Tesco

Scoring Points: How Tesco Is Winning Customer Loyalty

Expansion

In 1994, the company took over the Scottish supermarket chain William Low. Tesco successfully fought off Sainsbury's for control of the Dundee-based firm, which operated 57 stores north of the border, paving the way for Tesco to expand its weak presence in Scotland. To the present day, Tesco has based its Scottish headquarters at the former Wm. Low offices in Dundee. From small beginnings in Scotland - Inverness was recently branded as "Tescotown", since an estimated 50p in every 1 spent on food is believed to be spent in the three Tesco stores within the city. (Nationally, it is estimated that 1 in every 8 is the proportion spent) It introduced a loyalty card branded 'Clubcard' in 1995 and later an Internet shopping service. During the 1990s it expanded into Central Europe, Ireland and East Asia. In July 2001 it became involved in internet grocery retailing in the USA when it obtained a 35% stake in GroceryWorks. In October 2003 it launched a UK telecoms division, comprising of mobile and home phone services, to complement its existing internet service provider business. In August 2004, it also launched a broadband service.

Tesco's growth over the last two or three decades has involved a transformation of its strategy and image. Its initial success was based on the "Pile it high, sell it cheap" approach of the founder Jack Cohen. The disadvantage of this was that the stores had a poor image with middle-class customers. In the late 1970s Tesco's brand image was so negative that consultants advised the company to change the name of its stores. It did not accept this advice, yet by early 2005 it was the largest retailer in the United Kingdom, with a 29.0% share of the grocery market according to retail analysts TNS Superpanel, compared to the 16.8% share of ASDA and 15.6% share of third-placed Sainsbury's, which had been the market leader until it was overtaken by Tesco in 1995. Key reasons for this success include:

• An "inclusive offer". This phrase is used by Tesco to describe its aspiration to appeal to upper, medium and low income customers in the same stores. According to Citigroup retail analyst David McCarthy, "They've pulled off a trick that I'm not aware of any other retailer achieving. That is to appeal to all segments of the market" . By contrast ASDA's marketing strategy is focused heavily on value for money, which can undermine its appeal to upmarket customers even though it actually sells a wide range of upmarket products. During its long term dominance of the supermarket sector Sainsbury's retained an image as a high-priced middle class supermarket which considered itself to have such a wide lead on quality that it did not need to compete on price, and was indifferent to attracting lower-income customers into its stores. This strategy has been abandoned since losing the number 1 spot to Tesco and particularly since the arrival of Justin King as CEO in 2004 who has established a new customer-focused strategy closer to that of Tesco.

• One plank of this inclusivity has been Tesco's use of its own-brand products, including the upmarket "Finest" and low-price "Value". The company has taken the lead in overcoming customer reluctance to purchasing own brands, which are generally considered to be more profitable for a supermarket as it retains a higher portion of the overall profit than it does for branded products.

• Customer focus: Sir Terry Leahy, chief executive since the mid 1990s, has taken the bold step of trying not to focus on the usual corporate mantra of "maximising shareholder value". The company's mission statement reads, "Our core purpose is, 'To create value for customers to earn their lifetime loyalty'. We deliver this through our values, 'No-one tries harder for customers', and 'Treat people how we like to be treated'". The underlying aim is of course to make higher profits, but there is a clear focus on customer service at the top level of the company.
• Diversification: The company has a four-pronged strategy:
  • "Core UK business" - That is, grocery retailing in its home market. It has been innovative and energetic in finding ways to expand, such as making a large-scale move into the convenience-store sector, which the major supermarket chains have traditionally shunned.
  • "Non-food business" - Many United Kingdom supermarket chains have attempted to diversify into other areas, but Tesco has been exceptionally successful. By late 2004 it was widely regarded as a major competitive threat to traditional high street chains in many sectors, from clothing to consumer electronics to health and beauty to media products. Tesco sells an expanding range of own-brand non-food products, including non-food Value and Finest ranges. It also has done quite well in non-food sales in Ireland. CDs are one of the best examples, with Tesco Ireland promising to sell all chart CDs (except compilations) for 14.95 compared with HMV Ireland or Golden Discs selling the same for around
    20.
  • "Retailing services" - Tesco has taken the lead in its sector in expanding into areas like personal finance (see below), telecoms (see below), and utilities. It usually enters into joint ventures with major players in these sectors, contributing its customer base and brand strength to the partnership. Other supermarkets in the United Kingdom have done some of the same things, but Tesco has generally implemented them more effectively, and thus made most profit.
  • "International" - Tesco began to expand internationally in 1994, and in the year ending February 2005 its international operations accounted for just over 20% of sales, or about
    7 billion (approximately $13 billion). It has focused mainly on developing markets with weak incumbent retailers in Central Europe and the Far East and now in 2006 they are going to branch out in the United States. The medium term aim is to have half of group sales outside the United Kingdom. Tesco rolls out successful UK initiatives in other countries. For example Tesco Personal Finance and Tesco Express convenience stores both operate in several markets.

  Internet operations

  Tesco has operated on the internet in the UK since 1994 and was the first retailer in the world to offer a robust home shopping service in 1996. Tesco also has Internet operations in the Republic of Ireland and South Korea. Grocery sales are available within delivery range of selected stores, goods being hand-picked within each store. In contrast to the warehouse model followed by Waitrose's home delivery service partner Ocado, this model, which is now also applied by competitor Sainsbury's, allowed rapid expansion with limited investment, but has been criticised by some customers for a high level of substitutions arising from variable stock levels in stores. Nevertheless, it has been popular and is the largest online grocery service in the world.

  In 2001 Tesco invested in GroceryWorks, a joint venture with the American Safeway Inc. (who had long since sold-off their UK subsidiary and Tesco's former rival, Safeway plc), operating in the United States and Canada. GroceryWorks has stepped into the void left by the collapse of Webvan, but did not expand as fast as initially expected and Tesco sold its stake to Safeway Inc in 2006. 

  Concerned with poor web response times (at the time of its launch in 1996, broadband was virtually unknown in the UK), Tesco offered a CDROM-based offline ordering program which would connect only to download stock lists and send orders. This was in addition to, rather than instead of, ordering via web forms, but was withdrawn in 2000.

  Tesco claimed in its 2005 annual report to be able to serve 98% of the UK population from its 300 participating stores. In the financial year ended 25 February 2006 it recorded online sales up 31.9% to
  948 million and profit up 54.9% to
  56.2 million.

  Tesco is expected to launch its first home shopping catalogue in autumn 2006, as another channel for sales of its non-food ranges. This is expected to be integrated with the internet operation, with both channels being branded as "Tesco Direct".

  Tesco launched an advertising campaign for its internet phone, marketing the service to customers by offering free calls to all other Tesco internet phone customers.

  On 1 October 2006, Tesco announced that it will be selling six own-brand budget software packages for under
  20 each, including office and security suites, in a partnership with software firm Formjet. As Formjet is exclusive distributor for Panda Software and Ability Plus Software, packages from these companies are likely to feature.

  Operations outside the UK

  Many British retailers that have attempted to build an international business have failed. Tesco has responded to the need to be sensitive to local expectations in foreign countries by entering into joint ventures with local partners, such as Samsung Group in South Korea, and Charoen Pokphand in Thailand (Tesco Lotus), appointing a very high proportion of local personnel to management positions.

  In late 2004 the amount of floorspace Tesco operated outside the United Kingdom surpassed the amount it had in its home market for the first time, although the United Kingdom still accounted for more than 75% of group revenue due to lower sales per unit area outside the UK. Tesco regularly makes small acquistions to expand its international businesses. For example in its 2005/06 financial year it made one in Korea, one in Poland and one in Japan.

  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. Tesco is the grocery market leader in the Republic of Ireland, with a reported November 2005 share of 26.3%. On their Irish website, they also claim to be the largest purchaser of Irish food with an estimated 1.5 billion annually.

  United States

  On 9 February 2006 Tesco announced that it plans to move into the United States by opening a chain of convenience stores on the West Coast (Arizona, California and Nevada) in 2007. The initial planned capital expenditure is up to 250 ($436m) million per year. CEO Terry Leahy stated, "We have committed serious resources to developing a format that we believe will be really popular with American consumers". Investors responded with some scepticism to the project, with a small fall in the company's share price on the day of the announcement. In May 2006 the Los Angeles Times reported that Tesco had purchased a 130 000 m (1.4-million-square-foot) distribution center in Riverside County, California, near Los Angeles, and planned to acquire another in Phoenix, Arizona. The stores are expected to be around 1400 m (15,000 square feet) - good sized supermarkets in many countries, but a rather odd segment in the U.S. market.

  Tesco's US research did not stop at just shopping with consumers. In east Santa Monica, away from the beaches and tourists, Tesco constructed a dummy store within a warehouse.  Knock down the walls of the warehouse and it could be a standalone fully functioning store, said a Tesco insider.

  Such is the secrecy surrounding Tesco's US plans that when it first built the store it pretended to be making a film set.

  More than 200 focus groups have toured the store, providing feedback.   From what I hear, the ready meals are to-die-for. And Californians are wealthy and busy enough to try them all out, said a member of the Santa Monica Chamber of Commerce.

  Tesco has announced that it has taken a lease on a 300 m (32,500 square foot) former Albertsons store in Glassell Park (Los Angeles), suggesting that the company might be planning stores twice as large as previously thought. However, analysts noted that Tesco could divide the Glassell Park site or bring in a concession so that it would be left with a store in line with its plans for a convenience chain.

  "It is a strategy of developing local scale. They want to build enough market share to matter," said Darrell Rigby, who heads the global retail practice of consultant Bain & Co. in Boston. "The biggest question for competitors is how many Tesco formats will show up here," Rigby said. The size of the Glassell Park lease indicates that the British retailer most likely has a multifaceted approach to capturing a slice of the U.S. market, Rigby said.

  Both Albertsons Inc. and Kroger Co.'s Ralphs chain have closed supermarkets in the Glassell Park neighborhood, leaving the community with one independent grocer and a smattering of small convenience stores. "This has forced us to shop outside of our local area," said George Brauckman, president of the Glassell Park Improvement Assn. If Tesco "is clean and has fresh food and produce, it will do very well," Brauckman said. "People will like the idea that Glassell Park is the location for this new venture."

  • Glassell Park Improvement Association Tesco Info

  Tesco PLC