Tesco’s retreat from Japan is further evidence of how hard it is to grow businesses in the country

Why are we talking about this now?

Last week, Tesco put its Japanese operation up for sale and said it wanted to exit the market because it could not build a scalable business. Japan is difficult for international companies – Carrefour pulled out in 2005, though Walmart remains. Tesco has 126 Japanese stores and a market share of just 0.2%.

Have other retailers stopped operating in international markets in the past few years?

Topps Tiles called time on its Dutch business, stating it was impossible to overhaul its operation, while Halfords shut its central European business, and said the recession was holding back its expansion opportunities. It had stores in the Czech Republic and Poland. More recently, Clinton Cards liquidated its Birthdays Ireland operation after struggling there for some time.

When should retailers pull the plug?

Retailers have to weigh up the short-term investment versus the long-term potential. Many enter a new market via acquisition, which can immediately give them scale, but if they only purchase a small number of stores, there must be an opportunity for substantial organic growth. If, however, the retailer does not achieve scale, the costs can outweigh the potential.

In the US, for example, Tesco’s Fresh & Easy business remains a loss-making concern, but so far the grocer is committed to the market. It suffered from unfortunate timing as shortly after launch the US plunged into recession, but it carried on, tweaked the model and believes it will break even by February 2013. Part of the reason it makes a loss is that it does not have the scale to deliver maximum efficiencies and that is what the grocer is focusing on.

Which markets are retailers concentrating on most?

Planet Retail analyst Rob Gregory points out that many global retailers are investing in what they consider high-growth markets, such as China.

This means they are re-evaluating their position in markets where they believe it will take much greater investment to become a major player. Global retailers such as Tesco are only interested in markets where they think they have a chance of becoming a top-three player.

When should retailers stick it out in a struggling market?

If retailers can see long-term gain, then it can be worth holding on through the tough times. Kingfisher has had a tough time in China, but is still there. Retailers can’t carry loss-making businesses forever, though. Something has to give if they want to invest elsewhere.