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Transnational Corporation's Failure in China: Focus on Tesco

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Transnational Corporation's Failure in China: Focus on Tesco sustainability Article Transnational Corporation’s Failure in China: Focus on Tesco Kim Woohyoung 1, Hyun Kim 2,* and Jinsoo Hwang 3,* 1 Graduate School of Technology Management, Kyunghee University, Yongin, Gyeonggi-do 17104, Korea; [email protected] 2 Sejong University, 98 Gunja-Dong, Gwangjin-Gu, Seoul 143-747, Korea 3 The College of Hospitality and Tourism Management, Sejong University, 98 Gunja-Dong, Gwangjin-Gu, Seoul 143-747, Korea * Correspondence: [email protected] (H.K.); [email protected] (J.H.) Received: 31 July 2020; Accepted: 30 August 2020; Published: 2 September 2020 Abstract: Many of the foreign companies operating in China have claimed that they have failed and are constantly deciding on a strategic withdrawal from the Chinese market. We intend to conduct an empirical analysis of Chinese consumers in order to determine the cause of Tesco’s management failure in China. The survey was conducted on those in their 20s or older who had experience shopping at both Tesco and RT-Mart. As a result, a total of 650 copies were distributed to obtain an effective sample of 607 copies, which was used for the analysis. This paper conducted a comparative analysis on Chinese consumers who visited both Tesco and its rival company RT-Mart in China. We found through comparative analysis that Tesco was destined to fail in many areas. It was estimated that RT-Mart was more satisfactory in all factors, including product, location, brand recognition, and employee service. Keywords: consumer behavior; Tesco; China; retail internationalization; retail store attribution 1. Introduction In the last three decades, many countries, particularly those in emerging economies that have opened up their economies or have been forced to do so, have witnessed an increase in activity by foreign retailers. Privatization of state-owned assets has often been key to attracting foreign participation with the aim of boosting competition and long-term efficiency. While a review of international retail literature remains beyond the scope of this paper [1–4], most studies have underlined the importance of serendipity and opportunities within the environment leading to retail growth (at home), internationalization abroad, and potentially divestment (both at home and abroad), the main argument in the retail sector being to achieve global economies of scale. Examples of opportunities abound but include Burt et al. [4], who highlighted the strength of the sterling, the Asian financial crisis, and political change in Eastern Europe as important factors in the 1990s. After decades of expansion, Tesco has now become heavily involved with divestment strategies, particularly since the realities of trading post-sub-prime took effect. Thus, far from being a hedge against a downturn, retail internationalization is revealing mixed results. Generally, retail deleveraging is undertaken when (a) more entrenched local retail chains prevent incomers from becoming market leaders in the medium to long term and (b) difficulties arise in the home market. According to the Tesco 2012 financial statement: “Group sales, in 2012, increased by 7.4% to £72 billion, while Group trading profit was up 1.3% on last year and underlying profit before tax rose to £3.9 billion, an increase of 1.6%. Group capital expenditure in the year was £3.8 billion. Group return on capital employed (‘ROCE’) increased—to 13.3% (last year 12.9%) in the UK, core market, business clearly Sustainability 2020, 12, 7170; doi:10.3390/su12177170 www.mdpi.com/journal/sustainability Sustainability 2020, 12, 7170 2 of 11 did not meet with expectations. High petrol prices and falling real incomes affected customers’ discretionary spending in the year. The combination of disappointing sales in the second half of the year and our decision to increase investment into the shopping trip meant that our UK performance was weaker than planned. Sales grew by 6.2%, supported by excellent new store performance, but trading profit declined by 1%” [5]. Nevertheless, Tesco shares made a good start in 2013, rising 27% despite the widely-reported horse-meat scandal affecting most of the UK retail trade, but its pre-tax profits slumped by 51% after it took an expected £1bn charge for exiting its US business, Fresh & Easy, and an unexpected charge of £804m on property write-downs in the UK. The latter raised our suspicions that the hypermarket/superstore format may be suffering serious structural problems. The situation after tax was even worse, with profits collapsing by 95.7% to £120m (first profits fall since 1990). Many companies in the developed world have failed to gain a foothold in China [6]. In other words, many of the foreign companies operating in China have claimed that they have failed and are constantly deciding on a strategic withdrawal from the Chinese market [7]. Several reasons for Tesco’s failure in the Chinese market have been noted. The main reasons are a lack of understanding of Chinese consumer purchasing habits, late entry into the Chinese market, and tough competition. Therefore, we will first take a theoretical look at what strategy Tesco applied in the Chinese market and try to derive theoretical and practical implications by analyzing factors that are considered important to Chinese consumers when shopping. In particular, we would like to focus on the theory of consumer choice [8] through comparative studies among foreign companies in the form of retailers. Rather than quantitative research, qualitative research is the main trend in studying transnational corporation (TNC) withdrawals. Burt et al. [9] proposed a theoretical framework that focused on the withdrawal of European grocery retailers from Northeast Asia, estimating that there was a lack of longitudinal studies. Burt et al. [9] argued that TNC divestment is caused by different internal and external factors and different time periods, depending on the strategic priorities of each entity. Strategies that fit regional characteristics or a global corporate-centric mindset must be implemented for these conditions to proceed. The objectives of this study are as follows: analyze the reasons why Tesco, a TNC, was forced to withdraw from China, and draw conclusions as to why it was always doomed to fail. In particular, we would like to look for the factors in which Tesco failed in the special environment of China and report them as examples of management failure. Second, we intend to conduct an empirical analysis of Chinese consumers in order to determine the cause of Tesco’s management failure. We would like to shed light on why Tesco, which failed to localize based on the retail attributes theory [10,11], was forced to withdraw from the Chinese market. If empirical analysis is conducted based on retail attributes theory, it will be possible to ascertain through quantitative analysis why Tesco has been shunned by Chinese consumers. Through the empirical analysis, we intend to thoroughly analyze localization strategies that fail to meet the preferences of Chinese consumers and draw theoretical practical implications from the analysis. First, the theoretical contribution is as follows: compared with studies on globalization, studies on exit or divestment from abroad are far less common, and few have been conducted [12,13]. In particular, there is no further study dealing with the reasons and consequences of Tesco’s withdrawal from the socialist country. Through this study, a growing number of companies that have entered the unknown Chinese retail market and tasted failure rather than success are empirically analyzed. This will help us understand why foreign companies that decide to withdraw are affected by certain factors. This study aims to thoroughly understand where Tesco was less competent than RT-Mart and thus provide implications for foreign companies that are planning to enter the Chinese market or are currently operating in China. Sustainability 2020, 12, 7170 3 of 11 2. Materials and Methods 2.1. Divestment Success, failure, or withdrawal that is essential to an enterprise’s business processes are often mentioned in retail internationalization research [14,15]. The international return distribution for corporate restructuring still continues to spread [16,17]. The international retail partition was not a very important issue until the mid-2000s, but since the mid-2000s it has been addressed as a very serious issue through the method of emotional research [9]. We found an important problem in the course of conducting our literature review: that European grocery retailers decided to withdraw within 10 years of entry and 40 stores for management reasons [9]. Of course, there are some exceptions, but the fact that European grocery retailers decided to withdraw after entering the East Asian market due to mismanagement and other non-compliance issues has significant implications for this paper. We know that when Tesco withdrew from Korea, it was not due to localization, but rather because it was forced to make up for the financial failure of Tesco’s headquarters [18]. Although Tesco pulled out of the Korean market in September 2015, Tesco’s withdrawal was mainly due to its strategy adjustment at Tesco’s headquarters, not management failure. The relocation of TNCs is usually done in terms of strategic coordination, not management failure, and this strategy has already been supported by researchers such as Bodewyn [19], Pattnaik, and Lee [20]. Divestment is an intrinsic feature in the internationalization of retail, and until recently, has been a key part of academic research [4]. Divestment-related studies can be analyzed according to two viewpoints. The first is that the division is a result of management failure. Burt et al. [3] argued that a division can be defined by an entity’s lack of planning and underperformance, and that failure arises from four causes: market failure, competitive failure, operational failure, and business failure. Another viewpoint is that withdrawal occurs as part of rebalancing corporate strategies. Burt et al.
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