Tengelmann: International Business

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Introduction and Company Background

Tengelmann is a privately owned food retailer based in Muelheim, West Germany. The company was founded in 1867 by Wilhelm Schmitz and is now managed by his great-grandson Erivan Haub. When Schmitz started his business in the late nineteenth century, German merchants were often considered to be of low societal standing. To preserve the honor and dignity of his own name, Schmitz named his first grocery store after one of his salesmen, Emil Tengelmann. Until the 1950s Tengelmann used the traditional European retail store format in all their All products were placed behind barriers away from customers, and salesclerks worked behind the barrier gathering the orders. In 1952 Haub was sent to the United States to do a three-year internship at two supermarkets. Haub sent sketches of U.S. self-service supermarkets back to Germany and soon after his return, Tengelmann opened its first self-service grocery store in Munich. Eventually all Tengelmann stores were smaller sized versions of typical suburban U.S. supermarkets highlighting weekly specials with bright banners on the windows (Tengelmann Group, 2009).

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Local Marketing Mix

Tengelmann has store operations in West Germany, Austria, the Netherlands, and the United States, and is currently expanding into East Germany. Tengelmann owns a 51% share of three food chains in East Germany and has already invested DM 100 million in East German establishments. In addition, Tengelmann plans to invest another DM 300 million per year over the next five to six years. Tengelmann also has minority shareholdings in several other countries, including Hungary, Italy, and the United Kingdom. Tengelmann’s foreign investments combined gave them an international group turnover of DM 46.7 billion in 1990-91. In 1982 Tengelmann operated 514 branch supermarkets and stores in West Germany. Today Tengelmann has approximately 4,404 stores in Germany, over 300 in Austria and the Netherlands, and approximately 1,000 in the United States (Tengelmann Group, 2009; see appendix 2).

Product

Private label products have become highly accepted in Europe. This segmentation of private labels in Europe is an indication of a fully mature private label market. Power will move in favor of the retailer rather than the manufacturer; this power shift comes about as the result of concentration and increases in scale in the distribution industry. Manufacturers are faced with a limited number of large customers with enormous purchasing power. Imports from low wage countries and the development of retailers’ own labels also decrease the manufacturers’ power (Tengelmann Group, 2009). Standardization of coding and information classification are essential for wide-scale use of EDI. Currently the EDIFACT standard is used worldwide for information definition. To successfully use EDI in retailing a unique code for each article handled by the system must be developed. This code, called EAN, is being developed. Two German organizations BTE (Federal Association of Textile Retailers) and BEV (Federation of Buying Groups) have opposed the thirteendigit EAN code on the grounds that it is inadequate for the industry needs. The diffusion of bar codes into nonfood sectors has been slow but is anticipated to increase dramatically. Tengelmann is identified as the sector leader in retailing of food and consumer products. This is the only source identified in which this privately held company is compared to its competitors. Sector leaders are identified by combined financial performance for 1990 in an article in the March 1992 issue of International Management. Tengelmann Gruppe had an international group turnover increase of 10.6% in 1990-1991). Domestic turnover rose 21.9% in the same period. Tengelmann has 4,404 sales outlets in Germany and the total workforce is comprised of 77,891 employees (Kotler and Armstrong 2005).

Price

Tengelmann group tends to rely more on an average cost approach to pricing than on a marginal approach. Average costs, which are rarely pertinent to an optimal decision, satisfy the desire to “cover our costs and make a profit.” In reality, this reliance on average costs can lead to a decision that can actually reduce sales, increase costs, and reduce profits. However, some executives advocate that sunk costs (costs that cannot be revoked and that are not part of the current pricing decision) should be ignored. They are not affected by current decisions — nothing can be done about them. Yet it is also recognized that over the long run, they must be covered (Hollensen, 2007).

Promotion

Effective sales force management depends on good planning — establishing realistic objectives and specific sales goals. They provide the means for evaluating salesmen and allocating sales resources. They are basic to determining sales, profit, and cost objectives, developing corresponding budgets, and setting sales quotas for such control units as salesmen, products, customers, and territories. Changes in territories must be made with considerable tact. The reasons for change and the effect on potential should be discussed openly with those affected. Particular attention must be given to the salesman’s situation, and salesmen should be given assurance that necessary territorial revisions will not affect them adversely in the long run (Hollensen, 2007).

Place

In many countries, manufacturers have turned to subcontracting the physical distribution function. Transport service providers cover not only the more traditional functions such as transport, storage, and inventory management but also order processing and invoicing. Logistics services rent office space that is attractive to foreign (non-EC) businesses wishing to operate in the EC. Companies are therefore able to rent sales and marketing offices, and leave the physical distribution function to the logistics services provider. These logistics services providers in the transport sector fulfill the functions traditionally provided by the wholesaler. The scale of operations for logistics services providers has become very large and as a result very capital intensive. Few manufacturers and retailers can make the financial investment necessary to remain technologically competitive. There is a great deal of specialization among logistics services, including specializing in product or geographic areas. Logistics services providers concentrate on products with a high value density (the cost of the goods is high relative to weight). Products such as this have a high rate of turnover, because holding a large supply in storage would tie up too much capital. Rapid turnover equates to more handling for the service provider, creating added value for the handling (Hollensen, 2007).

International Strategies and Marketing Mix

Tengelmann is an excellent example of a true multinational retailer. While they retain a global definition of their marketing strategies, they adapt their operations to the local culture. Tengelmann tried to use a global strategy when they acquired A&P by converting some of the A&P stores into box stores based on German models. Merchandise was displayed in cardboard boxes and prices were posted on signs rather than on each individual item (Kotler and Keller, 2005). The experiment failed, resulting in a loss of $75 million over the two-year trial period. Tengelmann abandoned the concept of no-frills discount stores, and refocused on store modernization, upscaling, and acquisitions. Tengelmann has concentrated its activities on a few foreign countries to achieve a large local presence Tengelmann uses a growth induced intentional approach to its international involvement as it strives to penetrate new markets and thereby consistently enhance its financial performance. (Tengelmann Group, 2009).

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The Tengelmann group began its U. S. expansion in 1979 when it acquired a majority interest in the Great Atlantic & Pacific Tea Company supermarket chain, better known as A&P. Prior to the acquisition, A&P had experienced severe management and legal troubles that almost forced the company into bankruptcy. The problems A&P was having with management made it an ideal American company for Tengelmann to acquire because European retailers commonly seek out companies with inefficient management for acquisition (Perreault et al 2003). Tengelmann managed to turn the company around by bringing in James Wood as the new CEO. Wood, who is known as a reputable turnaround manager, restructured the A&P stores and began a cost-reduction plan that included closing six hundred stores and several manufacturing plants. Wood also concentrated on growth through the purchase of regional chains within A&P’s newly defined markets. It took three years for A&P to show postacquisition profits, but the success of Wood’s strategies enabled A&P to become the fourth largest grocery chain in the United States (Bartlett and Ghoshal 1999).

In 1990 A&P earned $146.7 million on sales of $11.1 billion. In January 1992 Tengelmann increased its share in A&P to 53.2%. Tengelmann had no plans for any mergers involving A&P. Tengelmann plans on holding the stock for investment purposes and is considering the acquisition of additional shares. There are no plans to become involved in the daily management of the grocery chain and no plans for a merger involving A&P or a sale or transfer of a material amount of the assets of the company or its subsidiaries. Despite the increased share in A&P, the Tengelmann group predicts a downward trend in the fiscal year 1991-1992 due to tax increases and rising inflation. Tengelmann expects profits to be down 50% for the A&P stores, and the future of the subsidiary looks rather negative (Tengelmann Group, 2009; see appendix 1).

Recommendations and Proposed Strategies

With Tengelmann’s expansion, it is possible that they will eventually have to sell a portion of their A&P stock to raise capital. Tengelmann already has over 300 stores in East Germany, and plans to have 1,000 stores open by 1995. Another of Tengelmann’s latest acquisitions is 179 stores from Asko, a food retailer located in Frankfort, West Germany. With this addition, Tengelmann will be near to the size needed to compete effectively in the area. Tengelmann was also involved in 50% joint venture with Pizza Hut until 1991 when their share was sold to Pepsi-Cola (Perreault et al 2003). Prior to the sale Tengelmann banned the sale of Pepsi in its German stores because of negative sentiments about the negotiations between Pepsi-Cola and Pizza Hut concerning the buyout of Tengelmann’s shares in Pizza Hut Restauranrgesellschaft that ran forty-five Pizza Huts restaurants in Germany. Tengelmann stores facilitated 15% to 20% of Pepsi-Cola’s $585 million German sales. Apparently the ban could extend to encompass Tengelmann stores in Austria, Italy, and the Netherlands. There were rumors that Tengelmann planned to introduce a private label cola (Tengelmann Group, 2009).

To attack small segments of Euroconsumers in economically advanced regions of northern Europe, industry groups have taken steps to develop Eurobrands and to standardize their ad campaigns. Some companies have changed their regional brands into more globally familiar brand names such as the well-known “Marathon” candy bar being transformed into “Snickers” ( Amine 1992). The removal of subsidies and barriers inhibiting the free flow of goods should enable many firms to develop Pan-European brands. Yet many believe that the Euroconsumer is a dream ( Toman 1989). The cultural differences between countries are likely to be heightened, not less- ened, by unification. Giving up some economic autonomy will push consumers to derive comfort from their cultural unity. there will be pockets of consumers who are nearly identical in the major developed portions of the world, but these consumers are not Euroconsumers. They are global consumers, best served by the global retailers who do well at serving unique niche markets throughout the world. Responding to the changing scenario, international retailers will allocate more resources to human resource development. This function will also attract cross-border alliance. For example, Intercompany European Management Club founded by Promodè with six other international groups offer management training programs and integrate environmental changes into policies. Training of retail personnel in multinational companies will need added emphasis on cross-cultural aspects of retail operations, environmental scanning, cost control, and logistical issues (Kotler and Keller, 2005).

Expansion in Eastern Europe

Joint venture and franchising are and will remain preferred entry modes in Eastern Europe from the standpoint of the existing political-legal environment in these countries. Massive privatization programs in many Eastern European countries have opened immense expansion opportunities for Western retailers. Private shop owners who have taken possession of state shops are often deficient in retailing know-how and will look for franchise relationships to get guidelines in shop design, easier access to bank loans, advertising, and other marketing services. A franchise agreement works out as the best solution to the new breed of Eastern European businessmen who want to own shops but are afraid of losing their savings in an unstable and sometimes volatile environment (Hollensen, 2007). Some countries have not yet framed laws to regulate franchise operations. Hungary, for example, has no franchise law and though it has not posed a real obstacle, it does mean that contracts can be tough to hammer out. Interested retailers from Western Europe will face problems in identifying suitable franchisees who would maintain continuity of relationship, have business acumen, and are endowed with market orientation. It would help prospective franchisors if they enter through a subfranchisor who shares ownership and helps in the development of an ideal franchise package for the country in question (Tengelmann Group, 2009).

These major German retailers have abided by the goals established by German economic system. When these retailers acquired a location in the former East German area, they put a lot of money into renovating the locations and also retained the previous employees. They have adapted their product offerings accordingly to consumer demand and have begun offering new services (i.e., staying open later on Thursday evenings, offering credit cards, offering financial services, selling insurance, etc.). Adapting packaging and transportation means has been evidence of an attempt by these retailers to abide by the strict environmental laws recently imposed by the government. Education about environmental issues, directing money toward research, and taking an overall interest in the well-being of the community have also contributed to the success of the German retailers. Germany’s high level of technological and communication sophistication is attractive and retailers should use this to their advantage. Germany’s location in Europe is strategic because it is in the midst of many potential markets and has an excellent transportation infrastructure. Germany also has increasingly become the location for companies that are seeking access to the Eastern Bloc region because of its geographical placement next to these desired markets. Strong German retailers will use their international experience to operate in these opening markets. By observing their activities in the German marketplace and the challenges they face in operating in the former East German area, these retailers obviously can continue to be successful on an international scale (Tengelmann Group, 2009).

The proposed pricing strategy is skimming. This product pricing presents different problems from those of pricing mature products. New products place the manufacturer more or less in a monopoly position, but one that will erode. They also create situations in which price reactions are largely guesswork. Two general pricing strategies are used here — skimming or penetration pricing. The former refers to “skimming the cream” from a number of market segments in succession by means of a relatively high price, thus recouping investments quickly. It encourages new competitors to enter the market because of attractive margins. The philosophy is one of segmenting markets by time, getting a premium price from those segments that will pay it, and then gradually reducing prices (Hollensen, 2007).

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Advertising and personal selling may be used as complementary or supplementary market-communications activities. Their respective roles depend on company products, customers, and markets. Often they are used in a complementary manner, with advertising paving the way for personal-selling activities. In other situations, such as in making industrial sales, personal selling is usually the most important component, while advertising may be a supplementary activity that helps create awareness. In either case, both should be coordinated by marketing managers. Salesmen should be aware of advertising plans and programs, and advertising compaigns should be developed within the boundaries of sales tasks, both of which should be viewed as mutually supporting functions (Tengelmann Group, 2009).

New promotion strategies involve the diverse range of activities from making calls on old customers, calling on new prospects, merchandise stocking activities, placement of sales material and literature, handling complaints, preparing call and sales reports, and providing service and maintenance, in addition to making sales. Salesmen’s activities range over a wide spectrum of situations from maintaining accounts and taking orders to the development and creation of customers. The role of the sales force should be geared to company and marketing department objectives. The starting point of the sales program is company goals. Volume, profit, industry, territory, product, image, and rateof-return goals influence the direction and scope of sales activities. The practical range of sales alternatives for a company may vary from the company’s own sales force, to the use of a variety of wholesalers including sales agents and manufacturers agents, to the elimination of salesmen by such techniques as mail order (Deresky, 2008).

Further Direction

A five-year investment plan for East Europe will aim to modernize retailing operations that were acquired there. Tengelmann is also targeting Hungary for expansion into Eastern Europe because the purchasing power and buying habits of consumers there are now mostly developed. Environmental concern for Tengelmann is their initiation of a new returnable packaging system for use in transportation packaging of products. They want suppliers to deliver their products in returnable containers that will be distributed through Tenglemann’s central warehouses to the individual supermarkets. Environmentally, these returnable packages are a good solution; additionally, this project also will improve logistical transportation and distribution of the products. The company also has extensive advertising on their products, shipping vehicles, and in their stores about environmental education

List of References

Bartlett, C. and Ghoshal, S. 1999. Managing Across Borders: The Transnational Solution. 2nd edition, London: Ramsden House.

Deresky, H. Christopher, E. 2008. International Management:Managing across Borders and Cultures (Pearson Education Australia).

Hollensen, S. 2007, Global Marketing: A Decision-Oriented Approach. Financial Times/ Prentice Hall; 4 edition.

Kotler, Ph., Armstrong, G. 2005, Principles of Marketing. Prentice Hall; 11th edition.

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Kotler, Ph, Keller, K. 2005, Marketing Management. Prentice Hall.

Perreault, W.D., Cannon, J.P., McCarthy, E.J. 2003, Marketing: Principles and Perspectives. McGraw-Hill/Irwin; 4 edition.

Tengelmann Group. 2009.

Appendix

International Marketing Mix

Marketing Activities Content
Advertising Media selection and relations
Radio Newspaper TV
Copy Research
Advertising budget
Advertising production
Sales promotion Exhibits and displays
Product publicity
Merchandising
Premiums
Catalogues
Place and sales force management Recruit and select salesmen
Sales training
Sales direction and compensation
Headquarters and field organization
Planning and sales programs
Sales control
Sales objectives and quotas
Product New Product development
Product line-eliminations and additions
Quality and standards
Services
Brand
Package and labels
Customer services Warranties
Post-sales service
Repairs
Customer relations
Information
Dealer relations Training
Information
Promotional Aids
Conferences
Sales and distribution channels
Service
Price Discounts
Skimming pricing

Advertisements

Logo and symbol
Logo and symbol
Brand name
Brand name
Tengelmann
Tengelmann

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