Tesco harbors big plans for Chinese market

Ken Towle, president and chief executive officer of Tesco China, said he believes his company's sales here could soon become bigger than in the retailer's home country.

The world's third largest retailer, which recently reported the biggest-ever profit for a UK retailer, $4.25 billion, captured one in every eight pounds spent on the British high street.

But Towle, who is spearheading major expansion in the country, said he believes that performance could be eclipsed in China because of the massive potential.

The company, which came to China in 2004 and has 65 stores here, is intent on investing in the distribution infrastructure to build a potentially massive retail operation.

To beat even the current level of UK sales, they would have to grow to more than the $63.2 billion recorded in the company's recent results.

Towle, a 45-year-old Londoner speaking in his cavernous office in Tesco's Guangxin store in Shanghai, said he has little doubt that can be achieved.

"I wouldn't say that it is beyond the scope of our thinking because when you think of the sheer number of people here, the incomes and our commitment here, I think anything is possible in China," he said.

Towle, who took over China operations in 2005, said he has been impressed by the potential of China right from the start.

"I thought it was amazing. What retailers like is a lot of customers and there is no shortage of customers in China. I like the energy here. You can move things forward here real fast. I have found it a thrilling place to be, " he said.

Tesco is currently China's third largest foreign retailer, behind the US giant Wal-Mart and the French-owned Carrefour, matching how the retailers rank globally. Wal-Mart and Carrefour, which have both been in the market longer, have double the number of hypermarkets. Towle insisted that the current rankings are just a photograph in time.

"I think the fact that we are smaller today will be largely irrelevant in the future. If you look at the Tesco story, we were No 3 in the UK in the early 1990s and now we are No 1 there and No 3 in the world. With determination and focus, I think anything is possible," he said.

This year is likely to be a landmark year for the retailer since it is for the first time going to be building its own shopping malls as part of its store development program.

There will be four such malls in the north of China, two in Liaoning province, one in Hebei and one in Shandong. In each of these malls, Tesco will be the anchor tenant and will be able to provide major car parking space, which is something lacking in an ever car-hungry market.

Towle, who himself has worked for the company's extensive property department at Welwyn Garden City in the UK, has been working with Tesco's property team based in China on sourcing the new sites.

He said he believes it will give the retailer control to build a solid platform for growth in China.

"The shopping mall will be our primary route for growth in China. It is this bigger format that we will have the most control over. We can acquire the site and then determine exactly how the development progresses," he said.

Towle said he believes one of the main attractions of these malls will be the "really fantastic" car parking.

"We have done a lot of work on forecasting car parking requirements and we are confident that our new shopping malls will have the best of any developments in their catchment areas, " he said.

Alongside the new mall developments, Tesco will continue opening traditional stores and aims to open at least 10 new stores a year.

"We aim to have at least 10 stores this year and I am very confident of achieving that. For us though, it is all about the quality of the stores we open," he said.

Towle admitted the economic downturn could have some impact on the company's expansion plans in China.

"We are watching carefully so that we know that locations we are going into are not uniquely affected by the downturn. Some of the locations in the south, for example, are feeling the pressure more than those in the north because the economy in the south is more dependent on exports. We see this as being quite cyclical, however," he said.

But he insisted Tesco's current investment program in China has a far longer horizon than the current downturn and it is not about quick returns.

"Our investment commitment to China is long term. We are putting in place a lot of infrastructure in order that we have a strong business in the future. It is about building great stores, putting in a supply chain so that we have a properly integrated business that is going to stand the test of time and compete on an equal measure," he said.

Towle's fascination with retailing began at 15 when he had a Saturday job while at school in a small private bakery business owned by two brothers.

Against his father's advice, he didn't take an academic path but chose instead to study baking technology and applied business management at South Bank Polytechnic.

"I have to thank my father really for not standing in the way of what I wanted to do," he said.

Towle's original aim was to set up his own bakery business but he joined the bakery department of the Kensington store of Sainsbury's, one of Tesco's main rivals in the UK. The store had a certain notoriety since Princess Diana was a regular customer.

"I saw her shopping but never served her, " he recalled.

Towle joined Tesco at 20 and has held a number of key positions over the last 25 years. He was the manager of Tesco's first smaller format Metro store in Covent Garden. He managed the flagship Brent Park store next to Wembley stadium and helped pioneer home Internet shopping in the early 1990s.

He then went on to work in the company's property department redesigning stores, ran Tesco's non-food operations and then all its back office operations, including human resources and security.

The move to China came as a result of him always stating at yearly career reviews that he had "high mobility".

"Out of the blue, I was asked whether I would have a chat with Philip Clarke, Tesco's international director, who said we had an exciting opportunity in China and what did I think," he said.

The company sent him out to have a look with his family and then decided to relocate.

"It wasn't a hard decision but it wasn't one also we were absolutely sure about. I discussed it with my wife and we agreed between ourselves that we would regret it if we didn't come," he said.

Whereas international business was something that British food retailers used to dabble in, it has become absolutely core to Tesco.

Sainsbury's, one of its main rivals in its home market, has run into problems in established markets such as the United States, but Tesco has pursued a policy of moving into undeveloped markets, starting with Hungary in 1995. Its first step into Asia was in Thailand in 1998.

In the company's recent financial results, international sales were $26.92 billion, just under 30 percent of total sales of $90.43 billion. The China proportion of this is not disclosed.

"Clearly the balance of the business is changing quite rapidly. We are on the world stage now, rather than just on a UK stage, " he said.

Towle said achieving success in any market is not about serving up the same as in other markets and with live turtles for sale the offer is clearly different in China.

"You only have to go across the (English) Channel to see live frogs. It is not for people such as us to come into China and say you must not sell these things. We must find ways of providing what is demanded, staying consistent with the laws of the country, " he said.

One of Tesco's key strategies is to precisely target customers and it achieves this through its loyalty card. Membercard, which although it offers customers rewards, is mainly aimed at gathering intelligence on what people buy in store. The customer profile information is produced by Dunn Humby, a company in which Tesco is the major shareholder.

"It is not a Big Brother thing. There are various other loyalty cards on the market all offering incentives to customers but none of them have this thought through end-to-end approach that we have," he said.

Towle said he believes the key way to develop a major presence in China is to have a sophisticated distribution system which will eventually unlock the large parts of the market that other retailers fail to reach.

"We are very committed to distribution systems. The Tesco way of working is to take control of a product at the earliest possible stage in the supply chain. The sooner we can take control of the product the more confident we are of buying at a great price to pass on to customers," he said.

To this end, the company has just established a collective farm in Shanghai, through which farmers will grow produce to Tesco specifications.

"It is a win win win situation since customers will get a more consistent product at a cheaper price, the farmer gets a relationship with Tesco, guaranteed volumes and a commitment to a fair market price," he said.

Tesco also hopes to build its non-food sales, which make up around 40 percent of the China total.

"Non food has largely been the preserve of the department stores up until now. We are seeing strong growth in electrical and household products as incomes rise in China," he said.

Towle said he has no doubt that he wants to make Tesco's operations in China a big business, indeed.

"We want to gain access to as many customers as possible and that will mean a very ambitious store opening program. We want to establish a strong market leadership position in China. Building our infrastructure is vital for this to happen," he said.

(China Daily 05/25/2009 page8)