Tesco Strategies, Competencies and Innovations - Case Study Example

TESCO: STRATEGIES, COMPTENCIES AND INNOVATIONS Keywords TESCO, UK retail, supermarkets, retail, international trade Introduction According to the United Nations Conference on Trade and Development (UNCTAD) (2004), the retail and consumer industry is one of the industries exhibiting one of the highest growths today. Though the UNCTAD subsequently report reduced the expected growth rate projections in 2005, the industry remains to be an attractive industry. The slowdown of the industry is generally attributed the continuing deceleration of the Chinese economy as well as fluctuations in energy prices that affected related industries (Awbi, 2006a; Tesco expands in Japan, backtracks on China, 2006). However, indicators by the second half of 2006 have indicated that earlier projections in 2004 may still be achievable due to market growth in India, Russia, South America, and Eastern Europe though US markets remain subdued in comparison (Markets Ready For Liftoff After Positive Economic Reports, 2006; Awbi, 2006a). Appendix A illustrates the state of the international retail industry: Tesco's international expansion programs is not limited by its consumer businesses, they are aiming to launch extensive services and related markets into new markets because of two major motivations: establishing their leadership in these developing markets and maximizing existing capacities (Corporate Watch UK, 2004). About Tesco Tesco, is a global leader in retailing that is based in Britain. Recent vertical and horizontal expansion of the company have now included in its portfolio agriculture, packing, merchandising and information technology (Tesco, 2006a). Next to only to Carrefour, it Europe's supermarket industry and is ranked eight in the global industry. Aside from its supermarket operations to has recently its retail interest expanded its retail interest to the convenience store industry. Among its outlets are Tesco Extra, Tesco superstores, Tesco Metro, Tesco Express and T&S (Corporate Watch UK, 2004). Appendix A details current operations of stores as well as information regarding their entry and current operations and employment levels. Locations Tesco is currently operation in twelve countries worldwide with about 2,705 stores in operation and is seeking to continue expansion particularly in Asia. Table 1 details existing stores and projected openings for 2006-2007. It also is aiming to strengthen its market presence in the countries it is already in by increasing the number of stores in operation as well as increasing the volume of its products in the market (Johansson, 2001). . Tesco's overseas expansion is one of the major factors that have led to present growth trends. It has maintained its strategy of buying existing grocery chains instead of starting from scratch in new markets. This has allowed them to secure key locations and ease to the new market more easily (Corporate Watch UK, 2004). From current targets of Tesco, it expects to have to increase its stores by 26%, increasing its total number of stores to around 3,700 stores. Size and Formats Size of Stores is defined by the store format. The different categories of the store is part of the effort to capture various market segments and they may be located near each other and be considered as indirect competition of other category stores. Table 2 details the different store format and their respective sizing and selling areas. Tesco Extra stores first opened to the public in 1997 and carry the full range of products found in all Tesco stores. They are classified as hypermarkets. The first floor carries food products while the second floor caries non-food items. They are comparative in size and format with Wal-Mart Supercenters. An average of twenty Tesco Extra stores are opened annually (Tesco, 2006d). Tesco stores follow the traditional size and format of supermarkets and are the oldest format used by the company. It also the usual type of store opened overseas (Tesco, 2006a). Tesco Metro stores are less than half the size of Tesco stores and are generally located in smaller cities; it is half way between typical Tesco stores and Tesco Express stores. They are specifically branded for the city center market (Tesco, 2006d) Tesco Express stores can are modeled after the neighborhood store format and carry mostly higher priced items. They are positioned in high traffic area as well shopping and residential districts, petrol stations. They are one of the key expansion markets eyed by the company for its horizontal expansion in the UK. One Stop stores were part of the t&S stores category that are not to be converted to Tesco Express stores. They do not follow Tesco pricing systems and are a competitive strategy to gain more market share by the company instead of being part of horizontal expansion efforts (Corporate Watch UK, 2004). The newest format of store for Tesco is Tesco Homeplus. It follows the warehouse club store format. The range of products is limited to non-food items. The format remains to be an experimental format and its implementation will depend on whether it will be successful in increasing market access (Tesco, 2006d). Employment One of the major benefits that Tesco presents is the jobs it provides in developing countries. Employment levels are determined by the size of stores as well cost of labor in the respective countries. It relies a great deal on local labor market to fill in its labor requirements to personalize customer services and to deter cultural factors that may deter service. The company employs standard requirements and operating procedures for employees whenever possible to create uniformity among its stores. However, special consideration is given for cultural of religious reasons (Corporate Watch UK, 2004). Table 3 details current employment levels of the company projects expected future employment levels employment level growth. Products and Services Most of the products and services found in Tesco stores are that of a typical grocer's. It has about 5% of the total food market with product ranging form fresh produce from local agriculture as well as imported goods. It carries also a wide range of manufactured goods as well as ethnic specific products. For example, stores now carry produce and products that comply with the Muslim requirements of halal from essential products to non-essential items such as chocolates ("Tesco targets chocolate-loving Muslims", 2006). The store carries a value line that is of Tesco's: it consists of food and non-food items that are generic in nature and have been labeled by Tesco label. This was a development that was motivated by special needs of customers that were highlighted upon into its expansion in Muslim countries such as Malaysia (Patton, 2006). Tesco has also expanded its line to include related services ranging from petrol, telecommunications, banking and personal finance. These efforts are not seen just par of expansion objectives but also to increase competitiveness of stores by creating one-stop centers for customer needs as well as a means of cashing in on developing markets that are revealed by its normal operations (Corporate Watch UK, 2004). Products - products represent the typical grocery products. Products include both food and non-food items. Tesco has a policy of utilizing local sources whenever possible both to reduce costs as well as create goodwill among local suppliers (Tesco, 2006b).Recently, Tesco has had to deal with issues that its operations are actually are detrimental to local producers. Issues of genetically modified product dumping in less regulated countries have also been raised (Corporate Watch UK, 2004). Food - Includes local and imported produce whether fresh, frozen or preserved or processed; food products such a bakery products, beverages and similar goods, spices and other miscellaneous food products; and food for pets Non-Food - Covers household goods, utensils and accessories including electrical, construction and repair products; chemical products; office and school products; hygiene, personal care and cosmetics; and entertainment and leisure products The most significant development of products for Tesco is in its expansion into services. The store based services range from personal to professional services. This expansion into services has allowed Tesco to attract more customers by making itself as a consumer hub Personal Finance - is a partnership venture launched together with the Royal Bank of Scotland. Services include credit cards, loans and mortgages as well as insurance. The products offered include a Club Card that has cash pay back and free petrol benefits. At the close of the 2005 operation of Tesco, the venture has earned 139 million and is one of the most significant developments of Tesco's ventures beyond retail operations (Tesco, 2006d) Telecoms - Tesco started its interests in telecommunications since 1998 but the most significant developments in 2003. This has coincided with the company's expansion into e-commerce and served both as support and as an actual product. Current portfolio includes internet services, mobile phone, landlines as well as voice over internet protocol. Brands include Tesco Mobile; Tesco Home Phone, a partnership with Cable & Wireless; Tesco broadband, in coordination with BT and in partnership with NTL; and Tesco Internet Phone, a partnership with Australian based company Freshtel. Fuel - initiated in 1974 and primary product is 99 RON by Greenergy, a sister company of Tesco Other services - stores also may offer photograph developing services, DVD rentals on line and other specialized services Online Services - One of the biggest innovations that was the introduction of online retail services. It was a pioneering effort that did not just increase market channels for the company but is one of the benchmarks of successful e-commerce. Its online services also became the foundation of its other service ventures Financials Tesco is among the largest retailers in the world, ranking fourth behind Wal-Mart, Carrefour and Home Depot. At the end of 2005, total capitalization was recorded at 26.035 billion. It is listed in London Stock Exchange as TSCO and on the Irish Stock Exchange as TESCO PLC (Tesco, 2006d). Table 4 details the most recent performance summary of the company which was part of its annual report in February of 2006. Though it has been posting significant growth, it has also has had significant borrowing. As of 2004, it has 28% of the UK retail market. History Tesco was established by Jack Cohen when he opened his first store in London's East End (Tesco, 2006d). The company name traces its origins from the first Cohen goods which was tea: the name is a combination of the initials of owner of the tea company, T. E. Stockwell and the first two letters of Cohen's surname (Tesco, 2006a). this line of teas became so successful that it was used for the first Tesco store which opened in Burnt Oak, Edgware, London in 1929 (Corporate Watch UK). In 1932, Cohen introduced an inventory system that revolutionized store management and allowed the operation of fifty stores more streamlined. By 1939, the numbers of stores were over 100 which were all supplied form the company's main house located in Edmonton. During the war years, Cohen initiated rationing of products to ensure equitable food supply, an effort that was followed by the government. After the war, market demand prompted the establishment of exclusive greenhouses, which were located in Cheshunt and Hertfordshire, for produces to fill the racks of the stores (Tesco, 2006a). Tesco began its international expansion in 1994: initially in Europe via Eastern European and in Ireland by 1997. After this European expansion, the rest of its expansion has been geared towards Asia. Appendix B summarizes this information. Tesco has historically utilized to a great degree acquisitions for its expansion, these activities are summarized below (Tesco, 2006d): 1968 - acquired Victor Value which was consequently acquired by Bejam in 1986) 1987 - acquired Hillards in North of England 1994 - acquired William Low in Scotland 1997 - expanded operations to Ireland through acquisition of Quinnsworth, Stewarts and Crazy Prices stores 2002 - acquired 13 HIT hypermarkets in Poland to establish operation in the country 2002 - acquired T & S Stores as part of expansion into convenience store category 2003 - acquired C Two-Network to establish operation in Japan (Tesco expands in Japan, backtracks on China, 2006) 2003 - acquired interest in Kipa, leading Turkish supermarket chain. 2004 - acquired interests in Adminstore, Cullens, Europa, and Harts convenience stores; entered the Thailand market through acquisition of Lotus 2005 - acquired Safeway/BP stores As of September 2006 - acquired 80% stake in Poland's Leader Price supermarkets To be converted as either Tesco or Tesco Metro stores The main objective of the company is to provide total products and services for the people who frequent its stores. The company is aiming to diversify its operations by going beyond the retail business. One of the competencies that the company has is its access to consumer trends and behaviors which it is now utilizing in its strategic objectives (Tesco, 2006b). Innovations One of the key reasons why Tesco has been able to establish itself as a market leader today is because it has sought to go beyond what is the traditional. It has had many innovations under its belt that has not just revolutionized its industry but also has developed the consumer market as a whole: Store Format Tesco is one of the first establishments developed like supermarkets as we know it today. Cohen learned from American supermarket setups the advantages of a self service store and brought the idea to Europe (Corporate Watch UK, 2004). Added to his own devised system of inventory and warehousing, it afforded stores to offer more products to consumers and at the same time increased profit margins (Tesco, 2006d). Currently, Tesco stores are considered as a model of efficiency. It has a very high inventory turnover and is one of the most responsive to in store consumers (Tesco, 2006b). Their innovation in store layout, merchandise display and storage has allowed for more products to become available to consumers. Its stores have also allowed smaller cities access to goods and services that were traditionally reserved for stores in more developed areas. Another store feature that Tesco pioneered was the One in Front system that called for making available a payment lane whenever lines were more than two trolleys deep which became a well-liked system to customers (Corporate Watch UK, 2004) Warehousing and Distribution The initial efforts in creating the centralized warehousing system that the company established was done by John Cohen himself with his establishment of the first central warehouse for his stores in Edmonton (Tesco, 2006a). This system, which was followed by the retail industry, was further enhanced in 1980 through computerization and adoption of a unified product leveling system (Corporate Watch UK, 2004). When Tesco began its international expansion, it was not the first to do so in its industry but they were able to pioneer the inclusion of local producers into existing supplier networks. It was also one of the first stores to carry and distribute internationally ethnic specific products. Own-label Product Lines The idea of producing products to supply specifically Tesco stores began when Cohen created the greenhouses in Cheshunt and Hertfordshire to augment his produce sections. However these products did not carry the stores label and were presented generically with other products. Tesco introduced products carrying the store label in the 1980's to cater to the discount market. Initially there were limited products available but by 1993, it began to fully launch the line (Schrage, 2005). At first, the product line was considered to be uncompetitive with branded goods but the posted sales prompted competitors to release their own own-label products. There has been controversy however regarding the own-label products because local producers see it as unfair competition (Mercer, 2006). Other issues raised have included that the products have been produced by genetic modification and the issue of product dumping (Tesco, 2006d) Loyalty Cards The loyalty card system has been so successful that it has been adapted by almost all industries. It was first introduced in the stores in 1995. Issues have also been raised regarding primarily regarding claims on benefits and privacy issues (Corporate Watch UK, 2004). However, they have remained extremely popular and have been used by Tesco to launch other marketing and public relations projects (Move by Tesco to Cut Carrier Bag Waste is Welcomed, 2006) It has also afforded more detailed customer tracking that has provided more information regarding market trends and preferences. It has also created the platform for cross-industrial partnerships. Non-Store Based Retailing Of all the things that Tesco has pioneered, non-store retailing is its greatest contribution to the retail industry. It has pioneered online supermarket shopping that is considered one of the reasons why e-commerce was recovered after the dot com crash (Corporate Watch UK, 2004). Internet operation began in 1994 and home shopping services began in 1996. Because internet services were not as reliable as we know them today in the 1990's, Tesco launched CD catalogues to support actual internet operations. However, by year 2000 the CD catalogues were discontinued primarily because of the great improvement of internet services by that time (Tesco, 2006d). By the last quarter of 2006, Tesco is scheduled to launch the first home chopping catalogue as part of Tesco Direct. Its recent expansion into software has also prompted it to launch its own software packages that are aimed to utilize pricing as its main competitive edge. Software includes security systems, office suites and other software products distributed by its partners Formjet who has an exclusive contract for Panda Software and Ability Plus Software (Snowden, 2006). Conclusion The preservation of its leadership in the UK has been safeguarded by its responsiveness to consumers needs. This has been seen in the innovations that it has developed which have been extended in its international expansion. These have allowed Tesco the ability to develop a stable and loyal customer base and have allowed it to extend its operations beyond retail to now include financial and information technology (Corporate Watch UK, 2004). Without a doubt Tesco's innovation have contributed a great deal to these endeavors. The innovation that the company has pioneered serves as its foundation as well as a motivation. These developments have also helped develop supporting industries like logistics, freight, IT Services and Merchandising. This has allowed greater distribution of products as well provided access to new and developing consumer markets for research (Tubbs et al, 2006). With the opening of international markets, Tesco is given the chance to implement these innovations into other markets, fine tuning them to further strengthen the economies of scale and market-industry expertise it already has. However, this has also made competition much stiffer as new entrants both to its home and overseas markets abound (Awbi, 2006b). Tesco, an established world leader in the industry has not only brought in its store retail products but also has brought in its technology and competencies than can help develop these markets References A. T. Kerney Inc. (2006). Emerging Market Priorities for Global Retailers: The 2006 Global Retail Development Index. Chicago, Illinois: A. T. Kerney Inc. Awbi, Anita (2006a). Tesco shuns US retail graveyard for China. [Online]. Available from [Accessed 21 November 2006] Awbi, Anita (2006b). Tesco to steal convenience crown from Spar [Online]. Available from [Accessed 21 November 2006] Bernal, L. E., Kaukab, R. S., and Yu, V. P. B. III. "The World Development Report 2005: An Unbalanced Message on Investment Liberalization". WTO Institutional Governance and Dispute Settlement of the Trade and Development Programme: Geneva, Switzerland. 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Eastern Michigan University: Michigan. United Nations Conference on Trade and Development (2005) World Investment Report 2005. Appendix A - Opportunity Analysis for International retailers based on Global Retail Development Index (Source: A. T. Kerney Inc.) Appendix B - Tesco Store Locations (Source: TESCO) Read More