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The Strategic Localization of Transnational Retailers: The Case of Samsung-Tesco in South Korea

Posted on: Thursday, 30 March 2006, 09:00 CST

By Coe, Neil M; Lee, Yong-Sook

Abstract:

This article contributes to the small but growing geographic literature on the internationalization of retailing by exploring the strategic localization of transnational retailers. While it has long been recognized that firms in many different sectors localize their activities to meet the requirements of different national and local markets, the imperative is particularly strong for retail transnational corporations (TNCs) because of the extremely high territorial embeddedness of their activities. This embeddedness can be seen through the ways in which retailers seek to establish and maintain extensive store networks, adapt their offerings to various cultures of consumption, and manage the proliferation of connections to the local supply base. We illustrate these conceptual arguments through a case study of the Samsung-Tesco joint venture in South Korea, profiling three particular aspects of Samsung-Tesco's strategic localization: the localization of products, the localization of sourcing, and the localization of staffing and strategic decision making. In conclusion, we argue that the strategic localization of transnational retailers needs to be conceptualized as a dynamic that evolves over time after initial inward investment and that localization should be seen as a two-way dynamic that has the potential to have a wider impact on the parent corporation.

Key words: global production networks, retailing, South Korea, Samsung-Tesco, strategic localization, embeddedness.

There is growing recognition that the internationalization of retailing is a phenomenon that requires urgent attention from economic geographers (Coe 2004; Wrigley 200Oa). While internationalization processes in this sector are not new-dating back as far as the end of the nineteenth century (Alexander 1997)- the events of the past decade and a half have greatly accentuated the need for geographic research in this area. The period since the early 1990s has seen the emergence of a select group of transnational food and general merchandise retailers that have used aggressive merger and acquisition activities, backed up by subsequent rapid organic growth, to assume dominant market positions across Latin America, East Asia, and Eastern Europe. Concomitantly, these retailers have dramatically increased both the scale and scope of their international sourcing operations, establishing regional and, in some cases, truly global sourcing operations for their home and foreign store operations alike. With these two interlinked dimensions of internationalization-stores and sourcing-retailing represents an important component of the broader processes of economic globalization that have so preoccupied researchers across the social sciences in recent times.

Table 1

Leading Transnational Retailers, by International Sales, 2003a

The transnational retailers in question are introduced in Table 1, which profiles the leading 15 retailers ranked by the value of their foreign sales in 2003. It reveals that no fewer than 14 retailers derived over $10 billion in revenue from their international operations in that year, with many having store operations in over 15 countries. Although it is important to note that many of these companies still depend to a great extent on their home market (only 5 derived over 50 percent of their revenues from international markets), a dynamic view would reveal a rapid growth in the relative importance of international sales in many of these firms. It is interesting that, with the exceptions of Wal-Mart (the largest retailer in the world by far) and the fifteenth-ranked Japanese company Ito-Yokado, the remainder of these leading transnational players are Western European. In comparison to retailers from the United States, which can achieve a huge size from the domestic market alone, these retailers have a more significant tradition of international expansion in their home region of Western Europe (although see Fletcher and Godley 2000). Now, however, these firms have turned their attention to a range of so-called emerging markets.

While geographers are only now recognizing the importance of the activities of these firms, there is a well-established body of work on retail internationalization in the business studies and marketing studies tradition (for key examples, see Corstjens and Corstjens 1995; McGoldrick and Davies 1995; Akehurst and Alexander 1996; Alexander 1997; Sternquist 1998; Dawson, Mukoyama, Sang, and Larke 2003). This literature has provided a range of important insights into the motives behind international expansion and the mechanisms and strategies that retailers use to penetrate foreign markets. That being said, there are a number of important limitations to how far this work can help conceptualize the events of the past 15 years. First, the literature has been largely firm centric, with less emphasis on the mutual interactions between transnational retailers and the regulatory, institutional, and political contexts in which they are operating. second, there is a tendency to conceptualize the internationalization process of a firm (or group of firms) in general terms (e.g., as "aggressive" or "cautious"), rather than as a complex set of processes that are temporally and spatially variable across different activities within firms. Third, somewhat understandably, work has thus far been preoccupied with market entry strategies and has looked less at what happens after entry and the wider impacts of those dynamics. The contention of this article is that research on retail internationalization would benefit from adopting an explicitly economicgeographic approach that places due emphasis on spatial and temporal complexity, the importance of both home and host political and institutional contexts, and the developmental impacts for host economies. More specifically, the adoption of a global production networks (GPN) approach is advocated (Henderson et al. 2002; Coe et al. 2004).

This approach provides the conceptual framework for the analysis of a particular instance of retail internationalization in this article, namely, the joint venture between the United Kingdom's leading food retailer-Tesco1-and Samsung in South Korea. Initiated in 1999 in the aftermath of the Asian economic crisis of 1997 to 1998, the venture had some 38 "Homeplus" discount stores, accounting for 3.2 million square feet of selling space, by early 2005 (with another 31 new store openings planned by early 2006) and was vying for market share in competition with both local retailers (primarily E-Mart and Magnet) and other transnational retailers (especially Carrefour and Wal-Mart) as part of a broader restructuring of Korean retailing toward larger formats. More specifically, the aim of the analysis is to explore how Samsung-Tesco has gone about developing its operations in South Korea since its initial entry. While in some areas the company has been integrated into Tesco's broader corporate structures (which we term "network embeddedness"), in general, Tesco's strategy in South Korea is best characterized as one of "strategic localization." This term reflects how several aspects of the firm's activities have been intentionally localized to meet the needs of the political and institutional frameworks, industrial structures, and cultural norms and expectations of the South Korean market (a series of dynamics here termed "territorial embeddedness"). This is not the same as saying that Tesco will pursue the same kind of strategic localization approach in all its international territories. Instead, it is important to think in terms of different degrees of both network and territorial embeddedness for different realms of corporate activity in and between different country operations.

The remainder of this article proceeds in five sections. First, the global production network framework is introduced as an antidote to the deficiencies of the prevailing management/business studies approaches to transnational retailing. Two background-context sections then follow. The first charts the rapid growth of transnational retailing over the past decade and positions Tesco within that terrain and the second profiles the nature and structure of retailing in the Korean context and introduces Samsung-Tesco. Then, the nature of Samsung-Tesco's strategic localization in South Korea is profiled, including an analysis of the three key elements of SamsungTesco's localization-namely, the localization of product designs, sourcing, and staffing/strategic decision making. The concluding section considers the wider implications of our case study for future research on transnational retailing. Our study of Samsung-Tesco is based on a mixture of primary and secondary sources. In-depth interviews were conducted with three managers from Samsung-Tesco in May and June 2002. This material is supported by a quantitative analysis of Samsung-Tesco's suppliers, site visits, and longitudinal data from annual reports, company documents, and the business press.

Conceptualizing Global Production Networks in Retailing

As we noted earlier, since the mid-1980s, a substantial body of work in the marketing/business studi\es tradition has explored certain aspects of the internationalization of retailing. Coe (2004) critiqued this literature from an economic-geographic perspective. On one level, this body of work can be characterized as inward looking and seemingly keener to emphasize the particularities of retail internationalization than to engage in broader conceptual and theoretical debates about the nature of economic globalization more generally. On another level, there are a number of substantive gaps in the coverage of this literature, gaps that could usefully be tackled using the broader economic geography literature on the processes of transnational production. Coe identified six such areas in his analysis, all of which will subsequently be elucidated- albeit to different degrees-in the case study of Samsung-Tesco in South Korea.

First, rather than focusing solely on international store operations, work on transnational retailing needs to adopt a holistic perspective that considers both store and sourcing operations. It is important to do so because while both are increasingly coordinated at the international scale, there are important two-way functional connections between the geographies of stores and sourcing (i.e., stores following international sourcing networks, sourcing following international store operations). second, although the literature has tended to be concerned with the point of entry into a foreign market, more studies are required that profile the internationalization of retailing as a temporally and spatially dynamic process (e.g., Clarke and Rimmer 1997; Wrigley 200Ob). In temporal terms, work is needed that charts the waxing and waning of transnational retail operations post-entry (Bianchi and Arnold 2004; Alexander, Quinn, and Cairns 2005). In spatial terms, research needs to explore the way in which retailers use different strategies for different activities and how these strategies, in turn, vary across different territories. Attempts in the marketing literature to explain retailers' growth through "differential advantages" that are based on ruthless cost control and the implementation of own-brand goods are instructive (e.g., Corstjens and Corstjens 1995), but they do not explain the geographic variation in retailers' strategies. What is important in the context of this article is that a single retailer, such as Tesco, will not have a single, standardized internationalization strategy, but will strategically vary the nature of its investments and activities- and, most centrally, the degree of adaptation of the home country model-depending on the host country in question (Coe 2003).

Third, it is important that research reveals the organizational and technological infrastructures through which transnational retailers facilitate international expansion. In particular, the systems through which retailers capture and transfer different forms of retail knowledge merit further exploration (Currah and Wrigley 2004; Palmer and Quinn 2005). Fourth, work by geographers on corporate and organizational cultures (e.g., Schoenberger 1997; Shackleton 1998) could usefully be brought to bear on the activities of retailers and to consider the success (or not) of international expansion patterns enacted largely through mergers and acquisitions. Fifth, while many analyses of retail internationalization have been concerned with developing checklists of generic push-and-pull factors that may drive the processes (for a summary, see, e.g., Alexander 1997; Sternquist 1998), the internationalization process is more profitably conceptualized as a set of situated network connections that are shaped by, and constitutive of, the political and institutional contexts that they connect (see, e.g., Marsden and Wrigley 1996). Finally, there is a whole research agenda to be developed on the multifarious developmental impacts of transnational retailing in host countries. Four broad areas of impact can be delimited: the impacts of competitiveness on domestic retailers, changes in consumption practices in host countries, impacts on regulatory frameworks, and impacts on supply chain restructuring (for more details on these impacts, see Coe 2004; Dawson 2003; Wrigley and Currah 2004; Coe and Hess 2005).

The argument of this article is that the spatially and temporally complex dynamics just alluded to are best tackled using a flexible, geographically infused "network" approach to transnational retailing that, at the same time, accords a full and active role to political and institutional contexts. The GPN approach needs to be understood in the context of a broad range of "chain" and "network" approaches to economic globalization that have appeared over the past 20 years or so (for a full explication of the antecedents of the GPN approach, see Henderson et al. 2002; Coe et al. 2004). In particular, the GPN approach draws upon and seeks to extend two bodies of work. On the one hand, emerging from the development studies tradition is the notion of the global commodity chain (GCC) (e.g., Gereffi and Korzeniewicz 1994)-interorganizational networks that link households, firms, and states across the global economy. Each GCC has four interrelated dimensions: an input-output structure, a territoriality, a governance structure, and an institutional framework. While an impressive body of work has been produced since the concept's initial formulation, it has several clear limitations (Henderson et al. 2002), two of which are particularly relevant here. First, the approach has proved relatively weak at revealing the ways in which firm networks link together, and are constitutive of, societies with different social and institutional frameworks. second, and relatedly, the approach has not fully considered the impact of firm ownership patterns, particularly how firms of different nationalities may adopt various organizational structures and strategies.

On the other hand, emerging from investigations on the sociology of scientific knowledge, actor-network theory (ANT) is an approach that emphasizes how entities in networks are shaped by, and can only be understood through, their relations and connectivity to other entities (e.g., Law 1999). For the study of transnational production systems, the implication is that space and distance have to be seen not in absolute terms, but as interrelations of influence, power, and connectivity (Murdoch 1998). ANT also involves a rejection of traditional binaries, such as structure-agency, and recognizes that nonhuman forms (especially technologies) are a key component of network forms. ANT offers an interesting methodology and indeed has been directly applied to the study of transnational production networks (e.g., Whatmore and Thorne 1997). However, the contribution of ANT to the study of globalization is ultimately limited by its downplaying of the structural preconditions and power relations that, in effect, provide the "rules of the games" for the formation and operation of production networks.

Further insights are derived from approaches that emphasize the particularities of what are variously called "national business systems" (Whitley 1999), "varieties of capitalism" (Boyer and Hollingsworth 1997), or "welfare state regimes" (Esping-Anderson 1990). The argument presented here is that different societies exhibit significant social and institutional variation-owing to differences in culture, polity, educational system, financial regulations, and so on-and therefore embody different welfare regimes, labor market practices, and capacities for state economic management. These variations will, it is posited, leave a distinctive imprint on the elements of production networks that are located in particular national territories. Ultimately, however, when undertaking research on production networks, it is necessary to steer a delicate path between overemphasizing the transformative effects of transnational corporations in the economies where they invest and overstressing the extent to which national conditions shape their operations in particular countries. Instead, the aim should be to explore the (often gradual) mutual transformation of both the firms and the places in which they are embedded (Dicken 2000).

Accordingly, the GPN framework emphasizes the complex intra-, inter-, and extrafirm networks that are involved in the delivery of any product or service and how these networks are structured both organizationally and geographically at a variety of spatial scales. Through the consideration of extrafirm networks, the approach necessarily brings into view the broad range of nonfirm organizations-for example, supranational organizations, governmental agencies, trade unions, employers' associations, nongovernmental organizations, and consumer groups-that will (or may) shape the activities of firms in the particular locations absorbed into GPNs. Broadly, then, we define global production networks as the globally organized nexus of interconnected functions and operations of firms and nonfirm institutions through which goods and services are produced and distributed. The operationalization of the framework depends on the analysis of three interrelated variables. First, processes of value creation, enhancement, and capture are scrutinized. second, the distribution and operation of power of different forms within GPNs is considered. Third, the embeddedness of GPNs-or how they constitute and are reconstituted by the economic, social, and political arrangements of the places they inhabit-is investigated.

In the context of this article, it is important to explore the notion of embeddedness in more detail. Following Hess (2004), we identify three specific yet interrelated forms of embeddedness within the GPN framework. The first is societal embeddedness. This form signifies the ways in which actions are shaped by the cultural, institutional, and historical origins of the organization or in\stitution in question. As such, it relates most closely to Polanyi's (1944) original conception of embeddedness and is the one that is most frequently mobilized for explanatory purposes in the varieties of capitalisms literatures introduced earlier (e.g., Whitley 1999). For example, when a company invests overseas, it takes with it some of the social and cultural attributes that it has acquired in the process of its evolution within the context of its home base. These attributes can include attitudes toward labor- management relations, working conditions and welfare benefits, how supplier networks should be organized, and the appropriate role for host-country governments in the business environment. The second, network embeddedness, refers to the network structure, the degree of functional and social connectivity within a GPN, the stability of its agents' relations and the importance of the network for its participants. In addition to interfirm relations, network embeddedness also takes account of the broader institutional networks, including nonbusiness agents (e.g., governmental and nongovernmental organizations, such as trade unions) that are often involved. It highlights the connections between heterogeneous actors that constitute a GPN (i.e., organizations and individuals), regardless of their location, and is therefore not restricted to one geographic scale. The third form, territorial embeddedness, deals with the various GPN firms' "anchoring" in different places. GPNs do not merely locate in particular places; they may become embedded there in the sense that they interact with and, in some cases, become constrained by the economic activities and social dynamics that already exist in those places. This "anchoring" will reflect a firm's dependence on the particular resources, labor markets, state policies, and so on that are found in particular places. A key element of territorial embeddedness is the extent and nature of the relationships that are formed between transnational corporations and local firms.

We now move on to consider how the GPN approach may profitably be applied to transnational retailing. Any such discussion must start with a recognition of the considerable ongoing power shifts between retailers and suppliers in the home markets of Western Europe and the United States. Perhaps the best-documented changes have been in the U.K. grocery market, where research has clearly revealed how, in the 1980s and early 1990s, concentration and growth in the major food retailers overtook that of manufacturers (e.g., Wrigley 1993; Doel 1996; Hughes 1999). Through both organic growth and mergers and acquisitions and facilitated by a permissive regulatory environment, a handful of national supermarket chains-most notably Tesco, Sainsburys, Safeway, and Asda-grew to dominate food retailing in the United Kingdom, a trend that has continued to the present day. The increased scale and capitalization of these retailers has created an oligopsonistic environment in which the balance of corporate power has tilted decisively away from suppliers, manufacturers, and supply network intermediaries (e.g., wholesalers) in favor of retailers. While a large retailer may account for 10 percent to 20 percent of total sales for a manufacturer, the same manufacturer might account for only 1 percent to 2 percent of the retailer's sales.

In the context of their supply networks, retailers are able to bring together five different but interrelated types of controls (Munson, Rosenblatt, and Rosenblatt 1999; Wrigley and Lowe 2002). First, as huge buyers with extensive access to final consumers, retailers are able to exert pricing control on suppliers (Morelli 1999). In many cases, pricing control extends well beyond bulk discounts, covering a range of noncontracted payments for the "privilege" of having a product on the shelves of a retailer (Blythman 2004). second, increased capitalization has allowed retailers to take control of their own distribution and logistics systems. Retailers can use inventory controls to pass the risk and responsibility for unsold stock to suppliers through just-in-time and inventory management systems. Third, operations control is revealed in the way that retailers increasingly dictate the specifications of the products they require and when and how the products are produced. For example, retailers have been able to introduce and then rapidly expand the sourcing of own-label goods over which they have an extremely high degree of supply network control (Morelli 1999). Fourth ,'retailers possess channel structure control, through which they can deliberately intervene to alter the ownership, length, breadth, and geography of supply networks through their purchasing strategies. Fifth, asymmetric information control about the supply network as a whole is another source of retailer power vis--vis suppliers. Taken together, these retailer-supplier power relations strongly influence the value dynamics in the networks as a whole. While retailers are increasingly looking to suppliers to undertake processes of value creation and enhancement (e.g., packaging and labeling), through the power and control mechanisms described here, retailers are able to dominate in terms of value capture.

This general model of power and value dynamics in retail GPNs needs to be complicated in two key respects, however. On the one hand, the nature of the supplier-retailer relationship will play out differently, depending on the relative concentration of both the retailing and manufacturing sectors that are concerned (Ogbonna and Wilkinson 1998; Fine and Leopold 1993). For example, large competitive manufacturers that offer a range of products to a number of retailers with some strong brands may be in a relatively strong position to bargain with large retail chains. Equally, small firms that are producers of unique or high value-added products or are dominant in particular geographically localized markets may also have relatively strong negotiating positions (Foord, Bowlby, and Tillsey 1996). In contexts that are characterized by vertically integrated business groups that are involved both in manufacturing and retailing (such as South Korea), manufacturers remain in a relatively strong position. There is, then, clearly a need to qualify simple notions of buyer-driven supply networks, since there is a great variety of different forms of manufacturer-retailer relationships. Equally, not all researchers cast these dynamics in an entirely negative light, choosing instead to emphasize the shift toward closer, more "associative" relationships (Dawson and Shaw 1990) that may underpin some of the supplier management mechanisms described earlier (see Fernie, Fernie, and Moore 2003, chap. 7).

On the other hand, when one considers the foreign activities of retail transnational, power and value relations need to be intersected with the variable embeddedness of the operations in host economies. Clearly, the foreign activities of transnational retailers will be shaped to some degree, by their societal embeddedness in the home market, reflecting nationally specific buyer-supplier cultures and regulatory influences. In addition, retailers will develop their own organizational cultures that reflect not just their home-country origins, but also the particular management and internationalization strategies of the firms in question (see Hughes 1996; Shackleton 1996,1998). It is important to note, however, that power and value relations will also be heavily inflected by the balance of network and territorial embeddedness that the transnational retailer uses in host economies.

In general, transnational retailing is highly territorially embedded in comparison to almost every other sector of the global economy because of several important characteristics of the core activity (Wrigley, Coe, and Currah 2005). First, since they require an extended network of stores, retailers are intricately connected to the property markets and planning systems of host countries. second, because consumption is clearly a sociocultural process as much as it is an economic interaction, retailers need to be responsive to local cultural tastes, norms, and preferences. Third, even where an element of regional or global sourcing exists, food retailers, in particular, still source the vast majority of their products from within the national territory that they are serving. The retailer is therefore intimately intertwined with the local supply base and logistics infrastructure. As a result, all transnational retailers adapt or "strategically localize" their operations, to some degree, in host economies. This is particularly the case where international expansion has taken place through merger and acquisition, or joint venture, activities, in which different organizational cultures are necessarily brought together to create new "hybrid" corporate cultures. As Shackleton (1996, 139) wrote, "the post-acquisition period is shown to be characterized by a series of power struggles as the corporate cultures contend for supremacy," and the successful management of this integration process may be a key determinant of market success. Relatedly, Bianchi and Arnold (2004), drawing on institutional theories, described how localization is critical to achieve "organizational legitimacy" in host markets in both the sociocultural (consumption trends, family structures, and understandings of corporate responsibility) and economic domains (relations with suppliers, competitors, and consumers).

The extent of this localization will vary between firms. Some firms will endeavor to draw heavily on their network embeddedness in transnational intrafirm relations to offer a standardized operation across different markets-characterized by Wrigley (2002) as the "aggressively industrial" model. Others will adopt a more decentralized "intelligently federal" approach that is mor\e heavily territorially embedded. A key argument of this article is that the balance of territorial and network embeddedness will also vary within a firm and between the different activities of the firm. We argue that Tesco has followed a relatively more territorially embedded model in the South Korean context than in its other foreign markets (e.g., Thailand and Eastern Europe). While Samsung-Tesco draws on its network embeddedness in Tesco's global operations (e.g., for certain information technology and logistical systems), most aspects of its activities are strategically localized to meet the specific characteristics and needs of the South Korean market and its business, political, and consumer cultures. From the viewpoint of a multiscalar GPN perspective, such insights indicate the vital importance of the national scale in processes of retail globalization.

The Emergence of Transnational Retailers and the Internationalization of Tesco

As we noted earlier, retail internationalization is not a new phenomenon, and its nature and intensity have varied since its initiation in the late nineteenth century. Alexander (1997) showed that, as in many sectors, retail internationalization has accelerated significantly since the 1960s and was until the 1990s, largely dominated by investments within and between the leading economies of North America, Western Europe, and Japan. Alexander identified the period from 1989 to 2000 as being characterized chiefly by "regionalized" expansion by American and European retailers, shaped, in part, by the European Single Market and NAFTA, but also the initial opening up of new markets in Eastern Europe and East Asia. However, it has become apparent that Alexander's final period of "regionalization" has been superseded and overtaken by rapid global expansion from the mid- to late-1990s onward. The initial investment tendencies toward Eastern Europe, East Asia, and Latin America that Alexander identified in the early- to mid-1990s have become the key geographic dynamic in this new phase.

Within the business/marketing studies literature on retail internationalization, several different approaches to explaining the phenomenon have been adopted. Several studies have sought to detail exhaustively the broad range of "push" and "pull" factors, both company specific and "environmental," that may be involved in the retailers' decision to internationalize (see Wrigley and Lowe 2002 for a critical review). Such lists can provide only a general background to events, however. Another strand of work has used so- called stages theories to explain gradual processes of overseas expansion into culturally and/or geographically proximate countries in terms of the accumulation of experience and expertise of internationalization (e.g., Vida and Fairhurst 1998). This approach struggles, however, to account for the rapid recent expansion into nonproximate countries by leading transnational retailers. Other scholars have mobilized Dunning's (1993) well-known eclectic paradigm, with its emphasis on ownership, location, and internalization advantages (e.g., Sternquist 1998). Again, such accounts tend toward description, rather than contextualized explanation. Overall, none of these approaches can satisfactorily explain the rapid rise of a small group of truly transnational food retailers since the mid-1990s.

A more convincing political-economic account has emerged from the work of Wrigley (200a). In Wrigley's analysis, rapid international expansion since the late 1990s has not simply been a defensive reaction to overdependence on the home market, but has also been fueled by a need to sustain earnings growth (and therefore equity valuations) by using free cash flow to secure revenue growth. Pressure from home-country financial institutions to secure profits and dividends is thus a significant factor. The emerging markets offer several important opportunities in this respect: potentially rapid economic development and rising levels of affluence, consumer spending and retail sales, in combination with low levels of penetration of Western forms of large store retailing and associated distribution systems. Prior to investment, the majority of retail sales in these markets were usually in the hands of small independent retailers or informal retail channels. After entering through either merger and acquisition or joint venture activity, leading transnational retailers have been able to use their scale, lower costs of capital, and advanced distribution and logistics systems to obtain rapid revenue growth and high capital returns. Rapid organic growth-sometimes combined with subsequent acquisition activity-has proved possible because the costs of site acquisition and store construction are relatively low and existing retailers are often inefficient in comparison. This kind of account is much more revealing as to why transnational retailers have chosen to invest in particular groups of Eastern European, East Asian, and Latin American economies. Within the broad regional trends, however, the particular form and method of international expansion will be highly shaped by particular national factors, as we shall show in the case of South Korea.

Leading these trends are a small group of what Currah and Wrigley (2004) termed "proto-global" retail transnational corporations, most notably Wal-Mart, Ahold, Carrefour, and Tesco. This label reflects not only their position in the ranking shown in Table 1, but also their rate of international growth and level of strategic commitment to internationalization. Thus, while Tesco ranks only fourteenth in Table 1, in dynamic terms it is one of the fastestgrowing retail transnational corporations in the world. The extent of Tesco's internationalization by the end of 2004 is shown in Figure 1. In the 10-year period of 1994 to 2004, Teseo entered 12 foreign markets, comprised of Ireland, 5 countries in Eastern Europe-including most recently Turkey, in 2003, through the acquisition of the Turkish hypermarket chain Kipa-and 6 in East Asia. Significantly, Tesco has recently entered the Japanese and Chinese markets. In 2003, the company undertook a $240million acquisition of the C Two-Network (a Tokyo convenience store chain), a purchase augmented in April 2004 with buying the ailing Fre'c convenience store chain ("Tesco Buys Bankrupt Japanese Store Chain" 2004). In 2004, entry into China was secured through a $240-million, 50-percent joint venture investment in Hymall, a Ting Hsin subsidiary that runs 25 hypermarkets, concentrated mainly in the relatively affluent cities of China's east coast ("Tesco in 140m China Venture" 2004). Overall, according to Palmer (2005), Tesco's internationalization strategy has been "regional," rather than "global," with the desire to retain a spatial focus on Europe and East Asia, and entry has been facilitated by reacting to opportunistic events in particular markets. While Palmer (2005, 30) suggested that markets have been chosen where local competition is "virtually nonexistent," this characterization does not apply in several Asian markets, including Japan, China, and, as we shall show, South Korea.

Overall, in terms of store numbers, employees, and turnover, Tesco's profile is still dominated by its vast U.K. operations. Static snapshots, as shown in Figure 1, do not do full justice to the speed with which Tesco's foreign operations are growing, however. The turnover from Tesco's foreign stores increased from just $917 million in 1996 to $11,732 million in 2005. Growth in Asian sales was particularly significant, increasing from zero in 1998 to $5,172 million by 2005. In terms of operating profits, the international contribution grew from $19 million in 1996 to $639 million by 2005(2) (data from annual reports for various years). Again, the Asian element was notable, with profits being returned just two to three years after entry and reaching $265 million by 2005. International expansion has seemingly accelerated since 2000. As Table 2 illustrates, the period from 2000 to 2005 saw Tesco's international operations expand from 10 percent to 20 percent of group turnover, from 5 percent to 18 percent of operating profit, and from 30 percent to 53 percent of total sales area. These are remarkable growth rates for any transnational corporation, and all the indications are that these dynamics are set to continue in the immediate future. Table 3 charts Tesco's growth in East Asia post- 2000 in more detail. As of early 2005, the company had almost 300 stores in the region and 13.2-million square feet of selling space. Thailand and South Korea were by far the most important national markets, with Thailand leading the way in both the number of stores and floor space. South Korea is a considerable operation, however, accounting for about one quarter of Tesco's selling space in East Asia.

Figure 1. The global distribution of Tesco stores, 2004. Source: Teseo (2005).

The Changing South Korean Retail Environment and the Emergence of Sanisung-Tesco

Since the mid-1990s, the high demand for modern shopping environments in South Korea has been growing because of rapid economic growth and rising levels of affluence. Prior to 1996, the South Korean retail market was essentially closed to foreign retailers owning to very strong protectionist policies. There were no foreign-owned stores in South Korea until 1995, and the distribution industry had remained relatively undeveloped. Small, traditional shops-so-called mom-and-pop stores3-still commanded about 80 percent of Korea's retail market ("Foreign Discount Stores Galvanize Distribution Industry" 2004). However, since the mid- 1980s, the South Korean government has been gradually changing its external economic policy from a protectionist orientation toward a more liberalized stance because of the increasing internal and external pressure for deregulation.4 In this ongoing deregulation proce\ss, a significant number of previously restricted service sectors were opened by early 1995, and the South Korean distribution market was significantly deregulated on 1 January 1996 with the abolishment of regulations on floor space and number of shops (S. C. Choi 2003).

Table 2

The Increased Importance of Tesco's International Operations, 2000-2005

Table 3

Tesco's Expansion in East Asia, 1999-2005

Despite the deregulation in the South Korean retail sector in 1996, however, the South Korean retail market was still an extremely difficult environment for foreign retailers to conduct business. One of the biggest barriers to foreign retailers' entry into the South Korean market was the extremely high price of real estate assets and the rental system, which required retailers to pay upfront approximately 70 percent of a property's value as rent-typically for a one-year lease ("Demand for Modern Shopping Centers" 2001). However, the Asian financial crisis of 1997-98 offered opportunities for foreign retailers to acquire retail and real estate assets at relatively cheap prices because of the devaluation of the South Korean currency. The crisis also made the South Korean customers- especially the middle classes who had become used to "conspicuous" consumption in department stores in the 1990s-more price conscious, and this shift accelerated the expansion of discount stores, which provide a wide range of low-cost goods and high levels of service. These discount stores, which are called Harin in Korean, include discount stores, supercenters, hypermarkets, wholesale clubs, and outlet malls and are run by both foreign retailers and Korean local retailers (S. C. Choi 2003). According to the Distribution Industry Development Law, these Harin stores generally have a floor space of over 3,000 square meters (909 pyung) (Yun and Koh 2003), and they can be characterized as follows:

The typical hypermarket or discount store in Korea is arranged over multiple floors, often two or three floors, with a food/ grocery floor, a non-food floor and a food service offer on a third floor. Non-food is merchandised in a "department store" environment, while food areas focus strongly on bakery, produce, meat and fish with extensive in-store labour used to promote trial and product sampling, making for a noisy and exciting shopping experience. (IGD 2004, 76)

During the crisis, the South Korean government also actively contributed to the expansion of foreign retailers into the Korean market. The government opened the South Korean market to foreign companies by proactively seeking to attract foreign direct investment (FDI); as a result, the volume of inward FDI began to increase rapidly and has exceeded the volume of outward FDI since 1998. To attract more FDI, the government relaxed merger and acquisition (M&A) restrictions applying to foreign firms by abolishing previous regulations on foreigners' shareholdings in domestic companies.5 Furthermore, the South Korean government put pressure on the chaebols to reduce the number of their businesses, which were considered to be excessively diversified.6 Consequently, some chaebols sold their distribution sector activities to foreign retailers or sought mergers with them. As a result of this sequence of events, several leading retail transnational entered and/or expanded their operations in the South Korea market from 1997 onward.

Carrefour, Wal-Mart, and Teseo are the three main foreign players in the market. Carrefour obtained authorization of investment ($60 million) from the South Korean government in 1993 and opened its first store in South Korea in 1996. In 1998, Wal-Mart, the world's largest retailer, acquired four stores of Korean Makro, which had entered into the South Korean retail market in 1996 and was suffering in the context of the ongoing economic crisis. Tesco entered the South Korean retail market through the merger with Samsung Corporation's distribution unit and opened its Homeplus chain in 1999. While transnational retailers were increasing their interest in South Korea, local retailers that were owned by the chaebols were also moving into the discount store sector and were competing with transnational retailers for market share. Shinshegae opened its discount store, -Mart, in 1993, and another local retailer, Lotte Shopping, launched its store, Lotte Magnet (Lotte Mart since 2002) in 1998 (W. K. Kirn 2002).

The entry of the leading transnational retailers into South Korea and the emergence of large local retailers have triggered drastic changes in the South Korean retail market. Small-scale distribution companies have increasingly been absorbed into large retailers (S. C. Choi 2003) or stagnated, and conventional retail markets have declined since the mid-1990s (see Table 4). According to the Korean Herald, the discount store market is dominated by five discount stores-E-Mart, Lotte Mart, Samsung-Tesco, Carrefour, and Wal-Mart- whose combined market share accounted for just over 72 percent of the national total in 2002 ("Retailers Change Development Patterns" 2003). These "big five" are engaging in fierce competition, opening many new stores to take advantage of the high rates of growth in this segment of the retail market (see Table 5). Foreign distributors, in particular, have quickened their pace of expansion as they seek to take a substantial share of the South Korean distribution market.

Table 4

Percentage of Retail Sales by Type of Store, South Korea, 1998- 2002 (in $ Billions)

As we mentioned earlier, Samsung-Tesco was established in May 1999 through the merger of Tesco and Samsung Corporation's distribution unit. Tesco agreed to invest initially $220 million and to take over the managerial rights to Samsung Corporation's distribution unit. Tesco secured a 51-percent stake in the firm initially and subsequently increased the proportion to 81 percent with an investment of $170 million ("British Food Firm Tesco" 1999).7 Tesco also agreed to employ all of Samsung Corporation's employees after the takeover, and the chief executive officers (CEOs) of Samsung-Tesco came from Samsung Corporation's distribution unit. The chief operation of Tesco's and Samsung's joint firm was the running of "supercenters," a type of discount store with a particular emphasis on food sales. More recently, however, Samsung- Tesco has expanded it activities to include smaller "Express" stores (2004 onward); a "Family Card" loyalty program (from 2003); personal financial services, such as home and motor insurance and credit cards; and online grocery shopping (five stores providing home delivery since late 2004). The company also plans to introduce a "compact" hypermarket format from 2005 onward (IGD 2004).

Table 5

Number of Top Five Discount Stores, South Korea, 1993-2004

From Tesco's point of view, with a brand and company name that was largely unknown in South Korea, taking over Samsung Corporation's distribution unit provided an invaluable local partner- and thereby the necessary degree of territorial embeddedness-in a market where other transnational retailers, such as Wal-Mart and Carrefour, were struggling in the face of the South Korean customers' strong nationalistic outlook and intense competition from leading South Korean rivals, E-Mart and Lotte Mart (see Table 6). From Samsung Corporation's viewpoint, Tesco's investment provided desperately sought-after funds to counter ongoing liquidity problems. These problems derived from the fact that Samsung Corporation8 opened its first three retail stores (Homeplus Taegu, Samsung Plaza Bundang, and Samsung Plaza Seoul) in 1997, just as the financial crisis was breaking out, leading to high costs of financing.9 Since the South Korean government also put pressure on the Samsung Group to reduce the number of their businesses, the Samsung Group decided to sell off Samsung Corporation's distribution unit as a noncore sector. Through the investment from Tesco, Samsung's distribution unit benefited because it was able to clear all debts and rehire all 1,137 workers who were laid off during 1998.10

Table 6

Top Five Discount Stores' Sales and Market Share, South Korea, 2000-2003 (in $ Billions)

Samsung-Tesco's Strategic Localization

Samsung-Tesco has successfully secured rapid revenue growth and become the second largest discount store chain within five years in South Korea (see Table 6). Its performance has resulted in the award of various prizes, including the Best Corporate Culture Award, Best Customer Satisfaction Award, Best Foreign Investment Award, and the Korea Retailer Award ("Samsung Tesco's Homeplus" 2001). To emphasize the importance of the "local," Samsung-Tesco made Homeplus the new name of its retail stores, instead of "Samsung-Tesco."11 The company operates Homeplus as a "value store," combining the attributes of both discount outlets and department stores to offer a unique combination of both price and quality. Homeplus has an ambitious plan to take a substantial share of the domestic market by setting up 55 stores with investment totaling $3.9 billion by 2005 ("Samsung Tesco's Homeplus" 2001). As of February 2005, Samsung-Tesco had 38 value stores in South Korea (Tesco 2005). This fast growth in the South Korean market is arguably due mainly to Samsung-Tesco's strategic localization, which enables the company to be highly responsive to local consumers' tastes, and makes it more competitive than other Western rivals, such as Carrefour and Wal-Mart.12 In the beginning, Carrefour and Wal-Mart adopted the "aggressively industrial" model by drawing heavily on their own intrafirm network- or network embeddedness-to offer a standardized operation across different markets ("Foreign Discount Chains" 2003; "Carrefour Korea's Shift" 2004). However, this strategy of "mass supply at low prices" was not sufficient to attract Korean customers. Hence, they suffered from slow growth and were overtaken by Samsung-Tesco, a r\elative latecomer to the Korean market.11 These firms have, however, been taking steps to boost their degree of localization since late 2003 ("Foreign Discount Chains" 2003; "Carrefour Korea's Shift" 2004).

Unlike Wal-Mart and Carrefour, Samsung-Tesco has followed a relatively more territorially embedded model and been more effective in localizing its service from the outset. This adoption of a more territorially embedded model reflects Samsung-Tesco's "hybrid" corporate culture. Tesco's joint venture with its local partner, Samsung, has been central to the delivery of this corporate culture. In particular, Lee Seung-Han-a Samsung executive who was appointed as CEO of Samsung-Tesco-has made great efforts to create a "glocalized" corporate culture that brings together the cultures of Tesco and Samsung Corporation. Immediately after the merger, in 1999, Samsung-Tesco faced several difficulties, including low staff morale, language barriers, and communication difficulties. In particular, the employees complained and felt anxious about the merger, since they were suddenly forced to belong to an unfamiliar foreign company. Many staff used to be proud of being "Samsung Men" (Samsung employees), but they were deprived of this status after the merger.14

To secure local employee loyalty to the new company and to avoid a serious collision between different corporate cultures, Lee-Seung Han has sought to create a new hybrid organizational culture, so- called Shinbaration, which combines the Shinbaram (excitement) culture of Korea with a more "rational" British business culture ("Samsung Tesco's Homeplus" 2001). Through Shinbaram, it allows employees to have loyalty to the company and achieve more than their apparent limits, while it seeks to achieve rational management practices by adopting elements of British business culture. For example, the former is supposed to encourage teamwork, while the latter is argued to deter the corporate culture from leaning toward cronyism. As Lee Seung-Han described: "Korean customers want the human touch and the customer-friendliness. We have combined the best of Tesco and the western way and the best of Samsung and the eastern way. Tesco has brought us professionalism and logistical strength but we have kept our Korean qualities" ("An Octopus in the Shopping Trolley" 2002, 28). Wrigley and Currah (2004) listed the following core competencies that were transferred by Tesco to the South Korean subsidiary: customer focus skills, site research and property acquisition skills, planning and financial discipline skills, supply chain management skills (including distribution and logistics), category management expertise, private label development expertise, store layout skills, fresh food retail skills, labor scheduling skills, and core company values. As the following comments from a manager at Samsung-Tesco suggest, however, these competencies combine with local attributes to produce an approach that is appropriate for local circumstances in what Shackleton (1996) termed an "acculturation process":

The strength of the company is a nice balance between global standards from Tesco and localization from Samsung. Tesco's retail business experience and know-how are very useful in establishing global standards, and Samsung has the advantages of manpower and localization. These two elements are different, so the combination of these two different elements may sometimes cause conflict, but we try to minimize conflict by highlighting "glocalization." Within this environment, Samsung-Tesco makes strategic decisions, and Tesco then confirms them. This is because local practices are more important than global standards in the retail business. The reason for this is that both customers and workers in the retail business are local people. Tesco is also very supportive of Samsung-Tesco's localization strategy. (Interview with a manager in the Strategic Planning Department at Samsung-Tesco, 29 May 2002)

The nature of Samsung-Tesco's strategic localization also reflects the power relations among the multiple actors-including local customers, local retailers, local manufacturers and suppliers, and foreign retailers-who are involved in the development of the retail sector. In particular, South Korean customers and local retailers played crucial roles in boosting localization in the retail market. The customers' strong nationalistic outlook and sentiments against foreign capital provide a strong incentive for foreign retailers to seek localization. In particular, foreign retailers, such as WalMart and Carrefour, are perceived to be poor at responding to local consumers' tastes. Negative attitudes toward foreign discount chain stores are especially prevalent outside the main cities where many customers believe that foreign firms are not only driving out small local stores, hut are also transferring the wealth derived from the local economy to their overseas headquarters ("Foreign Discount Chains" 2003). The image of foreign retailers was also affected when the South Korean police found that Carrefour was smuggling out currency(J. Y. Choi 2003). Reflecting this public sentiment, local governments have become more conservative when approving the entry of foreign discount chains into their regions ("Foreign Discount Chains" 2003).

The shopping habits of South Korean customers have also spurred foreign retailers to engage in practices of localization. South Korean customers tend to shop more frequently and buy less each trip than in other countries because of their desire for fresh food, such as high-quality meats and vegetables. To meet these freshness standards, it is crucial for foreign retailers to supply food products directly from local manufacturers and suppliers. Hence, closer contact with local manufacturers and suppliers is inevitable for successful discount chain businesses ("Samsung Tosco "s Ilomeplus" 2001). In this context, local manufacturers and suppliers tend to be in a relatively strong position to bargain with large foreign retail chains, and foreign retail chains tend to engage more in localization by using local supply networks in the host country.

The presence of South Korean local retailers, such as E-Mart and Lotte Mart, has also influenced Samsung-Tesco's decisions on localization and prompted Carrefour's shift away from its hard-line global approach to a more localized strategy. A pleasant shopping environment and friendly service are crucial to satisfy the tastes of South Korean customers, who have long been accustomed to department stores. E-Mart,15 a local fum with 51 stores controlling some 32 percent of the market, chooses to display products in an "easy-to-spot manner," rather than piling them on shelves, because Koreans feel more comfortable when buying goods that are displayed within their range of view, rather than picking things out of massive stockpiles ("E-Mart Undaunted" 2003). Following E-Mart, Lotte Mart and Samsung-Tesco also display a variety of fresh fruits and vegetables around the entrance to their stores and allow customers to touch fresh food products as South Koreans prefer to do before they choose and buy. They have continued to invest in upgrading their store layouts, benchmarking against the spacious, light, and clean styles of the department stores ("Foreign Discount Chains" 2003). As a result, their stores offer a "one-stop shop" encompassing various facilities like beauty salons, educational institutes, restaurants, coffee shops, play areas, and art galleries.

In contrast, Wal-Mart and Carrefour have done less to adapt to customers' needs, drawing on internationally standard formats and following development models that lean more toward intrafirm network, rather than territorial, embeddedness. They have accorded top priority to lowering prices and have retained their standardized "global" warehouse-style store layouts. Wal-Mart has not had a fresh food section. Initially, Carrefour offered only a limited variety of fish, prepackaged meat, and packaged kinichi (Korean-style cabbage pickles) products. However, their "aggressively industrial" model designed to offer standardized products with cheap prices has not been sufficient to lure Korean customers.16 More recently, and partly in response to the continued market lead of the local E-Mart chain, foreign retailers have adopted strategies that are more carefully designed to suit Korean tastes ("E-Mart Undaunted" 2003). For example, Carrefour stepped up remodeling its outdated stores, unveiling its midterm investment plan for the next five years in 2003. The president of Carrefour Korea, Philippe Broianigo, also announced that the company would invest an average of $242 million annually from 2004 until 2007 to boost localization and achieve stable growth ("Foreign Discount Chains" 2003). The president of Wal- Mart Korea also added that "the company will continue to increase sales, branch networks as well as boost customer service" ("Foreign Discount Chains" 2003). For this, Wal-Mart bought a 57,000-pyong (1 pyong equals 3.3 square meters) piece of land for a logistics center in Yoju, South Korea, in 2003 ("Foreign Discount Chains" 2003). We now look in more detail at three key elements of the localization strategies that Samsung-Tesco has pursued since its 1999 market entiy.

Localization of Product Designs

In general, a localization model involves the production of distinct products for each national market, while the globalization model is represented by the "world product" concept, in which the same product is produced for sale in all markets (Mair 1997). Samsung-Tesco has clearly sought to pursue the localization of distinct products for the South Korean market. The following news article clearly shows this localization of product designs:

Tesco's new store in Youngdeungpo, southwest Seoul, bares little resemblance to any of the UK company's domestic supermarkets. Shoppers \at a Tesco in the UK would not, to choose just a few examples, be able to buy a pet iguana, pick an octopus from a tank of live seafood, visit the dentist or take ballet lessons. Visitors to Tesco's first store in Seoul, opened last month, can do all of the above and more. The seven-storey hypermarket makes its UK counterparts look as drab and limited as corner shops in comparison. ("An Octopus in the Shopping Trolley" 2002)

To fit with customers' tastes, Samsung-Tesco sells not only a variety of fresh food, but also clothes, home appliances, household goods, toys, books, and even golf items. Since the success of localization depends on understanding local markets and customers, the company has chosen certain strategic items for the South Korean market.17 According to a team leader in the commercial management department, Samsung-Tesco has chosen garments, sports/leisure items, and hard line items, such as home improvement, house wares, and home decoration goods, as strategic items to reflect South Korean market trends. The following comments of the team leader elaborate the reasons for the choices of strategic items:

Since discount stores with a low price image sell low priced goods, these garments, sports/leisure and hard line items are not a main consideration in discount stores. However, we need to improve on quality and grade, and broaden our range of product items. Outdoor items for the home, leisure, and sports have gradually increased since Korea's income level has risen and the Engel index has dropped. Recently, as people recognize the importance of quality of life, their consumption level has adjusted to the level of quality of life, so the prospects for outdoor items are promising. Since the garment business has high margin rates, we can achieve profit improvement in this section. In hypermarkets, garments are not a key category, so people understand that only sportswear items (among garment items) are sold in hypermarkets. We can expect increased market expansion and higher margins and profits for garment items. Accordingly, we make every effort to secure more space for garment items, broaden their range through new development, and improve their quality. Thus, we strategically promote the growth of the garment business. (Interview with a team leader in the Commercial Management Department at Samsung-Tesco, June 2002)

In addition, Samsung-Tesco has actively adopted the localization of distinct products for the Korean market through the development of private brands (PB). Although PB accounted for only 1 percent of total sales in 2001, Samsung-Tesco intends to focus more on the development of PB, expanding exports of these products and working to improve distribution systems. According to the team leader, this PB figure would rise to 6 percent in 2002.ls In a 2001 interview with the Korea Herald, Lee Seung-Han described how Samsung-Tesco aimed to increase its PB from about 500 to 13,000 products by 2005. If that goal were to be met, 23 percent of sales would come from the Samsung-Tesco brand products ("Samsung Tesco Sends Soccer Balls" 2001). Most PB items are currently consumables that are bought in large volumes, such as edible oil, toilet paper, detergent, and frying pans, and sold under a mixture of "global" (e.g., "Finest" and "Value") and "local" (e.g., "Homeplus") Tesco brands. However, Samsung-Tesco has actively attempted to extend the range of PB: "Spring Cooler," a new Samsung-Tesco's garment brand, is reflective of these efforts to extend the range of PB.

Localization of Sourcing

Through its supply-chain management, Samsung-Tesco aims to provide high-quality food and nonfood products to Korean customers. As of 2002, it was transacting with more than 1,000 suppliers and vendors. Through Tesco's networks, certain standardized products, such as blue jeans, toothpaste, toothbrushes, and cola, are sourced globally, but the majority of products are supplied through direct procurement channels with local producers and local manufacturers in South Korea. This localization of sourcing is confirmed by the interview with a manager at Samsung-Tesco:

Our category managers select vendors directly, and Tesco UK does not request anything concerning vendor selection, and our category managers at Samsung-Tesco select vendors directly. It is only when Samsung-Tesco makes a contract with Coca-Cola or Pepsi-Cola at the global scale that Tesco supports us. All decisions regarding commercial management are made by Samsung-Tesco. My boss, . . . who is a commercial director in ST, makes the final decision and confirms vendor selection. But increasingly, buyers (category managers) in commercial divisions within STs merchandise department decide on supplier chains. . . . Within Samsung-Tesco, there are now 35 buyers. (Interview with a team leader in the Commercial Management Department at Samsung-Tesco, 5 June 2002)

Thus, global sourcing is rather limited in Samsung-Tesco as of yet. Although much fresh food is imported from China, the percentage of total goods that are sourced from abroad is about 30 percent to 40 percent of the total sales. In this case, these goods are not sourced directly by Samsung-Tesco but imported through the medium of Korean suppliers in overseas countries. The percentage of direct sourcing by Samsung-Tesco from abroad was just 1 percent of total sales as of June 2002, mainly constituted by such items as garments and toys that were sourced from Hong Kong and China.19 There are no foreign companies in the list of Samsung-Tesco's top 10 suppliers (evidenced by purchases made in June 2001; see Table 7). Indeed, there are only 6 foreign suppliers among the top 50 suppliers; the remainder are all local vendors and suppliers. Many of the foreign vendors already have subsidiaries in South Korea, and it is the subsidiaries, such as Nestle Korea, Sony Korea, MasterFoods Korea (Mars), General Mills Korea, Heinz Korea, and Kodak Korea, that transact with Samsung-Tesco (see Table 8). However, their sales to Samsung-Tesco are not substantial in the context of Samsung-Tesco's overall purchasing profile. Moreover, Tesco does not as yet have a regional product sourcing team established in Asia (IGD 2004).

Table 7

Source: Economic Geography

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