HookTesco's £1bn lesson in the Arizona sun
In November 2007 Tesco opened the first Fresh & Easy store in Los Angeles, the beachhead of a plan to conquer American groceries. It had done the homework — famously sending executives to live with Californian families, and building a mock store inside a warehouse to keep the format secret. Six years and roughly 200 stores later, Tesco walked away, having burned well over £1bn of shareholders' money without a single profitable year.
What went wrong is a checklist of everything 3.2 teaches. The push was real: the UK grocery market was saturated and regulators were wary of Tesco's roughly 30% share. But the assessment failed. Americans in car-centred suburbs did big weekly shops, not top-ups; they found self-checkout-only stores cold; British-style chilled ready meals were unfamiliar; and the launch coincided with the 2008 housing crash, which hit Arizona, Nevada and inland California — precisely Fresh & Easy's territory — harder than almost anywhere in America. Expansion abroad is a bet, and this section is about how to price that bet before you place it.
MechanismPush factors — when home stops growing
Push factors shove firms abroad because staying put looks worse. The classic is a saturated market: UK grocery volumes grow at barely 1–2% a year, so by the mid-2000s Tesco could only grow at Sainsbury's and Asda's expense — expensive trench warfare — while competition scrutiny and planning rules capped new superstores. Intense domestic rivalry does the same job: Aldi and Lidl's march from about 5% of the UK grocery market in 2010 to over 17% by 2023 squeezed everyone's margins and pushed the incumbents to hunt growth elsewhere.
A subtler push is the product life cycle. A product that is mature or declining at home can be launched fresh in a market that has never seen it — which is why confectionery and snack brands push hardest into markets where per-capita chocolate or crisp consumption is a fraction of Britain's. Selling abroad restarts the clock, spreading development and branding costs over a longer, larger life.
MechanismPull factors — what the new market offers
Pull factors are the prizes. Economies of scale: a firm doubling volume across borders spreads fixed costs — R&D, brand campaigns, head office — over more units, cutting average cost. Risk spreading: economies move on different cycles, so a downturn in one market can be offset elsewhere; Unilever's recent results have repeatedly leaned on emerging-market growth while Europe stagnated. And sheer market size: a British firm serving 68 million people at home is one flight away from markets of hundreds of millions.
Distinguish two ways of chasing lower costs, because Edexcel does. Offshoring moves an activity abroad but can keep it in-house — Dyson shifted vacuum production to Malaysia in 2002 while keeping design in Wiltshire. Outsourcing contracts the activity to another firm, at home or abroad — Apple designs in California and contracts assembly to Foxconn. The exam rewards precision here: offshored-but-in-house and outsourced-but-onshore are both possible, and candidates who conflate the two hand back marks.
ModelAssessing potential — the five-question checklist
Before committing capital, a firm scores a market on a handful of measurable conditions. Disposable income — its level, growth and distribution: averages deceive where inequality is high. Ease of doing business — how long registering property, enforcing a contract or clearing customs takes; the World Bank ranked economies on exactly this until 2021, and India's climb from 142nd in 2014 to 63rd in 2019 was a deliberate government sales pitch to foreign investors. Infrastructure — ports, power, broadband, cold chains; a grocer cannot operate without reliable refrigeration and roads. Political and legal stability — expropriation risk, corruption, rule of law. And exchange-rate stability — a volatile currency can wipe out a thin retail margin faster than any competitor can.
Weight the checklist by business model. A mining firm must go where the ore is and manage the political risk that comes with it; a software firm needs payment rails and intellectual-property protection but no cold chain; a supermarket needs all of it at once — one reason grocery is littered with failed foreign adventures, from Fresh & Easy to Walmart's 2006 retreat from Germany.
A UK premium biscuit maker is choosing between Germany and India. Germany: 84 million people, income per head around £38,000, market growth about 1% a year. India: roughly 1.4 billion people, income per head around £2,000 — but suppose about 5% of households have discretionary spending power comparable to the German median. That is 1.4bn × 0.05 = 70 million people — a Germany-sized premium market hidden inside the average — attached to an economy growing at about 6% a year. Rule of 70: at 6% the market doubles in roughly 70 ÷ 6 ≈ 12 years; Germany's, at 1%, doubles in about 70. The arithmetic says India — provided the checklist's other lines (infrastructure, ease of doing business, currency risk) do not erase what the income line promises.
CasePost-mortems — Fresh & Easy versus JCB in India
Run the checklist over the two cases. Fresh & Easy scored the income line correctly — Americans are rich — but misread everything behavioural: shopping habits, store format, product familiarity. And its timing was catastrophic: launching a value chilled-food chain into the 2008 sunbelt housing crash. The push factors were genuine, but a genuine push does not validate a bad landing zone; Tesco booked a write-down of around £1.2bn on the exit, and its incoming chief executive Philip Clarke used the retreat to refocus capital on the UK and Asia — a reminder that even giants ration capital between markets, and that the opportunity cost of a failed expansion is every alternative the money could have funded.
JCB read India the other way round. It entered in 1979 through a joint venture, decades before the income line looked attractive, betting on the infrastructure spending to come. It localised manufacturing — its Ballabgarh plant is reported to be the world's largest backhoe-loader factory — priced for the market, and patiently built dealer and service networks. Today India is JCB's largest single market and it holds a dominant, by some accounts majority, share of India's backhoe loader sales. Same corporate logic, opposite outcomes: the difference was the fit between the market's conditions and the entry model, not the quality of the spreadsheet.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Edexcel B loves a two-country comparison extract in Paper 3: expect a data table — income per head, growth rate, ease-of-doing-business rank, inflation — and a firm deciding where to expand. The method that scores: take THE FIRM'S specific product, walk the checklist line by line against the data, and finish with a weighted judgement, not a list. 'India has higher growth BUT the firm's premium price point fits German incomes today' is evaluation; a recited checklist is not.
Use Fresh & Easy as your cautionary case and JCB or Walmart Germany as the counterweight — examiners reward candidates who can name a failure and a success and explain the difference with the same framework. And keep push and pull separate in essays: candidates who structure 'push, pull, assessment, judgement' rarely fall below the middle levels, because the structure itself demonstrates the analysis.