From Seoul to Tokyo: Why did Tesco fail in Japan?

Tesco’s announcement that it is pulling out of Japan is hardly a surprise. In the almost decade-long period (it entered in 2003 through acquisition of local player C Two-Network) it was operating in the market, the retailer never seemed able to gain scale and traction in a notoriously difficult retail sector. This was despite Tesco launching its private label products (2006) and its Express format (2007) into the market - two initiatives which have been successful in other Asian markets.

But why did Tesco fail in Japan? I’ve been thinking about this and here are some thoughts:

Deviated from hypermarket strategy: Elsewhere in Asia, Tesco has had most of its success through establishing itself through hypermarkets. Thailand, S Korea, Malaysia, China - these are all markets where Tesco first built up a strong hypermarket chain before then filling in the gaps with smaller stores. Japan was an exception. C Two-Network operated small, value-orientated stores typically trading from units of around 100-300 square metres in the Tokyo metropolitan area. This was fine for Express stores, but meant that Tesco could never gain the scale it needed quickly that a chain of large hypermarkets would bring it. The revised City Planning Law, which came into effect in 2007, restricted large store growth anyway.

Wrong partner: Tesco has typically tied up with a relatively strong local player in local Asian markets - eg in S Korea is tied up with Samsung. In Japan, C Two-Network at the time of acquisition had 78 stores and annual revenues of less than $0.5 bn. By any stretch of the imagination it was not a major player in the Japanese retail sector. Plus, some of its stores required plenty of investment (see photo below)

Photo of a C Two-Network outlet in June 2003 - showing the very different nature of stores to what Tesco typically operates. Copyright: Planet Retail - www.planetretail.net

No acquisition: C Two-Network’s small size meant that even with rapid organic expansion, Tesco would have found it impossible to become a major player in Japan. Tesco management initially talked about plans to open a store a week, taking the total up to 500 stores by 2010. Clearly this never happened - store openings have remained relatively stagnant in recent years, peaking at about 142. Which begs the question why didn’t Tesco acquire once it had a foothold in the market. It acquired 27 Fre’c stores in 2004, but clearly missed out on larger opportunities which would have given it scale. Was Tesco unwilling to commit the investment required? Or did it quickly get cold feet?

Tough competition: Japan is a unique retail market as other global retailers (such as Carrefour) have also discovered. Launching Tesco Express seemed a logical move given the existing store portfolio and the format’s success elsewhere. However, it faced stiff competition from local c-store giants such as 7-Eleven, LAWSON, FamilyMart and Ministop. In addition, these players have also expanded into residential price-focused supermarkets - LAWSON STORE 100 for example. Tesco was also banking on its private labels as giving it a competitive advantage. However, rivals such as Seven & I and AEON have really invested in improving their own PL ranges in recent years.

The first Tesco Express in Tokyo, which opened in 2007

The first Tesco Express in Tokyo, which opened in 2007

It’s Japan!: Japan’s retail sector has seen stagnant (and even negative growth) in recent years. Sales growth has been hard to come by - even for the largest players, who have typically relied on a series of acquisitions to keep growing. In this climate is it any wonder why Tesco decided to cut its losses and instead focus on faster growing markets with higher potential - such as China?

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