Supplying Results

Large corporate brands have had their fair share of criticism over time, especially when entering developing markets such as Thailand. Tesco Lotus CEO Steve Hammett understands this, but also believes there is a positive influence. Since entering Thailand he believes his firm has brought international best practice standards to many Thai businesses and opened up many opportunities for export. Greg Lowe writes.

Ask the average chief executive of a multibillion dollar business what gets them out of bed in the morning, and visiting a local meat factory would be an unlikely reply. But for Steve Hammett, CEO of Tesco Lotus, such seemingly mundane events underpin what he says doing business is all about.

The meat supplier has recently started supplying overseas firms as a direct result of Tesco's technical assistance.

"When they were building the facility, our team went in and gave them detailed advice on how they could best design, build and run the place. It was based on our experience of what we have seen work in other countries," says Hammett. "Now they have a world class facility that not only benefits us and our customers, but also enables them to supply on an international level."

Grounded In Thailand

Since Tesco Lotus was established in 1998 as a joint venture between the British retail giant and Charoen Pokphand Group, Thailand's largest agricultural conglomerate, the firm has invested some THB 98 billion in the country. 

Under its holding company Ek-Chai Distribution System Co Ltd, the retailer now operates some 600 stores, has more than 36,000 full-time employees, with another 15,000 staff working for its mall tenants, and draws about one million shoppers each day.

But despite being run by one of the world's top five biggest retailers, the company retains a strong Thai focus, says Hammett. "Overwhelmingly it's a Thai business with Thai customers driven by Thai suppliers."

Meeting Local Needs

Tesco Lotus also features heavily on the global group’s balance sheet. Outside of the UK, it is the largest market in terms of store count, and it has second largest turnover after South Korea.

Local success has come from concentrating on the ‘customer wish’ and by giving shoppers what they want. Tesco has developed a number of store formats - from hypermarkets and compact hypermarkets to smaller format Talad supermarkets and Tesco Lotus Express - to respond to the needs of customers in different locations, says Steve. Such initiatives have seen the firm expand to almost every province, a move which he says is positive for both the retailer and its customers.

"Our compact hypermarket has enabled us to go upcountry into smaller towns which wouldn't have got modern retail in the timing that they did otherwise. That's why we've been able to fit into other locations and why we've been able to satisfy a stronger demand for convenience shopping in major towns and high streets."
 

Investing In Growth

The current business environment is undoubtedly the toughest that Tesco has had to endure locally. But even though recessionary forces and domestic politics have crimped trade in Thailand the company still plans to invest THB 6 to 7 billon this year. Most of the budget will be used finance new stores - half a dozen hypermarkets and about 50 Tesco Express outlets - while some will fund other projects to sustain the business, the chief executive says. "Investing through a downturn, I think, is a strong sign of commitment (to Thailand) from our business."

The company has found it difficult to disaggregate the individual effects of politics, global downturn, local recession, plummeting tourism and the H1N1 flu outbreak on business. The drop in tourist arrivals has dampened trade in resort markets, but the most significant factor is the reduction in money Thai businesses and consumers have to spend at Tesco. However, there have been signs since late July that the economic situation has stopped getting worse, says the chief executive, who remains cautiously optimistic of a recovery. "But I don't want to say that has started yet."

Hammett is also careful about other words he uses. While in just over a decade Tesco Lotus has transformed itself from newcomer to the country's largest supermarket retailer he is keen to reinforce the positive perspective of the company's operations, by discussing "investment" rather than "expansion".

"I always talk about investment. It's only words, but it's quite important. Expansion sounds kind of negative, whereas investment draws the mind to the really important positive parts of what we do. Without investment there aren't new jobs and businesses, there aren't the benefits of the multiplier of all that money going round and creating other spin-off jobs and businesses.

"Investment for me has only positive overtones. Other ways of saying it that people tend to use gets turned, which is a bit unfortunate I think."

Combating Resistance

Some quarters of Thai society disagree that the impact companies such as Tesco Lotus, Carrefour and Big C have on local communities is entirely beneficial.

Hammett defends the retailer's position. Mom and Pop stores account for about 5% of the retailer's customer base and walking through the store on Bangkok's Nawamin Road he points out a number of such customers who he says now use Tesco Lotus as a key supplier.

"There are two different issues here," he says. "One is the genuine concern of some people that they may suffer as a consequence of our investment. With those people I think we have a responsibility to explain our story; to explain how competition is helpful, to describe the other benefits of our investment in terms of jobs and business opportunities in the local economy. We work hard on that with a fair amount of success. One million customers a day say it's good for Tesco Lotus to be around.

"Then there's the resistance which is driven by self-interest of a negative kind. By the manipulation of genuine emotions by people who are concerned only with protecting their own big business, which is harder to manage. Sometimes we have to work on trying to separate the noise. Once we removed the noise from those who used to monopolise the retail and wholesale business in the towns where we go, you find that we are welcomed by small retailers and consumers in such towns."

Leveraging Vendors

Coming back to the example of the meat supplier, Hammett says Tesco's relations with its vendors show how the company can help upgrade local businesses while serving its own interests. About 90% of the 9,000 suppliers are local and most supply Thai products.

The company has a 100-strong technical team which checks product quality at the warehouse, stores and at the point of origin. The quality control staff visit both existing and potential suppliers to ensure their farms and facilities measure up to the firm's standards for quality, hygiene and ethical working practices.

If the vendor cannot tick all the boxes on the Tesco Lotus scorecard, then the technical team will help them make improvements to meet the minimum standards, whether it be matters relating to employment, the use of pesticides or packaging.

"Our people work as part of our controls, but they also contribute to the vendors' operations by visiting those facilities, assessing their operations and advising them on how to increase their efficiency, while ensuring the quality and safety standards of their products," he says. "But anywhere that we get consistently let down we tell a supplier 'three strikes and you're out'."

Beyond sourcing products for its local retail outlets, Tesco Lotus also connects with the global group's supply chain.  Last year, about THB 8 billion of Thai goods, including  1.6 billion of Thai fruits and vegetables, were exported to Tesco stores around the world.

"That's no small feat," says Hammett. "This year we're on track to improve that by about 30%, in terms of volume. We have a short-term plan to get that up by 100% over 2008, a commitment that we've made to the Prime Minister."

Future Opportunities

There are a couple of local barriers to international trade, however. The first is excessively high freight rates. Exporting products from Thailand to the UK costs on average 30-80% more than it does for similar shipments from parts of Africa or South America. And business leaders and associations have made repeated calls on the Thai government to make internal road and rail freight cheaper too.

The other key issue is the consistency of product quality as most export markets, especially the US and Europe, enforce strict food standards on imported goods which also cover the growing and production process.

"While the quality of product from Thai producers is good, it doesn't always have the certainty and consistency of controls evidenced - for example, the transparency of growing processes and fertilizer and pesticide usage that is needed to satisfy some bodies. Products exported to the EU have to meet GAP (good agricultural policy) requirements, but there is no such national Thai equivalent."

Hammett says addressing and overcoming these two barriers would not only improve Thailand's exports but would also result in significant benefits for the kingdom’s international trade overall.

"We're in a real market here, we have a super business and we have the chance to be even better. We have some challenges to get some corners of society to appreciate the force for good that we are. And what drives me is to reconcile the need to cover off those corners that tend not to agree so we can deliver the benefits," he says.

"Benefits for us because we would become a stronger business, but also strong benefits for the Thai customer, our staff and the community which we serve. This virtuous circle is a great source of pride for me and it feels entirely possible to deliver it in this country with this business."

What A Supplier Says

Garguar Lab Co has been producing cosmetics and pharmaceuticals for the local and export markets since 1987.

"Beyond the QA issues they also covered a range of issues including labour rights, employee welfare, corporate social responsibility and ethical training, plus making sure we don't do anything that might impact the environment."