Tesco's Strategic Real Estate Management - Case Study Example

Tesco- Strategic Real E Management Marketing consists of the strategies and tactics used to identify, create, and maintain satisfying relationships with customers that result in value for both the customer and the marketer. Retail marketing, has evolved over the years, with smaller and local companies. Gradually, it has acquired the status of a multi-national business. Tesco has been a formidable player in the retail industry for many years. With increasing customer focus and innovative marketing techniques the retail industry has become quite competitive. The futuristic thrust of a company can be assessed by its assets. If the company carries forward its business prospects by accumulating assets on a recurring basis, this indicates towards the fact that the company is not there for short term gains. Policies of such companies, in general, always happen to be friendly to different sets of stakeholders. Acquiring real estate is one good indication towards the strategic focus of the company. Tesco's policies have been to acquire the real estate with an eye on long term perspective. Continuously monitoring the environment and following the leaders has become key to a successful business. Continuously studying the different aspects of environment (social, political, legal, technological etc.) and taking corrective and adaptive steps accordingly helps in growing of an organisation. Tesco started computerised checkout counters as early as 1982 and this stride continued with opening of www.tesco.com and its online operations. Today it is the largest store in UK with presence in many countries around the world. This study is an effort to find out how the management at Tesco has been able to make use of its strengths and adapted to external pulls and pressure while successfully managing the resources at its command. Tesco-A Leading Retail Store Chain Introduction Of all the changes in distribution during the last century, those taking place in retailing have been the most dramatic. Totally new institutions have appeared in an industry that a hundred years ago consisted mostly of small general and specialty stores. Tesco is one such store which had a humble beginning early in the 20th century and today it is one of the leading company in the retail sector. Besides acquiring prime space in the major cities in UK, in the form of its stores, company has been able to take advantage of the opportunities in the overseas market. This study is an effort to figure out how the company is able to synchronise its marketing efforts while investing in real estate as well. The Evolution of Tesco Tesco has been a leading company in the retailing business. With its presence in many parts of the world, the company has been able to take good advantage of the liberalisation policies being adopted by nations around the world. While talking about the policies adopted by the management in order to take growth oriented approach, it is worth discussing how the company was able to effectively manage its assets like the real estate. It was in the year 1919 that Jack Cohen founded Tesco, when he began to sell surplus groceries from a stall in the East End of London. His first day's profit1 was 1 and sales 4. The name comes from the initials of TE Stockwell, who was a partner in the firm of tea suppliers, and CO from Jack's surname. It was in year 1929 that Jack Cohen opens his first Tesco store in Burnt Oak, Edgware, North London. And there's no looking back since then. Tesco has a long term plan for growth, based on four key strategies2: i. Growth in the Core UK ii. Making corporate social responsibility an integral part of the business iii. To expand by growing internationally iv. To be as strong in non-food as in food v. To follow the customers into new retailing services The company has been steadily progressing with these strategies over the years and with over 2100 stores in UK and serving 12 markets 12 markets internationally, in Europe, Asia and North America. Over the years, the company has also widened its product portfolio as well. It is one of the largest food retailers around the world, but the company has also diversified into non-food items like electrical items and clothing. With its core purpose being to create value for customers to earn their lifetime loyalty3 Tesco has indeed been able to make loyal customers over the years. With group revenues of GBP47, 298 million (approximately $94,736.5 million) during the financial year ending February 2008, Tesco was able to register an increase of 10.9 percent over 2007. Even under the recessionary trends, with cut-throat competition and shrinking margins the company was also able to register an increase of 5.4 percent in operating profits as well. This seems to be in line with the growth of global food and staples retail industry in 2008, which grew by 4.1 percent in 2008 to reach a value of $4,964.3 billion (Datamonitor, 2009). This is an indication that Tesco has been able to manage its resources quite effectively to match the growth in the industry. With projections of $6,403.6 billion global food and retail industry by the year 2013, with an increase of about 29 percent over the year 2008, there seems lot of scope for Tesco in the coming years as well. But the present period appears quite challenging for the company as its market share has seen a dip in recent months while conceding some ground to competitors like Sainsbury, Asda and Morrisons. According to the TNS Worldpanel grocery market share figures4, 'Tesco's share of the UK market dropped to 30.6% in the 12 weeks to 19 April, from 31.1% during the same period in 2008. The key driving force behind the philosophy of an organisation is the values and mission, with which the organisation moves ahead, takes care of its customers, takes care of its workforce, and resorts to healthy business practices. The very core purpose of any business, besides sustenance and profitability, happens to create value for the customers. A supermarket chain in particular needs to take into account the changing needs and requirements of the customers, depending upon the changing environment, food habits, time management, availability of alternates in the market, increasing awareness about environmentally friendly goods and services etc. This way they can earn the loyalty of the customers while successfully attracting more customers. Success of a retail business depends upon the people and how the company treats the people within the organisation as well as the customers. Therefore it is very important for any company to state the mission and objectives of its business and faithfully take a course of action which leads towards fulfilling this course of action. Tesco has expressed its mission and objectives by stating (Tesco, 2008); i. No-one tries harder for customers ii. Treat people as we like to be treated Retail Business requires managing a broad range of retail skills in the areas of customer sales and service, promotion & advertising, store layout, real estate management, visual merchandising, economics & accounting, marketing, buying from suppliers, inventory control, and human resource management. The mission and objective statement must encompass all such fields and activities. Tesco's Key Internal and External Factors In order to assess the factors shaping the business practices of Tesco, it is worthwhile finding about the main strengths of the company, as the internal factors find a shape depending upon the strengths of the company. Strengths i. A Strong Brand Identity: Tesco is a well known brand in UK and many markets overseas. The report5 by MillwardBrown (2009) while coming out with the top 100 brands for the year 2009, has mentioned Tesco amongst the top 10 brands with highest brand momentum. Tesco with a brand value of $m22,938 has been ranked with 9 basis points together with the likes of Apple, Wal-Mart, BMW etc for having a high brand momentum which implies better short-term growth prospects as compared to others. The report also places Tesco at number two position, after Vodafone in terms of companies having top brand value in UK. Visibility in the public domain is one of the main criteria for strengthening the brand identity. The stores of Tesco at strategic locations, fitted out in the blue, red and white corporate colours make a perfect brand statement for the company. ii. Strong Market Presence: Besides being number one in retail and food segment, Tesco has a strong market presence in the overseas market as well. Some other international players like Wal-Mart created intense competitive forces, but Tesco is placed at second position terms of its brand image worldwide. The first slot is occupied by Wal-Mart (MillwardBrown, 2009). Depending upon the market requirements, the availability of space and the level of competition, Tesco operates its retail outlets in different formats like, express, metro, superstore, extra and homeplus, depending upon the area of the store and the magnitude of operations. Express stores are set up with an area up to 3,000 sq ft. Such stores are set up in smaller towns and suburban areas or in places having smaller population. Metro stores function with an operational area of approx. 7,000-15,000 sq ft, catering to thousands of customers. The superstore acquires an area of approx. 20,000-50,000 sq ft and provides a number of non-food items as well. The 'Extra' format is meant to become a 'one-stop destination store' for its customers. started in 1997, such types of stores provide customers a whole range of non-food items like home wares, clothing, health and beauty and seasonal items such as garden furniture, besides the food items. The Homeplus with an area of approx. 35,000 sq ft to 50,000 sq ft includes mainly the non-food segment and the company prefers to call them 'trial stores' as of now. iii. Well Coordinated Online Presence: Today we are in an era with the footprints of information technology on almost all segments of society. Internet has brought about revolutionary changes to the manner in which we communicate and do the marketing. The successes of online portals like 'amazon.com' and 'ebay.com' have redefined the parameters of carrying out business. Tesco has always tried to be in line with contemporary issues. Therefore, in the form of 'tesco.com' it has a strong and well coordinated presence on the internet as well. 'Tesco.com' is said to be one of the largest online grocery shopping services in the world, the fourth biggest online retailer in the UK, behind Amazon, Dell and Argos (Datamonitor, 2009a). While serving more than a million customers from urban as well as rural areas the online portal has tried to fill the gap created by non-presence of the physical stores of company at some places. Online retailing doesn't require the company to open a brick and mortar store in the market place, thus saving the investment on real estate. Thus, it appears that company can widen its market base without much investment. But, it is equally pertinent to note that the company needs a huge storage space and a well coordinated distribution network for delivering the items ordered online. iv. Prime Area Location Advantage: Location of a food and retail store is quite relevant in making it popular amongst the people. Tesco has the advantage that most of its stores are located at prime locations around the city and are frequented by many customers. For example, the stores located in different corners of London are a reminder of how prosperous the company is in terms of its real estate value. The worth of real estate keeps rising as the location starts recording more number of footfalls, with people from surround areas also visiting the place. Its one-stop destination stores spread around an area of 60,000 sq ft and above have become hugely popular with customers, because in these stores, customers can find wide variety of branded and good quality food and non-food items under one roof. v. Presence in the International Market: Tesco has made its presence felt in 12 markets outside UK. While adhering to the basic values of its business activities, the company has made it a point to see that it inculcates the local beliefs while trying to reach out to the local people. vi. Commitment towards Community: The commitment shown by a company towards taking care of the needs of the community, the environment and other such factors helps in building an image of the company. Such goodwill gestures go a long way towards the successful future of any business activity. Moreover, such steps also help a company to tide over the negative press publicity. For example, Tesco was criticised when its chief executive Sir Terry Leahy said that6 he was ready to raise prices to deliver "a revolution in green consumption". But a statement from Asda to the effect that prices should not rise for adopting environment friendly measures, raised question marks about the intentions of Tesco. It is under such circumstances that the corporate social responsibility helps them compete against their main competitors like Marks and Spencers. By linking in with regeneration projects, as well as using different store formats, Tesco is also getting round the restrictions placed on them through changes in the planning system that now prohibit out-of-town retail developments. The management at Tesco has ensured that the corporate social responsibility (CSR) becomes an integral part of its business. Weaknesses Tesco is highly dependent on their UK operation, which makes its vulnerable to huge losses in case of any major developments in UK markets. Despite achieving a 3bn annual profit, the dip in the percentage share of the UK market is an indication for the company that its overdependence on UK market might not augur well during highly challenging times. The shrinking margins in the retails sector may well prove to be a loss making proposition for Tesco if the competitors decide to leverage their economies of scale. It is equally true that while the strong points of a company help its management in going ahead with bold decisions, it is equally true that a number of external factors also influence the company's policies from time to time. Some factors which have helped the management of Tesco to adapt to certain situations can be summarised as; i. Increasing levels of Competition: The level of competition in retail segment arises from other retail stores like Wal-Mart, Asda etc, but the competition also comes from the local markets and corner shops. In such a competitive environment the profit margins definitely take a hit and companies are forced to come out with innovative marketing ideas in order to attract and retain the customer. ii. Increasing online spending: Internet is becoming a very popular and convenient market space for purchase of goods and services. Therefore, it called for a renewed focus on the e-commerce aspects. The ad campaign started by Tesco in the form of calling itself 'Britain's biggest discounter' proved quite useful in inviting the attention of potential customers. But, diversification into online real estate market (with www.tescopropertymarket.com) failed to bring cheers to the property market, and in view of a number of controversies involving Tesco's relations with estate agents, partners in the venture etc. the company had to pull the plug out of the online property venture. iii. Rising income levels leading to more spending: There has also been a general increase in retail spending as disposable incomes have increased over the last two decades - this is linked to growth of retailing industries. Today more people own cars and freezers so this caters for large bulk shopping trips. iv. Recessionary trends: For just about a year, the recessionary trends, started off from the US mortgage crisis, have spread around the world in good measure. This has resulted in a crisis like situation in many sectors. Banking and finance being the worst affected sectors. But the lesser spending by consumers would surely result in lesser sales and revenues for Tesco as well. The management is therefore taking stock of the situation, and the impact of such trends has started showing in the form of reduction in sales figures, and crash in the property market. With the closure of their online property venture a number of employees were left redundant. Though the company was able to come out with good figures for the year, yet analysts are of the view that with the continuous contraction in British economy the impact is bound to be there. A management is said to be successful when it takes full advantage of its own strengths and the opportunities that come its way. It is quite apparent that the management at Tesco has been quite successful in strategic decision making with the help of all it had and adjusting itself with situations. For example, realising the threat from competition Tesco wanted to ensure its presence in almost all parts of UK. But, the shrinking profit margins coupled with weaker market sentiments were not proving to be conducive for the company to start off its new stores. Therefore the management at Tesco decided to acquire six stores from Somerfield. This step implied that the biggest retailer of UK has also been able to have its footprints into the Northern and Western Isles, where it had no presence till March last year (guardian, 2008). Similarly, at a time when the recession hit industry is looking for ways to come out of the situation by laying off workers and closing stores, Tesco has been able to show its strength by opening up more stores. Fresh & Easy, the US brand of Tesco has opened up yet another store in the metropolitan area of Corona in April (Hirsch, 2009). This is part of the aggressive expansion strategy planned out by Tesco in its overseas market. Tesco seems to have Real Estate - an Integrative Part of Strategy Effectively managing the assets and resources of an organisation are very crucial for the survival of the organisation. David (1999) defined strategy as 'the match an organisation makes between its internal resources and skills and the opportunities and risks created by its external forces'. While optimising the use of resources, management at Tesco has also tried to make sure that wastage is minimised. In today's market driven economy, customers have many alternatives. In order to reach out to the customer and inform him/ her about the qualities, product differentiation, value etc of one' product, promotional plans form an integral component. A well planned floor area, displaying different varieties of products in the store, helps in catching the attention of even an occasional visitor, who in turn feels tempted to know more. Then starts the role of the customer care executive; who informs the visitor about the features of the product, different varieties and value added services. A retail store can plan such strategies depending upon the area it has and the number of customer care executives pressed into service. Tesco has been managing its real estate quite effectively over the years. This is quite apparent from the kind of profit the company has been able to earn from its property division alone. This division, further divided into teams for mixed-use development, land acquisition team etc, is managed by an in-house team of experts appointed by Tesco. In these recessionary times this division has also come under some pressure with job losses in the property division (Richardson, 2009). A report published in the Telegraph in the April 2007 came out with the revelation that In the year 2006 Tesco was able to generate a profit of 139m, which is said to be equivalent to the amount of profit that another retail chain Debenhams, is expected to make from all of its operations (The Telegraph, 2007). Though, dealing in property is not Tesco's core business activity but the kind of properties that the company has been able to hold for about 90 years is proving to be a healthy asset for the company in these difficult times. In the recent past Tesco has sold off some of its properties to fund its expansion and diversification programs. Though Tesco still owns 84% of its freeholds but analysts reckon they will reduce this to 70 percent in due course. Part of this involves sale and leaseback deals e.g. signing of the 366mn joint venture deal in 2005 with Consensus. With almost a monopoly in the UK market, Tesco is said to biggest corporate property holdings in Europe with real estate worth 28bn (The Telegraph, 2007). The company was also getting increasingly involved in mixed development regeneration projects until the property market crashed. Thus, they are building more than just retail stores. This is helping them overcome planning restrictions in some areas. But such efforts are not without opposition against the monopoly of the company. For example, the store in Partick area of Glasgow had to withstand opposition from people. Their contention, Tesco's presence will lead to traffic congestion and damage to smaller businesses (BBC, 2007). From the study, it is quite clear that while on the one hand Tesco has successfully made inroads into retail segment, the company has been able to make good use of the real estate that it has amassed over the years. But, the immediate future appears quite uncertain as far as acquiring new property establishments are concerned, because of the crash in property market and falling banks. The long-term perspective though appears quite in line with the vision of Tesco. Conclusion Real estate management for a food retailing company might appear in contrast at the first instance, but after undertaking this study about Tesco, it is quite apparent that effectively managing the real estate can provide the company a definite edge in taking on the competition. Tesco holds prime lands and buildings at strategic locations in the cities and towns, which is a source of strength for the company. But, the company needs to plan out the moves in the coming months with an eye of the recessionary trends, which has put a spanner in the existing plans of the company. References: 1. BBC (2007). Trouble in store for Tesco plans. Available online at http://news.bbc.co.uk/2/hi/uk_news/scotland/glasgow_and_west/6562917.stm (May 14, 2009) 2. BBC (2009). 'Tesco is 'losing UK market share'. Available online at http://news.bbc.co.uk/2/hi/business/8023250.stm (May 14, 2009) 3. Datamonitor (2009). Global Food & Staples Retail - Industry Profile. Datamonitor Europe. London, UK. 4. Datamonitor (2009a). Tesco Plc-Company Profile. Datamonitor Europe. London, UK. 5. David, F.R. (1999), Strategic Management: Concepts, 7th ed., Prentice-Hall, Englewood Cliffs, NJ. 6. Finch, Julia (2007). 'Asda clashes with Tesco over green policies'. Available online at http://www.guardian.co.uk/business/2007/sep/13/retail.asda (May 14, 2009) 7. Guardian (2008). Tesco nears complete conquest of UK. Available online at http://www.guardian.co.uk/business/2008/mar/28/tesco.supermarketsgusrc=rss&feed=networkfront ( May 2, 2009) 8. Hirsch, Jerry (2009). 'Fresh & Easy expansion to continue despite red ink'. Los Angeles Times, April 22, 2009. Available online at http://www.latimes.com/business/la-fi-fresh-easy22-2009apr22,0,4825516.storytrack=rss (May 3, 2009) 9. MillwardBrown (2009). 100 most valuable global brands 2009. Available online at http://www.millwardbrown.com/Sites/Optimor/Media/Pdfs/en/BrandZ/BrandZ-2009-Report.pdf (May 2, 2009) 10. Richardson, Sarah (2009). Tesco culls property staff as it cuts back on regeneration. Available online at http://www.building.co.uk/story.aspstorycode=3136663 (may 14, 2009) 11. Tesco (2008). Tesco Plc. Available online at http://www.tescoplc.com/plc/ (May 1, 2009) 12. The Telegraph (2007). 'Tesco: Europe's biggest property company'. Available online at http://www.telegraph.co.uk/finance/migrationtemp/2807681/Tesco-Europes-biggest-property-company.html (May 3, 2009) Read More