Examination of Witnesses (Questions 140-159)
TESCO PLC
7 SEPTEMBER 2004
Q140 Chairman: But again below that you
will have a Tesco—
Ms Neville-Rolfe: —Below
that we have a general manager in each country who typically will
have had experience running stores, say, in the UK, may have had
experience in property, has the sort of ability to lead a team
and to lead a team of people from different cultures so not only
Brits because in the overseas business Tesco has 90,000 people
and only 90 expats. It is very much about sharing your expertise
and learning from the UK. We have been very fortunate in the way
we have had some people who have built their careers in the UK
business and they have been able to go overseas and build businesses
in these countries. It is a very satisfying, challenging and interesting
job.
Q141 Linda Perham: Can I just pick up
on something you said about your stores, that there were the hypermarkets,
the express stores and then the value stores which you said were
working with local traders alongside. I am wondering about the
competition aspects there. Is there a worry about local traders
being forced out of business? Your website does say that you offer
volumes of goods for re-sale through family stores.
Ms Neville-Rolfe: Is this in Thailand?
Q142 Linda Perham: I think so: Tesco
Lotus, that is Thailand, is it not?
Ms Neville-Rolfe: It is indeed,
yes.
Q143 Linda Perham: I just wondered if
that was a way of supporting local businesses as well as obviously
making profits for yourselves?
Ms Neville-Rolfe: I think it is.
Obviously we have the ability to buy. Our buyers can go off and
work with suppliers to bring new things through and we sell in
bulk as well as in smaller quantities and people do come along
and buy those. Indeed in the UK you often see caterers who buy
value line bread and use it for their sandwiches and things.
Q144 Linda Perham: There is maybe the
worry about a big, foreign, established firm coming in and although
obviously providing employment then maybe driving local people
out of business. I did wonder also about the incentives for foreign
investment that you have managed to take advantage of. Are there
tax incentives or policies on foreign equity holdings or assistance
with training costs or setting up that you get in the ASEAN countries
that made you attracted to that market?
Ms Neville-Rolfe: I think there
are two different questions. First of all, on this point about
benefits and small suppliers, I think there is a benefit to a
country from bringing in modern retailing because you then bring
in the know-how, the IT and the better distribution centres. The
big distribution centre we have got in Thailand has led to huge
efficiencies and this actually helps the economy and helps the
economy to grow and therefore helps people to have higher incomes
and bring down prices, but in relation to overseas assistance
from the government that is not normally a criteria for us in
choosing where to invest. What we would typically do is research
a market to see what it is like, to see whether the sort of things
we are able to offer consumers will be popular in that market
and that we have got a complete understanding. In Japan we had
people living in Japanese households because it is a very unusual
market just to see what it would be like. We then see if we can
build a significant business of scale in a country and that will
depend on how big it is, what the population is, what the disposable
incomes are like and, in a way, what the political and legal system
is like, whether it is reliable and whether it is not going to
be liable to huge and sudden changes of a difficult kind. I think
things like local incentives would come quite a long way down
the line after that. We would not essentially be setting up on
the back of subsidies. We would be setting up very much on the
back of opportunities in the market.
Q145 Linda Perham: I notice you are called
Tesco Lotus in Thailand and in Malaysia you have the joint venture
with Sime Darby.
Ms Neville-Rolfe: Yes.
Q146 Linda Perham: Did you have to do
that because when we went to China it seemed to be you had to
be in a joint venture? At least that was the situation two years
ago when we visited there. Did you have to do that to operate
in those countries?
Ms Neville-Rolfe: You do not have
to do it. I think in Malaysia they like you to do it but actually
we like to have a joint venture. It is quite unusual because it
does require different skills but because retailing is local we
think it is very advantageous to go in with a local partner and
then they can help you to understand what is right for that country,
to hire the right people, to train them in the correct way. Although
some countries require joint ventures as long as you have a fair
degree of control over the things that matter—the operations,
where you would site the stores—that is extremely valuable.
Q147 Linda Perham: Mentioning the inquiry
we made into trade with China and Taiwan, we also went to Hong
Kong and we were told that many UK companies still found it easier
to do business in Hong Kong than on the mainland because of the
common tradition of commercial law, the legal certainty provided
by the court system, and the congenial business culture in Hong
Kong. Were those factors relevant to you or British companies
in general as far as you know considering establishing in South
East Asia?
Ms Neville-Rolfe: Clearly political
and legal stability are important to us. That was one of the reasons
why we have chosen the countries that we are in. Obviously it
is a little bit different to Hong Kong. Hong Kong is a very small
place so it would not fit our other criteria. I think as time
has gone on there has been a change. You have probably been to
Shanghai. It is an amazing, modern city, more like an American
city than many ASEAN cities, it is quite extraordinary. Things
are changing and we are obviously trying to look ahead and see
where are the opportunities, where are consumers going and can
we create a business around that that will work.
Q148 Judy Mallaber: What sort of bureaucratic
problems have you had in establishing and maintaining businesses
in South East Asia? Particularly I was wondering whether planning
regulations pose particular problems for foreign retailers but
any other issues around regulation that you find difficult would
be interesting to know about.
Ms Neville-Rolfe: I think our
working assumption is that there will always be regulatory issues
and planning issues in retailing. We have learnt to, I would not
say love, but we have learnt to live with those in the UK, and
our approach is where there are regulations you need to work with
the grain of those and be innovative around them. In a way when
we moved into Thailand and they started to look at things like
zoning regulations you would perhaps prefer not to have them but
you understand where they are coming from and you then try to
work with the local planners to get the property. The answer is
that in most of the countries we have operated in there are planning
controls, there are regulatory controls, and part of the team
that you have to put together is a team which understands how
to deal with these and how to cope with them. Actually it is one
of the things that the British Government can help businesses
with, especially when they are new, small ones as well as big
ones, to see their way round some of the regulatory issues and
complications.
Q149 Judy Mallaber: How easy are they
to deal with? How does it compare with setting up a new Tesco
site in this country? How do South East Asian countries compare
with each other in terms of the level of bureaucratic imposition
and regulation?
Ms Neville-Rolfe: They are different
because the culture is different. Probably the planning system
does not have such long delays as the British system but in some
of the countries—Malaysia—there are rather more uncertainties
about it, but that is partly a function of the fact that you have
not been there very long so you do not know quite how to do it,
which is another reason why we have joint venture partners.
Q150 Judy Mallaber: Are the countries
we are talking about very similar?
Ms Neville-Rolfe: No, they are
all very distinct and they are very different.
Q151 Judy Mallaber: Is one of the countries
that you are dealing with more difficult than another? Does that
influence where you go?
Ms Neville-Rolfe: I think, as
I was saying, political stability and legal certainty is important
but the main criteria for us going places will be around the income
prospects, the consumer prospects, is it a big enough market,
can we move into it. I am just trying to think of a market where
we have been put off by the regulation and I cannot think of one.
We would regard it as something that is important for us to deal
with but we probably would not look at a country that did not
have some proper legal system.
Q152 Chairman: Just a small point. When
you were in these bureaucratic minefields, as it were, how did
you get through them? Was there anyone to guide you or did you
just use a stick to prod ahead and see what was there? Did you
have people give you advice and assistance?
Ms Neville-Rolfe: In some cases
we were lucky in that we had a joint venture so there were some
people there ready. Otherwise you have to hire local people who
are skilled in regulatory issues and legal issues. As with any
other problem, you sit down, you discover you have got these bureaucratic
problems, you work out who you have got in the team and who can
help you to do it. Sometimes the British embassies have been very
helpful to us. Sometimes fellow investors can be helpful. Sometimes
you meet other investors in the chambers of commerce, or partners
can assist you. Suppliers can actually assist you sometimes as
well. We have done a lot of working with suppliers to try and
get new products for the stores and they sometimes know quite
a bit about the regulatory issues. Perhaps I am making it sound
too easy. To some extent it is an attitude of mind that you have
got to sit down and work out these regulatory issues. It may be
more difficult in other sectors.
Q153 Mr Berry: Given the need to understand
the local market and given the very local planning and regulatory
issues that arise, is it really conceivable for a UK company to
invest in Thailand and Malaysia without a local partner? Do these
considerations not seem to suggest that having a local partner
does have enormous advantages and without one—?
Ms Neville-Rolfe: In our sector,
and I can only speak for our sector, we think that local partnership
is extremely valuable. There may be other sectors where you can
do it without a local partner. There are service companies who
can help you. The lawyers have been hugely helpful to us—and
sometimes they are legal firms we have employed in these countries—in
explaining to us how you get the necessary foreign investment
permits and all those sorts of things. So I think it would be
wrong to say that everybody has got to have a local partner and
you do need to find the right local partner and you need to invest
in the relationship with the local partner while you are with
them, so it has got to be complementary.
Q154 Mr Berry: Is it an advantage in
terms of the perceptions of the consumer so that in Thailand you
are linked very clearly with a local company and people feel that
they are therefore buying from—
Ms Neville-Rolfe: I think people
need to understand it is a local business so our approach of not
having a lot of expats is very helpful. The fact this was a joint
venture partner is less important than the fact that it was seen
to be Thai and seen to be investing. In Ireland we are Tesco Ireland
and we have got more and more Irish people in the business and
that seems to have improved business since we have done that.
Q155 Mr Berry: What about the logistics?
For a retailing organisation clearly getting your suppliers is
pretty crucial?
Ms Neville-Rolfe: Absolutely.
Q156 Mr Berry: Presumably a fair proportion
of food items in particular will be sourced locally? What is the
picture in Thailand and Malaysia?
Ms Neville-Rolfe: In Thailand
and Malaysia the vast majority will be sourced locally. Going
forward there may be more scope for exports and imports between
the different countries but you would mainly work with the suppliers
in the country in question. There are a few exports from, say,
Malaysia, a lot of rubber gloves I believe. It is rather nice
because of course Sime Darby was originally a rubber business.
So there is a little bit of that but it is mainly about understanding
and working with locals. Multinationals are there as well in Thai
business. There are 50 multinationals who service us but even
someone like Unilever will tend to have a local operation to serve
us locally, but they will use their skill from the learnings round
the globe to make the business better in that country.
Q157 Mr Berry: What proportion of your
sales would be locally sourced? Presumably a large proportion
of non-food items would be imported?
Ms Neville-Rolfe: Some of them
will come obviously from places like China where we are getting
goods for the UK business. I would have to see if I could find
you a figure to be exact but on the food side it would be well
into the 90s.
Q158 Mr Berry: On the whole there are
no particular logistics problems that arise in those two markets?
Ms Neville-Rolfe: Thailand itself
is a huge country so you have got the logistics issue of how do
you bring in suppliers, how do you in fact encourage new suppliers
in different parts of Thailand and get them to come into the business,
and that is one of the reasons we have invested both in Thailand
and now in Korea in a state-of-the-art distribution centre which
has obviously been highly welcomed by the countries because of
the improvements that those have created. That means that rather
than having, as I remember in Central Europe when we were first
there, rows of lorries out the door and round the roundabouts
coming in, once you have got centralised distribution you can
manage and time things much better.
Q159 Mr Berry: When I was last in Bangkok
a taxi driver said, "If you want to buy fakes do not go round
the corner, I sell the real fakes," which meant that he had
the high-quality fakes. Counterfeiting is pretty endemic in certain
parts of the world. Do you have a counterfeiting problem in Thailand?
Ms Neville-Rolfe: We work at it.
We have good relationships obviously with the suppliers and try
to always source reputable stuff.
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