent holding, leaving 15 per cent of
the ownership in the hands of management as part of an incentive scheme. According to the analysts’ research a
t the time, the company was attracted by Catteau's good record and high profitability. Group turnover of the chai
n in 1991 was GB£340 million and over 80 per cent of this revenue came from retailing (Catteau also had whole
saling and franchise activities). Management felt that Catteau's impressive net profitability reflected the economi
es gained from a tight geographical clustering of stores and the strong centralised cost controls, and as a result, t
he financial markets were largely supportive:

At the time the financial markets pointed out that Tesco had done all the classic right things – the lesson learned
from UK retailers’ forays overseas has been that it is vital to buy a successful business rather than a “turnaround
” situation and retain strong local management.

By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Catteau, and later in 199
7 would completely withdraw from France. For much of this early expansion, the company focused on structural
ly mature markets, but with more recent expansion the company has been more disposed toward emerging mark
ets (see Table I).

The third phase of the company's international expansion was in 1995, when management acquired the Global s
upermarket chain in Hungary for GB£15 million. This did not represent a particularly expensive entry, and inde
ed, this was reflected in the poor quality of the assets purchased – in total 43 small stores. The intention of the c
ompany was not to trade the stores in the long‐term, but rather to secure a foothold in the market and learn from
these businesses, while later building a larger hypermarket business based on their experiences. Using the Hung
arian acquisition as a foothold in eastern Europe, the company subsequently acquired Savia SA in Poland for G
B£8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired for relatively little financi
al consideration and designed to secure a foothold in the Polish market for Tesco from which to develop a hyper
market business. In 1996 the company entered the Czech Republic and Slovakia through the acquisition of Kma
rt for GB£77 million, acquiring a portfolio of 13 stores with an average selling space of 72,000 ft2. Essentially t
he Kmart business geographically was an in‐fill acquisition between Tesco's Polish and Hungarian investments.

Tesco also re‐entered the Irish market with the acquisition of ABF's Irish food retailing business for GB£630 mi
llion in 1997. Following the ABF acquisition, the company secured their position as the largest food retailer in Ir
eland with 109 supermarkets and annual sales of GB£1.23billion. And in addition Tesco captured 17.5 per cent
of the market in Northern Ireland and 19.4 per cent in the Republic securing number one position in both market
s.

The initial move into Asia, and the Thailand market in particular, came in May 1998 with the purchase of a 75 p
er cent majority controlling stake in Lotus, a chain of 13 hypermarkets which cost GB£111 million for the equit
y – assuming GB£89 million as their share of Lotus's debt. Lotus’ previous owner, Thai CP Group (a major agri
cultural supplier in the region) retained a 17 per cent stake, with SHV Makro holding the remaining 8 per cent.
Tesco subsequently entered South Korea. In March 1999, Tesco formed a joint venture with Samsung, one of So
uth Korea's largest conglomerates, into which the company invested GB£80 million in cash. Later that year the c
ompany increased their share of the joint venture from 51 per cent to 81 per cent at a cost of a further GB£30 mi
llion.

Tesco further developed operations in the region when they entered Malaysia in early 2002. In a similar structur
e to the other Asian operations, the Malaysian operation, Tesco Stores (Malaysia) Sdn Bhd, was established as a
joint venture with a local company Sime Darby Behad. Tesco would own 70 per cent of the equity, but the opera
tion would be under local control. Tesco later entered Japan during July 2003.

Dimensions of Tesco's international retail experience

This section provides an overview of the various dimensions of Tesco's international retail experience emerging
from the in‐depth interviews. Important lessons learned are extracted from the company's international retail exp
eriences.

Internal strategic processes

Market selection experience. Tesco's internationalisation raises several questions regarding the nature of their m
arket selection decision experiences. Tesco's decision‐making process highlights the contrasting motivational str
uctures that underpin the various paths towards international markets which eventually led to different spatial be
haviours. In qualitative terms, the interviewees highlighted a number of important characteristics of Tesco's mar
ket selection decisions:

•
Retaining spatial focus is more important than capitalising on small‐scale opportunities in diverse markets.

•
Competition from local retailers in their chosen markets is virtually non‐existent.

•
Dynamics for the international retailers are relatively level (which is not the case in Latin America where Carref
our has operated for almost 20 years).

•
Capitalised on opportunistic events unfolding within the existing portfolio of international retail markets.

Tesco's expansion was spatially characterised as being largely regional in nature and less global oriented. Cautio
usly, Tesco had decided to dominate the smaller central European markets that were unlikely to attract much att
ention from the large retail multinational peers such as Carrefour and Wal‐Mart who preferred to focus on the la
rger markets. The company incrementally entered markets rather than entering several markets at the same time,
limiting the large start‐up losses as one executive explained:
What is important to us is not the number of countries we are present in but rather that we attain, and/or sustain
number one or two position in each of these countries. The aim is to balance the global scale that comes from Te
sco with the local strength of being a market leader. Market position gives you market share, which in turn gives
you scale, which in theory, should allow you to have the lowest cost base, best buyers, best offers to customers,
therefore the best revenues, earnings and dividend growth. That is why retail multinationals aim for leadership i
n markets and strong regional presence. It's a virtual circle.

The importance of due diligence processes in foreign markets and/or target's operations is repeatedly inferred fr
om the company's executives and the corporate advisors. During the interviews, the company's management sug
gested that initial phase of expansion via international acquisitions placed too much emphasis on opportunism:

Organic growth is, in your hands, acquisition‐driven, consolidation is not. Acquisition‐driven consolidation is o
pportunistic, particularly with businesses that are privately owned. It's not something that is easily predictable.
We are not blind to acquisition opportunities, but the nature of the opportunities and when they present themselv
es is anybody's guess. Organic store‐by‐store development allows for a much more strategic approach to internat
ionalisation.

In turn, this would result in the management placing greater emphasis on store‐by‐store development that allowe
d the company to become more strategic in terms of their selection of markets, procurement, distribution and sto
re locations. Based on this evidence, it was apparent that the nature of the market selection decisions would be s
haped by the mode of entry used and whether or not opportunities existed.

Entry mode experience. Tesco used a combination of multinational entry mode strategies within one country. As
previously discussed, Tesco entered the central and eastern Europe by acquiring a relatively small chain of conv
enience stores in Hungary, a supermarket business in Poland and a department store chain in the Czech Republic
and Slovakia (see Table II). It was certainly unusual for such a large public company to become involved in the
se operations, and even competitors at the time questioned the logic of their approach. However, the use of “see
d acquisitions” with a view to develop knowledge of the market before expanding organically through store‐by‐s
tore development allowed Tesco to minimise their own human and financial capital in the face of potential econ
omic and political uncertainty. Some of these small stores would later be closed down and replaced by large hyp
ermarkets nearby. Although Tesco faced criticism and, indeed, pressure from the financial markets, there are so
metimes compelling reasons for retaining a small operating presence in a foreign market where international co
mpetitors are already established. First, the small presence would facilitate the implementation of an acquisition
strategy by securing the necessary contacts and networks into foreign retailers and local suppliers, especially co
nsidering the challenges associated with family owned and controlled chains. Second, retaining a direct and sma
ll operating presence in a competitors’ major market would lead to important insights into the competitive behav
ioural dynamics of competition that otherwise would not be possible without a direct presence. During the interv
iews, management made this point:

The reality is that you are not going to learn everything until you either open a store or purchase a chain in the n
ew market.

Small experiential or pilot stores were an integral part of initial learning phase of expansion, while later might b
e seen as surplus to requirements to international expansion, and consequently divested.

Indeed, after an initial period of understanding these store practices, management decided that the primary devel
opment comprised the hypermarket format. The development of the new hypermarket format was primarily driv
en through two pilot stores. Despite a relatively cautious approach to market selection, Tesco rather ambitiously
developed a completely new format in a distant market – a format, moreover, which had not been tested in the d
omestic market. This approach allowed the company to experiment and radically depart from their existing dom
estic supermarket format and extend the non‐food merchandise content of their international store operations. Te
sco's entry mode experience did not mirror the experiences adopted by manufacturing companies. In the broader
international literature Chang's (1995) findings showed that when Japanese electronic firms first acquired an int
ernational business, they did so in one in which they had a strong competitive advantage in order to reduce the ri
sk of failure. In stark contrast Tesco entered new markets by acquiring relatively weak target firms or by launchi
ng into areas where they were less strong in terms of a distinct competitive advantage. Tesco's initial forays into
Ireland and Czechoslovakia clearly illustrate this point. In Ireland, difficulty with post integration led to the reali
sation that these “turnaround” cases were disproportionately demanding for management resources, and in the C
zechoslovakia Tesco moved into non‐food merchandise lines by acquiring the Kmart department stores.

Divestment experience. What surfaced as a main theme from the findings was the intense learning process durin
g international retail divestments. The findings indicated that failure or partial failure during the internationalisat
ion process had a marked effect on the future trajectory of Tesco's international expansion. The strategic effect o
f Tesco's divestment in France and Ireland has resulted in the firm now ensuring that they establish a strong mar
ket‐leading position in new markets. For example, Tesco's aggregate market share in Hungary and Poland is ove
r 40 per cent. The advantages of a dominant market position for learning lie in the success that such a position i
mplies. A strong market position can obscure relatively small mistakes, whereas for small‐scale operations such
mistakes might prove to be fatal.

The Catteau divestment experience resulted in an equally valuable learning process for Tesco. Sell‐side analysts
suggested that Tesco delayed essential corporate divestment and reconfiguration even under intense pressure wh
en it emerged that the French operations were experiencing difficulties. The company found themselves locked i
nto the business through various exit clauses – out‐manoeuvred by Catteau's management – bidding competitors
and the investment banks facilitating the completion of the divestment:

Tesco have learned that advisors can advise but that's all. Don't trust any investment bank. The management wer
e misguided and ill‐advised with Catteau in France. There's no question that the management of Catteau are to b
lame. International retailers should never trust anybody they are buying assets from.

It was clear that Tesco's management learned from this experience by improving the techniques to prevent the c
ommingling of the management lock‐ins and sunk costs, which made divestments very difficult, in terms of futu
re acquisition due diligence processes. While the idea that continuous dissatisfaction from failure may seem part
icularly useful to initiate learning (Butler et al., 1991; Barwise, 1997; Arino and de la Torre, 1998), it remains di
fficult in practice. The acquisition of Catteau for Tesco and the subsequent years (i.e.1992‐1997) marked a conti
nuous process of management dissatisfaction with the French operations. This dissatisfaction generated negative
press commentary, but also weakened management and investor confidence and visibly undermined the strategi
c credibility of the company. The company's most high profile divestment had led to management evaluating pr
ogressive store‐by‐store expansion not with a view of proactively developing an exit strategy in the planning an
d due diligence phase of expansion as the following management viewpoint suggests:

… but with a view to our investment being underpinned by assets. Now that comes back to my point about the l
ong‐term liability of assets. If you are in a market where the currency devalues and the asset value diminishes in
this unstable environment – that is a due diligence mistake. Rather retail multinationals must invest in assets whi
ch are underpinned by asset value rather than nebulous goodwill in the context of organic growth.

In central and eastern Europe the company divested approximately 20 small‐scale stores while recouping the init
ial investment. Again, by way of illustration, management commented:
If you acquire good assets, then you can exit without losing money. Now that may seem an obvious thing to say
but in our desire to generate pace in our development programme we allow that to let us compromise on the qual
ity of assets that we are providing. We would never build a second rate store in a second rate location. I think we
have benefited from the fact we acquired small store operations internationally. This has helped us understand
more about the market and given us a step on the ladder. Some have argued that it was chaos, but we feel it has
helped us on the people side in particular. Moving forward I think it's less important because we have the experi
ence.

Contrary to what is commonly emphasised in the literature, learning does not need to be exclusively related to di
fficulties or problems, it may also refer to what has gone right in a firm. For example, in later years success of th
e new hypermarket concept has played an important role for the continuity of the learning processes of Tesco's i
nternationalisation process.

Locus of control experience. In the early phases of international development Tesco did not have a clear idea of
the corporate model in which to transfer their core competencies. Retaining the essence of the UK company's co
re competencies was problematic given the local spatial nature of food retailing and the lack of awareness of the
Tesco brand name. Several analysts noted that when Tesco acquired Catteau in France they did not fully underst
and how they would integrate and control the business. Put differently, whether or not they were trying to replic
ate themselves focusing on corporate brand, format adoption and culture or using a financial holding company st
ructure. One sell‐side analyst stated that:

The life cycle argument is that initially there is logic being a holding company. However, eventually the compan
y will have to add value. Tesco were caught in the middle and unsure which worked best. This was compounded
by the view that the cycle for international retailers was getting shorter with emphasis of adding value immediat
ely after the acquisition.

This led to indecision with the Catteau acquisition. For example, the company experimented with integrating so
me brands under the Tesco brand but then decided to retain the local brand. These mistakes made Tesco establis
h a clearer idea regarding how and why their international businesses would succeed or fail. Tesco underwent a
gradual withdrawal from a number of local tasks, while at the same time re‐establishing ownership of important
central functions. Following their second entry into Ireland, the company had a much clearer vision. Even thoug
h the Irish government insisted Tesco retain a regional headquarters, the company were determined that they wo
uld adopt a more industrial corporate model. However, as several analysts pointed out:

To replicate and duplicate identity across the world puts more pressure on the business, tends to be much slower
– replicating product offers, merchandising policies, staff training, culture, etc.

These early mistakes provided a firmer setting within which subsequent strategic decisions could be addressed
more confidently. Learning how to strike a sustainable balance between the two was an important lesson learned
by Tesco.

Experience with learning structures and processes. Ascertaining whether a firm possesses an intent to learn is an
important factor influencing their learning behaviour (Tsang, 1999). Intention relates to commitment. On the su
rface it appears that Tesco possessed a learning intent, however, it is questionable whether this learning genuinel
y went beyond the “official corporate line” at least in the early phases of internationalisation. When managemen
t were asked to discuss the structures and processes through which the international learning was disseminated b
ack to the UK market, critically there appeared to be no planned, structured, nor systematic mechanisms or form
al processes for capitalising on this learning. The company's acquisition of Catteau in France did not prove to be
the platform from which to inspire experimentation abroad. Nevertheless, the next phase of the company's expa
nsion into central and eastern Europe coincided with the company's ambition to broaden their non‐food merchan
dise in the UK market. The impetus was then on the diffusion of what the company had learned from developing
a new format which accommodated non‐food items in the overseas markets. This had a catalysing effect. Over t
ime, the company began to employ personnel whose sole responsibility was to transfer the hypermarket format l
earnings back to the UK from central and eastern Europe. These learning agents represented a new dimension in
the company's organisational structure, but there were difficulties in this process as management highlighted:

The learning challenge following on from this is how do management then transfer those learnings to the home
market and explain to the headquarters that they don't know everything, there is a better way of doing it. A new
product, process – that is culturally incredibly difficult to implement. This is extremely difficult to understand a
nd teach the domestic market.

According to the sell‐side analysts, these problems were much more acute in the aggressively industrial approac
h adopted by Tesco than the looser federal approach which emphasises the role of the international firm as a “ve
hicle” for investment.

External strategic processes

With regard to what had been learned by Tesco from the external strategic processes, a number of key themes e
merged from the in‐depth interviews.

Competitor orientation experience. At the corporate level, the findings suggest that Tesco learned particularly va
luable lessons when faced with abrupt competitive shifts, to new circumstances, and responses from other retail
multinationals. Specifically, Tesco were faced with hard decisions centring on whether they should participate i
n the consolidation process (as a consolidator or consolidatee), knowing that the valuations placed on acquisitio
n targets were over‐priced, and there would be a distinct possibility of losing strategic control. One sell‐side anal
yst summed up the pressure:

In going it alone, Tesco would be making a huge strategic call. If wrong, the business would be seriously disadv
antaged and would eventually lose their independence. If right, their vision would be second to none, and manag
ement would be regarded as one of the best in the world.

Despite their relatively strong position against UK competition, the consequences of Tesco's relatively weak pos
ition against much larger and more experienced international peers were profound:

•
acquisitions outside the UK may prove highly dilutive;

•
the size of possible acquisitions are effectively reduced;

•
a merger with a large European retailer would leave Tesco as the junior partner; and
•
Tesco is more vulnerable to an aggressive bid.

Tesco resisted such pressures and decided to pursue international expansion independently through organic store
‐by‐store expansion – albeit much more aggressively than had hitherto been the case (i.e. the development of 20
0 hypermarkets over four years). During what was rapidly emerging as one of the most intense periods of retail
merger‐and acquisition‐driven internationalisation, the growing sense of unease among analysts began to surface
about the long‐term endurance of Tesco internationally. However, management held their nerve – the speculativ
e scenarios which had been envisaged in the early 2000s (see Wrigley (2002) for example) pointing towards a se
ries of mergers and acquisitions at both the global and local level failed to materialise. Instead, quite remarkably
, the immediate years following 2000 saw relatively little consolidation whatsoever. Through a series of competi
tive adjustments including exploiting the benefits conferred by the scale of their UK operations, it seems that Te
sco's strategy paid off – and, importantly, deterred any hostile takeover bids. While the strategic effects of this in
tense period are difficult to determine analysts suggested that this period of vulnerability for Tesco led to a great
er realisation of the strategic necessity of the company's international operations in ensuring the long‐term future
of the company.
At the local competitive spatial level, Tesco adjusted operational retailing aspects, sometimes with minor modifi
cations and at other times ensuring fundamental transformation of the format during the internationalisation proc
ess. Both buy‐ and sell‐side analysts believed that this international juncture was an area where companies could
learn and experiment at the extremities of the company:

It will offer a company which is open to change the opportunity to observe and adopt best practice and apply it t
hroughout the totality of their organisation. It will see Tesco competing directly with some of the best food retail
ers, notably the French hypermarket operators.

In central Europe and Asia, Tesco is competing directly with some of the best food retailers in the world, notabl
y Carrefour, Auchan, and Ahold. As a result, Tesco is having to learn how to merchandise non‐food departments
and how to hone their merchandising skills.

The above quotations serve to draw out how much of the learning takes place as the expansion unfolds and the c
ompetitive situation evolves rather than simply with prior market knowledge. In other words, as the company fa
ces novel situations and makes small mistakes through trial‐and‐error expanding, management form more realist
ic perceptions of the foreign market. The need for learning‐by‐doing at the local spatial level indicates that learn
ing from the internationalisation process will often be a gradual, reiterative process (Alexander, 1997).

External regulatory experience. Faced with the inevitable prospect of different degrees of regulatory constrains i
n dissimilar international retail markets, Tesco generated negative publicity and commentary in both the Irish an
d French markets. The contrasting cultural nuances were particularly apparent in the different ways of conductin
g business concerning the management of the planning process. In Ireland, in the context of an unclear planning
policy frame, the company attempted to impose a process that had been utilised in the UK:

They [Tesco] underestimated how the planning process in Ireland worked at two levels. First, they underestimat
ed the extent of local networks and contacts in the property industry. They didn't have enough agents and adviso
rs. There was very much a local way of doing things, which relied on who you know as much as how much you
know. Second, there is a different decision‐making process, slightly opaque series of planning policy guidance a
nd framework. There was no independent planning inspectorate, with a lot of years experience in determining pl
anning proposals for new stores.

When Tesco announced several proposals for new store development in Ireland and there was little guidance wit
h regard to planning, this led to several years of independent planning and formalised inquiries. Although Tesco
had been actively addressing the legitimate concerns of customers, suppliers and small retailers in these markets,
it is clear that the company failed, at least initially, to communicate and negate the concerns that the local autho
rities and other stakeholders adequately. The strategic effect of this is difficult to determine in more recent expa
nsion, but with experience, rather than conceiving of regulation simply as fait accompli in international markets
and emerging markets in particular, Tesco embarked on a public relation campaign that would attempt to influen
ce important regulatory decisions in their favour. In marked contrast to the early phase of development, Tesco n
oticeably changed by becoming proactive in enhancing their credibility and reputation in new markets with natio
nal and local governments as well as providing new opportunities for local suppliers to export produce. As a sig
nificant measure of the company's commitment to internationalisation, upon Tesco's entry into the Irish food ret
ail market, management were willing to enter into an agreement with the government which meant that Tesco ha
d to adhere to a number of promises and guarantees including operating an autonomous head office, retaining ex
isting employees and the sourcing of Irish products.

Internal regulatory experience. Tesco learned from the importance of involving major shareholders during the in
ternationalisation process. Tesco required the support and guidance of the financial institutions and, indeed, this
forced them to invent communications and governance processes in order to stay informed of institutional invest
or concerns and perspectives. Arguably, Tesco's initial cautionary approach towards internationalisation was attr
ibutable to the restraints placed on the company by their shareholders’ expectations. According to management,
at the time of Tesco's first high profile, albeit small international acquisition, the gist of the financial analysts’ pe
rceptions towards Tesco's internationalisation was that the capital markets inhibited or constrained Tesco's inter
national expansion:

Tesco wanted to do a deal in France in the mid‐1990s but were prohibited at the time by the City. They wanted s
pecial dividends and share buy‐back options and didn't want to take the risk of them going abroad.

Serious questions were being asked by the financial analysts concerning the financial requirements and the press
ures to sustain international growth. However, over time, the question from the financial analysts then became h
ow rapid Tesco should expand internationally rather than whether or not they should actually internationalise. O
ne sell‐side analyst's report at the time succinctly put it:

The only question is the “haste” with which it is pursued and whether shareholders get a parallel sight of the cas
h through the dividend. In the context of Catteau, Tesco seems to be taking it reasonably slowly; it certainly is d
elivering a progressive pay out.

As previously discussed, Tesco came under intense scrutiny and found themselves subject of speculation of take
over bids during the mid to late 1990s. To combat this Tesco embarked upon a number of investor relations initi
atives. Some, as reported in the press at the time, interpreted Tesco's emphasis on overseas expansion as “a code
d plea to re‐rate the shares and put it in a stronger position to take part in the international acquisition‐driven con
solidation process” (Osborne, 1999), so that the company would not become increasingly marginalised in the ac
quisition‐driven consolidation process. Management were obviously concerned about the company's valuation d
uring this period relative to their international peers and deputy chairman David Reid (cited in Riera, 2000) sugg
ested as much:

People should be concerned if share prices are lower over here, as there is a possibility that the whole UK food r
etail industry could be owned by foreign competition.

Unfortunately for Tesco, these efforts were interpreted as a one‐off public relations (PR) exercise. The findings t
entatively suggest that a one‐off PR campaign for its own stake, in the context of intense consolidation pressures
, will not be positively interpreted by the financial markets. Instead, it was interpreted as a coded plea to re‐rate t
he shares and put the retail multinational in a stronger position to take part in the international acquisition‐driven
consolidation process, rather than an open and meaningful ongoing dialogue between the financial institutions a
nd Tesco. Tesco's message was not being effectively relayed to investors – in part, because analysts were placin
g excessive weight on the company's past international (in)experience and this obscured the prospects for prospe
ctive earning power from future international investments.

Internal operational functions

Human capital experience. Another theme emerging from the interviews was that Tesco's management greatly u
nderestimated the management capital required for international expansion. A significant measure of the compa
ny's attitude towards human resource capacity is reflected in the following statement by one advisor:

Probably every retailer that I have worked with within Europe on an international project has underestimated the
amount of time that is required from senior people in the business to make a relatively small venture in a new m
arket work. Retailers must be prepared to commit senior management, or director levels … often two years into
the new venture they will become very frustrated that the venture hasn't grown into the third leg of the business.
They must put their best people behind internationalisation and allow them to “champion” this expansion and dr
ive it forward.

Investment in human capital, whether at the managerial level or store level, to handle international expansion co
nstituted a significant lesson learned by Tesco. To achieve the necessary pace and scale of international operatio
ns Tesco have had to invest significantly in human capital, not least because the scale of the internationalisation
programme significantly depleted the existing management resources. The strategic effect of this under investm
ent in human capital for Tesco was that they acquired a number of small‐scale businesses in Central and Eastern
Europe as a substitute for their lack international experience and local knowledge. The size of Tesco’s retail ope
rations in their domestic market were a vital component in establishing successful international operations. By v
irtue of this size, Tesco had greater availability of capital and human resources for areas such as store manageme
nt, site location analysts, marketing and financial personnel, supporting and sustaining international operations.
Reflecting on this issue one buy‐side analyst made the following point:

The biggest lesson of all is a human resource lesson. Where do you get experienced international management?
While Carrefour and Ahold have considerable management depth and breadth, relatively new internationalists h
ave less human resources.

Also of increasing importance for the less experienced retail multinationals was the advisory support from exter
nal firms such as investment banks, management and property consultants and even manufacturers. The investm
ent banking advisory support intensified when Tesco expanded via merger and acquisitions, making possible a d
eepening of the knowledge transfer process, closely co‐ordinating the activities with the investment banks, and e
xpanding the learning process outside the boundaries of the company. Investment banks can therefore act as an a
gent for transferring knowledge regarding the dynamics in other international markets – in effect accelerating th
e learning curve for a less experienced retail multinational. Investment banks can be involved at any stage in the
internationalisation process as one advisor explained:

We are not retailers but we can provide comprehensive information, which facilitates the retailers’ learning and
helps to narrow down the potential options.

These networks also extend beyond the financial institutions. One important dimension for sustaining the compa
ny's aggressive expansion programme has been the close relationship with their largest supplier, Procter and Ga
mble. For example, Tesco utilised Procter and Gamble to fund an international field trip so that the executives g
ot an insight into retailing practices in Asia.

Financial capital experience. Progressive international expansion is likely to result in the deterioration of the fin
ancial profile. From 1995 onwards, the conditions for international expansion were far more capital intensive. T
hese costs were principally driven by the rising valuation (acquisition multiples) placed on acquisition targets, w
hich, during the wave of acquisitions, broke decisively beyond historical ranges. On top of that, costs were exac
erbated by the increasing sophistication of in‐store retail environments which, even within the emerging markets
, required additional levels of capital investment as well as broader, supporting investments in information techn
ology (IT) systems, distribution/logistics infrastructures and supply chain management. Developing markets hav
e attracted considerably more international competitors, resulting in a virtuous cycle of heavy capital investment
. One sell‐side analyst commented that for Tesco:

[…] the Polish market is developing at such a pace that in order to win custom, the in‐store environment needs t
o be highly sophisticated from the outset – especially in the highly competitive cities such as Warsaw.

Additional external sources of financing were therefore often required to supplement international growth. Tesc
o relied on external funding both in the form of debt and equity from the financial institutions. A key factor for
Tesco, however, was the size of their cash generating domestic markets, which allowed them to invest with conf
idence in international emerging markets. In 2002, for example, Tesco financed the HIT acquisition in Poland (e
stimated £386 million) from trading rather than incurring debt, benefiting from the cash generating strength of th
eir core UK business. Critical post‐integration investments were also supported from earnings from the UK busi
ness. Underlying Tesco's international programme was a relatively strong domestic position, which was in stark
contrast to their main rival in the UK, Sainsbury's. Sainsbury's international expansion became more difficult in
the face of opponents, who slowly undermined the company's international aspirations with resounding attacks o
n their under performing core business. Many buy‐ and sell‐side analysts that have followed this line of reasonin
g:

On the back of poor domestic expansion, retail multinationals should not plan on any foreign acquisitions as this
will only accelerate the demise of the current domestic operations. To wield power across markets, a retail mult
inational must have some measure of strength in their domestic market. In other words, retail multinationals wit
h under performing or insignificant positions in their domestic market will not have sufficient financial or huma
n resources to fully implement their international strategy.

If you are struggling in your domestic market, what credibility do you have that you can manage a business in a
nother country?
At the Global Institute of Grocery Distribution conference in early 2000, Tesco's management stressed that they
would not make the same mistakes as Sainsbury's in their domestic and international operations. It is clear that
management learned a considerable amount from Sainsbury internationalisation process, and briefly pointed to
Sainsbury's under investment in the domestic market.

Marketing and communications. The experiences of Tesco highlight some important lessons concerning internat
ional marketing and communication issues. In the international retailing literature, Lord et al. (1989) have noted
how multinational retailer expansion can often be a PR disaster – sometimes confrontational and controversial; l
eading to conflict with other retailers and suppliers, but also between the financial markets and the retail multina
tional (see also Wrigley, 2000). It is clear from the case findings that Tesco suffered from negative publicity in a
number of ways. At the investor‐retailer level, Tesco's fiduciary responsibilities were often strained due to ineff
ectual and disjointed marketing communication programmes. A lack of PR activity during the early phase of int
ernationalisation placed Tesco at a slight disadvantage, for their international peers wasted few opportunities to
play gently on some of the financial markets’ concerns regarding Tesco's international expansion. One sell‐side
analyst made this point:

One of the biggest risks of international expansion is to the reputation of the retail multinational. When a compa
ny's international reputation is questioned, valuation collapses, and as a consequence, management can't make fu
rther acquisitions. Then management spend all of their time on the back foot trying to build credibility rather tha
n growing the international business.

Serious questions were being asked of Tesco in this regard, but management defended their position explaining t
hat:

PR skills play a part in the way some of these perceptions get blown up. If pressed, we would say that the other r
etail multinationals are better at “talking up” their story than Tesco, which tends to take the old fashioned view t
hat the results should speak for themselves.

Tesco experienced a chain of PR mishap after mishap, which undermined consumer confidence and excessively
weakened their customer‐friendly image in foreign markets notably in the Republic of Ireland. Perhaps within a
larger and culturally dissimilar market, Tesco may not have survived these mistakes in the face of larger and wel
l‐established incumbents. Yet by the late 1990s, the company were forced to embark on an intensive PR campai
gn. Analysts postulated that the main reason for the intensification in PR was a direct result of management feeli
ng more confident in making larger international profits than initially intended for the early phase of their intern
ational expansion, or, as a direct result of the pressures surrounding the acquisition‐driven consolidation process,
which could threaten the strategic credibility of the firm if Tesco remained unresponsive to the consolidation pr
essures. What emerges from this evidence is the importance of an evolutionary marketing strategy within differe
nt competitive contexts. Tesco's retail marketing mix decisions have been characterised by trial‐and‐error behavi
our where different possibilities are explored and thus the decisions taken are largely evolutionary in different c
ultures. In addition, the company began experimenting with a new type of hypermarket format that contained a l
arger element of non‐food stock keeping units. Management succinctly captured the essence of experimentation
in a new market:

I think it's easier to develop new entrepreneurial formats in a new environment than it is in your existing market
where your business is successful. The biggest barrier to change is success. If you have a successful business tha
t does things in a particular way, stepping outside the box and doing something in a very different way always a
ppears high risk. Why take the back off a watch when it's ticking. When you don't have the watch, the quality of
your thinking will be much wider, management will challenge things much more in an apparently risk environm
ent with no baggage than you will in the UK. If you look at the development of our hypermarket in the UK, it ha
s been much more pedestrian in terms of small steps because it has been based around a highly successful forma
t that already exists. So why change? You actually need to be in an environment where you can afford to change
because you have nothing to lose.

As the above quotation suggests, retail innovation is facilitated by “shocks” or uncertainty in the international in
vestment process. The danger facing companies pursuing a progressive step‐by‐step development model is that i
deas may be inappropriately dismissed or overlooked simply because they did not work in the domestic market a
nd the success and size of the domestic operations creates a barrier to change and innovation. This raises some is
sues associated with the benefits of a more aggressive and ambitious international programme undertaken by Te
sco.

Global sourcing and supply chain experience. The capacity for cross‐border sourcing is generally seen as one of
the long‐term “strategic” justifications for cross‐border consolidation in food retailing (Wrigley, 2002; Palmer, 2
002a). Extracting longer‐term synergies and greater co‐ordination across borders – including the move towards
price harmonisation – was increasingly being used as justification for international retail acquisitions. For Tesco
, global sourcing was largely played down. Instead, the company emphasised that the debate concerning sourcin
g efforts did not shift the emphasis away from their core competencies, which were considered more important
within the international landscape. In principle, Tesco believed that a competitive advantage rests more on the o
utcomes of learning to improve local merchandising methods, systems and processes than simply on a cost adva
ntage in the distribution of standardised goods. There have been a number of strategic outcomes. First, Tesco ha
ve deliberately strived to occupy the top three position in all of their international markets. Tesco have performe
d less well and in some instances exited the market where they could not reach a sufficiently critical size. For ex
ample, management cited this as a reason for their divestment of Catteau in the French market. Second, Tesco's
actual sourcing efforts within the broader international context also shows several visible attempts by the compa
ny to aggregate scale across multiple markets and establishing pan‐regional presence in contiguous markets. Thi
rd, attempts to re‐organise their global sourcing activities practises by establishing buying centres in emerging m
arkets to develop the product range. Tesco has encouraged local food suppliers to develop retail brands, under th
e Tesco own brand. On the one hand, this prohibited the degree of global sourcing efforts, but on the other, it ha
s substantially improved the overall diversity of the company's product mix which was increasingly being export
ed into other international markets.

Discussion
As Tesco accumulates knowledge while internationalising, important insights and lessons have been learned fro
m stimuli internal and external to the company. By reflecting on these different learning experiences, particularl
y when contextualised within detailed single case‐level research, various dimensions of retailer internationalisati
on have emerged. In spatial terms, it appears that Tesco concentrated their efforts with more experience on dissi
milar markets in key regions or clusters aiming to achieve a market leading position. One explanation for this ac
tivity may be that as Tesco accumulated more experience they recognised the importance of local and regional s
cale economies for achieving profitability. In other words, retaining spatial focus was therefore more important t
han capitalising on opportunities in diverse markets. The decision of selecting a particular market may depend a
s much on the availability of suitable acquisition targets and the conditions of potential sellers as it does on the a
ttractiveness of the market (Dawson, 2001). For Tesco, market selection was thus entangled with entry mode ch
oice. Evidently, acquisition‐driven expansion had been a form of “postrationalised opportunism” where both ma
nagement and the financial institutions partisan to the acquisition rationalise the acquisition after it is accepted b
y the other company. Market selection decisions mirrored this opportunistically‐driven behaviour. In this respect
, the main lesson that Tesco had learned is that they must be in a position to quickly take advantage of unexpecte
d events (threats or opportunities). How Tesco dealt with unexpected successes, miscalculations, mistakes and s
erendipity was of critical importance to the international operations succeeding. The preceding evidence of Tesc
o also suggests that acquisitions have proved to be an important prism for learning. On several occasions Tesco
used small‐scale, nothing‐to‐lose acquisitions to minimise their own human and financial capital in the face of p
otential economic and political uncertainty in developing markets and to accumulate local market knowledge. T
hese acquisitions have provided Tesco with invaluable experiential opportunities to be “surprised” by the market
place and so to learn. The case evidence revealed that a willingness to experiment and feedback input on the res
ults from local store managers and expatriate managers is a meaningful lesson.

The case of Tesco also indicates that the internationalisation process of retail multinationals is not always a prog
ressive and straightforward process (Alexander and Quinn, 2002; Burt et al., 2002, 2003; Mellahi et al., 2002). T
he findings add new insights into the complexity of the international retail divestment process. It appears that Te
sco had learned rather valuable lessons from their own divestment experiences, while other retailers’ internation
al market withdrawals provided an opportunity to observe overt behaviour. From the Catteau experience, Tesco
became locked into an inappropriate acquisition through various acquisition‐related contractual (earn‐out) clause
s with Catteau's management which in turn prohibited a swift and timely exit. A lack of experience as an interna
tionalist was visible in the Republic of Ireland when faced with the task rejuvenating, re‐branding and re‐launchi
ng relatively weak store operations as well. While it is true that such operations offer undeniable opportunities t
o improve the operations, Tesco later recognised that, in reality, these “turnaround” acquisitions were disproport
ionately demanding of critical management's time and resources.

Apart from underestimating the level of effort required for these “turnaround” operations, Tesco painfully learne
d from employing an inappropriate corporate model in the French market. Alexander and Myers (2000) have re
marked that the differences between ethnocentric (centralised) and geocentric (decentralised) operating structure
s will impact the international learning process. Tesco viewed their early international moves abroad as a busine
ss extension and a redirection of free cash flow – effectively limiting organisational learning opportunities. Fro
m the mid‐1990s onwards however, publicly‐listed retailers had come under intense pressure from their sharehol
ders to demonstrate where and how value could be added to the international operations. This had a catalysing ef
fect. A lack of clarity in this respect would have severely undermined the strategic credibility of the retail multin
ational and inevitably placed financial cost of capital restrictions (Palmer, 2002a). Tesco were initially unclear a
nd less confident about the most appropriate corporate model with which to proceed. Effectively, Tesco passed t
hrough a number of iterations of organisational structure before finally adopting a hybrid structure between cent
ralised and decentralised operations, before ultimately adopting an aggressively industrial model. Perhaps more i
mportantly, the initial experiences of Tesco's control capabilities have proved that it is impossible successfully t
o adopt both corporate models simultaneously.

What is clear from an analysis of the findings regarding learning structures and processes is that an organisation
al‐led learning multinational goes beyond the “official corporate line” that executives may use to justify minorit
y entry positions or failures in new markets and deliberately establishes systematic internal learning processes to
support international learning. Within the context of international retail expansion in Europe, Alexander (1997)
suggested that retailers have lacked systematic internal processes to support their decisions with respect to appro
priate host market strategies. The present study would largely support his findings at least as far as the developm
ent of internal learning structures is concerned. It is proposed that innovations and continuous improvements are
 more successfully absorbed by the proactive formalisation and development of internal learning mechanisms. T
he formalisation and development processes for learning were seemingly rather fortuitous insofar as market exp
ansion into eastern Europe coincided with their ambition to broaden the non‐food merchandise in the UK. The i
mpetus was then on the diffusion of what the company had learned from developing a new format which accom
modated non‐food items in the overseas markets.

By considering Tesco's competitive behavioural dynamics within the context of the strategic international move
s it was apparent that retail multinationals are frequently engaged in exchange of threats at the corporate spatial l
evel. At the corporate level, learning takes place at a much faster pace, often precipitated by a catalysing event i
n the retail environment which could fundamentally alter the strategic authority of the company and ultimately i
nvestors’ evaluation of the company's worth. An illustration of a catalysing event was Wal‐Mart's entry into Ger
many which dramatically changed the status quo and the structural competitive dynamics for European retailers
and Tesco in particular (see Palmer, 2000; Arnold and Fernie, 2000; Burt and Sparks, 2001; Fernie and Arnold,
2002). At the local spatial level, intense competitive rivalry for securing regional market share also existed. At t
his interface, retailers learned from each other, particularly with respect to competitive responses from in‐store a
nd supply‐chain initiatives. It is proposed that much of this learning takes place as the expansion unfolds and the
competitive situation evolves. This learning‐by‐doing activity indicates that learning at the local spatial level wi
ll be a gradual and reiterative process. Experience has taught Tesco to adjust to the deregulatory/regulatory relat
ed spatial pressures, but also covertly shape rather than respond to regulatory frameworks to obtain their desired
spatial outcomes in international markets. A regulatory lesson, particularly in emerging markets, was the import
ance of investment in developing and maintaining good political relationships, while embarking on PR campaig
ns to facilitate the expansion efforts in new markets among stakeholders.

It is evident from the findings that from the mid‐1990s onwards, publicly‐listed retailers have come under intens
e pressure from their shareholders to internationalise. On the institutional front, the findings appear to suggest th
at shareholders insist that retail multinationals deliver not just instant sales growth from their foreign ventures b
ut also substantial cross‐border synergies and thus more profits. By definition, these synergies can only flow thr
ough an industrial or “global category killer” model (see Wrigley, 2002). It is concluded, therefore, that those e
mploying a federal structure model will realise the economic benefits of internationalisation immediately, while
the industrially aggressive multinationals will take longer to realise tangible cross‐border economies, although s
uch synergies will be higher in the long‐term. Higher integration risks therefore exist and serious miscalculation
s or mistakes may weaken the retail multinational's confidence and generate negative press commentary which, i
n turn, may eventually undermine the strategic credibility of the expansion efforts elsewhere.

A lack of experience and of familiarity with conditions in foreign markets created considerable strain on Tesco's
human capital resources. This situation is somewhat different from the large fast‐moving consumer goods (fmc
g) manufacturers such as Procter and Gamble and Unilever where the management ethos has grown up as a func
tion, or by virtue of being international companies and overseas posts became important in the long run rather th
an a stepping stone back to a more senior position at home. Within Tesco, the international division was very m
uch a tradition of a ‘stepping stone’ to a more senior position in the home market. Thus, while Tesco invested la
rge amounts of financial capital in their international operations, management underestimated the requirement of
human resources. The established international retail literature does not emphasise the importance of the human
capital issue in the implementation of an international retail strategy. The current findings make a significant co
ntribution to the established literature in that they illustrate that an international retailing financial‐human capital
gap may exist during the retail internationalisation process. That is, for Tesco the process of reaching the necess
ary pace and scale of international operations, together with the desire to outmanoeuvre competitors, resulted in
a medium‐term oversupply (or overhang) in the financial capital employed and a shortfall in the human resource
s employed. The immediate effect of this “gap” was immense pressure on the firm's recruitment processes. The
strategic effect of this under investment in human resources is subsequent investments in “management accretiv
e” acquisitions where the retail multinational immediately acquires strong management thereby reducing deman
ds on managers in the domestic business.

The findings of this study also highlight some important lessons concerning international marketing and commu
nication‐related issues. The findings suggest that at both the investor‐retailer and the consumer‐retailer interface,
relationships were often strained due to ineffectual and disjointed marketing communications efforts. Surprising
ly there was a conspicuous lack of action addressing negative rumours and this ineffectual and disjointed comm
unication undermined both investor and consumer confidence. The strategic effect of this was that Tesco's credi
bility was undermined and that, as a consequence, they encountered difficulties at later stages in the developmen
t process in terms of either seeking further commitment from investors or planning permission for new investme
nt from government regulators. The findings illustrated that customers can be easily alienated by changes in fasc
iae, assortments, store layouts or pricing following the post integration period (Shackleton, 1996a, b, 1998). Dur
ing this critical period, the retail multinational may unintentionally disenfranchise customers that may make it m
ore difficult to achieve post‐integration synergies, and even weaken comparable sales performance.

The present study identified fundamental movements of Tesco to reduce the price differential between markets o
f sourced merchandise in their favour during the retail internationalisation process. The findings suggest that the
financial institutions and other investors believed that there were global‐scale advantages and disadvantages. Ev
en under duress from the financial institutions, Tesco assumptions on global scale were similar to both Jackson's
(1976) and Williams's (1992) studies who felt that local know‐how could alleviate deficiencies of a lack of scal
e and any other competitive sourcing‐related disadvantages. However, it should be noted that investment banker
s may be over optimistic in estimating the power asymmetries, while management may play down the scale of th
is activity for disclosure reasons. Therefore, in attempting to ascertain the reality, it is possible to assume that th
e de facto power rests somewhere between these standpoints. It is concluded that it is equally important to have
scale at the local and global level. In this regard, Tesco could draw financially on their domestic operations and
other international cash generative retail operations while their costs were still being borne out in new markets b
ut results had not been obtained. The present study also found that stronger local and global retailer‐supplier part
nerships were increasingly critical for Tesco operating across different markets where distribution and logistics
vary considerably from market‐to‐market. The findings suggest that initially the manufacturers realigned and re‐
organised their organisational structures in order to support their leading brands fully. The impact of Tesco's inte
rnationalisation has dramatically altered the retailer‐supplier dynamics in strengthening and weakening relations
hips, and recovering and terminating relationships in other circumstances.

Conclusion
There has been a marked acceleration in the scale of international investment during the 1990s and as the proces
s of internationalisation gathers pace, it is vitally important to understand what retailers have learned from their
experiences. The aim of the paper was to provide an expository overview of one company's experiences of inter
nationalisation, however it is anticipated that the findings arising from the study will help to develop understandi
ng of the subject area in general. It has been shown that the concept of “learning” provides an important concept
ual framework and a new perspective for reinterpreting, re‐evaluating and refining the existing literature on retai
ler internationalisation. Such learning accounts necessarily are richer and deeper but less elegant than success‐fa
ilure dichotomies. The preceding case study of Tesco illustrates a number of different dimensions of the compan
y's international experience. Many important lessons have been learned by Tesco during the course of their inter
nationalisation process, enhancing the adaptability and responsiveness of the company. Tesco has undoubtedly e
xperienced several “shocks” in the marketplace – and as result the company was much more vigilant and willing
to experiment, learn and react to the unexpected during later phases of expansion. How far Tesco could, or wou
ld, apply the lessons learned from their experiences for future expansion is largely dependent on the company's c
apacity to identify the sources of international learning in different contexts, absorb and institutionalise this kno
wledge. In some circumstances, it has also been shown that the company did not learn from their experience, ev
en with the benefit of hindsight.

Fig thumbnail _i17

Figure 1 A framework of international retail learning

Fig thumbnail _i18

Table I Tesco's international expansion

Fig thumbnail _i19

Table II International acquisitions by Tesco in emerging markets

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This article is from International Journal of Retail & Distribution Management, vol. 33 no. 1

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