Tesco looks at concept of value


BY TEE LIN SAY

'We trust by working closely with our local partner and the Malaysian government, Tesco will not face any problems in moving ahead with our investment plans,' says Bracher.

RETAILING in today's economy may be a tough business, what with the intense competition and price war among players. In terms of growth, the retail business seems to have reached saturation point. Nevertheless, this spectre has not put off Tesco Stores (M) Sdn Bhd. 

Tesco Malaysia wasincorporated in November 2001, with local conglomerate Sime Darby Berhad holding a 30 per cent stake. and Tesco Ltd holding the balance 70 per cent. Tesco Ltd is Britain's leading retailer operating 979 stores in 10 countries, including hypermarkets in Thailand, South Korea and Taiwan. 

To compete for a larger share of the market, Tesco Malaysia is very much in the race. Having only come into the market slightly more than a year ago, Tesco Malaysia has almost immediately dominated the local hypermarket scene with its exceptionally low prices and value added products. As it is, the local retailing industry has still not fully developed in terms of creativity and private labels.  

“There is still room for modern trade channels such as Tesco (Malaysia),” says an analyst from a foreign research. 

At the moment, it may seem inappropriate to compare Tesco Malaysia with the other existing hypermarkets such as Giant Hypermarket and Dutch Carrefour Hypermarket, given its limited number of stores. Giant has about 12 stores, while Carrefour has 6. Relatively new player Tesco Malaysia has only 3 outlets. 

The first Tesco store in Malaysia was officially opened on 17 May 2002 in Puchong. This was followed by its Malacca store and the Klang Bukit Tinggi outlet. Its latest outlet, Mutiara Damansara Store is slated to open in early March 2003. 

Currently, the key ingredient for successful retailing is undeniably big discounts. That would be the pull for consumers. With three mega sales now in a year (March August and December), consumers tend to skew their spending towards the sales period. A research report says that in the longer term, the growing price-consciousness will shift more business away from the traditional department stores in favour of retailers giving huge discounts such as hypermarkets.  

Says the analyst from the foreign research: “It is good that the retailing landscape is opening. Why should consumers be penalised in order for existing retailers to pocket higher profits?”  

Excluding land cost, Tesco invests approximately RM50 million for the initial set-up of a store. Over the next five years, Tesco will be investing RM1.5 billion which is equivalent to opening about 20 outlets throughout Malaysia. At the moment, Malaysian suppliers export RM80 million worth of products to the Tesco group. 

Profit-wise, Tesco Malaysia achieves 15 to 20 per cent cash return on investment on the set up of each individual store. Tesco hypermarkets carry a total of 86,000 lines of products, including more than 1,000 Tesco branded items.  

Tesco Malaysia is very much in the race to compete for a larger share of the market.

Early in the week, Bizweek caught up with Tesco Ltd's head of international corporate affairs, Peter Bracher. In this exclusive interview, he shares his thoughts and views on the retailing landscape in Malaysia. 

Bizweek : The joint venture entity (between Tesco Ltd and Sime Darby) has proposed to invest RM1.2 billion over the next five years to build 15 stores. Have you received any guarantees that you will be able to proceed with this plan? 

Bracher: In business, there can never be guarantees. The only guarantee we can give is our confidence about our entry into Malaysia. So far we are happy to report that with the opening of the Mutiara Damansara Store in early March, it means the first phase of our plans has come to fruition. The other Tesco stores are in Malacca, Bukit Tinggi, Klang and Puchong. 

The retail industry is booming with new players and new formats. We trust by working closely with our local partner and the Malaysian government, Tesco will not face any problems in moving ahead with our investment plans. 

Are concerns that “hypermarkets“ erode business of small local traders warranted?  

No. We can all co-exist, just like the Internet, television and radio relationships. In Britain, we have established a huge network of local suppliers of all sizes, which Tesco has helped groom into international exporters when they started with exports to other Tesco stores in international markets. 

In Malaysia, for example, not only will Tesco be bringing in foreign direct investment but among our contributions to the country are: 

· Creating employment opportunities – up to 10,000 vacancies in 5 years' time.  

· Developing people – local and overseas training provided for all staff. Already invested RM6 million in staff training. 

· Developing Malaysian suppliers – working with the Ministry of Domestic Trade and Consumer Affairs to develop the Supplier Guidelines Communication Pack and Seminar. Working with the Federal Agriculture and Marketing Authority (FAMA) to maximise local sourcing opportunities. 

· Creating opportunities for small retailers – allocating 30 per cent of food court space for bumiputra suppliers. 

Are there any misconceptions over the pricing of your products, that perhaps because it's British, it's expensive? 

Our British origins do not make us expensive. While we benefit from the global experience of Tesco international, the pricing of items has got nothing to do with our origins. Tesco Malaysia is a local hypermarket managed by locals who continuously seek to know and understand their consumers’ preferences and tastes. Over 90 per cent of our merchandise is sourced locally and we have developed local Tesco products that are a hit. 

As an international business, Tesco stores worldwide are known for its value for money prices. In Malaysia, we have started with a good price image based on our customer feedback, and we will be working on our key initiatives to bring prices down for Malaysian consumers. 

What's the perception of Tesco in Malaysia? 

In Malaysia, perceptions are formed by what people think of British Tesco. It's unusual, because we're in ten countries, and here, this is the only place where people ask about Tesco, they start comparing us to our rivals in Britain, the stores in Britain, the range and what they want to see here. So it's fascinating. 

Why is Tesco so aggressive in Malaysia...it's a relatively small market after all?  

We look for opportunities everywhere. And, the Tesco view in Malaysia is that there is excellent infrastructure invested here. You've got a good solid reliable government and predictions of growth which is about 3-4 per cent GDP (gross domestic product), so we think the country is going to do well. It's the country to be in and it doesn't matter that it is a small market. 

What is the outlook on the Malaysian retail sector? 

It's going to grow and I have seen this in each of the 10 countries that Tesco is in. What happens is that as the economy develops, people tend to have less time and more money. The market itself will grow with a larger range of products. People will have more tendencies for pre-prepared value-added products. Consumers will also start to segment, where they go to hypermarkets and convenience stores for different wants.  

People will go to convenience shop to buy daily purchases, whereas hypermarkets are more for planned purchases. Each market is very different. People here still take pride in cooking and the ability to create. So, there is a lot of interest in quality, availability and the freshness of product. I can see that Malaysia has got sophisticated discerning shoppers. What we'll see in Malaysia is the increase in quality, the increase in range, more international products. In Czech Republic, for example, one of our most successful local suppliers is a Czech pasta manufacturer who experienced 500 per cent year-on-year growth making Tesco brand pasta. This is an example of how a local business can do well even with a thriving hypermarket around. We actually create opportunities for them. 

Tesco keeps its prices lower than the market. Is this what's behind its success?  

We feel that the most important thing is concept of value rather than just plain old price. Customers want good value for money, and that I believe is a combination of best price, right service, range and availability. It would be possible to have an incredibly low price if you were not concerned about service, or the continuity of availability. Tesco aims to try and get the whole package right. So we have a good price, good availability, good service and the environment. If we can get that all, then we can succeed. 

Can you comment on the Government’s initial proposal for a freeze on foreign hypermarkets back in April 2002?  

There was an initial freeze in the hypermarket industry, but that has been replaced by guidelines. Tough planning environments are not unexpected and completely understandable. 

We are working very closely with the Ministry of Domestic Trade and Consumer Affairs to see how we can achieve a win-win situation. At the same time, we are working at getting the approvals and working closely with the local councils. Hypermarket impact studies show that the existence of hypermarkets does not actually impact small businesses. In fact, hypermarkets are seen as local economic catalysts.  

Well before we were in Puchong, it was a dead town, people were not looking at it. Today, it is a dynamic place, there are more supplemental businesses coming in. Some of the small businesses are also looking at Tesco as their supplier where they buy things and then resell them. Hypermarket and small business customers are completely different in profile. Small business customers just buy things, they think of urgency and time. They don't walk around to slowly shop for things. Thereby, the existence of a hypermarket does not negatively impact the small businesses. Britain took 25 -30 years to transform from judicial supermarkets to the current hypermarkets. This is now happening in Central Europe and Asia. Our way is to work with the government so that everybody benefits.  

And, the impact of the guidelines? 

Our investment in Malaysia would be slower than in other countries because of the controls. Modern retail development in each country is that it's been a benefit for that particular country. It creates a growth in domestic market and domestic demand. Local suppliers have an increase in sales, capabilities and efficiency. These things inevitably lead to an increase in exports. And also, the investment creates jobs, people paying taxes, all these help the local economy. The rate of those improvements is dictated by how quickly we can open stores. More stores would mean more efficiency, especially with a computed generated distribution centre to monitor products and supplies. The guidelines that we are working inevitably means that development will be slower. Nevertheless, there is always a limiting factor in each country that we're in. It's not a serious issue. 

How similar is Tesco Malaysia's business model to that of everywhere else or even Britain? 

Some fundamentals are the same, like listening to the customers, the values, the way we treat our staff and the emphasis on efficiency. But customers are so different everywhere. We have to have different styles and serve completely different range in different stores. Here again is an exception. We were surprised that in Malaysia there was a demand for British style Tesco products.  

In Thailand, there is almost no parallel to the products here. Quality and service may be similar but products are entirely different. Here, the customers are so international, they have a taste for English products, English food. That was what initially brought about our availability problem.  

Would Tesco be interested to venture into e-commerce? 

We would venture into e-commerce, but we would need the scale of size first. We would need more stores and of course, the demand for this service. Currently, we don't have enough stores just yet. We could probably start this venture in e-commerce once we've got 9-10 stores. We'd have to be sure there is customer demand. We're running it in Korea at the moment, on a trial basis, and it's been very successful. Internet penetration in Korea is second only after the US, so they've taken to home shopping easily.  

Is it a coincidence or is Tesco Malaysia opening stores near Jaya Jusco Stores (M) Bhd? 

That is definitely not a deliberate strategy, but we probably got similar reasons for going into those areas. The criteria for an ideal spot for a store isn't quite different among the competitors. So we're looking at transport networks, where people live, where people want to shop. We'll put a store there. We do not view then as our main competitor, the days are still early. 100 per cent of out focus is on customer needs. And if we get that right, we're going to be successful. We're not particularly looking over our shoulders.  

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