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The localized merchandising for international retailers: a study of Tesco’s

failure in Japan

Article · January 2018

DOI: 10.34382/00001284

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 Vol.LVI No.5　　THE RITSUMEIKAN BUSINESS REVIEW　　Jan 2018 259

The localized merchandising for international retailers:

a study of Tesco’s failure in Japan

Junghwa Son ＊
Jungyim Baek ＊＊
Ho Park ＊＊＊
Changju Kim ＊＊＊＊

Abstract
Considering Tesco’s record of successful retail operations in global markets, its failure
in the Japanese market and subsequent withdrawal surprised many people. This study aims
to investigate the main factors for Tesco’s failure in the Japanese market. We focus on the
company’s localized merchandising (MD) strategy, utilizing the Structure-Conduct-
Performance (SCP) paradigm of industrial organization. Based on several interviews and
secondary data, this study summarizes the key reasons why Tesco could not develop a
localized merchandising strategy. In particular, it investigates Tesco’s partner selection,
store size and format, centralized merchandising authority, and private brand-focused (PB-
focused) merchandise assortments. The findings and suggestions of this study will help
retailers internationalize as well as help those who want to thrive in the Japanese market.

Keywords:
Keywords: localized merchandising, Tesco, industrial organization paradigm, retailing, Japan

1. Introduction
2. Localized merchandising in retail internationalization
3. Conceptual framework
3.1 Research context
3.2 Research questions
4. History and performance of Tesco in Japan
5. The characteristics of market structure
5.1 Over-competition in the retail market
5.2 Selective consumption
5.3 Super aging society
5.4 Unique buying habits

＊Assistant Professor, Sejong University, South Korea

＊＊Associate Professor, University of Marketing and Distribution Sciences, Japan
＊＊＊ Assistant Professor, Kunsan National University, South Korea
＊＊＊＊ Associate Professor, Ritsumeikan University, Japan
 260 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

6. The characteristics of market conduct

6.1 Partner selection
6.2 Store size and format
6.3 Centralized merchandising authority
6.4 Private brand-focused merchandise assortment
7. Conclusion and discussion

1. Introduction

Over the past few decades, internationally recognized retail chains, such as Walmart,
Carrefour, and Tesco, have achieved tremendous growth and posed a threat to local retailers
in host countries. In spite of their significant successes in many international markets, they
have also decided to withdraw from countries such as Germany, South Korea, and Japan
(Arnold and Fernie, 2000; English, 2016; Ghehard and Hann, 2005; Suh and Howard, 2009)
after failing to establish a clear competitive advantage.
Existing literature has discussed that the success or failure of global retailers depends
on their capability and willingness to adapt to local markets (Burt et al., 2003; Dawson and
Mukoyama, 2014; Dupuis and Prime, 1996; Wood et al., 2016; Yoder et al., 2016). Even
though the factors and antecedents of the success or failure of global retailers have been
widely studied, there is limited literature on the localized merchandising (MD) strategy of
global retailers.
For example, Tesco, one of the giant global retailers in U.K., entered the Japanese
market in 2003, after Carrefour and Walmart. Before Tesco’s entry, these two giant global
retailers had struggled in the Japanese market and faced losses for several years (Haddock-
Fraser et al., 2009). Surprisingly, in spite of the accumulated international experience and
knowledge especially from South Korea which is geographically and culturally closest to
Japan, Tesco finally ended up exiting the Japanese market after eight years in business.
However, very few studies have investigated the story of failure of Tesco in Japan.
Against this background, this study aims to investigate reasons and factors of Tesco’s
failure in the Japanese market through the lens of localized merchandising strategy,
utilizing Structure-Conduct-Performance (SCP) paradigm of industrial organization. The
SCP paradigm is a management tool which explains how the characteristics of the market
structure of a firm’s industry influences market conduct (i.e., firm strategy) and the
performance of the firm (Bain, 1968). Information and data used in this study have been
obtained from both primary and secondary sources. Primary data are from interviews with
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 261

employees of some companies in the Japanese food retail market. Secondary sources include
annual reports, reputed Japanese-language newspapers and business journals, as well as
academic articles.
Drawing on retail merchandising strategy, the findings and suggestions of this study
will guide other international retailers or domestic retailers who plan to enter international
markets with internationalization strategies. In addition, this study will also provide useful
lessons for global grocery retailers who are entering the Japanese market.

2. Localized merchandising in retail internationalization

The internationalization of retailing is considered as an ongoing process (Alexander and

Myers, 2000), in which retailers have valuable opportunities to learn about the ways of
successfully expanding their operations in foreign markets (Bianchi and Ostale, 2006;
Palmer and Quinn, 2005). The selection of foreign markets is influenced by their similarity
to home country characteristics, as well as growth opportunities. That is, international
retailers consider the cultural distance, geographical distance, and psychic distance while
selecting foreign markets they want to enter.
Many studies have discussed the different approaches of international retailers
(Alexander and Myers, 2000; Helfferich et al., 1997; Salmon and Tordjman, 1989). Salmon
and Tordjman (1989) addressed two internationalization strategies: global strategy and
multinational strategy. The global strategy refers to the retailers’ decision to replicate their
core business concept in other countries. In the multinational strategy, retailers modify their
core business concept (or format) to meet local market conditions without sacrificing its basic
elements.
Comparing the two different approaches, some researchers believe that it is easier for a
retailer with unique offerings to expand its business in new markets in a standardized
manner than adaptation (Salmon and Tordjman, 1989; Treadgold, 1990). However, others
insist that adapting to the local culture, taste, and purchasing behavior is essential if
international retailers are to achieve a better performance in each market (Baek, 2014; Burt
and Mavronmmatis, 2006). In practice, the adaptation strategy is frequently considered as
more effective for international retailers who are entering global markets and setting up
their business there. Interestingly, Treadgold (1990) suggested a transnational strategy as a
type of hybrid strategy, which is a mix of standardization and adaptation strategies. The
 262 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

mixed strategy needs to be modified at the time of entry, as well as at each stage of
operations to deal with the standardization-adaptation issue (Baek, 2005).
To implement the adaption or hybrid strategy, global retailers must adopt flexible
organizational arrangements that permit the use of country-specific knowledge (Sashi and
Karuppur, 2002). The specific knowledge enables retailers to develop localized
merchandising. Merchandising refers to a series of retailers’ activities to plan merchandise
assortments, select suppliers, purchase merchandise, set selling price, and devise sales
promotion. In this study, we use the term “localized merchandising strategy” to refer to the
retailers’ strategy of localizing their merchandising activities.
We posit that retailers who are aware of the importance of the localized merchandising
strategy prioritize to build attractive merchandise assortments. To this end, the localized
merchandising strategy should consider carefully the operation of stores through optimal
store size and format, selection of local partners including suppliers, planning for
merchandise assortments, and design of the merchandising organization within host
countries. This suggests that the localized merchandising strategy in international retailing
should include the entire organizational design, rather than just the merchandise
assortment plan for the local market. Retailers with an effective organization design can
develop cooperation between the merchandising and store divisions for better decision
making on merchandising (Takashima and Kim, 2015), encourage retail buyer
innovativeness through optimal design of management control systems for better purchasing
performance (Kim and Takashima, 2016), and manage their suppliers in order to receive
relationship-specific investments (Takashima and Kim, 2016).

3. Conceptual framework

3.1 Research context

Food retailing in Japan is highly developed and strongly resistant to competition from
foreign food retailers. All foreign grocery retailers like Carrefour, Costco, Walmart, and
Tesco attempted to introduce a new consumption culture to the Japanese food / grocery
market. For example, Carrefour brought its hypermarket format to Japan in 2000, but from
the Japanese consumers’ viewpoint, it was not much different from the Japanese general
merchandise stores. In fact, the domestic food / grocery retailers were so well entrenched that
it made it difficult for the Western retailers to penetrate the Japanese market. It is no
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 263

exaggeration to say that domestic retailers have been dominating the Japanese market. Not
being able to achieve expected results, Carrefour had to finally exit Japan in 2005.
The Japanese domestic retailers are more sophisticated in terms of handling technology
and know-how of perishable food, such as fishes, fruits and vegetables, and meat, than the
Western retailers because they have to satisfy the needs of Japanese consumers who are
sensitive to the freshness and quality of these foods (Baek, 2014). When Walmart entered
the Japanese market, they realized that the procurement capabilities and reinforcement of
handling know-how in perishable food would be critical to success in the Japanese market
after witnessing of Carrefour’s struggling in Japan. Walmart believed that having a local
partner might be better to operate its business in Japan due to its lack of knowledge of the
market. At that time, Seiyu, one of the largest retail chain stores who developed Muji as its
private brand since 1980, looked for business partners to overcome its financial issue.
Meanwhile, Walmart evaluated that Seiyu was one of the leading retailers in terms of better
understanding of the local market, local consumers, and handling know-how of perishable
food.
Given this, Walmart first acquired a 6.1% stake of Seiyu, and in 2005, acquired a
majority stake, making Seiyu Walmart’s subsidiary. Walmart proceeded to acquire the
remaining shares, and Seiyu finally became a wholly-owned subsidiary of Walmart in 2009.
It was ironic that although Walmart acquired Seiyu as a local partner in Japan, it struggled
to enhance store operations and merchandise procurement capabilities by fully leveraging
its global networks and acquiring a competitive advantage.

3.2 Research questions

Tesco, the most successful retailer in U.K., entered the Japanese market in 2003. Before
entering Japan, Tesco accumulated localization experiences and knowledge, especially from
South Korea, which is geographically and culturally the most similar to the Japanese
market. Their business in South Korea was stable at that time. Tesco must also have
analyzed and researched the previous success and failure of some global retailers (Palmer,
2005). Although Tesco wanted to provide a better shopping experience and more valuable
products to Japanese consumers, they met the same fate as their predecessors. Tesco
withdrew from Japan in 2011.
This raises the following research questions: 1) How does the Japanese retail industry
differ from that of other countries? In other words, what are the unique structural features
 264 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

of the Japanese retail industry?; 2) How did the characteristics of the Japanese retail
industry impact Tesco’s operations in Japan? In other words, how did Tesco develop
strategies to compete with the Japanese retail industry?; and 3) How was Tesco’s
performance in Japan? To respond to these research questions, this study applies the SCP
paradigm based on the industrial organization. The SCP paradigm is a management tool
which explains how the characteristics of the market structure of a firm’s industry influences
market conduct (i.e., firm strategy) and the performance of the firm (Bain, 1968). However,
it limits the research scope to one retail company, focusing on Tesco’s store operations, its
selection of local partners, merchandise planning, and the design of its merchandising
organization during its eight years in Japan.

Figure 1. The conceptual framework

Market structure Market conduct Market performance
・Over-competition ・Partner selection ・Business retreatment
・Selection consumption ・Store size and format ・Lower customer loyalty
・Super-aging population ・Centralized MD authority ・Selling 129 stores with 1 yen
・Unique buying habits ・PB-focused assortment ・Debts of 20 billion yen

Figure 1, which draws on the SCP paradigm, shows the research framework used to
suggest the key reasons for Tesco failing to develop retail organizational capabilities for the
localized merchandising strategy and finally exiting. First, in order to focus on the analysis
of the failure of Tesco Japan, the history of Tesco Japan and its market performance is
summarized. Then, the market structure of Japan which has four major factors — over-
competition, selection-oriented consumption, super-aging population, and unique product
buying habits — is discussed. Finally, Tesco’s efforts to establish its business in the Japanese
market, through decisions on partner selection, store size and format, centralized
merchandising, and private brand-focused (PB-focused) merchandise assortment are
analyzed.

4. History and performance of Tesco in Japan

Tesco entered the Japanese market by acquiring C2 Network, a discount retailer, for
32.8 billion yen in July 2003. In order to expand its business in the Japanese market, Tesco
invested a further 20 billion yen, and officially changed its name to Tesco Japan in
September 2007. Although Tesco actively invested and extended its business in Japan, it
finally decided to exit from the Japanese market in August 2011.
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 265

When Tesco entered the Japanese market, it received huge media attention due to the
scale of its M&A with local retailers. In order to expand its business scale, in August of 2004,
Tesco started M&A with Frec holding twenty-five stores, where operates in Chiba. In
October, 2005, Tesco acquired a medium-sized retailer, Tanekin, which had eight stores in
Tokyo. Because of the active expansion of business through mergers and acquisitions, Tesco
Japan had one hundred five stores by February 2006 (Syukan Diamond, 8 October, 2011).
Additionally, Tesco developed and diversified its own store format. They opened the first
store of Tesco Express, which is synonymous with convenience-based, small-sized
supermarkets, in April 2007. Then, it opened Tesco, a new supermarket brand, in December
2009.
Even though Tesco aggressively operated its business in Japan, it announced its
decision to exit the Japanese market in August 2011. The reason they exited from the
Japanese market is similar to the reason due to which Carrefour (entered in 2000, but exited
in 2005) left and also the reason for Walmart struggling (entered in 2002). All of them
encountered a concrete barrier in the Japanese market. When Tesco declared that it was
closing its Japanese business, it was operating 129 stores in metropolitan areas around
Tokyo, and its revenue reached 50 billion yen (The Nikkei, 1 September, 2011a).
It had been said that it expected to get 20-30 billion yen by disposing its assets.
However, it was hard to find a company who was interested in taking over their stores.
There were several reasons for this. For example, prospective buyers found that the store
size and format were unsuitable for their business model. More than half its stores were
running deficit operations. Further, Tesco suggested during the sale negotiations that the
buyer should absorb all 1,900 employees of Tesco, which included part-time employees. After
struggling to sell its business for some time, it finally sold its business to AEON for just one
yen (Business Journal, 2012). Further investment of five billion yen for rebuilding the
supermarket business was one of the terms of the sale agreement reached between the two
companies. In addition, Tesco agreed to pay the debt of 20 billion yen accumulated by Tesco
Japan before finalizing the sale deal with AEON.
Tesco Japan received huge attention before entering the Japanese market and on its
exit, but interest in it was muted during the eight years it operated in Japan. The Japanese
people expected that Tesco would exit the Japanese market sooner or later due to the market
barriers (i.e., the structure of the Japanese market, unique consumers’ preference, and
purchase behaviors) that had led to Carrefour’s retreat and left Walmart struggling with its
 266 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

business due to depressed demand. However, we conclude that the main failure of Tesco
Japan was not only the unique structure of Japanese market, but also its inability to exhibit
organizational learning, coupled with a misunderstanding of the local consumers. The rest of
this study addresses these main factors for Tesco Japan’s failure.

5. The characteristics of market structure

5.1 Over-competition in the retail market

The excessive competition among retailers is often considered as one of main
characteristics of the Japanese retail industry. Tamura (2008) argued that it is not difficult
to predict the outcome of the intense competition among retailers in Japan. Those who build
organizational capabilities to create value innovation would be winners in such a market. It
is also known that supermarkets have reached the maturity stage in the retail life cycle.
That is, the market is extremely saturated and fragmented. However, supermarkets mainly
carry groceries and food; thus, it is hard to believe the prediction about the fading away of
supermarkets. Given this, differentiation at the store level is strongly recommended and
indispensable to survive the competition.

Figure 2. Fierce retail competition in grocery store

Total Sales Number of Stores Store Size Sales per 1m²

180
160
140
120
100
80
60
40
20
1990 1995 2000 2005 2010 2015

Note: 1. Data is based on sales statistics of Japan chain stores association

(https://www.jcsa.gr.jp/public/statistics.html/).
2. The index of each year is relative percentages when we set the value of the 1996 sales volume (the peak
of total sales volumes of members) and other retail parameters as 100.

The data drawn from member firms of the Japan chain store association depicts the
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 267

severity of the competition among supermarkets (see Figure 2). If we set the value of the
1996 sales volume (16.98 billion yen) and other retail parameters as 100, the value
represents 85.2% of sales, 65.6% of sales per 1m2, 104.2% of numbers of stores, and 129.6%
of the store size in 2003 — the year when Tesco Japan entered the Japanese market.
However, when Tesco Japan announced its exit from the Japanese market in 2011, the size
of stores had increased by 146.8%, but sales per 1m2 had dropped to 51.3% of the 1996 levels.
From these figures, we can easily infer the uphill struggle Tesco Japan had to face in order
to just survive.

5.2 Selective consumption

Figure 3 shows the variation in monthly expenses on diverse consumption categories,
based on the total monthly expenses of households having two or more people. In Figure 3,
the average monthly expense value of 335,246 yen in 1993 — the year with the highest
average monthly expenses — are taken as base 100. In 2003, the total expenses had dropped
by 9.7%; those on food and clothing & footwear had decreased even more drastically by
13.9% and 37.4%, respectively. In contrast, medical care and transportation &
communication expenses increased by 25.4% and 13.2%, respectively.

Figure 3. Yearly average of monthly disbursements

Consumption expenditure Food Clothing & Footwear

Medical care Transportation & communication
150

130

110

90

70

50

30
1990 1995 2000 2005 2010 2015

Note: 1. Data is based on family income and expenditure survey announced by statistics bureau in ministry of
internal affairs and communications (http://www.stat.go.jp/data/kakei/longtime/index.htm#longtime).
2. The index of each year is relative percentage when we set the value of 1993 (the highest average
monthly expenses) and other parameters as 100.
3. The data is not including agricultural, forestry, fisheries workers’ households.
4. Tabulated households in 1967-1984 include households additionally surveyed in cities with prefectural
office. Gas is included in 1963-1966. Sewerage charges are not included in 1963-1984. Medicines include
health fortification since 1993.
 268 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

It shows a continuous drop in the expenses. By 2011, total expenses had fallen 15.6 %
from the 1993 levels; food and clothing & footwear fell by 17.9% and 48.9%, respectively.
However, the expense on medical care has witnessed a consistent increase. By 2015, it was
28.7% more than the 1993 value, whereas the expense on the transportation &
communication had increased by 21.7%. Given this data, the market size of food items—in
which Tesco Japan was a new player — has been shrinking while the size of the medical care
market has been growing much faster. Hence, apart from Tesco Japan, it is vital for
Japanese retailers to reflect on this market trend when practicing merchandising to
differentiate themselves from their competitors.

5.3 Super aging society

When Tesco Japan entered the Japanese market in 2003, the Japanese population was
increasing gradually. The drop in population after 2010 (nearly 128,057,000) was not seen
as a big concern for businesses and the economy. In contrast, multinational corporations are
required to more deeply understand the issue of aging population in Japan.

Figure 4. Population and percentage distribution

Total
population Total population 0~14 years 15~64 years 65 years and over
% of
(million) each group
140 80%

105 60%

70 40%

35 20%

0 0%
1990 1995 2000 2005 2010 2015

Note: 1. Data is based on population census announced by statistics bureau in ministry of internal affairs and
communication (http://www.e-stat.go.jp/SG1/estat/NewList.do?tid=000000090001).
2. Data is announced in October of each year.

According to Figure 4, those under 14 years and above 65 years accounted for 14% and
19% of the population, respectively, in 2003. In 2011, the share of those under 14 years in
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 269

the population had fallen to 13.1% and that of people above 65 had increased to 23.3%. It
shows the shrinking of the working population, which constitutes the main consumer group
targeted by retailers. More importantly, Japan is an aging society, with one fourth of the
population aged 65 years or above. As shown in Figure 3, the elderly have a tendency to
consume lower quantities of food and clothing & footwear, spending more on health and
medical care. Consequently, satisfying the elderly, who have purchasing power and a regular
stream of expenses, has become the key to survival in Japan.

5.4 Unique buying habits

The unique habits of the consumers are linked to their needs and wants. It would be
summarized as twofold of consumers’ needs and wants for supermarkets. First, Japanese
consumers are very sophisticated, not only in terms of the taste of fresh food, but also in
demanding quality, newness, and variety. Many Japanese consumers visit supermarkets
daily to purchase fresh and high quality merchandise. In particular, the elderly often wait
for stores to open so that they can purchase fresh food before others arrive. Second, the
Japanese consumers demand variety in merchandise. They are easily bored with the same
merchandise and layout. In other words, the Japanese consumers want to purchase and try
newness. In line with this, retailers should actively carry and treat new merchandise in
stores, and are required to provide a range of differentiated merchandise.

6. The characteristics of market conduct

6.1 Partner selection

Tesco targeted consumers in metropolitan areas and wanted to operate small-sized
supermarkets, to avoid the path taken by Carrefour and Walmart, who operated
hypermarkets. To enter the Japanese market, Tesco tried to localize by partnering with a
local company, C2 Network, in 2003. C2 Network, the cash cow among discount stores, had
an income to sales ratio of 7%. C2 Network operated its stores in metropolitan areas. In
order to acquire the advantages of C2 Network, Tesco selected it as the local partner.
However, choosing a discount retailer was considered as one of the factors leading to Tesco’s
failure (Syukan Diamond, 8 October 2011). It has been remarked that Tesco, a supermarket
retailer focused on groceries and fresh food, should have selected a retailer with a concept
similar to it as its partner.
 270 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

Apparently, there were differences between the two partners on store opening strategy.
C2 Network was focused on a low-price strategy and preferred to open stores at locations
that had lower rent, even if it was inconvenient to reach them. C2 Network could maintain
its price competitiveness by saving on rent. Even if the location had lower population
density, there was a higher probability of expanding its trading area because of its efficiency
achieved through lower opening and operating costs of discount stores. For this reason, they
did not pay much attention to the standardization of store size and their stores were of
different sizes. In contrast, supermarkets like Tesco typically have a narrow trading area;
therefore, it is better to be located in areas with higher population density. Moreover,
operating stores of different sizes proved difficult for Tesco as it was used to standardizing
the store size and operating them centrally from its headquarter. This led to poor efficiency
in operating stores.
Additionally, the merchandise assortment strategy of the two companies varied. C2
Network carried inventories that were unsold at wholesalers, non-branded merchandise, or
merchandise with a short use-by date to offer cheaper prices to consumers; thus, they could
survive during the period of deflation. Given this, C2 Network focused mainly on groceries
rather than fresh food. Not being able to handle fresh food in a market that required
differentiation in supermarket for success was said to be the main reason for Tesco’s failure.
Finally, Tesco Japan struggled due to the disagreement with the top management of its
partner on prioritization relating to store operations and the high turnover of talented
employees to its competitors, which worsened the poor performance.
Generally, M&A in retail sector involves improperly-run enterprises. However, Tesco
took over a successful local partner and it was expected that Tesco would have an advantage
in expanding its operation in Japan. However, Tesco failed to build a competitive advantage
(Nikkei Marketing Journal, 5 September 2011b). Moreover, given the long deflation after the
collapse of the bubble economy in 1991, value for money had been emphasized by giant
retailers such as AEON. Therefore, the low-price strategy of Tesco was unable to attract the
Japanese consumers.

6.2 Store size and format

Tesco Japan aggressively expanded the number of stores over the short term. Since they
targeted metropolitan dwellers, Tesco actively took over additional supermarket companies
in metropolitan areas (Nikkei Marketing Journal, 5 September 2011a). Tesco Japan acquired
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 271

25 stores of Frec and eight stores of Tanekin in 2004 and 2005, respectively. In 2010, Tesco
Japan was running 137 stores. In line with the expansion of stores, Tesco Japan also opened
new formats. These included Tesco Express and Tesco, which were started in April 2007 and
December 2009, respectively. When Tesco Japan announced its exit from the Japanese
market, it had 129 stores. Of these, it had Tsurukame 76 stores, the representative store
type of C2 Network; 30 stores of Tesco; 10 stores of Tesco Express and 13 stores of other
types.
The aggressive M&A and the development of new formats of stores had the advantage
of achieving economies of scale, expanding market coverage, and responding appropriately to
the variety of needs of consumers over the short term. However, as Tesco Japan focused
mainly on achieving scale in a short-time, it also had rather negative effects on the system of
store operations, such as inconsistency of store size and merchandise assortments across
stores (Nikkei Marketing Journal, 5 September 2011b). For instance, the store size ranged
from 70 m2 to 800 m2. Under this situation, it is hard to realize the anticipated scale merits
by standardizing store operations from the headquarter.

“Regardless of the retail format, it will be hard for retailers who emphasize economies of scale
by operating chain stores underpinned by standardization to achieve great efficiency from
diversified store size.” (from an interview with the CEO of a retail company)

The small-sized stores on which Tesco focused have limited spaces; thus, the
merchandise on the shelves is also limited. Tesco Japan was not much attractive to
customers due to its lack of merchandise assortments—especially brand new merchandise—
and no differentiation in its merchandise assortments, when compared with its competitors.
Additionally, the store expansion strategy had a negative effect on store branding. After
2007, Tesco planned to strength the format of Tesco Express, which was identical to what it
ran in U.K., and Tesco, which is new store concept. Yet, the store branding strategy of Tesco
did not succeed and the store name remained Tsurukame. From the standpoint of
consumers, having an unified store image of Tesco Japan is considered difficult.

6.3 Centralized merchandising authority

What makes an international retailer suffer in the Japanese market? In addition to the
high labor cost and rent, the unique culture and practices of transaction (The Nikkei, 1
 272 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

September 2011b) cannot be ignored. In particular, it is a fact that grocery stores in Japan
are extremely competitive, when compared with those in European countries; therefore,
profits and profit margins are relatively low. Therefore, the lifecycle of groceries becomes
short. In order to survive the competition, manufacturers resort frequently to new product
development, which further shortens the product life cycle.
Retailers need to display popular merchandise without running out of stock and replace
non-popular merchandise with better selling merchandise on their shelves. This is a way to
satisfy the needs of Japanese consumers, who require both differentiation and newness in
merchandise. In order to meet consumers’ needs, it is required to achieve significant
localization of merchandise and provide attractive merchandise assortments by closely
cooperating with suppliers.
However, when visiting one of Tesco Japan’s stores, fresh fish products like sashimi
were out of stock at noon (Nikkei Marketing Journal, 5 September 2011b). This stock-out
happened because headquarter reduced the quantity of fresh fish supplied based on the
forecast of rain for the next day. In Tesco, the headquarter had the authority to make
merchandising purchase decisions. In this situation, even if store managers want to order
additional merchandise based on demand in the store, they cannot get it because the
headquarter decides the quantity of merchandise distributed to each store the day before
actual delivery.
Tesco Japan also employed information systems which were utilized in other countries
in which they operated stores in 2008 (Nikkei Marketing Journal, 5 September 2011b).
Employing information systems created centralized management of many functions,
including order fulfillment. This centralization hands over administrative power for
merchandise display and store layout, selling price, and order quantity of merchandise, as
well as the choice of merchandise and/or suppliers, to the headquarter. In Japanese practice,
it is essential for a store to rapidly respond to local rivalries by scrutinizing the merchandise
that had sold well and the prices in the store. However, once the authority of the store is
restricted, it is hard to react quickly and provide satisfactory merchandise and price, or
changing shelf allocation in tune with local needs and competition.

“It can vary by firm. However, by checking on prices and merchandise of competitors every
day, it is quite common in a localized store operation to change merchandise, prices, and
promotions to attract customers. Additionally, because this requires a quick reaction, the store
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 273

manager is given to certain degree of authority to make decisions and handle the urgent
issues without reporting to the headquarter.” (from an interview with a grocery store manager)

As opposed to the decision-making system of Tesco Japan, Ito-Yokado recently gave the
authority to placing an order for merchandise to not only its store manager but also
employees in stores. It did this in order to provide localized merchandise assortments (Nikkei
Marketing Journal, 22 June 2015). In addition, the single biggest factor for Yaoko achieving
growth in both sales and profits for 27 consecutive years is localization.

“The acceleration in the aging of society is guaranteed to increase the number of localized
stores. In order to be localized, stores need to empower their employee, by involving them in
planning and taking their suggestions on store management; this leads to a competitive
advantage for the stores.” (from an interview with a grocery store manager)

6.4 Private brand-focused merchandise assortment

Tesco Japan was quite active in the development of private brands (PBs) (Nikkei
Marketing Journal, 18 August 2010). There are two types of PB development — low price-
oriented PBs and high quality-oriented PBs. In addition to the two types of PBs, policy of
merchandise assortments was reinforced by cheaper national brands. Yet, attractive
merchandise assortments were not a priority for Tesco Japan. They focused mainly on low-
priced merchandise with some core PBs.
Tesco Japan did not seem to realize that the awareness about, or preference for, PBs is
quite low among the Japanese consumers, compared with that among consumers in the U.K.
In Japan, there are few supermarket retailers that have over a 10 percent share of PB
merchandise in total sales. The fact that consumers’ national brand (NB) loyalty is strong
and manufacturers offer aggressive price reduction on NBs further explains the lower
awareness about PBs among the Japanese consumers.
For the Japanese consumers, both price and quality benefits are significant; therefore, it
is easily conceivable that a lack of differentiation in merchandise assortments and restricted
merchandise choices of Tesco Japan caused it to struggle for existence in Japan (Kim and
Baek, 2011). On the other hand, Costco has been popular and famous in Japan due to the
attractive merchandise assortment through successful local and global sourcing.
 274 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

“As a retailer, the existence of differentiated, unique merchandise which consumers are
willing to pay for is critical. A retailer is meaningless if he/she offer merchandise which
consumers do not want to buy and pay for.” (from an interview with a management planning
manager)

The personal interviews made it clear that newness, popularity, quality, and freshness
of merchandise are the main considerations for Japanese consumers. On average, the
Japanese consumers usually visit a supermarket three to four times in a week. Some visit
the supermarket on a daily basis. Furthermore, as consumers have a strong inclination to
try something that is brand new, manufactures respond by actively developing new products.
Japanese consumers are easily bored with retailers who do not continuously improve
merchandise and run store promotions; in most such cases, they do not visit such a store
again. This partly explains why Walmart has been struggling in Japan. Thus, specifying the
local consumers’ needs and wants and providing attractive assortments are the most
important factors to satisfy consumers, particularly in Japan.

7. Conclusion and discussion

This study investigated Tesco’s failure in the Japanese market and examined the key
reasons why Tesco couldn’t develop the localized merchandising strategy. This study
contributes to the current literature of retail internationalization process by using the
industrial organizational approach and addressing the concept of the localized
merchandising. It examines key factors which retailers should consider when they
internationalize. Our findings help retailers take advantage of the knowledge that can be
gained from failure.
This study emphasizes that retail strategies must respond to market structures,
consumers’ needs, employees’ characteristics and personalities, competitor behaviors, unique
transaction practices with suppliers, etcetera, in the market that retailer enters. In other
words, adaptation toward the local market is vital. Even if Tesco truly understood the
characteristics of the market structure in order to provide attractive merchandise
assortments, however, it was unable to develop organizational capabilities for the localized
merchandising strategy.
In analyzing the failure of a global retailer, the focus is commonly on market conduct,
 The localized merchandising for international retailers: a study of Tesco’s failure in Japan（Son, Baek, Park, and Kim） 275

and less attention is paid to analyze the key reasons why it could not develop retail
organizational capabilities for executing the localized merchandising strategy after
understanding the market structure and market performances. This suggests that it may be
more beneficial in future research to focus on whether a global retailer holds organizational
capabilities, including partner selection, the centralized merchandising authority and PB-
focused merchandise assortments, as well as the store size and format to develop the
localized merchandising strategy.
Apart from Tesco Japan, the performance of a global retailer can be viewed as a
continuum of the internationalization process. The performance is often described with
either of the following two keywords: success and failure. The choice of strategies leads a
global retailer to ascertain the success or failure of its operations in foreign countries.
With regards to failure, majority of research picked up global retailers’ withdrawal from
a foreign market, which has been evaluated in mostly negative, but sometimes also in
positive terms. Even if a global retailer’s withdrawal from a foreign market is described as a
failure to adapt to local market conditions, it can still be seen as a lesson that can benefit the
company when setting up future operations in other foreign countries (Palmer and Quinn,
2005). In this sense, the failure can also make a positive contribution to the
internationalization process. At the very least, the experience of a retailer’s withdrawal can
be an important step leading to a development of new internationalization strategies (Burt
et al., 2002; Jackson et al., 2004).
Given this, Tesco Japan’s case provides us useful lessons. Tesco’s significant success in
the South Korean market and knowledge learnt from the Carrefour and Walmart’s
experiences did not lead to the Tesco’s success in Japan. The reasons for the failure are
summarized as following.
First of all, how did Tesco analyze and define the Japanese market? As Japan has a
significant market size in terms of purchasing power, the Japanese market is often
considered as a potential market for global giant companies. However, consumers’ spending
on food has been decreasing continuously because of a rapidly aging population. Despite the
decrease in consumers’ spending, they are extremely choosy about fresh food, freshness of
merchandise, differentiation of merchandise; further, they demand deep and wide
assortments. Even Japanese companies, who are already aware of consumers’ needs, can fail
if they do not meet such consumers’ needs. Tesco Japan had a competitive advantage in
groceries and frozen food, rather than in fresh food. However, it was not a leading company
 276 THE RITSUMEIKAN BUSINESS REVIEW Vol.LVI No.5

in Japan. Considering fierce competition in Japanese supermarket industry, some said that
entering the Japanese market with a supermarket format itself led to Tesco’s failure
although it did make a huge investment and developed strategic plans in order to overcome
various pitfalls.
Second, were the strategies of Tesco to meet the Japanese consumers’ needs
appropriate? According to Kim and Baek (2011), an attractive merchandising assortment is
the most important factor leading to consumers’ store loyalty in Japan. Japanese consumers
frequently visit a retail store in pursuit of unique and differential merchandise. Here are
some tips for global grocery retailers considering entry into the Japanese market. Retailers
must develop differentiated, attractive merchandise assortments, particularly in fresh food.
In pursuit of differentiated, attractive merchandise assortments, they should build concrete
relationships with local suppliers; invest on localized store operations underpinned by store
cooperation; and devise organizational structures for better organizational decision-making
processes that respond to the local market.
Carrefour and Tesco withdrew from the Japanese market. Walmart seems to be still
struggling with the Japanese market. In contrast to these global retailers, Costco has
steadily expanded its market size in Japan due to the exclusive merchandise assortment via
well-balanced local and global sourcing. Consequently, retailers should remember that they
need to source merchandise as agencies who offer it in order to meet their customers’ needs
and wants. It is not a good idea for retailers to source merchandise that they want to sell.

Acknowledgment

This research was supported in part by Grants-in-Aid for Scientific Research from
Japan Society for the Promotion of Science (Project Number: 15K03651 and 16K17201).

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