Tesco Strategy Analysis

Introduction

First I will start with brief introduction of the firm I am writing about. Tesco is the largest food retailer in UK, operating around 2,318 stores worldwide. Tesco operates around 1,878 stores throughout the UK, and also operates stores in the rest of Europe and Asia. Tesco.com is a wholly-owned subsidiary offering a complete online service, including tescodirect.com and tesco.net. The company also offers a range of both online and offline personal finance services. Tesco is headquartered in Hertfordshire, UK. For the year ended February 2004 Tesco PLC achieved revenues that totaled £33,557 million, an increase of 18.7% against the previous year’s revenues that were £28,280 million. (5)

History

This part I have divided into three main fraction: Grows; Marketing/management strategy and competition during each particular period of time. Competition is included here for the reason that I am strongly persuaded that it is the main driving force for any business.

Pre 1980

Grows

The Tesco brand first appeared in 1924. Name was formed by using the first three letters of the supplier’s name (TES), and the first two letters of a brand creator surname ((CO) Jack Cohen), forming the word “TESCO”. Tesco floated on the London Stock Exchange in 1947 as Tesco Stores (Holdings) Limited. The first self service store opened in St Albans in 1951 (still operational in 2008 as a Metro), and the first supermarket in Maldon in 1956. During the 1950s and the 1960s Tesco grew organically, but also through acquisitions until it owned more than 800 stores. The company purchased 70 Williamsons stores (1957), 200 Harrow Stores outlets (1959), 212 Irwins stores (1960), 97 Charles Phillips stores (1964) and the Victor Value chain (1968) (sold to Bejam in 1986). (3)

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Marketing strategy

Tesco introduced the new superstore concept for Britain. After a few years from appearance (1968) superstore became very popular for it’s vide range of products at competitive price. In 1974 company introduced its first gas station which had lower price for petrol but was adjacent to Tesco superstore. (1)

1980s

In May 1987 Tesco completed its hostile takeover of the Hillards chain of 40 supermarkets in the North of England for £220 million

1990s

Grows

1995

Tesco overtook Sainsbury and became UK largest supermarket. In the 90s international expansion began: France (1992) Hungary (1994) Poland (1995) Czech Republic (1996) Slovakia (1996) Republic of Ireland (1997) Thailand (1998) South Korea (1999). Entering foreign markets in the first half of 90s was made mainly by purchasing already existing stores or joining the local retail leader. For example first stores in the Czech Republic were opened by buying US corporation Kmart’s operations in the country and converting them into Tesco stores. In 1997 expansion to Asia market began from acquiring 13 shops from CP Group in Thailand and formed Tesco Lotus. In 1999 by joining with Samsung entrance to South Korea market was achieved. (3)(1)

Marketing strategy

Tesco introduced a loyalty card, branded ‘Club card’, in 1995. This card was giving discount but what is more important it gave an opportunity to keep a hand on a pulse of customers need and to collect all necessary data for future planning’s. New goals were set: Expansion to foreign market, developing of a nonfood products selling. Tesco’s main advertising slogan appeared “Every little helps”. Its advertisements in print and on television mainly consist of product shots (or an appropriate image, such as a car when advertising petrol) against a white background, with a price or appropriate text, e.g. “Tesco Value”, superimposed on a red circle. (1) On television, voiceovers are provided by recognizable actors and presenters, such as James Nesbitt, Jane Horrocks, Terry Wogan, Ray Winstone, Neil Morrissey, Martin Clunes, David Jason and Kathy Burke among others. In international expansion Tesco took to attention difference in tastes between different regions. While entering Central Europe market Tesco was instilling western standards of shopping by introducing large number of hypermarkets. (2) Also very big attention was devoted to customers’ needs usually it was represent in product line. In Czech Republic for example Tesco concentrated on providing Czech products in retail shops. In China, the locals preferred to buy live fish, turtles, meat and other popular products such as instant noodles, unlike in European countries. Tesco had to provide these in its hypermarkets to draw the Chinese customers. Similarly in Thailand, the customers spent a huge proportion of their income on fresh foods. To adapt to the shopping habits of the Thai customers, Tesco developed a fresh market hall – an area adjacent to the main store, wherein 14 local vendors sold a range of fresh fruits, vegetables, meat, ready-to-eat products and other local food products. This area was designed to provide the Thai customers with traditional and local atmosphere.

Competition

On 21 March 1997 Tesco announced the purchase of the retail arm of Associated British Foods which consisted of the Quinnsworth, Stewarts and Crazy Prices chains in the Republic of Ireland and Northern Ireland, as well as associated businesses for £640 million. The deal was approved by the European Commission on 6 May 1997. This acquisition gave it both a major presence in the Republic of Ireland, and a larger presence in Northern Ireland than Sainsbury’s which had begun its move into the province in 1995. Tesco’s nonfood marked faced a huge competition level in GB from such giants like ASDA and Marks&Spenser. At the beginning of entrance to the Hungarian market main competition was represented by small family-run stores, which served immediate customer needs. The strategy against it was introducing more than 1000 its own label products at 20% cheaper price than branded ones. Later Auchan (Fr), Metro (gr) and Cora (Fr) entered Hungarian market and became the main competition.

2000s

Grows

After purchasing 35% share of Grocery Works in July 2001 Tesco became involved in the USA internet grocery retailing. In 2002 Tesco purchased 13 HIT hypermarkets in Poland. By purchasing T&S Stores, owner of 870 convenience stores in the One Stop, Dillons and Day & Nite chains in the UK it made a huge step in the homelands convenience store market. In October 2003 Tesco started UK telecoms division which added to existing already internet service provider business also mobile and home phone services. In June 2003 Tesco purchased the C Two-Network in Japan and acquired a majority stake in Turkish supermarket chain Kipa. In 2004 Tesco continued its acquiring parade by buying Adminstore, owner of 45 Cullens, Europe, and Harts convenience stores, in and around London. August same year broadband service was launched. In Thailand Tesco Lotus was a joint venture of the Charoen Pokphand Group and Tesco but facing criticism over the growth of hypermarkets CP Group sold its Tesco Lotus shares. In late 2005 Tesco acquired the 21 remaining Safeway/BP stores after Morrisons dissolved the Safeway/BP partnership. In mid 2006 Tesco purchased an 80% stake in Casino’s Leader Price supermarkets in Poland. They will be rebranded into small Tesco stores. (3; 1)

Marketing/management strategy

Tesco`s international expansion strategy in Asia was mainly represented as joint ventures with the local partner firms like Samsung Group in South Korea (Samsung-Tesco Home plus), and Charoen Pokphand in Thailand (Tesco Lotus) due to sensitivity of local market for foreigners and a bit more complicated “know how” than the rest of the world. In these mergers local personnel has an assured quantitative domination in low and middle management positions. . It also formulate not big acquisitions an important part of its expansion strategy. For instance, in its 2005/2006 financial year it made acquisitions in South Korea, one in Japan and one in Poland. In September 2005 Tesco announced that it was selling its operations in Taiwan to Carrefour and purchasing Carrefour’s stores in the Czech Republic and Slovakia. Both companies stated that they were concentrating their efforts in countries where they had strong market positions. (1)

In May 2007 Tesco decided to move its online operations head office to Switzerland for the tax reasons. This allows it to sell CDs, DVDs and electronic games through its web site without charging VAT. This opportunity was closed by government in June 2008.

Tesco has made a devotion to corporate social responsibility, by contributing of 1.87% in 2006 of its pre-tax profits to local communities’ charity organizations. (3) In 1992 Tesco started a “computers for schools scheme”, offering computers in return for schools and hospitals getting vouchers from people who shopped at Tesco. Until 2004, £92m of equipment went to these organizations. The scheme has been also implemented in Poland.”BITC – Tesco Computers for Schools”. Starting during the 2005/2006 association football season the company now sponsors the Tesco Cup, a football competition for young players throughout the UK. The cup now runs a boy’s competition at Under 13 level and two girl’s cups at Under 14 level and Under 16 level. Over 40,000 boys alone took part in the 2007/08 competitions.

Competition

Tesco was accused by the UK Office of Fair Trading (OFT) for being a part of a price cartel; among participants were top five UK supermarkets (Safeway, Tesco, Asda, Morrisons and Sainsburys) and a number of milk, butter and cheese. The investigation started in 2007 and in the same year Asda, Sainsburys and Safeway adjudged them guilty in acting against consumer interest by covering of 5000 farmers support in recovering after the foot-and-mouth crisis. Total fine for them amounted £116M. Tesco, on the other hand, maintain to deny any activity in this cartel, therefore it is investigated by the OFT. (3)

Strategic analysis

Industry analysis: PESTE. UK.

Political Factors

Because of employment legalization reasons, the state encourages big firms to be a representation of different kind of labor demand, starting from part time, lower-paid local jobs till higher-paid and centrally-located jobs. (7) This includes hiring students, disabled and elderly workers, who are paid lower rates but for the reason of a usually frequent staff turnover, these workers propose a higher level of devotion and therefore represent desirable labor supply.

However at Tesco, an overwhelming majority perceived no difference in the treatment of part-time and full-time employees.(7) Moreover In a period of six years, Tesco procured employment to over 2,000 unemployed and disadvantaged people, according its job guarantee scheme. In this scheme the aim is to provide training and employment to people who are first-time workers, single parents and older people. (8)

Competition Commissions ruling and have been lobbying to boycott supermarkets and large food manufacturers and instead support small independent suppliers, processors and retailers at the expense of large supermarkets like Tesco. A supporting argument can be shown in figures. In UK by 2004 small grocery stores overall had employed 500,000 people with turnover of £21 billion, and Tesco managed to hire twice less (250,000) with even bigger turnover £29bn. (12)

Proposals from the European commission to clamp down on predatory pricing policies to prevent the selling of goods below cost price such as exist within France Germany, Ireland and Spain.

Furthermore, there are standards for nutrient descriptors such as “light”, “reduced fat” and “low fat”, set by governmental and European agencies like the European Food Authority (EFA)

Economical Factors

The UK food retailing market is mature and highly competitive and this market has been affected by negative inflation in the food sector. The diffusion of domestic markets and the desire for expansion have treated increasing globalization in retailing via self-start, merger and acquisition and franchising. Poor land resources issue enhanced by government legislation on planning restrictions on out of town shopping facilities makes it difficult to expand into these locations Britain’s supermarkets are racing to open small high street stores to cash in on demand for convenience shopping in urban areas. (6)

Social/Cultural Factors

Demographic changes as for example higher percentage of older people, less women as housewives and overall trend for eating outside mean that UK retailers are responding towards changes by focusing on added value products and services. Moreover new trends are the supply chain and other operations cost reduction and own-label share in the business, overall silence about taking new supplier between national retailers.

In the UK a tendency toward healthier food and environmental awareness, represented by friendly packaging can be noticed. Nevertheless in the last ten years there has been a quantity improve in consuming quality products with good tastes, among them exotic fruits, fish and other can be noticed. Overall, can be stated that UK population is becoming more experimental in their food traditions. (9)

Technological Factors

Changes in retailing methods as such clothes sales via the Internet is now a common place in retailing. Paperless operation, the management and administration of the company are undertaken on IT systems, which are accessed through secure servers; provide flexibility in the running of the business. As Sweden is at the forefront of technological advancement with national companies like Ericsson, Tesco would enjoy the comprehensive logistics and distribution channels already in place.

Environmental Factors

Starting from 2003, an increase in pressure on large companies and managers in UK may be observed, main motivation of a government is to make them be more aware of their responsibility to society, and act in a way which benefits society overall. For the food retailing the biggest issue is environmental, the main area for them to act in the “socially responsible” way. Therefore by recognizing this drift movement, Tesco developed Corporate Responsibility committee in 2001 in order to fulfill its obligations before society. (6)

In 2003 the UK government has launched a strategy for environmentally friendly consumption and manufacturing in order of cutting waste, reducing expenditure of resources and diminishing environmental damage. One of the legislation was a creating of a tax on highly processed and fatty foods advertising. The so-called ‘fat tax’ directly affected the Tesco product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers. (9)

Porter’s Five Forces

Threat of New Entrants

The grocery market of United Kingdom is crucially dominated by a small number of competitors, among them such brand names as Tesco, Asda, Sainsbury’s and Safeway that hold a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a another 10%. Starting from 80th the grocery retailing system has been represented mainly supermarket business. This powerful force had a major impact on the small local, private owned shops, such as grocery, bakers and etc. Therefore in nowadays it can be treated as a huge blockade for the companies who are willing to to enter this market. As an example, two reasons can be stated: necessity of a sufficient capital because of large fixed costs and highly developed supply chains. This is also evident in huge investments done by large chains, such as Tesco, in advanced technology for checkouts and stock control systems that impact new entrants and the existing ones. Other factors can be economies of scale and differentiation (in the provision of products or services with a higher perceived value than the competition) which is highly developed by Tesco and Asda due to their promotional/advertizing activity, aggressive operational moves in product development, and more sophisticated distribution.

Bargaining Power of Suppliers

These representatives of a supply side are usually influenced by key grocery chains and are under a constant pressure of losing their business to the supermarket chains. As a result, it enhances a strong enough as it is positions of dominant stores like Asda and Tesco in compromising better prices from suppliers, which smaller market chains are just unable to go with. Moreover UK based suppliers are vulnerable to the ability of big retailers to source their products abroad at a cheaper price. The UK Competition Commission found that Tesco steadily paid its suppliers 4% below the industry average on the 2000 date. In 2005 newspaper “Financial Mail on Sunday” started the campaign called “supermarket bullies” to uncover cases of pressuring farmers by large grocery chains. “We have heard numerous cases of poor treatment of suppliers by Tesco, but all of those we spoke to asked to remain anonymous for fear of losing contracts. One supplier said “I would like to give you this info but cannot risk being seen to be a troublemaker for fear of losing valuable supermarket customers”” was written in the report. (12) Tesco voluntary signed for supplier Code of Practice provided by Department of Trade and Industry (dti) to solve the problem of pressuring suppliers. However as Office of Fair Trading states that code is not working effectively, suppliers concerned about being de-listed by supermarkets or worsening trade conditions if they will officially complain.

Bargaining Power of Customers

Tesco’s famous loyalty card – Club card can still be named as the most successful customer maintenance strategy that plays a big role in Tesco’s financial profitability upkeep. Brand Tesco can hold and increase its customer base because of its permanent tendency to meet customer needs, constant in-store promotions, customizing service to maintain lower prices. A crucial change has occurred in shopping habits of UK population in recent years. People tend to satisfy more of their needs in one place and in shorter time, it shows a necessity for large chains to expand their services into new non-food markets as banking, pharmacies, telecoms, etc. Consumers have become keep an eye on fair trade and the influence of developed countries consumers on the Third World suppliers. Fairly traded products as tea, coffee and cocoa are viable, and such products are now widely available at the majority of large chains. In 2005 Tesco had the largest range of fair-trade products in the UK, it was represented by 91 fair-trade products line, however comparing with overall context of the 40,000 products line it looks rather tiny (0.2%) achievement of supporting third-world countries. Moreover there are evidences that supermarkets exploiting customers good will by overcharging for fair trade products. “The supermarkets know that people do not go for the cheapest product when buying fair trade because they think the extra money is helping someone in the developing world.” John McCabe, a retail pricing expert states. (12)

Threat of Substitutes

In the grocery industry small chains of convenience stores are emerging in the industry. In this case Tesco, Asda and Sainsbury’s are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centers. With a giant share of the grocery retailing market represented by Tesco`s chain, small private shops can be placed nowhere but substitutes. Most local retailers wind it almost impossible to compete with Tesco because its enormous buying power. On average Tesco contracts with wholesalers are 11.5 per cent cheaper than for private independent retailers. Londis, the “corner shop” brand in UK, has claimed that it is cheaper to purchase brands from Tesco and resell them than to buy them from wholesalers. (12)

Bargaining Power of Competitors

The retailers market environment can be characterized as dominated by large players with significant grows, increasing store size, emergent retailer concentration, and the utilization of a range of formats, which are now important characteristics of the sector. As it was already stated, almost all purchasing power of the food retailing industry is acquired in the relatively small number of retail buyers. Besides market can be described as mature operating, where grows is difficult and it serves as a driver to diversification into non-food areas, moreover, consumers are more and more demanding and sophisticated, big players like Tesco are constantly accruing large amounts of consumer information that can be used to predict and fulfill their changing preferences. This highly competitive market currently is in the position where advanced technology and innovations are required for maintaining and increasing market share. Such innovation can be seen in the development of a range of trading formats, in response to changes in consumer behavior. The dominant market leaders have responded by refocusing on price and value, whilst reinforcing the added value elements of their service. (8, 4, 6)

Corporate Social Responsibility Initiatives

Mission statement: Creating value for customers, to earn their lifetime loyalty.

Tesco’s corporate responsibility work is reflected in its everyday activities, mainly focusing on use of organics, use of energy and recycling water and in addition charity and community initiatives. Tesco’s CSR strategy was “to earn the trust of our customers by acting responsibly in the communities where we operate, by maximizing the benefits we bring and working to minimize any negative impacts.” (10) The company is publishing “Corporate Social Responsibility Report” every year, with a detailed description of a company’s CSR approach, implementation and policies. Usually it consists of such element as “Environment”, “Community”, “Suppliers and ethical trading”, “Customers, choice and health” and “People”.

A Corporate Responsibility committee was established in 2001 it consists of different functions executives, who are gathering four times a year for Tesco`s Corporate Social Responsibility initiatives discussion. The first report of committee came out in 2001. CSR plays a big role in strategy decision making of Tesco due to its wish to ensure that corporate responsibility creates a component of the everyday activities of the company.

Because of its large size and degree chain, supermarkets like Tesco are influencing society in a broad perspective by encouraging its employees, suppliers and customers to be socially responsible. In Tesco`s case an example of this kind of responsibility can be its charity, fund raising for education, promotion of health food and making it as affordable as it can be. This social responsibility policy is implemented not only for chains operating in UK, but also to the all countries where Tesco is developing its business. (11)

In 1992 Tesco started a “computers for schools scheme”, offering computers in return for schools and hospitals getting vouchers from people who shopped at Tesco. Until 2004, £92 million of equipment went to these organizations. The scheme has been also implemented in Poland. Starting during the 2005/2006 football season the company now sponsors the Tesco Cup, a football competition for young players throughout the UK. The cup now runs a boy’s competition at Under 13 level and two girl’s cups at Under 14 level and Under 16 level. Over 40,000 boys alone took part in the 2007/08 competitions. (3) Tesco gave at least 1% of its pretax profit to charity, in the form of donations, employee time and gifts. In the fiscal 2004-05, Tesco’s total charity contributions stood at £21,762,931. Tesco Charity Trust provided grants of £878,556 to local and national charities in the UK… (3)

Though Tesco`s initiatives toward being more social and environmental responsible a quite visible, there is some issues it is criticized for. For instance, Tesco distributed 1.4 billion plastic bags in 2004, which ended up in landfill. In the UK, only 7% of plastic bags were recycled and the company continued using more and more plastic bags. Grocery packaging makes up roughly a quarter of all household waste. (11) Second what is Tesco claimed for is energy use. Tesco uses twice more energy and on average in the industry – 4.3 GJ/m2/yr to 2.4 GJ/m2/yr respectfully. Among others concerns of Tesco`s environmental friendship are Pesticides and organic food (the issue is that not just Tesco tries to gives no privilege to non pesticide food, but also overprices organic goods); GM foods (dairy and meat products from animals fed on GM cattle feed (maize and soya)) and deforestation.

Aims and Objective

Five objective of Tesco`s business strategy are:

To be a successful international retailer

Since the mid 90th Tesco have been investing in market out of the country, looking for new opportunities for expansion and accumulating long term securities and returns for shareholders. Today Tesco is present in 13 markets outside UK and planning to enter India. To fulfill all international ambitions Tesco has evolved a strategy based on six elements. Be flexible(in Japan people prefer to buy small amount of fresh food every day) ; Act local (In Thailand customers have a habit to interact with vendors and choosing what they want from piles of production); Maintain focus; Use multi-formats (hole spectrum from convenience to hypermarkets) ; Develop capability; Build brands.

To grow the core UK business

Core UK business has over 285,000 employees and over 2,200 stores, moreover, 70% of sales and profits comes from UK business. Tesco in planning to maintain their different store format strategy, which consists of Express, Metro, Superstore, Extra and Homeplus.

To be as strong in non-food as in food.

The broadest range of non-food products can be seen in Extra stores and Homeplus that include such products as clothing, health and beauty, stationery, cookshop and soft furnishings, etc. In 2006 was launched Tesco Direct, an online catalogue with non-food offers, including almost 13,000 products in it.

To develop retailing services – such as Tesco Personal Finance, Telecoms and Tesco.com

“All our customers are different, and their needs are continually changing. That’s why we continue to offer more than one way to shop.” Tesco Personal Finance is giving for customers a choice of 28 products varying from savings account and credit cards to car insurance. Tesco.com has attracted more than one million customers since 2000 in UK. Main target groups are people without access to transport and without time for shopping. Tesco.com also operates in the Ireland and South Korea.

To put community at the heart of what we do.

“Our core purpose is to create value for customers to earn their lifetime loyalty. Our values, which underpin everything we do, are that no-one tries harder for customers and to treat people how we like to be treated.”

References

1. “Tesco: The British Supermarket Chains Global Expansion Strategies» ICFAI Business School; Case development centre

2. “Supermarket Wars” Andrew Seth and Geoffrey Randall

3. Wikipedia.org

4. http://www.answers.com/topic/tesco-plc-adr

5. http://www.tescoplc.com/plc/ir/

6. Ivoryresearch.com “Strategic Management of TESCO supermarket: PESTEL analysis, Porter’s 5 Forces analysis, Critical success factors, SWOT Analysis, VALUE CHAIN analysis, TESCO’S strategic options, Core Competences & Cultural Web.”

7. “Part-time Workers in the Multiple Retail Sector Small Change from Employment Protection Legislation?” Alison Balchin

8. http://ivoryresearch.com/sample5.php

9. Marivic Butod “Strategic Analysis of Morrison, Asda and Tesco” July 20, 2009

10.’Tesco Corporate Social Responsibility Report 2009′

11. ttp://www.icmrindia.org “Tesco’s Corporate Social Responsibility Initiatives”

12. “The Tesco Takeover” the friends of the earth report. http://www.foe.co.uk/

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