Tesco and Sainsbury's: A Comparison of Strategies

1. Introduction

Business strategies are largely unique to individual business organisations and depend upon the objectives of their primary stakeholders, namely the shareholders and the senior management. While these two entities are the main decision makers for the road maps followed by firms, which they exercise through formulation and articulation of objectives, mission statements, and strategies, many other issues like product or service features, strengths and weaknesses of business organisations, economic, legal and political environments, nature and intensity of competition, opportunities and threats, environmental and ecological needs, as well as technological advances, often play major roles in determining and implementing business strategy. Work in these areas, by management experts, have led to the development and construction of models and theories that attempt to elaborate, explain and demystify these issues. The tackling of these challenges previously depended upon the thought processes and ingenuity of business owners, and played vital roles in the successes or failures of business organisations. The work of Igor Ansoff and Michael Porter led to the enunciation of well known strategic models for growth and the Five Forces theory for analysis of competitiveness. These tools, as well as decision making aids like SWOT and PESTLE analyses have become commonplace in today’s business scenario, and are widely used by managers all over the world. While most growth strategies deal with marketing, other areas like production, human resource, information technology and finance also need goal setting, and are important to overall strategy for optimisation of organisational wealth. Total Quality Management, for example has emerged in recent years as a necessary item in every strategic manager’s toolbox for achievement of organisational objectives. Apart from these tools, business strategies for growth and shareholder wealth appreciation are also influenced by the ethics and value systems of individual corporations; while many firms chose to forsake both growth and profitability for ethics, the reverse, as evinced by scams like Enron and WorldCom is equally true.

Every so often, companies in the same industry, and operating in the same national or global environment, adopt sharply different strategies with spectacularly divergent results. Search engines like Yahoo and Alta Vista existed for years before Google arrived on the scene and swept everything before it. Toyota, a Japanese car manufacturer, formed much after the end of the Second World War, entered the car market of the United States in the face of widespread scepticism, and over a few decades, orchestrated a business strategy that saw it overtake Ford, the iconic American car making giant. Among British companies, the last two decades saw the rise and rise of the retailing company, Tesco. The company changed its down market “pile them high, sell them cheap” public perception to emerge as the largest retailer in the country, first overtaking the much older market leader Sainsbury’s and then proceeding to widen the gap until its’ market share was twice that of its erstwhile condescending rival. This assignment aims to examine and analyse the different strategies adopted by these companies, which have similar products and services, and also operate in the same environment.

2. Commentary and Analysis

Business organisations constantly face challenges in every sphere of activity, be they in marketing, sales, production, workforce, human resource management, information technology development, or in raising and controlling finances. Many of these challenges arise from the social, political and economical environments in which organisations operate. While businesses in the UK operate in democratic and market friendly environments with institutionalised legal and financial systems, they need to conform to the stipulations laid down by numerous regulatory bodies (of the UK and the EU) and governmental organisations, and that too in almost all operating areas. Furthermore, firms with global operations have to frequently function in conformity with different environmental requirements, necessitated by dissimilar political and legal systems, or by widely divergent local, infrastructural or market conditions. Sainsbury’s and Tesco’s both entered the UK retail market, as small convenience stores, not much different from the many such establishments that exist all over the UK. Both organisations outgrew and outperformed other businesses in their genre to become colossal retailing chains with countrywide presences. Sainsbury’s, a much older firm than Tesco’s was the market leader in the UK retailing sector, until 1995, when it was overtaken by Tesco’s.

a. Sainsbury’s

J Sainsbury, plc, is one of Britain’s most famous firms, represented across the country, through its chain of supermarket stores that operate under the Sainsbury’s brand. Apart from supermarkets, the company operates convenience stores, an internet-based home delivery shopping service, and Sainsbury’s Bank. The company, originally started as a partnership in 1869, and while incorporated as a private company as far back as 1922, listed on the London Stock Exchange only in 1973, in what was until then the LSE’s largest stock issue. Sainsbury’s grew to become the UK’s largest supermarket company and retained its privileged position for much of the twentieth century. Tesco’s overtook Sainsbury’s in 1995, and ASDA/ Wal-Mart relegated it to third position in 2003. (J Sainsbury, 2007)

While the business, in the beginning, grew organically into a chain of convenience stores, its first major strategic decision came, in 1950, with the opening of the first self service store, in Croyden, London. This initiative was followed by increasing the number of self service stores, expanding the range of non food goods, opening of hyper markets, acquisition of smaller chains, and commencement of operations in Scotland and North Ireland. The company grew to become the country’s largest supermarket chain, fuelled by increasing economic affluence, changing buying habits, customer convenience, and the ability of Sainsbury’s to provide a large and diverse range of products under one roof. Large Sainsbury’s stores typically stock 50,000 products, of which 50% are home brands. While the company grew slowly in its initial years, real growth came only in the post war years, with the development of a strong market economy, economic prosperity, increased spending power, and customer desire for a large range of better quality goods. Sainsbury’s responded to this changed economic environment, by concentrating on the increasing and upwardly mobile middle class. The company refrained from taking too many risks or initiatives, possibly feeling that its reputation would enable it to grow steadily and retain market leadership. The strategy of least resistance was interspersed by a few initiatives like the introduction of Do it Yourself (DIY) products, and acquisition of chains like Bell’s Stores, Jackson’s Stores, and JB Beaumont, which served to add to and broaden its customer base. The company has more than 750 stores today, and with a turnover in the range of 16 billion GBP, is one of UK’s more successful corporates. A prima facie assessment regarding the company’s response to business and environmental challenges would tend to give credit to the company’s corporate strategies in an extremely competitive business environment.

This assessment would however be substantially incorrect. Even as the company continued to grow steadily, in both profits and sales, through the 1990s and into the 21^st century (except for the difficult years of 2004 and 2005), it was overtaken, first by Tesco’s in 1995, and later by ASDA in 2003. Tesco’s , which had a turnover of less than 11 billion GBP in 1994 saw its sales touch 38 billion GBP in 2006 and now sells more than twice of what Sainsbury’s does. Very apparently, Sainsbury’s has committed serious errors in handling and responding to business and environmental challenges, and has yielded the high ground in supermarket retailing to younger and possibly more effective competition.

b. Tesco’s Growth Path

Tesco’s started off as a small one man grocery operation, in 1919, in London’s East End. It took Jack Cohen, the founder, 10 more years to start his first store, in 1929, a full 60 years after Sainsbury’s. The company grew organically in the initial years, spurred by Cohen’s hard work. In the beginning business strategy revolved around providing cheap and economical goods, (pile them high, sell them cheap) espousal of trading stamps to induce customers, and relentless opening of new stores. Strategies, broadly similar to those followed by Sainsbury’s in the post war years led Cohen to open Tesco’s first self service store in 1947, and the first supermarket in 1956. In retrospect, Cohen’s better understanding of the demands and changing moods of customers is possibly evinced by his decision to open his self service store, a full three years earlier than Sainsbury’s.

When Cohen resigned, in 1977, the company had achieved significant growth and traction but was still much behind Sainsbury’s, both in size and reputation. The years that followed Cohen’s handing over of Tesco’s leadership were marked by strategic swings designed to take the company away from its image of a purveyor of cheap and low quality goods. This period saw the management launch an aggressive campaign for market share, a multi dimensional effort that involved (a) rapid expansion of stores, (b) acquisition of medium sized supermarket chains, (c) entry and consolidation in a number of foreign markets, (d) large scale expansion of non food products, (e) opening of a number of hypermarkets, (f) introduction of loyalty cards, and (g) exploitation of online markets. The company assessed the existing national and global environment and felt that it would be able to work towards significant increases in sales and profitability and make it into a global leader from its status of a lowly down market UK based retailer. These strategies, combined with effective systems and operational implementation, enabled Tesco’s to power past Sainsbury’s, the British market leader, and establish itself as the third largest retailer in Europe. With sales of 38 billion GBP and 2 billion GBP in profits, Tesco is today the undisputed market leader, way ahead of both Sainsbury’s and ASDA. It played for glory and won hands down. (Pringle and Cohen, 2007)

c. Management of Environmental Conditions

In the early 1960’s, Cohen lobbied Parliament to have the Retail Price Maintenance (RPM) act abolished, efforts supported by Edward Heath. The RPM allowed manufacturers and suppliers to set the price of goods thus preventing large retailers, who could buy in bulk and had greater buying power, from benefiting from economies of scale and undercutting the prices of smaller shops. To get “around” this, Tesco offered another incentive to get customers through the doors – Green Shield Stamps. These were collected by customers when they spent money in the store, and were then traded for goods in a catalogue. An effective discount (Tesco, a corporate profile, 2004)

This extract serves to illustrate Tesco’s response to environmental challenges and the many innovative ways the company found to constantly improve customer value. The emergence of Thatcherism, in the 80s, coupled with the break up of the Soviet Union, the consolidation of a unipolar world, sharp improvements in internet technology, and the commencement of globalisation, created a number of opportunities that Tesco was quick to spot, grab, and exploit. The company closed down 500 stores, revamped and modernised hundreds of others. Store formats like Tesco, Tesco Express, Tesco Metro, and One Stop, catered to distinct sizes, products, and locations, and ranged from small street corner shops to huge all inclusive supermarkets. The company was quick to realise that its image as a purveyor of cheap products, with its perceived down market connotations, would not help growth in a society that was rapidly becoming richer, and did not hesitate to close down its coupon scheme. In a brilliant segmentation exercise, the company created three product categories, good, better, and best, across most of its product lines. While this enabled customers to access different price ranges, it also allowed the company to access an “inclusive” and huge market. Sainsbury’s, which had traditionally catered to the middle class clientele with zealously protected margins, tried to enlarge its product base, but was unable to make any headway, because of its lesser supplier base and inferior logistical capability. (Pringle and Gordon, 2007)

Tesco’s introduced customer loyalty cards in 1995. While it took Sainsbury some time to catch up with the idea, the two companies used it for widely divergent aims. Even as Sainsbury’s used the cards primarily to drive repeat visits and purchases, Tesco’s processed the information feedback from the loyalty card customers, to assess customer demands and needs, and keep on adding to its product range. The company also foresaw the potential of the internet and globalisation, and established profitable online sales channels, as well as successful overseas forays. Tesco’s international business now accounts for nearly 25% of company sales, and the immediate priority is to drive it up to 50% of company revenue. Apart from maintaining strong market leadership, Tesco is now focussing on two major areas that are propelling the company’s growth and increasing the gap between the company and its competitors. Its aggressive growth in the non-foods market means that it is possibly selling more clothes than Next and more health and beauty products than all the others put together. (Hunter, 2006) The company has set up base in numerous countries in Europe and Asia and should soon have a significant presence in the USA. “Indeed, some 60% of Tesco’s floor space is now based outside of the UK.” (Hunter, 2006) Sainsbury’s, on the other hand has been too busy handling its inadequate stocking mechanism, half empty shelves, and falling market share, to be able to pay much attention to new thrust areas, and opportunities, made available by changes in environmental conditions and advances in technology. (Tesco, a corporate profile, 2004)

3. Conclusion

While this analysis does not intend to eulogise Tesco’s management practices, or its planned and meticulous exploitation of available opportunities, the stark difference in the working of Tesco’s and Sainsbury’s tend to make any comparative analysis of strategy, and management practice, enormously one sided. Even as Tesco was using feedback from its loyalty card scheme to add enormously to its product range, Sainsbury’s was trying to adamantly protect its margins and cutting down on service quality, practices that inevitably led to further customer dissatisfaction and loss of market share. It was not until 2004, a full 9 years after Tesco overtook it, that the company realised that its major problem lay in under stocked shelves, inadequate logistics and poor supply chain management. While Sainsbury’s strategy appeared to be one of risk avoidance and slow growth, in reality it proved to be akin to that of an ostrich in the face of danger. The company however still remains a respected and successful retailer. Recent initiatives, taken after a change in top management, have seen a priority shift and led to revived sales, reduced costs and improved profitability. The company has its heart in the right place and contributes a much higher percentage of its post tax profit to charity than Tesco.

The tremendous success of Tesco, in assessing customer needs and environmental opportunities, came about because of a new aggression that evinced itself after the departure of jack Cohen and is an indicator of the possibilities that exist for Sainsbury. The fact that Tesco lagged behind Sainsbury’s until 1995 is proof of the levels to which Sainsbury can aspire without being impractically optimistic. Sainsbury’s has a number of strengths, namely its goodwill in the UK market, access to enormous amount of shop space and property that have been built up over the years, very strong domain knowledge in the retailing business, and adequate capital resources. The company has also become active in the online segment, the fastest growing market segment in the retailing market. It however definitely needs to scan the environment constantly, look for new opportunities, upgrade technology, and be more fleet footed in responding to opportunities and challenges.

Both the companies have seen rapid departures from existing strategies after changes in top level management. Strange as it may appear, changes in management appear to have been critical to Tesco seeing opportunities that were not explored earlier. Sainsbury’s too has commenced implementation of measures that should have logically been done much earlier, only after a change of guard at the top. The solution to the paradox possibly lies in realising that management theories, practices and strategies, in most cases, become relevant only if the CEO thinks them fit. The boss is the key.

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