Why can’t Tesco, Sainsbury’s and Morrisons make it work overseas?

Last week, the news broke that UK supermarket giant Tesco was considering offloading its entire Asian business, with a deal in the offing to offload its Thai and Malaysian arms for up to £6.8bn.

The grocer confirmed it had received “inbound interest” for its Asian business, which spans more than 2,000 stores and employs 60,000 people. It has since “commenced a review of the strategic operations for its businesses in Thailand and Malaysia”.

Any sale would fit into a larger pattern of UK grocers retreating from overseas markets that has emerged over the last decade.

Tesco has come out of a number of international markets such as the USA, China, South Korea and Japan.

The supermarket giant is not the only UK grocer to have suffered internationally, with Sainsbury’s – which now has no stores internationally – suffering a high-profile failure when it crashed out of the Egyptian market at the turn of the century, incurring losses of more than £100m. Marks & Spencer has also been forced to retreat from international markets, closing stores in China, France, Belgium, Hungary and Hong Kong.

While almost all UK grocers have turned their attention inwards, international players are building empires.

Walmart’s international business – which includes Asda – is almost 6,000 stores strong and spans 26 countries across Africa, North and South America, Europe and Asia. Earlier this month, it unveiled plans to open 500 more stores in China.

Meanwhile, Carrefour’s international business accounts for more than half (53%) of its sales.

Why haven’t UK supermarkets been able to emulate this international success, and are they missing a trick?

Focus on home

TCC Global global insights director Bryan Roberts gets frustrated with the “narrative that all of these British retailers have failed overseas”.

He maintains that a number of UK grocers’ overseas business, such as Tesco’s in South Korea, were “awesome” but had to be sold off due to problems at home.

“There are very few UK retail adventures that you’d classify as genuine failures. Sainsbury’s Egypt and Tesco USA you probably can put in that bucket, but everything else has just been a case of prioritisation. Overseas markets have been less important and shoring up or freeing up capital or management expertise to focus on the issues at home.”

He also suggests tough domestic market conditions have played a role in European retailers such as Carrefour and Ahold Delhaize expanding internationally. He says factors such as having smaller domestic markets to serve and legislation limiting operating times means “the onus is to expand overseas” for European retailers.

Of course, travel sickness isn’t an illness suffered by UK grocers alone. Walmart and Carrefour have both been forced into tactical retreats from a number of markets.

“If you look at grocery retailers, the ones who have done international best are probably the German discounters Aldi and Lidl because they have such a plain, basic system which is based on their own-brands”

Dimas Gimeno

French giant Carrefour only this year sold its Chinese business, while Walmart has been trying to tactically disentangle itself from a number of markets, including the UK, as it mulls floating Asda.

Given the combative and highly competitive nature of the UK grocery market, Roberts says it’s no wonder that a number of domestic players have chosen to “jettison some international distractions, in order to regain their focus on domestic businesses”.

A senior grocery source who used to work internationally with Carrefour makes a wider point about internationalisation: “Ten years ago, the debate was to what extent you could scale internationally. At the time, the arguments were skewed more towards that there were significant benefits from being an international player.”

Now, he says, “the wider industry agrees on that, actually, grocery retailing is hyper-local, and you really need to understand your customers, catchment area by catchment area”.

Roberts agrees, and says the globalisation narrative being pushed by grocers in the 1990s proved to be “a myth”.

“Globalisation was supposed to bring this global buying power, which never materialised. When it comes to branded groceries, that’s still 100% a local game. More global buying power was one of the great fallacies of the globalisation push of the 1990s,” he adds.

Hyper-localism 

Former chief executive of Spanish department store chain El Cortes Ingles, Dimas Gimeno, says the grocers making a success of international markets need to focus predominantly on own-brand products.

“If you look at grocery retailers, the ones who have done international best are probably the German discounters Aldi and Lidl because they have such a plain, basic system which is based on their own-brands,” he says. “Around 60% of the brands they stock in each market are own brand. I think UK grocery players are much more externally brand-based. That makes it more complicated.”

Backing own-brand is a strategy Tesco has used of late. At its most recent capital markets day presentation, it said it had recently launched over 1,000 own-brand lines in its Central Europe business, with approximately 2,500 more to come. It had also been working hard to reduce excess stock.

One UK grocer that is succeeding overseas, albeit with a different model, is Ocado. With its Solutions technology arm, Ocado has struck partnerships with large supermarket chains in Sweden, France, Canada, the US, Australia, Spain and, most recently, in Japan.

A senior source at the grocery pureplay says Ocado originally considered launching its digital grocery delivery service in the US under its own brand – but quickly decided the complicated logistics meant it would take the best part of a decade to get right.

“Let’s say we’d gone to Los Angeles. We could have set up a customer fulfilment centre and launched the service, but nobody knows the Ocado brand. We don’t know the suppliers. Don’t really know the US consumers. Could we have been successful? Yes, probably, but how long would that have taken? Probably 10 years.”

By working with partners, Ocado instead takes on none of the risk or heavy capital investment of expanding overseas and avoids the pitfalls of trying to increase brand awareness from a standing start.

“The partners are the one that are making the decisions around ranging, pricing, marketing, all of that,” he says. “Because, for example, Kroger knows their customer better than we ever will. The division of labour then is on the right basis. We’re providing the technology we know works, and they are selling to their customers who they know intimately.”

Likewise, UK grocers are increasingly looking to different types of models to drive international sales, with wholesale proving particularly popular. Sainsbury’s signed a supply deal with Australian grocery giant Coles in November, while Morrisons has inked a supply agreement with Lulu in the Middle East.

Future expansion?

While it seems, the era of UK international grocery expansion is over, might a time come again where the big four and others look overseas once more?

Roberts suspects that time won’t come soon. He maintains a lot of UK businesses learnt their lessons the hard way, which has hugely reduced the appetite for global expansion.

“Outside of the discounters, the appetite for geographic reach is no longer there”

Bryan Roberts, TCC Global

“Why would you embark on any new market entries, unless there’s a really compelling strategic opportunity?” he asks. “I think that, outside of the discounters, the appetite for geographic reach is no longer there”.

Gimeno agrees, however, he points out that large retailers no longer need stores to have an international presence. With a strong brand offering and a few well-positioned warehouses, he says retailers can get up and running in a new market “within seven months”.

However, for the time being, UK retailers have a big battle on their hands to maintain their share at home.

As Roberts says: “It’s not like the major supermarkets in the UK don’t have enough to worry about, what with banging heads against the discounters, each other and probably Amazon in the fullness of time.”