Taking Tesco Global: David Reid, Deputy Chairman of the United Kingdom's Largest Grocer, Explains the Company's International Strategy. (Interview)

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Many retailers have tried and failed to establish themselves outside their home markets. Likewise, some retailers have gone astray trying to exploit Internet shopping. As a result, Tesco, the United Kingdom's biggest grocer, has attracted considerable attention because of its ambitious overseas strategy and its successful on-line home delivery service.

Relying on sales of nonfood items and on international sales--particularly in emerging markets--for an important part of the company's future expansion, Tesco has delivered one of the fastest organic growth rates of any major retailer in the world. Its nonfood business rose by 18 percent in 2000-01, and its international business, which began with a launch in Hungary in 1994, now accounts for more than 40 percent of the group's floor space.

Tesco also happens to be the undisputed world leader in Internet grocery sales (www.tesco.com). Its on-line home delivery service is now profitable, Tesco says, and it has struck a deal in the United States with Safeway, which will use Tesco's system for a home-shopping service. Underpinning Tesco's success is excellent management and an obsession with operational efficiency and productivity gains, which the company uses to keep prices low or to improve service rather than to increase its operating margins. Despite this impressive record, Tesco is still relatively small compared with the likes of Carrefour and Wal-Mart, but it is growing faster.

In this interview, conducted by Peter Child, a director in McKinsey's Paris office, Tesco deputy chairman David Reid discusses the role of international expansion, Internet shopping, and nonfood sales in the company's ongoing quest for growth.

The Quarterly: Tesco is renowned for the speed of its recent international growth. What determines overseas success for a retailer?

David Reid: First and foremost, cash--which means a strong core business. It's expensive to grow abroad. If you're going to be a serious international player, you have to be one of the top two companies in a number of countries, which has sizable cash implications. Yes, you could grow on a more gradual basis; you don't have to start up in several countries simultaneously. But it still adds up to a huge cash investment, particularly if you choose to grow, as we have done recently, on an organic basis.

If you're spending, you also need the support of shareholders. They need to know what you're doing and why, what the returns might be, what it is you're after. International expansion is a key part of our growth strategy, and it was important for our shareholders to understand that it would take time to show returns.

Indeed, such a strategy inevitably dilutes returns for a while. But it's also an attractive strategy given the growth rates in many overseas markets and the fact that it's difficult to grow in many Western markets because you can't open stores, or there are union issues, or there are no sites available. We had the support of our shareholders, and our stores in the Republic of Ireland are now cash neutral. Our stores in six of the Central European and Asian markets where we operate are now profitable. In a seventh, Taiwan, we'll be profitable in a couple of years. But initially, it was all driven by our UK cash flow.

The Quarterly: So you have the cash, and you have the shareholders' confidence. What more do you need for successful international expansion?

David Reid: You need good research in terms of which countries you choose. You'll need to understand the local market. But the real key is your capabilities. What have you got that will add value abroad? If it's an acquisition, what are you going to add that's going to repay the shareholders? And if you're expanding on an organic basis, what have you got that will give you a leading edge over the current incumbents or will sustain you through the inevitable future competition? …