30.09.

04

TESCO
A Corporate Profile

By Corporate Watch UK
Completed September 2004

'Our market share of UK retailing is 12.5% - that leaves 87.5% to go

after'
Terry Leahy, Tesco Chief Executive, quoted in Management Today1

'Tesco will just sail away. It will become unreachable, and the
Competition Commission has perpetrated that. The only thing that could
bring Tesco down is its management, and they do not make mistakes'
Carlos Criado-Perez, former chief executive of Safeway Plc2

1. The Company

Name: Tesco Plc

Industry area: Retailing goods and services

 Summary
 Market share and importance
 History - Pile 'em High, Sell 'em Cheap
 Strategy
 Core UK business
 Non-food
 Retailing services
 Legal services
 International expansion or world domination
 International strategy
 Moving in on the convenience (c-store) sector
 Retailtainment
 The 'Tesco' approach

Summary
Tesco, Britain's biggest and most profitable supermarket chain, is the
darling of the City. But behind the fascia of the 'under one roof' out-of-
town Tesco Extra, or the friendly high street Tesco Metro, lies a ruthless
billion pound operation. In recent years, Tesco and its major
supermarket rivals have faced criticism for abusing their monopoly
positions and contributing to some of the major social and environmental
problems plaguing society today. These include exploiting small farmers
in the UK and worldwide and hastening their replacement with industrial
monoculture plantations where wages are low and labour rights are
minimal; undercutting almost every other retailer and hence turning our
town centres into boarded-up ghost towns; co-operating with climate
criminals, Esso; as well as numerous other corporate crimes.

This profile was updated in 2004 as a reflection of Tesco's continued

meteoric rise over the last few years, with all the attendant social and
environmental impacts.

Market share and importance

'No matter how fast we grew Sainsbury's were always in front of us. But
slowly but surely we managed to grind them down and grind them out.'
Tim Mason, Tesco marketing director3

In 1995 Tesco overtook Sainsbury’s as the UK’s largest supermarket. In

2001 Tesco occupied 15.6% of the UK grocery retail market and was the
market leader by 6%.4 Tesco's enormous share is still growing: by
September 2004, it had increased to a massive 28%, around 12% more
than its nearest market rival, Asda.5 Some would argue that if we were to
include Tesco's share of the convenience store market (bizarrely
considered a seperate sector by

UK competition authorities) in this figure, Tesco could be said to control

34% of the grocery market.

Considering how concentrated and cut-throat the 'supermarket' market is,

this is quite an achievement. In the UK, Asda's only real shot at catching
up with Tesco would have come from a merger with Safeway, which
was disallowed by the competition authorities 2003. However, Asda's
parent company, Wal-Mart, the world's largest company, with global
sales of $256bn in 2003, is still eight times bigger than Tesco.
At present the only threat to Tesco's ever-increasing market share would
come if the Competition authorities stepped in to enforce monopoly
legislation which defines a ‘classic monopoly’ as 25% of market share in
a given sector. Since they have already carried out an investigation into
the power of supermarkets in the lifetime of the Blair government, it
seems unlikely that the Competition authorities will step in to stop
Tesco's obvious and increasing anti-competitive position. On the
contrary, they are just letting Tesco grow and grow. In September 2004,
after Morrisons bought Safeway, Tesco was permitted to buy 10 of the
52 Safeway stores that Morrisons were obliged to sell by the competition
authorities as part of their acquisition.

Tesco is equally impressive when considering its share of the total retail
market. In its interim statement of results (August 2003), Tesco claimed
'our share of the total retail market is just 12.3% and there is a lot left to
go for.' Already, 'just 12.3%' means that almost one pound in every eight
spent in the UK is spent in Tesco.6

Tesco’s favoured measure of growth is 'like for like' growth – sales

growth on exixting shopfloor space - which excludes growth from extra
shopfloor space in new or extended stores. Even by this restricted
measure sales grew 8.3% in the year to September 2004.

Tesco profits have increased every year but one since 1987. In April
2004, Tesco announced profits of £1.6bn for the financial year ending on
28 February; £4.4m profit a day, 17.6% higher than the previous year.
As a comparison, in 2003 Tesco made as much profit as M&S,
Sainsbury, Next and WH Smith combined.7 Analysts are now forecasting
Tesco pre-tax profits for 2005 will be above the £2bn mark, five times
that of Sainsbury.

Tesco is Europe's second largest supermarket after the French firm

Carrefour, and according to Mintel market research in 2004, Tesco is
closing the gap. It is the fourth largest supermarket in the world. 8 Tesco
operates 2,318 stores in 12 countries around the world and employs
326,000 people, 237,000 of them in Britain where it is the largest private
employer. According to Terry Leahy, Tesco is market leader in 6 out of
the 12 countries that it operates in, with its largest store, not in Bristol or
Birmingham, but in Budapest.9

It operates 1,878 stores in the UK, 261 stores in Europe and 179 stores
across Asia,10 and plans to open 184 stores worldwide over the next year.

In the UK, there are 83 Tesco Extra stores; 447 Tesco superstores; 161
Tesco Metro stores; 277 Tesco Express stores and 910 recently-acquired
T&S stores still to be converted (see ‘Moving in on the convenience (“c-
store”) sector’, below.11

A study carried out for the Sunday Times by research group CACI12
revealed that Tesco has almost total control of the food market in 108 of
Britain's postal areas - 7.4% of the country. This includes Epping in
Essex, Penarth in South Glamorgan and Buckingham. In a further 104
areas, it accounts for more than half of grocery spending. Competition
law states that a corporation should not account for more than a quarter
of the UK market nationally, but this study showed 325 areas where
Tesco exceeds this limit. The populations in Buckingham, Bicester and
Brackley can now choose from 'Tesco, Tesco or Tesco' as a result of the
chain's recent acquisition of the One Stop chain of convenience stores.13

At the end of 2003, Tesco was voted most admired company and its
chief executive, Sir Terry Leahy was voted most admired leader by
Management Today. The most impressive aspect of Tesco's triumph was
the 'margin of victory' in both categories. Tesco also came top in other
categories, 'Quality of Management', 'Quality of Goods & Services',
'Ability to Attract, Develop & Maintain Top Talent', 'Value as a Long-
Term Investment', 'Quality of Marketing' and 'Use of Corporate Assets'.
Only in the rankings for 'Community and Environmental Responsibility'
did it fall outside the top 10.14

History - Pile 'em High, Sell 'em Cheap

Tesco was founded in 1924 by John Edward Cohen. Jack 'the Slasher'
Cohen, as he was better known, started out as a market stall trader in the
East End of London.15 The name ‘Tesco’, was first used on tea, and was
derived from the initials of Cohen's tea supplier, T E Stockwell,
combined with the first two letters of Cohen. Tesco Stores Limited was
incorporated in 1932.16

Cohen was responsible for several small revolutions in retailing which

led to the rise of 'the supermarket' we know today.

In 1935, Jack Cohen visited the USA and was impressed by the
supermarkets’ self-service system which enabled more people to be
served faster, with lower labour costs. In 1947, the Tesco branch in St
Albans, a small shop by 21st century standards (200 square metres) was
the first Tesco to be converted to self service, although it didn't
immediately catch the public's imagination.

In the early 1960's, Cohen lobbied Parliament to have the Retail Price
Maintenance (RPM) act abolished, efforts supported by Edward Heath.
The RPM allowed manufacturers and suppliers to set the price of goods
thus preventing large retailers, who could buy in bulk and had greater
buying power, from benefiting from economies of scale and
undercutting the prices of smaller shops. To get 'around' this, Tesco
offered another incentive to get customers through the doors - Green
Shield Stamps. These were collected by customers when they spent
money in the store, and were then traded for goods in a catalogue. An
effective discount.

In 1964, Parliament passed the Resale Prices Act, curtailing RPM, which
by 1979 remained in force only on books and pharmaceutical goods.

In the 1960s, Tesco was buying up literally hundreds of grocery stores

and small grocery chains around the country.17 It introduced 'Home 'n'
Wear' departments into larger stores to carry higher-margin non-food
merchandise, including clothing and household items, and opened its
first 40,000ft 'superstore' in Crawley, Sussex.

Until the 1970's, Tesco operated on the 'pile it high, sell it cheap' formula
Cohen had imported from the USA. However, the market was changing,
leaving the company with slim margins and a serious image problem.
Under the leadership of Ian MacLaurin, who succeeded Jack Cohen in
1973, Tesco decided to try something dramatic and different: to become
an ‘aspirational mass retailer’. It discontinued the use of Green Shield
trading stamps and launched 'Operation Checkout' which cut prices
across the board and started a price war with major rivals Sainsbury’s.
Next, Tesco decided to modernise itself, closing 500 unprofitable stores,
and extensively upgrading and enlarging others. At this time, Tesco
prioritised the development of large out-of-town stores where parking
was convenient, the selection of goods broad, and where a higher
volume of business could be generated at increased margins while
reducing overheads.

In 1974, in a deal with Esso, Tesco began to open petrol stations on the
grounds of its superstores. The idea was successful and by 1991 Tesco
was the country’s largest independent petrol retailer: it now accounts for
12.5% of all petrol sold in the UK.18

Other innovations throughout the 1980s included introducing own-label

product lines; computerising and centralising distribution systems and
developing shopping centres outside of the major cities. In 1983, Tesco
Stores PLC renamed itself simply Tesco PLC.

In 1985, Tesco opened its 100th superstore on a 43-acre site in Brent

Park, Neasden. From the time it acquired the site in 1978, it had come
into conflict with the local council whose greatest concern was the
impact that this, the largest food store in London, would have on
retailers in the surrounding areas.

In 1993, when Tesco introduced 'Value' lines, a cut-price range of own-

label goods, competitors scoffed and the share price sank. But Tesco had
gauged the popular mood: after years of recession, shoppers were
looking for bargains, and sales soared. A year later, Tesco started 'One in
Front'—opening a new till whenever a checkout line exceeded two
trolleys. It cost millions in extra staff, but customers loved it.19

In 1995 Tesco became the first supermarket to introduce a company

loyalty card, an idea developed by the then Deputy Managing Director,
Terry Leahy. At first the other supermarkets were sceptical, but the
concept caught the public imagination leaving the others racing to catch
up. See under ‘Corporate Crimes’ for more on loyalty cards.

Strategy

'We have only got 5% of the non-food market in Britain, we've only got
6% of the convenience market and we have only got 2-3% of the banking
market...In all those examples we could be much bigger' Sir Terry
Leahy, January 200420

'Tesco's strategy is far ahead of Sainsbury – it has grown a strong UK

core, and then rapidly developed international stores, built good non-
food sales, expanded into retailing services and exploited e-commerce
successfully' Datamonitor, food retailing analysts21

Tesco's success in recent years has mainly come from expanding

overseas, shifting to 'higher margin' non-food merchandise and
maintaining a strong UK core business. Its UK success has been built on
low prices, cultivating customer loyalty, offering a range of different
store concepts and expanding into retailing services, such as banking and
insurance. Tesco's focus on non-food items has led some to wonder
whether it is fair to compare Tesco with the other grocery retailers at all
as it seems to have become a consumer goods company.

At the annual Institute of Grocery Distribution conference in October

2003,22 Tesco Chairman David Reid made the assertions that 'You
cannot save your way to prosperity' and that 'Growth is crucial to
shareholders...staff...and suppliers'. Investing in growth is really at the
heart of Tesco's strategy. This investment doesn't just come from
ploughing back profit. In January 2004, Tesco raised £773m by placing
315m new shares23, and in March 2004 announced a joint venture with
property group Topland to release £650m from its UK property
portfolio.24 The main reason for the new share offering is to pay off the
company's debt. Tesco's credit rating had fallen the previous year
because so much of its growth had been based on borrowing.25

Core UK business

In its preliminary statement of accounts, April 2004, 26 Tesco considers

the following bullet points:

 We have been investing in further improving our price position.

£70m in January and a further £70m yesterday (19th April) are
the two most recent price campaigns maintaining our position as
the UK's best value retailer.

As Tesco is so large and successful it can afford to cut prices to a

much larger extent than many of its rivals – for example in 2000,
when there was a general price deflation in groceries of 2-3%,
Tesco deflation was nearly 4%.27

 During the year (2003-2004) we opened 21 Extra stores, of

which eight were new and 13 were extensions giving us 83 in
total.

 We have further evidence that customers love our Express stores

and we have grown our share of the convenience market to
5.9%. We now have 277 Express stores and the customer offer is
the best in the convenience sector achieving high sales per sq. ft.
and increasing returns.
Tesco executives look to the 'street corner' strategy, i.e. more
Tesco Express convenience stores, as the key to continued
growth in core UK sales. See also below in 'C-store sector'
section.

Tesco's sparkling growth has come at the expense of rivals, especially

Sainsbury and Safeway, both of whom are battling to keep customers.
The other UK supermarkets simply cannot compete on both price and
range of different store formats.

Sainsbury was the UK's biggest grocer until 1995, but was recently
relegated to third position behind Tesco and Asda. Internal problems and
strategic errors have left Sainsbury struggling. the company believed it
could abandon the classic focus on 'price' in favour of refurbishing store
'fascias' (their own term for aesthetic design) and supply-chain
improvements. Its loss of market share illustrates that price is still the
key for many consumers. 2004 has also seen shareholder unrest for
Sainsbury's. Unpopular board appointments were compounded by the
news that chairman Sir Peter Davis received a massive bonus despite the
firm's poor performance. He resigned in July 2004.

Morrisons is currently struggling to absorb Safeway and in 2004, issued

its first profit warning in 37 years, leaving Asda as Tesco's only really
credible UK rival.

Asda, owned by US corporation Wal-Mart since 1999, is the only

supermarket with the potential to become a thorn in the side for Tesco.
Wal-Mart, with global sales of $256bn in 2003, is the biggest company
in the world with annual sales eight times bigger than Tesco's. Asda is
rumoured to be about to acquire Matalan, the giant discount clothing and
home furnishing store. Already, Asda's George range of clothing is the
best selling brand in the UK. Two million of its £4 pairs of jeans were
sold during 2003-4.

Interestingly, many industry insiders believed that the only way to tackle
Tesco's dominance in the market would have been for the competition
authorities to have allowed an Asda/Safeway merger, as this would have
created a credible rival. In the event, out of the major supermarket chains
competing, Morrisons acquired Safeway, although remarkably, Tesco
has been allowed to buy 10 of the 52 Safeway stores which Morrisons
was obliged to sell off for a rumoured £120m.

Asda showed a slight slow down in growth in the period to September

2004. This is probably in part due to the planning restrictions on large
supermarkets which wouldn't affect Tesco and other supermarkets
concentrating on smaller store formats. Asda had tried to get around
these restrictions through a planning loophole that allowed them to build
mezzanine floors.28 Asda have also been affected by the Safeway store
conversions by Morrisons.

Tesco used to be considered a cheap supermarket, compared to the more

'up-market' supermarkets like Waitrose and Marks & Spencer. However,
in recent years, with the 'Finest' range, it has moved to capture that
market too. M&S in particular is now struggling with poor sales in both
food and clothing. M&S was also recently the target for an attempted
hostile takeover bid by retail entrepreneur, Philip Green who already
owns BHS and Top Shop amongst others. Today you can buy a £50
bottle of wine in Tesco, and the ‘Finest’ label food products are far from
cheap. Tesco is rumoured to be considering an upmarket range of
clothing bearing the Finest label.29

Many farmers, suppliers and researchers have highlighted another Tesco

strategy that they do not broadcast so widely: abusing their monopoly
(or, to use a more accurate term, 'oligopsony') position to force down the
price they pay to their suppliers. This means that they profit not only
from their consumers, but also by exploiting their suppliers. See later
section on Tesco's relation with suppliers and farmers.

Non-food

For supermarkets, the appeal of 'non-food' products – from fashion to

photo-labs, pharmacies to electrical goods – is that they carry much
bigger profit margins than traditional food products, especially when
they can be bought in bulk and sold at low-rent out-of-town premises.
Wal-Mart introduced this strategy when it entered the UK market in
1999 with their acquisition of Asda.

In September 2004, Tesco announced that 20% of its sales now came
from non-food goods, and that some of its stores were becoming a
destination for non-food, such as its Tesco Extra hypermarket in
Newcastle, where half of the store's £100m annual turnover is non-
food.30

Tesco claims that its clothing ranges, Cherokee, Florence and Fred, are
the fastest growing in the UK both in value and in volume, with a 4.4%
market share.

Petrol stations on the grounds of many superstores have also been a big
winner, with high volume of sales offsetting the fact that Tesco does not
always pass on oil price increases to the consumer.31

Tesco in-store pharmacies have been doing well; according to one report
these sell more than Boots and Superdrug together 32. Tesco also sells
more top 40 CDs than many specialist music stores combined and is
attempting to break the wholesaler monopoly on newspaper sales (which
affects all newspaper retailers).

In 2002 Tesco, opened a 'Nutricentre' offering alternative medicine in its

West Kensington store. Apparently, 'The biggest surge in demand in
Tesco has been for natural products to boost sexual performance, rising
steadily at 140% a year, as customers discover their benefits to both men
and women.'33
Since poaching Terry Price from Wal-Mart to head up its non-food
strategy in 2003 , Tesco seems on course to become Britain's largest
non-food retailer, fiercely pursuing growth in this area.

Tesco Homes This seems to be the latest supermarket venture. Tesco is

said to be looking at building 1,000 new homes over 2005, mostly to be
concentrated around London. Some councils are suggesting that
supermarkets build affordable housing in exchange for planning consent.
Tesco is said to be working with a mix of partners including housing
associations and construction companies.34

Retailing services

In 1997 Tesco Personal Finance was launched as a joint venture with the
Royal Bank of Scotland. During the late 90s Tesco launched, amongst
other things, a visa card, home insurance, motor insurance, pet insurance
and travel insurance. Tesco’s latest strategy is to launch 'Tesco
Telecoms', which includes Tesco Mobile and Tesco Talk, a land line
service. Tesco Personal Finance has proved a big success as one of
Europe's fastest growing financial service providers, with over 4 million
customer accounts by August 2003, and 50,000 new accounts opening
each week.35

Tesco has also expanded into selling over the Internet and is by a long
stretch the world’s largest e-grocer. In 2001 Tesco.com broke even in its
Internet sales for the first time. 36 By April 2004 it had become a fast
growing and profitable business, with sales of £577m and generating a
profit of £28m, up from £12m the previous year. Tesco.com delivers
120,000 customer orders per week.37

Legal services

'Lawyers can be expensive - why not see if you can handle the problem
yourself? '
Tagline for Tesco legal services

The term 'Tesco law' was coined by Lord Falconer in July 2003 when he
announced a regulatory review of legal services. One of the things up for
discussion was whether supermarkets should be allowed to offer off-the-
shelf legal services. Despite claims that they have no immediate plans to
offer legal services, Tesco is one among several supermarkets who
appear to see it as a natural progression from selling credit cards and
insurance.

In June 2004, the Government announced that non-legal companies

could sell legal services, and Tesco responded by offering shoppers the
chance to purchase documents such as do-it-yourself wills, rental
agreements and a number of legal advice handbooks online. Visitors on
the Tesco website can also search for lawyers in their area and buy
various services, such as will storage, from legal services provider
Lawpack.38

Under current regulations, Tesco is unable to develop this trend further

and offer its own specialist legal advice to customers, but must instead
refer them to Law Society regulated solicitors.

In a survey conducted by The Grocer, 31% of respondents said they

objected to the idea, giving answers such as 'They shouldn’t be allowed
– there’s huge potential for something like that to go horribly wrong,'
and 'It isn’t appropriate. If I’m buying food I don’t want to see a
solicitor!'39

International expansion or world domination

Tesco's huge growth in this country is a hard act to follow. With the
domestic market increasingly saturated, some UK supermarket chains,
namely Tesco, Sainsbury (who have now sold their interests in the USA)
and M&S have looked to overseas markets to maintain their positions.
This is a whole new ball game, bringing into play competition with large
firms from other countries, such as US retailing giant Wal-Mart and
French multinational Carrefour.

Tesco began expanding internationally in the 1990s and now (2004) has
outlets in the Republic of Ireland, Poland, Hungary, the Czech Republic,
Slovakia, Thailand, Malaysia, South Korea and Taiwan. It has also
recently bought chains in Turkey and Japan and is in the process of
negotiating expansion into China.40

Early in 2004, Tesco reported that its international sales were up 29% to
£6.7bn, with a 44% rise in profits to £306m. The growth has been
especially marked in Asia, where the underlying group profit rose
71.8%.41

International strategy
In most countries Tesco's preferred tactic seems to be to buy an existing
retail chain, or a significant share of one, and turn it into a Tesco
subsidiary. Then it can begin the usual tactics undercutting local traders,
aggressively competitive pricing, selling petrol, launching loyalty card
schemes, 24 hour opening and so on.

Tesco has favoured large hypermarkets for its international stores, since
in most countries it is easier to get planning permission for these than it
is in the UK. The hypermarkets have an emphasis on non-food items:
55% of the sales area in a typical Asian hypermarket and 50% in a
European one. Tesco is also opening petrol stations in Hungary, Ireland
and Thailand.

Rather than expanding into other West European countries, Tesco is

focusing on ex- Soviet countries and South East Asia. According to
David Hughes, professor of agribusiness and food marketing at the
Centre for Food Chain Research at Imperial College in London,
supermarkets from rich countries feel obliged to do this because,

'...they've got nowhere else to go. Their domestic markets are saturated,
so they are looking for countries with large populations, high population
growth, per capita GDP edging toward consumer levels, high income
growth, and low supermarket presence. Countries with all five of these
characteristics are a good bet, and companies rush to get there before
everyone else.'42

The rest of this section surveys Tesco's international activities and

corporate crimes on a country-by-country basis.

Asia

The arrival of Tesco and the other major international supermarkets

means that retail patterns are rapidly changing in the developing world.
Tom Reardon, professor of international development and
agribusiness/food industry at Michigan State University, argues that 'this
retail revolution poses serious risks for developing country farmers who
have traditionally supplied the local street markets.'43

A survey from the International Food Policy Research Institute suggests

that farmers in Asia are having a hard time getting used to the
procurement systems supermarkets set up. Rather than growing their
produce and taking it straight to a market, they have to deal with a new
chain of middlemen such as procurement officers, wholesalers and so
on. They also have to deal with supermarkets' standards of uniformity in
shape and size, meaning that a lot of produce is rejected. 'The small
farmer will not be the one making the decision about what to grow.
That's a fundamental change for farmers,' explains Jean Kinsey, co-
director of the University of Minnesota Retail Food Industry Center.44

Once the food has been grown, and if the supermarket chooses to accept
it, farmers can also have trouble with transporting it. Payment is then
often delayed for up to 60 days after the product has been delivered, too
long for many people to wait.

The system is set up so that supermarkets only have to deal with a small
number of large and often mono-cultural farms, a fundamental change
from the way food has traditionally been produced which means that a
lot of small farmers who are used to producing a variety of crops will
have to either make radical changes to their practices or go out of
business.

The Malaysian and Thai governments are clearly concerned about

Tesco's power and are making attempts at curbing it. Tesco's entry into
both Thailand and Malaysia seems to have prompted a new wave of
legislation aimed at reducing the power of foreign supermarkets and big
business. However, Asian governments may feel they are treading a fine
line between on the one hand encouraging foreign investment and
boosting their country's economy, and, on the other, letting multinational
chains take over at the expense of local traders. But then they don't
always have a choice, since they risk WTO action if they take measures
to restrict the power of the multinationals.

For example, the Thai government in November 2002 withdrew plans to

legislate against foreign-owned supermarkets - who now control more
than half the Thai market - by restricting their opening hours 'because it
feared retaliation under international trade rules'. The Thai Prime
Minister, Thaksin Shinawatra, told a meeting of small shopkeepers, 'We
already have existing laws that can be modified and enforced quickly,
which won't be viewed as a trade discrimination practice. Why don't we
use them?...From now on, there won't be a new law, just let it rest.'45
However, Deputy Commerce Minister Wattana Muangsuk said that Thai
policy would continue to use planning legislation to favour Thai traders.

In only seven years, Tesco has reached annual sales of £2.8bn in Asia. It
has a total of 179 stores, covering 9.5 million square feet, and plans to
open another 65 in the coming year.46
Thailand

'Industry onlookers expect Tesco to use Thailand as a launch pad for a

large-scale Asian expansion.'47

Tesco first moved into Thailand in 1998 by buying a large stake in the
Thai-owned Lotus chain of convenience stores. Thailand was the first
south-east Asian country into which Tesco moved on a large scale, and
by the end of 2002, Tesco had already captured 31% of the Thai
market.48 Tesco now has 64 stores in Thailand, 47 of which are
hypermarkets, and plans to open another 57 stores in 2004/5.49 These
will include 40 Tesco Lotus Express stores which will be attached to
Exxon Mobil petrol stations.50

During 2004, Tesco also plans to buy the remaining stake in Tesco
Lotus.51

When it entered the Thai market, Tesco was keen to point out that it
would be sourcing produce locally, employing local people, and
generally benefiting the local economy - 'the company is committed to
helping its local suppliers access local and international markets, and
sell to multinational retailers, by helping them improve their quality and
service standards'52. However, today, it is embroiled in accusations of
unfair trading practices and conflicts with local businesses:

Sourcing locally
Tesco was very vocal about its intentions to source products locally.
This sounds good, but it is hard to believe Thai farmers can keep
working on a human scale when trying to supply produce for 47
hypermarkets. Even where Thai products are being used, they are still
likely to have been intensively farmed at the expense of small farmers,
traditional farming methods and the environment. The use of centralised
distribution centres also means that even if a product is produced locally,
it has probably been on an epic journey before it reaches the
supermarket.

Exploiting suppliers
Sourcing local produce does not mean treating local suppliers any better.
In July 2002 Tesco Lotus was taken to court along with several other
international retail chains including Carrefour, and found guilty of
charging slotting fees to carry manufacturers' products, charging entry
fees to suppliers, advertising fees and product display fees, and
displaying own-brand products next to similar branded products.53

Benefiting the local economy

It is impossible for Tesco to honestly claim to benefit the local economy.
It may be increasing the general traffic of money in the area where it sets
up new stores – i.e. creating a culture of wanting to buy more things and
encouraging people to spend more money on things they would probably
not otherwise even want – but a tiny percentage of this money stays with
local people, even those who have been promoted to store manager. The
vast majority of profit goes towards making the corporation – and the
directors and shareholders – even richer. In the words of Boonyoong
Vimuttayon, a Bangkok grocery store owner whose sales have declined
by more than half since a Tesco Lotus store opened on his street four
years ago:

'The foreigners get richer and richer, while we get poorer all the time.'54

Tesco is very proud of its price reductions in South East Asia - ‘Just as
in the UK and Europe we carry out price campaigns to deliver
unbeatable value for our customers' – www.tesco.com. However, it
seems to be starting a war – of prices, opening hours, and so on - that
local retailers cannot possibly compete in55. It is worth remembering that
from Tesco's point of view, the only serious rivals are other international
companies, namely Carrefour and WalMart, and local ones who suffer as
a result are merely 'collateral damage'.

GM food dumping
According to a report from Greenpeace Southeast Asia, in 2003 a high
percentage of GM soya was found in a Tesco Lotus own-brand Chinese
Sausage which was not labelled as containing any GM product. 56 The
article points to Thailand's weak labelling laws as the problem, but
surely if Tesco was as committed to organic agriculture as they like to
claim, there wouldn't be GM soya in its products in the first place? It
seems unlikely that Tesco would even consider taking such a risk in its
UK stores, where GM is firmly on the agenda as a consumer issue. A
Greenpeace campaigner said:'The loopholes in the labelling law allow
multinational companies to dump GM soya into Thailand. It is time to
make this law stricter to protect consumers and give them a genuine
right to know.' The same article says that Tesco Lotus is on Greenpeace's
blacklist of businesses because of their use of GM soya and lack of
labelling. Greenpeace South-East Asia continues to campaign against the
use of poorer countries as 'GM guinea pigs'.

Malaysia

Tesco has had a presence in Malaysia since 2002, and now has five
stores and two more planned for 2005.57

New legislation just for Tesco

Despite having been in Malaysia for a relatively short time, and having
few stores, Tesco's presence has been controversial and a catalyst for the
implementation of stricter trading laws. As of January 2004, there is a
five-year freeze on the building of any new hypermarkets in Malysia's
three major cities Kuala Lumpur, Penang and Johor Bahru.58 The article
reporting this mentions Tesco and Carrefour specifically as foreign
chains who will be affected by the ruling. In 2003 the government ruled
that plans for new hypermarkets must be submitted two years in advance
and socio-economic impact studies carried out. There are also new
'zoning rules' which say that there can only be one hypermarket for every
350,000 people.59

However, curbing Tesco's power may prove to be difficult. In March

2004, Tesco decided to continue opening its Puchong store 24 hours a
day despite having been told not to do so by the Ministry of Domestic
Trade and Consumer Affairs who cited the negative effect it would have
on other retailers in the area.60

Local food?
When it first began moving into Malaysia in 2002, Tesco was anxious to
make assurances that it would 'work closely with local suppliers to
source many own-label products locally'.61 However, the same article
states that these products will eventually be exported to Tesco stores in
other countries, so it doesn't really come into the category of local scale
production. It is very hard to imagine how such a large company, with
such an emphasis on hypermarkets in so many parts of the world, can
ever realistically say it is going to source products for its stores locally.

South Korea

Tesco moved into South Korea in 1999 in a joint venture with South
Korean company Samsung, opening the Homeplus chain of
hypermarkets. It now has 28 stores, all hypermarkets, and plans to open
four in 200562

Japan

Tesco began its expansion into the notoriously difficult Japanese market
in July 2003 by buying a 94.54% shareholding in the C Two-Network, a
successful retailer with 78 neighbourhood supermarkets and some
wholesale outlets around the Tokyo area. Tesco was delighted by the
acquisition, Terry Leahy describing it as 'a continuation of our
international strategy for long term growth. C Two-Network provides
Tesco with an excellent opportunity to enter a large and unconsolidated
market where we have potential to grow.'

C Two-Network trades using the brand names Tsurukame, Tsurukame

Land, Foodlet Tsurukame and Kamechuru. Food retail covers 87% of
their total sales, the majority being packaged foods. In April 2004, Tesco
also acquired Fre'c, another Japanese chain.63 Fre'c was a bankrupt
Japanese chain, with 27 stores on the outskirts of Tokyo. Of Fre'c's
outstanding £50m debt, some is being rescheduled by the Industrial
Revitalization Corporation of Japan, the rest will come from C Two-
Network.

According to the Guardian, Tesco is expected to use C Two-Network's

links to processed-food wholesalers and Fre'c's knowledge of fresh
produce to open between five and ten small stores a year. In Japan,
Tesco is relying on customer loyalty to the high street, whilst its US and
European rivals, including Wal-Mart, CostCo, Carrefour and Metro
believe their fortunes lie in encouraging a culture of out-of-town
superstores.64

Selling whale, dolphin and porpoise meat

Through its subsidiary C Two- Network, Tesco sells whale, dolphin and
porpoise (cetacean) meat, both fresh and in cans. In 2003 the
Environmental Investigation Agency (EIA) carried out a survey which
discovered that all the canned cetacean products were sourced from
Japan's two major whaling companies, Nissui and Kyokuyo. These two
companies own the majority of shares in Kyodo Senpaku, the company
who leases whaling boats to the Japanese Institute of Cetacean Research
so they can carry out Japan's so-called 'scientific' whaling policy.

The scientific whaling policy was implemented in 1987 after a

moratorium banned commercial whaling. Now around 700 whales are
killed each year in the Antarctic and North Pacific in the name of
'scientific research', including minke whales, Bryde's whales, sei whales
and sperm whales. All the meat and blubber is then sold commercially
within Japan. Up to 22,000 dolphins, porpoises and small whales are
also killed every year around the Japanese coast in unregulated and
unsustainable hunts.

As well as being involved in systematically exterminating cetaceans,

these companies could be feeding high quantities of toxins to the
consumer. Many of the whales they kill carry high levels of pollutants
including methylmercury and polychlorinated biphenols (PCBs).

The EIA survey also found that more than 70% of whale meat sold is not
identified by species and most retailers do not specify the source of the
meat.65

China

In March 2004, it was revealed that Tesco was negotiating to buy 50%
of Ting Hsin International,66 which owns 25 hypermarkets in China,
operating under the names Hymall and Le Gou. In July 2004, a £140m
deal was confirmed that will give it a presence in some of the key
Chinese conurbations, link it with a good local operator, and provide
plenty of scope for rapid expansion. More than that, however, the deal
will give it a market-leading position in Shanghai – China’s largest retail
market – leapfrogging over arch-rival Carrefour in the process.67

Tesco follows Wal-Mart, Carrefour, the German chain Metro and the
Dutch Makro, all of whom have recently moved into the Chinese market.
China is considered an important but difficult market by international
retailers. However, a relaxation of Chinese trading rules after the
country's entry to the World Trade Organisation could mean more
Western companies move in fairly rapidly. China is seen as a desirable
country for foreign investment because of the increasing encroachment
of capitalism and the low cost of labour.

Statistics from the IGD's Market Index (2002) illustrate that the most
attractive markets for modern retailers are China, Italy and Russia. It
remains to be seen whether Tesco make a move on the latter two.68

There is also a Chinese dental company called Tesco. As far as we can

ascertain they're not related.

Europe

Tesco's European annual turnover for 2003-4 was £3,385 million. 69

Besides Ireland, all the European countries Tesco operates in - Poland,
Hungary, the Czech Republic and Slovakia - joined the EU in May 2004.
Tesco has recently acquired a chain in Turkey whose 'European' status is
unclear. Turkey has application status to the EU but no timetable for
joining.

In both Slovakia and Hungary - where it has had a presence since 1994 -
Tesco describes itself as the 'market leader'.70 In March 2004, Tesco
opened its first petrol station in Hungary and is planning to build another
five to seven in the country over 2004, 71 having acquired a licence to
build petrol stations at all of its Hungarian outlets.72

Turkey

In November 2003 Tesco bought the Kipa chain for £75m. Kipa is a
'small and profitable chain' that owns five hypermarkets in the Aegean
region of Turkey.73

Poland

Modestly describing itself as the 'hypermarket leader', Tesco has 69

stores and a new distribution centre in Poland and plans to open another
ten over 2004/5.74 Transnational retailers are expected to control nearly
50% of Poland's supermarket sector by 2006.75

Industrialisation of farming to feed EU shoppers

'The conditions negotiated between the Polish government and the EU

are not favourable. They will threaten many Polish farmers with
destruction. There will be no local markets any more.'76
Marian Zagorny, Rural Solidarity campaigner

Poland joined the EU in May 2004. The Common Agricultural Policy

(CAP) is likely to cause dramatic change for the predominantly
agricultural nation. Agriculture in Poland has been small-scale, un-
mechanised and practically organic by default - it is probably no
coincidence that Poland has preserved some of the greatest biodiversity
in Europe.

The CAP consumes almost half the EU's entire budget. Under new CAP
rules, subsidies will be paid per hectare farmed, but farmers in the new
countries will be paid a quarter of the amount given to old members.
With trade barriers coming down, Polish farmers will be forced into
competition with highly industrialised farmers from across Europe. With
less subsidies than their Western European counterparts, they will have
to massively increase 'productivity' to keep in business. Major European
and US agribusiness have now moved into to Poland to take advantage
of the cheap land, cheap labour and new markets.

There is already high unemployment in Poland – up to 40% in some of

the old state farming areas. With EU accession and the CAP, this will
doubtlessly increase. Officials in Poland and Brussels are assuming that
large numbers of small, traditional farmers will go out of business.
Henryk Zatorski, director of the agricultural chamber for the Wroclaw
region believes 'In this region the 40,000 (farmers) with seven hectares
[17 acres] or less will not survive'.

Bad news for most ordinary people living in Poland perhaps, but great
news for Tesco and other transnational supermarkets. A study by Verdict
(2003) forecasts 'real growth opportunities' for grocery retailing in the
newly enlarged EU and mentions Tesco, Carrefour and Metro as the
most likely to benefit quickly. Verdict goes on to suggest that these
corporations' next priorities should be: 'improving the efficiency of their
supply chains, driving productivity initiatives and increasing sales
volumes, targeting non-food sales, corporate merger and acquisition
activity and developing their multi-faceted trading strengths.'77

Ireland

Tesco has been in Ireland since 1997 when it purchased the chain Power
Supermarkets, owners of Quinnsworth and Stewarts. Since its launch
Tesco has spent nearly €500m (£335m) on modernising and expanding
its network of stores. By 2004, Tesco had 82 stores, with eight more
being built during 2004/5.78 In 2003 Tesco achieved a 24% market share
in Ireland, and opened its first petrol station and its first distribution
centre. Tesco has been highly successful in Ireland, reaping the benefits
of its huge investment. According to one report, one out of every four
Euros spent on grocery shopping in Ireland ends up in a Tesco till. 79
Tesco claims to be the largest private employer in Northern Ireland, with
around 7500 employees.80

Allegedly bullying farmers

Irish farmers are concerned by Tesco’s economic power over them. In
December 2003, a senior Tesco executive allegedly warned growers that
if they wished to continue selling to Tesco, they must not supply
discount retailers Lidl and Aldi. He is also reported to have said that
Tesco aimed to have 35% of the Irish grocery market within five years.
A spokesperson from Tesco denied the allegations, adding: 'Nor do we
have an expectation of reaching a 35% share of the grocery market,
though a 35% share of the fruit and vegetable market is possible.' The
Irish Farmers Association is hoping to discuss the matter further with
Tesco.81

Below-cost selling
Tesco Ireland has been fined for selling products below their cost price
in an attempt to undercut other retailers, and for selling certain products
at a higher price in Ireland than in the UK. In Ireland, the Groceries
Order makes persistent below-cost selling illegal, mainly because only
big retailers who benefit from economies of scale can afford such
practices, and it evidently puts smaller retailers at a disadvantage.
However, rising inflation may see the Groceries Order lifted soon.82

Tesco's co-accused on this issue is Dunnes Stores, 83 which describes

itself as 'Ireland's largest and most successful retailer' and is therefore
Tesco's main competitor in Ireland. Other retailers welcomed the
decision to prosecute. Ailish Ford, director general of independent
retailers' lobby group RGDATA, said:

'It is vital groups with such incredible market power are not allowed to
abuse it at the expense of consumers, suppliers and retailers.'84

When the case came to court in January 2004, Tesco and Dunnes were
both fined 300 euros for each of seven counts of selling products below
price.85

Worker's strike
Discontented Tesco workers rarely raise their voices. In June 2001,
Tesco workers in Ireland voted overwhelmingly to go on strike over pay.
Workers at Tesco were earning £4.85 an hour, which the unions claimed
was some 20p to 25p lower than wages paid by Tesco competitors. 86 The
strike was estimated to have cost the company up to IR£4 million as
9,500 staff walked out for 24 hours.87 Unions accepted a revised pay deal
in July 2001.

Moving in on the convenience (c-store) sector

Tesco executives look to the 'street corner' strategy (i.e. more Tesco
Express convenience stores) as the key to continued growth in core UK
sales. This takes advantage of a major shift in food consumption patterns
- away from the family meal to 40% of people eating alone; away from
Saturday morning traipsing round the hypermarket, to a small shop
where the harried commuter can pick up a microwaveable ready meal on
the way home from work, and not mind paying extra for the
convenience.

While Tesco has 27% of the market share in grocery retailing, it only has
7% market share in the convenience store sector. Although many would
consider convenience stores as supermarkets, the Competition
Commission in its report on supermarkets (2000) made a clear
distinction between the two sectors based on the fact that convenience
stores are smaller, in terms of floor space, than supermarkets, and that
they cater for 'top-up' rather than 'one trip' shopping.88

This 'helpful' distinction basically gave the green light for the
supermarket chains to buy up convenience store chains since it creates a
loophole in anti-monopoly laws. Despite recent challenges from
remaining independent c-stores and the Federation of Wholesale
Distributors, the Office of Fair Trading (OFT) refuses to change its mind
on this.89

As usual, Tesco was quick off the mark, acquiring T&S Stores, the
highly successful c-store and CTN (confectioners, tobacconists,
newsagents) chain, in October 2002. T&S Stores' main c-store fascias
are One Stop and Day & Nite, both acquired by the company on the way
to becoming the UK's leading specialist operator of c-stores. T&S Stores
also operates as Dillons newsagents, and Supercigs, a discount tobacco
format. Supercigs has since been sold and Tesco is rumoured (June
2004) to be in negotiation with TM Retail, which operates Fourbuoys
and Martins, to sell Dillons.

The T&S Stores acquisition brought Tesco 1,202 outlets, 862 of which
were formatted as convenience stores. Its intention is to convert those
stores suitable for its Express format (around 450 stores) and retain
smaller c-stores within the T&S Stores operating company. These stores
will continue to trade as One Stop. It seems as though Tesco was mainly
interested in the largest stores.

Absorbing so many stores requires impressive management, and of

course, Tesco has not failed. In its 2004 interim report, Tesco state 'We
are pleased with the trading performance of the T&S stores. They are
ahead of plan and we are looking to convert 136 stores this year.'

This success spurred it onto another convenience store chain acquisition

in March 2004; London-based Administore, which operates 45 stores
under the trading names of Harts, Cullens and Europa.

Tesco plan to consolidate Tesco Express, Administore and T&S stores

into one group headed up by T&S former boss, Colin Holmes. Tesco is
currently the fourth largest c-store operator behind Spar, Londis and the
Co-op. Verdict research claim that within a few years, Tesco will be
vying with Spar for the top spot. As one City analyst stated, 'Tesco has
made no secret of its ambitions. It will look for further acquisitions in
the c-store sector.'90 See Corporate Crimes section.
Retailtainment

'Well it's activity and theatre, and people create activity and activity
creates theatre, it's an interchange and its different every time you come,
there is always something exciting about it.'
Ken Morrison, of Morrisons91

On average, Britons spend around 3% of their waking lives in

supermarkets, so the big chains have realised that it pays to make them
more fun. Lighting, ambience and presentation all mix to convince
shoppers they are having a good time. Tesco's approach to retailtainment
isn't as overt (and embarrassing!) as Asda, with their store greeters and
price cuts constantly announced over the aisles, or Safeway, where opera
singers announce the pizza spinning.

Tesco's latest innovation is in-store TV advertising for products, sold

through advertisers JC Descaux. Adverts for products are blasted at
consumers in the form of recipes and helpful suggestions. By the end of
2004, the TV advertising will be available in Tesco's 300 largest stores.
Since 70% of purchase decisions are apparently made instore, this gets
consumers where they are most vulnerable or suggestible. Meanwhile,
these adverts are not regulated by the media regulator, OfCom, but that’s
okay because Tesco's 'Editorial Governance Team' will make sure Tesco
doesn't brainwash us. It is important to note that numerous complaints
have been made against Tesco advertising over the last five years, with
several upheld.92

Tesco is also reportedly working on 'The Trolley Tamer' - a new kind of

shopping trolley that plays DVDs and games to entertain children while
their parents are shopping.93

The 'Tesco' approach

The final plank in Tesco's strategy is the 'Tesco' approach - 'To create
value for our customers, to earn their lifetime loyalty'. Its two values are:
'No-one tries harder than we do for customers' 'We treat people the way
we like to be treated'[94].These values are, however, rather selectively
applied to customers and shareholders rather than farmers and smaller
competitors.

Over the 80 years since its inception, Tesco has responded to and taken
advantage of major changes in lifestyle patterns, and this is key to its
ongoing success. Changes have included more women entering the
workplace; greater disposable incomes; fewer cooked family meals, the
advent of the weekly shop, made easier by the rise in car usage; and
Britain's cheap food policy adopted after the Second World War.

Advisers

 Stockbrokers: Deutsche Bank A + G London

 Morgan Stanley + Co International
 Auditors: PriceWaterhouse Coopers
 Lawyers: (among others) Freshfields Bruckhaus Deringer108
 Registrar: Lloyds TSB Registrars
The Causeway, Worthing, West Sussex BN 99 6DA
01903 502541 109

Subsidiaries

Tesco has 150 subsidiaries, around half of which have 'Tesco' in their
name and are based in Cheshunt. Please contact Corporate Watch if you
want more information. Readers should be aware of Tesco Corporation,
which is an energy and oil company and is not related to Tesco PLC.

As part of its acquisition of T&S stores, Tesco acquired Dillons the

newsagents. The Dillons chain includes 180 stores selling newspapers,
tobacco and grocery items. In July 2004, Tesco was believed to be
discussions to sell Dillons to private convenience store chain TM Retail,
who own Forbuoys and Martins.110

Matalan, the membership-based clothing and home furnishing retailer

has been struggling through 2003/2004, and rumours have been flying
for some time that Tesco may be interested in a merger. 111 Asda is also
rumoured to be about to make an offer (August 2004)

In a Telegraph article published in 1999, it was suggested that Tesco and

the other supermarkets were on the verge of submitting bids to take over
the running of the 103 very basic grocer's shops inside British prisons.
Hence capturing the the spending power, all £10 a week on average, of
British prisoners’ wages from cooking and cleaning etc. 112 While this
does not seem to have happened, it is interesting that Tesco and the other
major British supermarkets have not actively been tendering for
contracts in the public sector – e.g. running shops in hospitals.

5. Conclusion
'Absolute nonsense...They are based on a series of allegations that are
completely untrue...We are always prepared to explain what we do...I
will explain to anyone who wants to listen'.

Sir Terry Leahy's response to Friends of the Earth allegations over their
treatment of farmers, pushing small retailers out of business and selling
furniture made from illegally logged timber.265

At the end of 2004, Tesco seem totally unstoppable. They can

confidently brush aside criticism knowing that nothing is really standing
in their way, certainly not the government or the competition authorites
who have already shown themselves very unlikely to act. Unless we, as
consumers, choose not to shop in Tesco, or at least, to shop less at
Tesco, very soon we will have no choice but to shop at Tesco. They will
control our lives from 'the cradle to the grave' – from the 'Baby and
Toddler' club to the 'buy one get one free' Tes-coffin (not currently
available). Unless we as citizens act to restrain Tesco and call for
legislation to restrict its market share, no one else will.

What you can do

'Breaking the Armlock' is a new alliance of 14 farming, environmental

and consumer organisations calling for stricter controls over the major
supermarkets' trading practices, particularly to stop them passing on
unreasonable costs and demands to farmers and growers in the UK and
overseas. The Alliance says that supermarket power should be regulated
by an independent watchdog with real teeth, supported by a legally
binding Code of Practice.

Please ask your MP to sign Early Day Motion 817 Supermarket Code of
Practice in support of the demands of the 'Breaking the Armlock'
Alliance. http://www.breakingthearmlock.com/