Global Investment Watch

Background

Tesco is the world’s third-largest grocer and operates 2,100 supermarkets and convenience shops in the UK (where it’s the #1 retailer), 1,600 stores in Ireland, Central Europe, and Asia, and Fresh & Easy stores in the US. Founded on the “pile it high, sell it cheap” creed of founder Sir Jack Cohen, Tesco abandoned its discount format with its down-market image for a variety of mid market formats. Its operations include convenience and gasoline retailing (Tesco Express), small urban stores (Tesco Metro), superstores (Tesco Extra), and financial services (Tesco Personal Finance). Tesco.com is Britain’s leading Internet delivery service.

While about 75% of Tesco’s sales are generated in the UK, the retailer is expanding faster away from home in about a dozen countries in Central Europe and Asia. While historically the company has relied on organic international growth, typically via joint ventures and store-by-store openings, it stepped out of that norm with a major acquisition of a chain of hypermarkets in South Korea from E-Land Group for about $2 billion in 2008.

In 2007 Tesco launched a convenience store chain called Fresh & Easy Neighborhood Market in the U.S. The aggressive store opening program resulted in about 60 shops open in Arizona, Nevada, and Southern California. The company has announced plans to add 18 stores sites in Northern California beginning in 2009. Thus far the company’s expansion into the U.S. has been been met with mixed reviews among customers and industry watchers.

Labor & Human Rights Factors

A February 2008 article in Ethical Corporation reported that for the past 3 years the UK based non-profit the Environmental Justice Foundation (EJF) has lobbied clothing retailers and manufacturers, using testimonies from children who are forcibly enlisted into an underpaid, overworked army of cotton pickers in Uzbekistan. The response was slow, but now, Tesco has announced a pioneering ban on the purchase of Uzbek cotton. The company also announced a new process to allow them to examine their supply chain to be sure they really do know where their cotton comes from.

In its 2007 Corporate Responsibility Statement the company states: “This year we have faced accusations of poor labour standards in some of the factories, farms and plantations that form part of our supply chain. Some NGOs have claimed that our low prices inevitably lead to worker exploitation. Faced with these allegations, it would be easy to walk away from sourcing in the developing world and leave its problems to others. But we believe that international trade is the key to helping hundreds of millions of ordinary people escape poverty and build better lives for their families. Tesco has strong employment and environmental standards and we are confident that trading with us can be an important force for good anywhere in the world. We also understand that although our customers want low prices, they also want fair prices and decent standards. Although we have a major economic impact, we alone cannot change the political and social conditions of the countries in which we do business. What we can and must do, however, is ensure that everyone involved in our supply chain – and the communities they live in – truly benefits from their relationship with Tesco.”

In May 2007 The Guardian reported that a small shareholder had amassed enough support to force the issue of ethical trading with suppliers onto the agenda at Tesco’s annual shareholders’ meeting. The shareholder won the support of more than 100 shareholders and the group tried to force Tesco to include a resolution demanding higher standards to be put to shareholders. Company secretary Jonathan Lloyd turned down the request, claiming it was “not valid”.

In December 2006 the UK’s The Independent cited Tesco among other companies in a report called “The real price of cheap clothes: Bangladeshi sweatshop labourers paid just 3p an hour.” Tesco stated that its affordable clothing was not achieved through poor working conditions at suppliers. In October 2006, the UK’s Channel 4 News filmed footage that captured child workers producing Tesco clothes in Bangladesh. Tesco claimed to not know that two of the factories were manufacturing its clothes. As a result, Tesco had never ethically audited them. Both Bangladeshi suppliers have denied the existence of any child workers within their factories, stating the ages of all workers are independently verified. In a statement to Channel 4 News Tesco said it: “… abhors the use of child labour and is at the forefront of industry efforts to stamp it out through systematic investigations of its suppliers…” Tesco is a founder member of the Ethical Trading Initiative which bans child labour. According to Channel 4, the investigation raises questions about Tesco’s ability to actually enforce the ethical standards it claims to insist upon.

Geographic Risk

The company operates in China, which is on the AFL-CIO Country Watch List. Countries on this list are either lacking labor legislation that recognizes fundamental worker rights or they have labor legislation, but it is not enforced.

Union & Employee Relations

It appears that Tesco has a history of tense labor relations, and not just in the U.S.

A February 2008 article in London’s The Evening Standard reported that TESCO is facing growing industrial unrest in Poland after a two-hour strike at a hypermarket in the southern town of Tychy. The strike by cashiers followed protests over pay from unionized workers in its store in Czestochowa. Tesco has been accused of exploiting its Polish workforce. It claimed the Tychy strike last week was illegal.Tesco spokesman Przemyslaw Skory said: “We do not know yet what action we will be taking against the participants in the strike but we will be considering each individual involved.” A Tesco employee in Warsaw said: “Managers can do what they like, and the workers are treated like cattle. There is no respect for us as individuals or even as human beings as far as I can tell. We are treated like some kind of sub-species. We work our guts out and do everything they say and what do we get in return?”

In April 2007 the UK’s Transport and General Workers union reported that drivers at Tesco’s distribution depot at Livingston in Scotland started a strike action ballot this Monday, were sent a strong message of support by their colleagues in the Transport and General Workers Union today. Shop stewards representing over 5,000 key workers at Tesco’s main distribution depots rejected the supermarket chain’s “divide and rule” tactic. At the close of their meeting in London, they agreed to launch a national campaign against Tesco to defend against changes to their pay, terms and conditions. “The shop stewards were very clear that they saw the attack on their colleagues in Scotland as a first step by Tesco against all the plants,” said Ron Webb, T&G national secretary for transport. “The reports we had from the rest of the country strongly indicated that Tesco are aggravating the concerns of our members.”

Findings

Tesco is presently under very close scrutiny in the U.S. and abroad. Although the company appears to be a responsible corporate citizen on paper and says all the right things publicly, the company’s blatant disregard for fostering congenial union relationships for its U.S. workforce is a serious concern and represents a real risk for shareholders. Additionally, the company is not a signatory to the UN Global Compact and there are questions about whether the company is able to enforce the ethical standards it has established in its policies.