British supermarket giant Tesco is on a roll. Fresh from reporting its first billion-pound profits, the group is keen to expand its stores to Asia. So far, Tesco supermarkets have sprouted in Thailand, South Korea and Taiwan. In Malaysia, the group has entered into a joint venture with conglomerate Sime Darby, and is currently conducting research into China and Japan in relation to market entry. Tesco estimates that by the end of 2002, 45% of the group’s selling space will be outside the United Kingdom (UK), with a large proportion of this being in Asia.
The retailer’s treasury functions, however, remain centralized in a global treasury centre in the UK with just four dealers handling exposures of 845 stores, including more than 100 stores in Asia. The rationale behind Tesco’s global treasury centre is, firstly, the need to export the best practice in retailing around the world, within the distinct culture of Tesco. "In terms of best practice around the world, centralization was very much the theme," says Peter Evans, international treasurer for Tesco.
Secondly, Tesco wants to manage risk, both from within the organization and with external counterparties, in a centralized manner. "We are more than just a retailer. We also build and operate our stores in each country so the size of our capital investment can be quite large. So we needed to create a structure that would minimize the risks involved."
Thirdly, a critical part of Tesco's successful retailing is controlling overhead costs. "It would not have been cost effective for us to have two or three people in each country undertaking treasury activities as compared to increasing the headcount by one or two in the global treasury center," explains Evans. In addition, Tesco was keen to let each business "run the shop". "In retailing, the interface with the customer is critical and all our efforts are focused on this relationship," says Evans. By operating through a centralized treasury, Evans found that an additional distraction to the overseas subsidiary was removed and this helped it to concentrate on this all important customer interface.
Lastly, centralization means that structure and treasury processes can be standardized. "We could move a finance director from one country to the next and they would be fully up to speed with the treasury operations before their feet had touched the ground," says Evans.
Tesco deals with local currency wherever its stores exist and by sourcing locally, the company has a natural hedge. Furthermore, any profits are reinvested back into the country of location, to build more stores. This means that Tesco has little need for a pooling structure. "We have no pooling because they are all in different currencies. We are operating in some of the most tightly regulated countries in the world. So we are unable to pool everything back up," says Evans. "Given that all these businesses are in a growing stage, they are all net takers of cash. There is, therefore, little benefit in pooling." Evans adds that Tesco does not sell from one company to another, so there is no need for netting.
Tesco currently concentrates its cash management business in Asia on two major international banks -- Citibank and HSBC. "The local capability of international banks now is such that we don't really need to get directly involved in domestic banking arrangements. Our primary aim is to achieve a turnkey solution with the overlay bank. We expect them to arrange and operate the necessary domestic arrangements," says Evans. Where a turnkey solution is not available,Tesco will look for alliance arrangements, and as a last resort, will establish a tri-party agreement between itself, a domestic bank and the overlay bank. HSBC operates Tesco companies' accounts in Thailand and Korea, and Citibank has Tesco's Taiwanese business. Tesco is currently tendering for a bank to handle its Malaysian joint venture.
"We use two banks on purpose," Evans reveals. "We get them to compete head to head in each country and this way we also get to choose the best local operation in addition to keeping the banks honest."
Each of Tesco's Asian subsidiaries operates the company standard tri-bank account structure: an accounts receivable, accounts payable and a group treasury (GT) account. The accounts are all in local currency and in the name of the local onshore subsidiary. "Wherever possible, we like to operate on a maximum of three accounts per country. This greatly simplifies the cash management process. In addition, we keep flows gross to speed up the reconciliation process," says Evans. When the receipts come in at the end of the day, the proceeds then get swept into the GT account. This account is managed on behalf of the subsidiary by the treasury centre in London.
"We also put funding in the GT account, and manage the liquidity in that account. So we invest the excess cash in bank debt or commercial paper within set credit risk parameters," Evans says. The investments are principally short-term in nature as Tesco looks to manage the cash generated by the existing operations before investment in additional stores.
There are drawbacks to a centralized treasury, though. "The problem is real-time contact with and knowledge of the local markets," Evans admits. "But we believe that we have overcome this through building strong relationships with the in-country teams and our relationship banks."
Tesco will continue with the policy of centralized treasury but will look to operate it within a regional structure when a critical mass of operations has been achieved within Asia. "It will be a change in logistics in terms of working within a time zone," Evans says.
For example, Tesco wants to try out the online foreign exchange system FXALL. "Transactional exposures arise when we are sourcing goods for re-sales out the country, for example US apples for sale in Thailand," says Evans. "This creates a USD exposure which we need to hedge. Through FXALL, we would set the parameters of pricing and the size of the deal. In-country finance staff can then do the hedging, and we can monitor every deal being done in London. The system can directly debit the accounts and deliver the currency required to suppliers. This way we don't have to generate a whole cottage industry of foreign exchange management, and it allows Group Treasury to concentrate its efforts on working with the subsidiary to identify and measure transactional currency risk or pass things back to the UK -- because it is all about identification of the risk, which the in-country staff can do."
The next stage then, says Evan, is a shared service centre. "Our stores stock about 160 individual stock items, so we have to deal with a correspondingly large volume of invoices. The next step would be to outsource this activity or centralize it in a low-cost regional base."
