Tesco plc (LSE: TSCO) is a global grocery and general merchandising retailer headquartered in Cheshunt, United Kingdom.[4] It is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart).[5][6] It has stores in 14 countries across Asia, Europe and North America and is the grocery market leader in the UK (where it has a market share of around 30%), Malaysia, the Republic of Ireland and Thailand.[7][8][9]

Jack Cohen founded Tesco in 1919 when he began to sell surplus groceries from a stall at Well Street Market, Hackney, in the East End of London (ironically, the market is now much smaller than in those days; a large Tesco Metro store now sits on the site.)[11] The Tesco brand first appeared in 1924. The name came about after Jack Cohen bought a shipment of tea from T.E. Stockwell. He made new labels using the first three letters of the supplier’s name (TES), and the first two letters of his surname (CO), forming the word TESCO.[12] The first Tesco store was opened in 1929 in Burnt Oak, Edgware, Middlesex. Tesco was floated on the London Stock Exchange in 1947 as Tesco Stores (Holdings) Limited.[11] The first self-service store opened in St Albans in 1956 (which remained operational until 2010, with a period as a Tesco Metro),[13] and the first supermarket in Maldon in 1956.[11]

During the 1950s and the 1960s Tesco grew organically, and 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, beating Express Dairies Premier Supermarkets to the deal), 97 Charles Phillips stores (1964) and the Victor Value chain (1968) (sold to Bejam in 1986).[14]

Originally specialising in food and drink, it has diversified into areas such as clothing, electronics, financial services, telecoms, home, health, car, dental and pet insurance, retailing and renting DVDs,[10] CDs, music downloads, Internet services and software.

Tesco, Britain’s biggest and most profitable supermarket chain, is the darling of the City. But behind the fascia of the ‘under one roof’ out-of-town Tesco Extra, or the friendly high street Tesco Metro, lies a ruthless billion pound operation. In recent years, Tesco and its major supermarket rivals have faced criticism for abusing their monopoly positions and contributing to some of the major social and environmental problems plaguing society today.

These include exploiting small farmers in the UK and worldwide and hastening their replacement with industrial monoculture plantations where wages are low and labour rights are minimal; undercutting almost every other retailer and hence turning our town centres into boarded-up ghost towns; co-operating with climate criminals, Esso, as well as numerous other corporate crimes.

Tesco operates 923 stores and employs 240,000 people, giving access to a population of 260 million across nine markets. Over the past five years, they have expanded from traditional UK supermarket base into new countries, products and services, including a major non-food business, personal finance and internet shopping. The increasing scale and internationalization of our sales and purchasing operations makes a significant contribution to our efficiency and profitability, as we progress towards our long-term goal of becoming a truly international retailer.

~ TESCO’S STRATEGIC OPTIONS: GENERIC STRATEGIES

Generic Strategies are characterised by an individual retailer’s response to the industry structure. For a giant retailer, such as Tesco, to obtain a sustainable competitive advantage they should follow either one of three generic strategies, developed by Porter.

The first strategy of cost leadership is one in which Tesco can strive to have the lowest costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Tesco’s ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage. If Tesco uses another strategy of differentiation, than it has to try to offer services and products with unique features that customers value. Tesco will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings, technology, special features, or customer service are popular approaches to differentiation.

The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In pursuing a cost leadership strategy Tesco focuses on the creation of internal efficiencies that will help them withstand external pressures. Therefore, it appears reasonable to think that Tesco will have frequent interactions with the governmental/regulatory and supplier sectors of the environment. In accordance to this framework, while both overall cost leadership and differentiation strategies are aimed at the broad market, Tesco may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche (Porter, 1980). In other words, Tesco pursues a strategy of cost leadership or differentiation either in a specific market or with specific products.

The danger some organisation face is that they try to do all three and become what is known as stuck in the middle. In case of Tesco it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.

~MARKET OBJECTIVES AND STRATEGIES IMPLEMENTATION

Strategy frameworks and structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Tesco as the strategic alternative.

From the generic strategies discussed above, Tesco is likely to employ two strategic options that are also likely to be primary market objectives of focus on market development though partnerships and diversification through new product development.

Market Development Strategy: Joint Developments and Strategic Alliances

By entering new markets like China and Japan it can serve as a key growth driver of the company’s revenues and expansion strategy. Tesco’s interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.

In the case of Tesco, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence.  By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger market presence, Tesco will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Tesco may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating. It is about the rationale of this expansion-market development strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to whether Tesco has the resources and competence to deliver the strategy.

Product Development: Diversification

Johnson and Scholes (2003) believe that changes in the business environment may create demand for new products and services at the expense of established provision. Ansoff’s matrix also suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Tesco’s product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the customers Tesco can introduce new product lines. This may require more attention to R&D, leading to additional spending.

The retailing industry is experiencing overcapacity and innovative services and products being the major competitive advantage. Therefore, innovation has to be a major driver for Tesco’s product development. For example, Tesco can develop a portfolio of different store formats in the UK, each designed to provide a different shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets, Tesco can also develop different store types in these markets as well. This value added by the uniqueness will eventually lead Tesco to command a premium price.

The management of technological innovation is increasingly involved in strategic decision-making. Tesco have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage (Although a competitive advantage is the goal innovators want to achieve, the ability to create platform(s) depends on how they could manage the innovation. Nevertheless, it does not mean that the innovator has to possess all requisite capabilities, the important thing is the ability to organise and use the capabilities of others in order to create a business platform).

Tesco’s strategy is far ahead of Sainsbury – it has grown a strong UK core, and then rapidly developed international stores, built good non-food sales, expanded into retailing services and exploited e-commerce successfully

Tesco’s success in recent years has mainly come from expanding overseas, shifting to ‘higher margin’ non-food merchandise and maintaining a strong UK core business. Its UK success has been built on low prices, cultivating customer loyalty, offering a range of different store concepts and expanding into retailing services, such as banking and insurance. Tesco’s focus on non-food items has led some to wonder whether it is fair to compare Tesco with the other grocery retailers at all as it seems to have become a consumer goods company.

At the annual Institute of Grocery Distribution conference in October 2003, Tesco Chairman David Reid made the assertions that ‘You cannot save your way to prosperity’ and that ‘Growth is crucial to shareholders…staff…and suppliers’. Investing in growth is really at the heart of Tesco’s strategy.

This investment doesn’t just come from ploughing back profit. In January 2004, Tesco raised £773m by placing 315m new shares, and in March 2004 announced a joint venture with property group Topland to release £650m from its UK property portfolio. The main reason for the new share offering is to pay off the company’s debt. Tesco’s credit rating had fallen the previous year because so much of its growth had been based on borrowing.

Core UK business

In its preliminary statement of accounts, April 2004,26 Tesco considers the following bullet points:

We have been investing in further improving our price position. £70m in January and a further £70m yesterday (19th April) are the two most recent price campaigns maintaining our position as the UK’s best value retailer.

As Tesco is so large and successful it can afford to cut prices to a much larger extent than many of its rivals – for example in 2000, when there was a general price deflation in groceries of 2-3%, Tesco deflation was nearly 4%.27

During the year (2003-2004) we opened 21 Extra stores, of which eight were new and 13 were extensions giving us 83 in total.

We have further evidence that customers love our Express stores and we have grown our share of the convenience market to 5.9%. We now have 277 Express stores and the customer offer is the best in the convenience sector achieving high sales per sq. ft. and increasing returns.

Tesco executives look to the ‘street corner’ strategy, i.e. more Tesco Express convenience stores, as the key to continued growth in core UK sales. See also below in ‘C-store sector’ section.

Tesco’s sparkling growth has come at the expense of rivals, especially Sainsbury and Safeway, both of whom are battling to keep customers. The other UK supermarkets simply cannot compete on both price and range of different store formats.

Sainsbury was the UK’s biggest grocer until 1995, but was recently relegated to third position behind Tesco and Asda. Internal problems and strategic errors have left Sainsbury struggling. the company believed it could abandon the classic focus on ‘price’ in favour of refurbishing store ‘fascias’ (their own term for aesthetic design) and supply-chain improvements. Its loss of market share illustrates that price is still the key for many consumers. 2004 has also seen shareholder unrest for Sainsbury’s. Unpopular board appointments were compounded by the news that chairman Sir Peter Davis received a massive bonus despite the firm’s poor performance. He resigned in July 2004.

Morrisons is currently struggling to absorb Safeway and in 2004, issued its first profit warning in 37 years, leaving Asda as Tesco’s only really credible UK rival.

Asda, owned by US corporation Wal-Mart since 1999, is the only supermarket with the potential to become a thorn in the side for Tesco. Wal-Mart, with global sales of $256bn in 2003, is the biggest company in the world with annual sales eight times bigger than Tesco’s. Asda is rumoured to be about to acquire Matalan, the giant discount clothing and home furnishing store. Already, Asda’s George range of clothing is the best selling brand in the UK. Two million of its £4 pairs of jeans were sold during 2003-4.

Interestingly, many industry insiders believed that the only way to tackle Tesco’s dominance in the market would have been for the competition authorities to have allowed an Asda/Safeway merger, as this would have created a credible rival. In the event, out of the major supermarket chains competing, Morrisons acquired Safeway, although remarkably, Tesco has been allowed to buy 10 of the 52 Safeway stores which Morrisons was obliged to sell off for a rumoured £120m.

Asda showed a slight slow down in growth in the period to September 2004. This is probably in part due to the planning restrictions on large supermarkets which wouldn’t affect Tesco and other supermarkets concentrating on smaller store formats. Asda had tried to get around these restrictions through a planning loophole that allowed them to build mezzanine floors.28 Asda have also been affected by the Safeway store conversions by Morrisons.

Tesco used to be considered a cheap supermarket, compared to the more ‘up-market’ supermarkets like Waitrose and Marks & Spencer. However, in recent years, with the ‘Finest’ range, it has moved to capture that market too. M&S in particular is now struggling with poor sales in both food and clothing.

M&S was also recently the target for an attempted hostile takeover bid by retail entrepreneur, Philip Green who already owns BHS and Top Shop amongst others. Today you can buy a £50 bottle of wine in Tesco, and the ‘Finest’ label food products are far from cheap. Tesco is rumoured to be considering an upmarket range of clothing bearing the Finest label.29

Many farmers, suppliers and researchers have highlighted another Tesco strategy that they do not broadcast so widely: abusing their monopoly (or, to use a more accurate term, ‘oligopsony’) position to force down the price they pay to their suppliers. This means that they profit not only from their consumers, but also by exploiting their suppliers. See later section on Tesco’s relation with suppliers and farmers.

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Non-food

For supermarkets, the appeal of ‘non-food’ products – from fashion to photo-labs, pharmacies to electrical goods – is that they carry much bigger profit margins than traditional food products, especially when they can be bought in bulk and sold at low-rent out-of-town premises. Wal-Mart introduced this strategy when it entered the UK market in 1999 with their acquisition of Asda.

In September 2004, Tesco announced that 20% of its sales now came from non-food goods, and that some of its stores were becoming a destination for non-food, such as its Tesco Extra hypermarket in Newcastle, where half of the store’s £100m annual turnover is non-food.30

Tesco claims that its clothing ranges, Cherokee, Florence and Fred, are the fastest growing in the UK both in value and in volume, with a 4.4% market share.

Petrol stations on the grounds of many superstores have also been a big winner, with high volume of sales offsetting the fact that Tesco does not always pass on oil price increases to the consumer.31

Tesco in-store pharmacies have been doing well; according to one report these sell more than Boots and Superdrug together32. Tesco also sells more top 40 CDs than many specialist music stores combined and is attempting to break the wholesaler monopoly on newspaper sales (which affects all newspaper retailers).

In 2002 Tesco, opened a ‘Nutricentre’ offering alternative medicine in its West Kensington store. Apparently, ‘The biggest surge in demand in Tesco has been for natural products to boost sexual performance, rising steadily at 140% a year, as customers discover their benefits to both men and women.’33

Since poaching Terry Price from Wal-Mart to head up its non-food strategy in 2003 , Tesco seems on course to become Britain’s largest non-food retailer, fiercely pursuing growth in this area.

Tesco Homes This seems to be the latest supermarket venture. Tesco is said to be looking at building 1,000 new homes over 2005, mostly to be concentrated around London. Some councils are suggesting that supermarkets build affordable housing in exchange for planning consent. Tesco is said to be working with a mix of partners including housing associations and construction companies.34

International expansion or world domination

Tesco’s huge growth in this country is a hard act to follow. With the domestic market increasingly saturated, some UK supermarket chains, namely Tesco, Sainsbury (who have now sold their interests in the USA) and M&S have looked to overseas markets to maintain their positions. This is a whole new ball game, bringing into play competition with large firms from other countries, such as US retailing giant Wal-Mart and French multinational Carrefour.

Tesco began expanding internationally in the 1990s and now (2004) has outlets in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia, Thailand, Malaysia, South Korea and Taiwan. It has also recently bought chains in Turkey and Japan and is in the process of negotiating expansion into China.40

Early in 2004, Tesco reported that its international sales were up 29% to £6.7bn, with a 44% rise in profits to £306m. The growth has been especially marked in Asia, where the underlying group profit rose 71.8%.41

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International strategy

Asia

Thailand

Malaysia

South Korea

Japan

China

Europe

Turkey

Poland

Ireland

In most countries Tesco’s preferred tactic seems to be to buy an existing retail chain, or a significant share of one, and turn it into a Tesco subsidiary. Then it can begin the usual tactics undercutting local traders, aggressively competitive pricing, selling petrol, launching loyalty card schemes, 24 hour opening and so on.

Tesco has favoured large hypermarkets for its international stores, since in most countries it is easier to get planning permission for these than it is in the UK. The hypermarkets have an emphasis on non-food items: 55% of the sales area in a typical Asian hypermarket and 50% in a European one. Tesco is also opening petrol stations in Hungary, Ireland and Thailand.

Rather than expanding into other West European countries, Tesco is focusing on ex- Soviet countries and South East Asia. According to David Hughes, professor of agribusiness and food marketing at the Centre for Food Chain Research at Imperial College in London, supermarkets from rich countries feel obliged to do this because,

‘…they’ve got nowhere else to go. Their domestic markets are saturated, so they are looking for countries with large populations, high population growth, per capita GDP edging toward consumer levels, high income growth, and low supermarket presence. Countries with all five of these characteristics are a good bet, and companies rush to get there before everyone else.’42

~ PESTEL ANALYSIS

The political factors can be local, national or international. Many governments can be involved. For instance, Tesco might have to deal with British and Columbian politics in regards to its coffee supply. 

Economic factors have large impacts. Fluctuations in the stock market, or tax increases, can seriously affect the bottom line of a company like Tesco.

Sociological factors can vary from the impact of immigration, to changes in fashion.

New technologies have had a great impact. For instance, online shopping has become a major factor in Tesco’s recent success. 

The changes caused by all the external impacts lead to many legal problems. 

Finally, any large organisation has an environmental impact. For instance, Tesco uses fossil fuel in its transport network. Reducing this demand is a major challenge. All of this will be explained below.

– Political Factors

Operating in a globalized environment with stores around the globe (Tesco now operates in six countries in Europe in addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. It also operates in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan), Tesco’s performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU).

For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as students, working parents and senior citizens. Tesco understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an inherently local and labour-intensive sector. Tesco employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.

– Economical Factors

Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods.

These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to contribute greater amounts to Tesco’s profits over the next few years, the company is still highly dependent on the UK market. Hence, Tesco would be badly affected by any slowdown in the UK food market and are exposed to market concentration risks.

– Social/Cultural Factors

Current trends indicate that British customers have moved towards ‘one-stop’ and ‘bulk’ shopping, which is due to a variety of social changes. Tesco have, therefore, increased the amount of non-food items available for sale.

Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).

The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. One example of Tesco adapting its product mix is to accommodate an increased demand for organic products. The company was also the first to allow customers to pay in cheques and cash at the checkout.

– Technological Factors

Technology is a major macro-environmental variable which has influenced the development of many of the Tesco products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient.The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains (Datamonitor Report, 2003). Tesco stores utilise the following technologies:

Wireless devices

Intelligent scale

Electronic shelf labelling

Self check-out machine

Radio Frequency Identification (RFID).

The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).

– Environmental Factors

In 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical stance, Tesco’s corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. (Johnson and Scholes, 2003)

Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste, reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called ‘fat tax’ directly affected the Tesco product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers

– Legislative Factors

Various government legislations and policies have a direct impact on the performance of Tesco. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004). The presence of powerful competitors with established brands creates a threat of intense price wars and strong requirements for product differentiation. The government’s policies for monopoly controls and reduction of buyers’ power can limit entry to this sector with such controls as license requirements and limits on access to raw materials (Mintel Report, 2004; Myers, 2004). In order to implement politically correct pricing policies, Tesco offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.

CRITICAL SUCCESS FACTORS

After a close evaluation of the external analysis of the grocery industry and SWOT analysis presented in Appendix B, it is crucial to consider internal operational effectiveness of Tesco in the form of identifying critical success factors of the company within the food retailing sector.

4.1 Branding and Reputation

There are companies that have always understood that they were selling brands before the product. Tesco is a brand and also serves as the core strategic advantage. The company was spreading like wildfire transforming the generic into the brand-specific, largely through carefully branded packaging and the promotion of an “every penny counts” environment. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value.

The product and service development processes of the company have been substantially re-engineered, to facilitate better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product activity has focused on enhancing core ranges and introducing quality products. Tesco’s innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on strong brand reputation.

The company is also very successful in terms of customer loyalty due to its loyalty cards system and its general approach to customizing services to the needs of every customer. This is truly evident in terms of tremendous growth of on-line sales where the company has a strong platform to further develop this revenue stream. After considering the fact the nowadays majority of people have less time for shopping, Tesco employed this on-line systems and now became the biggest online supermarket.

4.2 IT Integration

Today companies act in an increasingly dynamic and complex environment, giving more difficulties making forecasts and adapting themselves to the continuous changes. In order to be able to compete in this kind of world, it is necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For Tesco operations have become necessities rather than luxuries. Systems that control stock, keep all the stock and deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has risen beyond its traditional support role and taken up a central role in business strategy formulation.

Extranet system employed by the company, enables Tesco to use the Internet to create proprietary and customised information flows between the company and its business partners. The system connects business partners online behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution channels. Extranet also helps to extend the key information on business partners throughout the supply chain and facilitate coll