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Tesco is anÂ mutinational chain of retail stores established by Jack Cohen in 1924,and since then the group has grown to become one of the largest Â retailers in the world operating in over 14 markets all over the world, includingÂ China, Koria, India, Japan, and the United States. Tesco has 4811 stores worlwide with a staff of over 472,000 and Sales area of 94m Sq ft and a pre-tax profits of £3.4bn for the 12 months to the end of February 2010 a 10.1% rise on the previous year. Â Its principal activityÂ is food retailing, but it has expanded into different formats / markets including clothing, financial services, music download and electronics.
The company is engaged in the operations of Superstore, Extra stores, Homeplus, Metro, Express and hypermarkets. The company offers a wide variety of both food and non food products, including clothing, health and beauty products, electronic goods, home entertainment, stationery, kitchen utensils, soft furnishings and other related products. Tesco also offers several services, including website selling, telecomunications services, and financial services. The company has operations in European countries, United States and Asian countries. The headquarter is in Hertfordshire, United Kingdom.Tesco, one of the most successful British companies of recent years, which first hit through the £1bn profit mark in 2001. It has posted record annual profits every year since, driven by rapidly rising sales both at home and abroad.
Tesco was originated in the markets of London's East End, where in 1924, war veteran Jack Cohen began to sell groceries. The Tesco name first appeared on packets of tea in the 1920s. Tesco was an amalgamation of the initials of T.E. Stockwell, a partner in the firm of tea suppliers, and the first two letters of Cohen. The first Tesco store was founded in 1929in Burnt Oak, Edgeware. Tesco Stores Limited was incorporated in 1932. The company floated on the stock exchange in 1947 with an initial share price of 25p.
In 1956 Tesco opened their first self-service supermarket in a converted cinema in Maldon. Tesco added to its stores and expanded during the 1960s and the term 'superstore' was used when Tesco opened a store in Crawley, West Sussex, in 1968 and by the then Tesco has becoming a familiar household name, selling household goods and clothing. In 1974, the company set up petrol stations with the name of Esso at its major sites, selling fuel at competitive prices. In 1979, the company's annual turnover reached £1 billion for the first time.Throughout the 1990s, Tesco expanded even further, and continued its international expansion. In response to a growing Eastern European market, Tesco opened stores in Poland, Hungary, Slovakia and the Czech Republic. Tesco also expanded intoTaiwan, Thailand,South Korea China and India.
EVALUATION OF TESCO'S STRATEGIC POSITION
Tesco Strategic Objective
In November 2003, Tesco acquired the small Turkish hyper market chain, Kipa. The chain operated in five hypermarkets in the Aegean region with reported sale of £124 million in 2002, and a pre tax profit of £4.7 million and over 1,500 employees.In early 2004, Tesco also acquired the family-run chain "Adminstore" which was operating the Europa, Harts and Cullens grocery outlets in London, for £53.7 million.In April 2004, Tesco faced a hurdle in its acquisition of Adminstore, even though the Office of Fair Trading (OFT) cleared its bid, however the Federation of Wholesale Distributors (FWD) attempted to block the deal and argued that the OFT's decision was flawed since the acquisition would make it virtually impossible for independent retailers to open new shops in central London.
Tesco's growth over the last 15 to 20 years has involved a transformation of its strategy and image. Its initial success was based on the approach of the founder Jack Cohen"Pile it high, sell it cheap". The disadvantage of this was that the stores had a poor image with middle-class customers. In the late 1970s Tesco's brand image became so poor that the consultants advised Tesco to change the name of its stores. However Tesco did not accept that advice, and 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 Super panel.
Reasons for this success
An "Inclusive offer". This phrase is used by Tesco to show its unique appeal to all its customer i.e ( the 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"
One thing which support this inclusivity has been Tesco's use of its own-brand products, including the upmarket "Finest" and low-price "Value" ranges.
Sir Terry Leahy, the CEO since the mid 1990s, has taken the bold step of trying not to focus on the usual corporate myth of "maximising shareholder value". According to the company's mission statement, "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 ofcourse to make higher profits, but there is a clear focus on customer service at the top level of the company. It remains to be seen whether Tesco will be able to maintain this focus now that it is widely perceived as a great corporate success story and the dominant company in the United Kingdom retail market, or if it will succumb to corporate arrogance as sometimes happens to dominant companies.
Economies of Scale
Tesco was able to take advantage of commercial economies of scale by using the bulk purchase from suppliers, the existence of resale price management restricted Tesco's ability to be as competitive as trading conditions now allow. The system allowed suppliers to dictate that retailers sold their products for a set price. Tesco used other strategies to build customer loyalty including the use of stamps that could be exchanged for cash or goods.
During the 1980s saw the growth of new stores and also the development of new schemes. In 1985, Tesco started its Healthy Eating options with nutritional information and advice on some of its own branded products. By the 1990s, the move to overtake the other major supermarkets was well under way. The main focus was on finding new ways of satisfying consumer needs and building the loyalty of the customer. A range of new services and facilities were introduced, including Tesco Metro, a store concept aimed at the high street customer while offering the benefits of a large supermarket. In some respects, this was Tesco returning to the high street after selling off many stores in the 1960s and '70s in the move to join the out-of-town shopping trend. Tesco continued to make strong progress using the following strategy:
Making their shopping trip as easy as possible
Constantly seeking to reduce our prices to help them spend less
Offering the convenience of either large or small stores
Bringing simplicity and value to complicated markets
Tesco's Turnover, Number of Stores and Selling Space, 2001-2005
In 1995, Tesco introduced the Club card, a loyalty card for customers who were able to collect points from purchases and use them to exchange for goods. Tesco also use this to get massive amount of information about the customers who visited its stores, what they bought, the regularity with which they bought them and how they responded to the in-store promotions and special offers. Tesco became the market leader with a market share of 17%.
Apart from these services it opened pharmacies in some stores, developed a range of financial services such as Visa card, mortgages, insurance and a bank account all in conjunction with the Royal Bank of Scotland. The expansion of the non-food side included offering entertainment goods such as TVs, DVD players and home entertainment systems as well as white goods, household products, clothing and so on.
In 2000, further developments pushed Tesco's profits higher as it introduced shopping via the Internet and home delivery and a range of foods reflecting different qualities from the 'Value' range which had been introduced in 1993 through to its 'Finest' products as well as a brand called 'Free from' for customers who has special dietary needs.
Tesco's Share Price (July 2004 - May 2006)
Current Strategic Situation
The Macro Environment
In this section, the PESTEL framework which applies to all businesses in one way or another, regardless of their geographical location; is used to evaluate and identify opportunities and threats in the macro environment (Jobber, 2001)
Tesco has stretched its operation around the world in 14 countries including UK, US, Asia and Europe. The political condition and legal system in these countries will have an effect on Tesco's operations. On the other hand Tesco will have to bear in mind the European Union (EU) legal system. Governments of these countries will certainly have an influence on Tesco. For instance, governments may not want to grand permission to Tesco to sell Alcohol in an Islamic state.
The employment regulations will also have and impact on tesco because the government will require them to provide all kind of job opportunities to the community. Tesco understands that retailing has a great impact on jobs and the local community (the new store developments often destroy other jobs in the retail sector as other small stores go out of business. Tesco is a local and labour-intensive sector and therefore employs large numbers of students, disabled and elderly workers, and pay them lower rates.
Economy affect every organisation and its operation e.g interest rates exchange rates has an impact on the cost of capital and ultimately, profitability and business decisions (Siciliano, 2003). Tesco operates in 14 different countries, their prices could be affected by exchange rates of these countries.
Economic factors are not in the control of an organisation but they have an effect on the strategy and the performance of the organisation. Although international business is still expanding and will contribute greater amounts to Tesco's profits in the future years, Tesco will be badly affected by any decline in the UK food market.
During the recession people have less money and they want cheap product and may do bulk shoping to save some money and the recession has changed the attitude of the british people. Tesco have however changed their plan and have come up with the solution to increase non-food items available for sale.
Demographic changes such as less and less people prepare meal at home and an increase in the population of female worker and an increase in the aging population mean that Tesco is to add value to their products and services. In addition, Tesco has now turned its focus on own labeled product mix and other operational improvements, National retailers are increasingly reluctant to take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).
Technology is a significant factor which play an important role in the efficient ways of communication and operation. Tesco's many products are influenced by this macro-environmental variable. The new technologies will certainly benefit both he customers and the company e.g the use of technology will save time and money for Tesco in the management of food supply chains. Tesco stores utilise all sorts of technologies.
In recent years there has been an increased pressure on many corporate organisation and their managers to take their responsibilies to the society, and should act in way which will help the the society overall. The major social issue with food retailers is environment, the corporate social responsibility of Tesco is concerned with the ways in which a corporate citizen exceeds their minimum obligations to stakeholders specified through regulation and corporate governance. (Johnson and Scholes, 2003)
Legal factors and policies have a direct effect on Tesco. For example, the Food Retailing Commission (FRC) suggested and enforced certain Code of Practice and banned many of the current practices, for example taking payments from suppliers and changing prices without notice (Mintel Report, 2004). Tesco has powerful competitors with will established brands which creates a price wars and strong requirements for product differentiation. In order to persue the right legal pricing policies Tesco offers customers 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.
A stakeholder, according to Alston (2004) is anyone inside or outside of the organisation who can demand for the organisation's attention, resources or output or who is affected or impacted by the organisations actions.
In deciding the strategic direction or to successfully manage projects and implement strategies, the most important and influential stakeholders of a firm must be managed in a such a way as to get them on board, else the strategic choice risks being blocked of sabotaged by them (Johnson et al 2008).
Tesco's most influential stakeholders are their Shareholders, Customer, Supplier, Local Community, Finanacer, Pressure Group, Customers and Suppliers are the most important and influentail for tesco because these two play an important role in the running of Tesco.
Tesco capabilities are resource and competence base which allow them to achieve competitive advantage (Johnson et al. 2008). The following capabilities according to Jenster and Hussey (2001) enable them to select effective strategies.
Superior performance, according to Johnson and Scholes (2003), has to be determined by the way in which company's resources are deployed to create competence in the organisational activities. Core competencies are activities or processes that critically underpin the company's competitive advantage. The primary target for the company is to recognize that competition between businesses is as much a race for competence as it is for market position and market power. Therefore, the goal for Tesco management is to focus the attention on competencies that really affect competitive advantage.
PORTER'S 5 FORCES
This section considers how Porters five forces might be applied to the problems facing Tesco PLC, including an investigation of the threat of substitutes from other supermarkets, power of buyer in relation to grocery purchases, power of supplier , and customer power at the till.
Generally economics predicts that rivalry between companies should drive profits to zero. This is partly down to the threat from substitutes. For instance, Tesco has competition from companies like ASDA and Sainsbury that can provide substitutes for their goods. This drives the price of groceries down for customers of both companies.
Threat of New Entrants
The big 3 (Tesco, Asda, Sainsbury) and other supermarket chains put up huge barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For example, Tesco may have cornered the market for certain goods; the new supermarket will find it difficult to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The cost of items is a lot less than the corner shop. It achieves this, partly, through buying bulk of goods. A small supermarket chain can only buy a relatively small volume of goods, at a greater cost.
Bargaining Power of Suppliers
Supplier power is an important part of the Porters five forces model. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If Tesco don't pay the price, they don't get the goods to sell. But Tesco, have an overwhelming advantage over the small corner shops they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their products.
Bargaining Power of Customers
The power of customer acts to force prices down, for example if a can of Coke is too expensive in Tesco, buyers will move to ASDA. However there are few other large supermarket companies. This means the market is disciplined, that is, the supermarkets almost use the same approach to set the price. Discipline stops them destroying each other in the war of profit.
Threat of Substitutes
Substitution is able to reduce demand for a product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the retail industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, for example the way small chains of convenience stores are emerging in the industry. In this case Tesco and Sainsbury's are trying to puchase existing small-scale operations and opening Metro and Express stores in local towns and city centres Ritz (2005).
In 2008, Tesco won Retailer of the Year 2008 award that increase it market image to its stakeholder. On the other hand Tesco also achieved to be the third largest retailer of the world in 2008.
Tesco is pursuing the property development strategy to pay off their shareholder and to fund its expansion projects. The freehold property that Tesco holds now is substantial which strengthen and secure its future expansion programme.
The brand name of Tesco is being perceived to be good and it has value in the mind of customers that attract and influence the customer to repurchase from Tesco.
Club card is one of the most successful relationship database tools in hand of Tesco which help them understand shopping pattern of the more than 60 million customers.
Tesco is relying too much on diversified product i.e. O2 joint venture in telecommunication, Tesco Personal Finance with the Royal bank of Scotland etc.
On one hand it is difficult for Tesco to charge premium prices and on the other hand the stores have high operating cost. They both adversely affect profit margin.
Tesco telecommunication sector no doubt has recovered from loses but still struggling to be profitable.
There is an increase in the bad debt, arrears of credit card, and household insurance claim offset the profitability of Tesco.
Tesco has emerged as the world's third largest retailer which reflects the level of purchasing power to ensure typical economies of scale.
Tesco has a good chance to expand and enhance brand in Asia, particularly in South Korea and China and also grow in further International markets.
The success of Tesco Direct through electronic media and catalogue shopping pattern will grow the use of technology that provides an opportunity to extend non food products.
TESCO mobile have moved to profitability and have captured customer base to Â¼ million customers in 2008, further growth can be achieved.
Due to recession, economy all over the world is depressed. Low economic activities will affect the purchasing power of the customers.
On one hand purchasing power of the customer is down but on the other hand the cost of raw material is increasing which is reducing the profit margin of Tesco.
There is threat of takeover of Tesco by world leading retail giant Wal-Mart. Wal-Mart is the holding company of Asda and gives a tough competition to Tesco on price.
Tesco has a well-established and consistent strategy for growth. The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong, sustainable long-term growth by following customers into large expanding markets at home such as financial services, non-food and telecoms and new markets abroad, initially in Central Europe and Asia and more recently in the United States. This strategy has five elements, reflecting Tesco's four established areas of focus plus Tesco's commitments on community and the environment.
To be a successful international retailer
To grow the core UK business
To be as strong in non-food as in food
To develop retailing services; and
To put community at the heart of what we do.
The strategy to diversify the business has been the foundation of Tesco's growth in recent years. It was laid down in 1997, with the fifth element Community being added in 2007. Many of the new businesses that have been created and developed over the last 13 years as part of this strategy are now of significant scale and highly profitable in fact Tesco is now market leader in many markets outside the UK. In 1997 its International business generated 1.8% of the Group's profits and it had only just entered the Retailing Services markets today these parts of their business represent 22% and 16% of profits respectively.
The strategy has given the business momentum to grow well through the economic down turn. By continuing to invest through the recession in the customer offer, in infrastructure and in our people, Tesco is now well placed to grow faster and improve shareholder returns as the global economic environment improves.
Internationally Tesco has delivered a resilient performance in the face of challenging economic headwinds. Its businesses have made good progress delivering for customers today and at the same time investing in the future growth. Tesco strategy is working and ended this year stronger than they started it.
Each of Tesco's businesses has adapted itself to the demands of its local market with strong local management teams finding ways to reduce costs and offer great value for customers. Tesco international businesses are also utilizing the scale and skill of the Tesco Group with more international sourcing, Discount Brands now in seven markets, F&F clothing now in ten countries, Club card introduced in seven countries with more Club card holders internationally than in the UK and Tesco Operating Model sharing their global best practice to the benefit of all their businesses. With clear signs that Tesco's international markets are starting to recover Tesco is planning to resume a faster pace of new space opening in the coming year. In 2009/10 Tesco opened 5.1m sq ft of new space and in 2010/11 it will open 8.5m sq ft in addition to nine shopping malls in China. The performance of Tesco International businesses through this severe recession has provided reassurance on the quality and resilience of its assets and local management teams and strengthens its confidence in Tesco international strategy and long term growth prospects. In Asia, Tesco has delivered a strong performance despite challenging economic conditions in the region. Tesco has grown sales and profits driven by new space and the excellent performance of the stores acquired in South Korea in 2008, which are now profitable. Europe overall delivered a robust performance against strong economic headwinds in the form of increasing unemployment and price deflation. By reducing costs and lowering prices for customers and by continuing to invest in new space Tesco has made market share gains across the markets. A good example is Ireland where Tesco has made substantial changes to its business, which was facing the dual challenge of a severe recession and cross border trading. By integrating more international brand buying with UK business Tesco has been able to reduce the prices of 12,500 products by an average of around 20%. In the United States, Fresh & Easy has been making good progress, despite prolonged weakness in the California, Nevada and Arizona economies. Losses were broadly in line with guidance and reflect the fact that Fresh & Easy has been built with the infrastructure to support hundreds of stores.
The size and scale of China provides unique challenges for a retailer but also offers a huge opportunity for a business prepared to show flexibility and vision. Tesco strategy is to expand into less developed second and third tier cities by opening hypermarkets in leading shopping malls. Tesco found it hard to find locations with the right facilities in some cities giving Tesco an opportunity to develop their own malls, to ensure they are the right size, location and design to meet the needs of the new Chinese customers. During the year Tesco opened first three Tesco Lifespace shopping malls in Fushun Qingdao and Qinhuangdao and are planning to open nine more this year. Each mall comprises approximately 500,000 sq ft of retail space over five floors and is a one stop destination providing shopping (including a 100,000 sq ft Tesco hypermarket), entertainment, dining and leisure.
Tesco is in partnership with investors to share the capital commitment on some of these projects, enabling them to roll out more sites faster.
In a further step, Tesco says it is looking at introducing a labelling scheme which would show the carbon footprint of each of its products. It is examining ways of creating a "universally accepted and commonly understood" measure of the emissions created in the manufacture of goods and their transport to its stores.
Tesco aim is to offer maximum value and choice to their customers to retain their life time loyalty. According to Porter Generic Model Tesco is pursing a hybrid strategy because Tesco is struggling in achieving low price and differentiation as compare to its competitors i.e. Wall Mart-ASDA and Sainsbury but the influence of low cost is very high than differentiation. Tesco has launched its low cost brand Tesco value; discounted products however on the other hand Tesco is also selling their premium brand i.e. Tesco Finest. Tesco declares itself as "discounter". The underpinning of Tesco competitiveness is a relentless attitude lowest cost provider of goods and services to be successful in world's most competitive markets.
Porter Generic Competitive Strategy Presentation of TESCO
Tesco has a consistent strategy since 1997, which strengthen its core UK business and help them achieve their plans of expansion into new products and services and in international markets. According to the Ansoff Matrix presentation, Tesco is operating in all three segments. Tesco has introduced Non food segment, online retailing, introduced Tesco personal finance, Tesco Insurance and recently entered into telecommunication sectors. They have entered into 14 international markets.
Ansoff Matrix Presentation of Tesco Growth Strategy
UK Core (Grocery)
The segment of grocery is Tesco's largest contributor of its revenue to £51.8bn which is 40% of total sales, Asia 29% and Europe 25%. International retail sale represents 19% of Group revenues. The launch of Tesco direct in non-food product range provides online buying option to customer. Tesco sales from the non-food desk were 10 billion pound in the last year and it will further increase. Tesco Personal Finance is joint venture with Royal Bank of Scotland. Tesco has attracted 1.7m customers for its personal financial product and aims to further increase it. The Telecom business has been made with the venture of O2 that have moved from minor loss to profitability. Tesco according to Ansoff growth matrix is reluctant to diversification with new product into new market. The results indicate that Tesco is effectively managing the growth strategy into marketing penetration, product development and marketing development.
Findings and Recommendations
Tesco is performing very well to be the leading supermarket, but how Tesco are going to maintain this success and take it further. I believe that Tesco can still go further by providing more services to satisfy their customers.
I would recommend Tesco to open a play area for children because it will allow customers of Tesco that have children to have a more peaceful time while they do their shopping. If Tesco will have a play area for children it will attract more customers that have children, as Tesco will be the only superstore that offers this service.
I would also recommend Tesco to improve their Internet shopping by making it more secure as potential customers are always worried that their personal information could be stolen.
Tesco can make their internet shopping safer by making their website hacker free, this will therefore make internet customers feel more secure and open with their information.
I would recommend that Tesco should also make their stores more ethnic so that they appeal to customers from all communities of the world.
Tesco can make their stores more ethnic by employing staff who can speak a variety of languages so that they can understand customer that are from different communities, the way that Tesco can get customers that speak a variety of languages is by training them to speak different languages.
Tesco is consistently improving with its fairly utilized resources, higher return on capital employed, higher return on equity capital more profitable business unit and better profit margin. Tesco has maintained their edge over the competitor on the basis of economies of scale. However, despite of all factors it is also notable that some further initiative taken particular during the period of 2007 and 2008 i.e. change in supply change management, energy saving, store operation to attain efficiency to reduce cost are not fruitful.
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