TESCO: UK supermarket giant sees Lotus as a good-value investment, and counts on the local expertise of the CP Group to help it grow

Hoping to repeat the retailing success it has achieved in Europe, Britain's Tesco Plc has taken a leap into the Asian market by acquiring 75% of Lotus Supercentre from the Charoen Pokphand (CP) Group for an estimated 13 billion baht "Tesco has been fortunate that this opportunity has emerged out of the current Thai economic climate," deputy chairman David Reid said in a statement.

‘[Lotus] is an excellent business and if it wasn’t for the downturn we wouldn’t have had the chance to enter the country. Having a good, strong and supportive partner like CP also helped us make the decision’
MICHAEL RAYCRAFT
CEO, Tesco Thai operations

"In normal times, it would have been unlikely for stores of this quality to be available. It means that our entry can be much quicker than by organic expansion, and Lotus has already gone through the pains of start-up losses."

Lotus Supercentre has 13 stores in Thailand with a total selling space of approximately 1 5 0,000 square metres, as well as two outlets in China. It was founded by the CP Group just four years ago, but in the wake of the recession the conglomerate has decided to focus on its core activities, mainly agribusiness in Thailand, China, Indonesia and other countries.

"There were three elements involved in our buying Lotus Supercentre. We had three teams looking at opportunities in this region: one in nand the third in Thailand," said Michael Raycraft, chief executive officer of Tesco's Thai operations. "These countries were chosen on economic criteria such as population, household expenditure and future outlook.

"The second reason [for choosing Thailand] was the relative stability of the pound against the baht. Third was the availability of Lotus Supercentre, and the opportunity to have a partnership with strong partners such as the CP Group."

He agreed that under normal circumstances, a company such as Lotus would never have been for sale.

"[Lotus] is an excellent business and if it wasn't for the downturn we wouldn't have had the chance to enter the country. Having a good, strong and supportive partner like CP also helped us make the decision," Mr Raycraft said.

In the long-term, Tesco would like to develop 12 more stores within the next three years, mainly in the most densely populated centres of the country. It also wants to build more distribution centres in line with the growth in the number of outlets. Currently, all Lotus distribution is handled from a central facility in Ayutthaya.

Mr Raycraft said that entering a new market at this time might be seen as risky, but he credited the ability of the Thai government to create trust in the international community for helping to make the decision more easy.

Tesco is one of the largest foreign investors to have entered the country since the crisis began in mid-1997. The only other investment on a comparable scale has been that of the consortium led by financier George Soros, with $650 million (24.1 billion baht) committed to the Nakornthai Strip Mill steel project.

"We as businessmen believe that there will be an economic recovery in the next two to three years, and therefore further investment in Thailand is required," Mr Raycraft said.

Further investment could even include a piece of the Central Group's Big C Supercentre chain. But Mr Raycraft declined to comment on the reports, saying only that the company would look at any opportunities that become available and make a decision based on their merit.

"In order to manage the business in Thailand, we needed a strong partner and we have CP Group with us," he said, acknowledging that operating in a developing market was quite different from the way Tesco was used to managing in the United Kingdom and other developed nations.

Tesco is moving quickly to meet its ambition to become a leader in the competitive local retail market and. It has begun customer surveys, focus groups, consumer panels and even street interviews to find out what customers want. Given the current economic mood, great prices top the list, Mr Raycraft said.
Lotus Supercentre gets high marks from Tesco as a ‘world-class’ retail operation with good management and technology.
The key will be the recovery of the economy, with the government taking a leading role by bringing in new legislation to improve the investor environment, he said.

"We have played our role in trying to raise the level of investors' confidence in Thailand, with our investments and our further commitment in Thailand, although we have had a lot of encouragement from the government to accomplish our objectives."

He called Lotus Supercentre one of the best investments Tesco had made in years, saying there was very little that needed to be changed as the whole operation was very new and modern.

"Lotus stores are first-class stores. I would say they are as good as it gets, they are world-class: that's America, that's Europe, that's the UK, that's France that's anywhere.

"It's a well-run business and we don't have to make too many changes in the stores, but our, long-term plans are to improve the supply chain of fresh food into the stores. This will involve us working closely with the whole supply chain: the farmers, and us as retailers."

Given the company's relatively recent arrival in the country, Mr Raycraft said it would be premature to talk in detail about future plans or operational restructuring. However, Tesco does not plan to change the Lotus name because the stores have built a strong identity.

Tesco has been satisfied with the Lotus sales figures for this year, given the depth of the economic downturn, he said. One reason for the satisfactory results, he said, was that the country was coming to terms with changed circumstances and people were adjusting their spending. As well, there was a lot of confidence that the government was doing the right things to revive the economy.

Lotus sees its main challenge as keeping customers happy and coming back, especially when it comes to price and value. To improve sales and provide more one-stop shopping for customers, it is looking to introduce a number of new products, drawing on the expertise of Tesco.

"We at Lotus will provide customers with everything they need to fulfill their shopping needs. In the UK, there are lots of products that are provided which are not available in Thailand, and therefore we are looking at these options," Mr Rayeraft said.

He also dismissed the notion that the entry of a new foreign partner would automatically lead to lay offs. In fact, he said, Lotus would continue to hire people - it now has 5,600 employees -to meet the expected growth in number of stores.

"We [Tesco] are the largest private-sector employer in the United Kingdom with over, 163,000 employees. I would like to see that the Thai operations too reach such scale of success and we be among the biggest employer in this country."

Each Lotus store has between 350 and 400 employees, and out of the 13 locations, two of the store managers are women.

Mr Raycraft also said that just because Tesco had acquired Lotus, it did not mean that learning would flow from Tesco to Lotus. The Thai company had much teach its new partners, so the process can be a two-way street, he said.

"It's a remarkable achievement that Lotus has gone through: from nowhere to 150,000 square metres of retailing space in just a span of four years is a pretty impressive operation.

"There are lots of impressive things that we have discovered since we moved in, including the technology."

The future f or large-scale retailing promises to be exciting for consumers, if a bit nerve-wrecking for the companies themselves. With Carrefour, the French retailing giant, 21 Big C stores, Tops Supermarket and other competitors, Lotus will be counting heavily on developing the right pricing and service strategies to stay ahead of its rivals.

Tesco, meanwhile, is looking to use Thailand as the base for expansion into other parts of Asia. Mr Raycraft said the backing and regional connections of the CP Group would certainly help, so the idea of Tesco taking up 100% equity in Lotus was not in the cards.

Tesco wants the backing of local expertise and it is happy with what it has, he said.

Lotus Supercentre Ltd
Established: 1994
Major shareholders: Tesco Plc, Charoen Pokphand Group
Main business: Hypermarkets
Number of employees: 5,600
Assets at end-1997: 2.37 billion baht
1997 gross revenue: 13.33 billion baht
1997 net loss: 132 million baht, prior to foreign-exchange loss

Worldwide
Headquarters: London
Number of countries: 7
Number of employees: 185,000
1997 gross revenue: 16.45 billion pounds (Financial year ending February 28, 1998)
1997 net profit: 505 million pounds