Phenomenal Success of Tesco PLC in the United Kingdom and Other Markets - Case Study Example

Executive Summary This report looks at the phenomenal success of Tesco PLC both in the United Kingdom and other geographical markets. The first section identifies and explains the key success factors in its operation. Recognizing that marketing is fundamental in its operation, an in-depth exploration of its marketing mix was also done. Another section was devoted to the issues and challenges faced by Tesco when trying to capture foreign markets. The last part looks at the implications of Tesco's rapid growth in the market environment and the possible recommendations on how to minimize its harmful effects. Table of Contents I. Introduction 3 II. Tesco's Success Drivers 4 III. Marketing Strategy 7 IV. Foreign Markets 9 V. Societal Marketing 12 VI. Conlusion 14 I. Introduction Tesco PLC is the largest British retailer based on both global and local shares. Traditionally, the UK-based international retailer specializes only in the distribution of food products but it currently adds other goods and services to its product portfolio which ranges from clothing to consumer electronics to consumer financial services to internet services to internet service and consumer telecom. Last February 26, the company announced a total annual turnover of 33.974 billion and reported a pre-tax profit of 1.962 billion. It is estimated that in every 8 UK retail sales, 1 is spent on Tesco. Tesco is currently one of the world recognized retailers. The phenomenal success of Tesco as a retailer is recognised even in the global arena. The company lags behind Wal-mart in terms of global sales, staying ahead of other retail giants like Carrefour, and Home Depot. The company's success and even mere existence in the strategies it employs to capture new markets and retain its current buyers. Its well-crafted marketing strategy is a huge factor becomes a main driver in the company's success. However, as the company focused on capturing other geographical regions in the world, it is irrefutable that the Tesco also needs to modify its current domestic strategy and design other strategies taking into account the features and issues in the new market. Together with other large global companies, the strategies employed by Tesco are met by a lot of criticisms from commentators. As societal marketing is becoming a trend and a common feature in the businesses, it is imperative that Tesco adapts ways to mitigate the identified harmful effects of these issues in its operations. This report will look at the phenomenal success of Tesco PLC both in the United Kingdom and other geographical markets. The first section will identify and explain the key success factors in its operation. Recognizing that marketing is fundamental in its operation, an in-depth exploration of its marketing mix will also be done. Another section will be devoted to the issues and challenges faced by Tesco when trying to capture foreign markets. The last part will look at the implications of Tesco's rapid growth in the market environment and the possible recommendations on how to minimize its harmful effects. The report will conclude with its findings. II. Tesco's Success Drivers As with any business organization, the success of a retailer is based on having a distinct competitive strategy. Accordingly, retailers' competitive advantage should come from critical success factors in the value chain. Market oriented and customer focused companies undoubtedly become successful in their industries as they focus on understanding customer needs, motives and patronage decisions. The current business arena shows companies being transformed into lean organizations as they evaluate their value chains and including only processes which add value to the customers. The evolution of new technologies which drives competition into higher intensity calls for a system for which to hear, understand, and respond to customers' needs in order to succeed. The factors discussed above become the most important tenets of retailer's success. These concepts will be applied in order to assess the major driving forces of Tesco's growth and profitability. Tesco has its distinct, well-crafted competitive strategy which it utilizes in its quest for market share. It's initial success in the UK market is based on the approach that John Cohen, its founder built the company with-"Pile it high, sell it cheap." This strategy worked for Tesco for sometime but it totally created distaste in its middle class customers. Thus the company created a new competitive strategy based on "inclusivity," overcoming customer's reluctance in buying Tesco's own brand, customer focus, covering geographical presence by building more stores, and selling almost anything. Inclusivity is Tesco's response in order to attract all the market segments in the retailing industry including the lower, middle, and elite class. Instead of focusing in a specific niche, the retailer opted to craft strategies geared in capturing the entire buying public. A good illustration of inclusivity is the company's product line. Tesco offers price-sensitive customers product lines like Value, while those who are less price-sensitive are offered "Finest" products. Inclusivity can also be seen in the company's diversification into other previously unrelated businesses like financial services, consumer electronics, internet services, consumer telecommunication. All in all, Tesco becomes a company which offers almost all products in one roof. The contribution of inclusivity to the retailer's strategy is tremendous. Unlike its competitors which are only to able a capture a small portion of the buying market, Tesco became appealing to essentially everyone. Critical retail analyst David McCarthy recognized the company's strategy and remarked, "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 (Liptrot 2005)." The company's success is also related to its ability in turning its revenue into profits. One way that Tesco does this is by significantly overcoming the customers' reluctance in purchasing its own brand. It should be noted that retailer's own brand is considered more profitable than those supplied by manufacturers as it retains a higher overall profit with this products. The company's success is also due to its very customer focused strategy. Tesco's vision boldly states this as "Our core purpose is to create value for customers to earn their lifetime loyalty (Our Core Purpose)." This statement is further expressed in two key values known as "No one tries harder for the customer," and "Treat people as we like to be treated (Our Core Purpose)." In their feat to know customer's preferences, they are gained the following information through their surveys: clear aisles; can get what they want; good prices; no queues; and great staff. Armed with this information, Tesco PLC strives to give exceptional service to its customers. Lastly, the two other driving forces which are key to Tesco's success are its presence everywhere and selling everything. Retailers need to be accessible where the buyers are and offering all their needs. Tesco does this by providing more stores to reach all their customers and offering a broad product line. To date, the retailer has a total of 1897 stores and offers 40, 000 products. Not only that, the company's products can also be accessed through their online website. After looking at the competitive strategies employed by the customer, we can also use the retail growth cycle and retail value equation to analyse the success of Tesco. The retail growth cycle clearly points out that the company should go beyond the traditionally tailored product and service mix employed by retailers in order to improve margins. A retailer should be able to pursue either competitive pricing which boosts the revenue or economies of scale which significantly drives down cost. These two options improve margins, helping the company take advantage of the purchasers' buying power. In the discussion above, it can be seen that Tesco employs both competitive pricing and harness economies of scale. In terms of pricing, Tesco is known to have loss-leaders to entice its patrons. An article by Murray (2004) documents such strategy: "The former is the tacky blue-white-and-red version at the discount end of the mass market - for loss-leading staple household goods like baked beans and toilet paperTesco uses this brand to hold the mass market with a small number of loss-leaders and without losing the middle to high end of the market." Aside from loss-leaders, Tesco also use intensive price discounts in its entire product line. Tesco is known to gain due to this pricing strategy. In fact, Smith (2004) notes that "Tesco now sells books - at such cheap prices that one of the country's leading book suppliers recently shut down, unable to make ends meet." In terms of economies of scale, the company manages its information for its utmost benefit. A good example of this is its Clubcard which gathers significant information of its buyers and use it to know their preferences. The Clubcard significantly helped the company is establishing more accurate targeted marketing to customers. Tesco also utilized the retail value equation in its operations. It should be noted that the retailer is known to offer the elements in retail value equation such as more quality, more choices and availability, more convenience, and process enrichment all for less time, risk, money, stress, and effort. III. Tesco's Marketing Strategy The major focus of Tesco in its marketing operations is the satisfaction of customer needs and building customer loyalty. The retailer's marketing mix composed of its product, price, place, and promotion is shown in the table below. Tesco's Marketing Mix Table Factors Description Product An "inclusive offer" consists of 40,000 product lines which are both branded and private label brands. Convenience of buying under one roof Price Different pricing strategies tailored to suit the behavior of customers. Micromarketing Place Four different store formats to suit the preference of customers-Express, Metro, Superstore, Extra Located in UK, Asia, and other parts of Europe. Virtual location Promotion Clubcard Campaigns such as "Computers in Schools" Tesco is known to retail an "inclusive offer" indicating its aim of appealing to all market segments. The company, as stated above, offers 40, 000 different product lines both branded and private labels. Analysing further, Tesco does not only offer what it has on its shelves but the convenience of finding everything in one roof. There is no single consistent description on how Tesco prices its goods. Though known as a retailer which offers low price, it is irrefutable that the company prices higher on other products especially those which are offered to its upmarket. Another notable factor in its pricing strategy is the utilization of micromarketing. Prices are adjusted in different Tesco retail stores according to the propensity of customers to spend. The retailer has different store formats geared in capturing different customers. These are Express (up to 3,000 sq ft), Metro (approx. 7,000-15,000 sq ft), Superstore (approx. 20,000-50,000 sq ft), and Extra (approx. 60,000 sq ft and above). Tesco's operation is also focused not only on delivering a wide range of choices for each buyer but also on the provision of unique services to make shopping experience easier and more convenient. In the 1990s, programs are launched such as "making a staff available to help customers pack bags and take them to the car, having a policy opening opening checkouts is there was more than one person in queue, linking in with Airmiles group in relation to its Clubcrard, and the provision of facilities such as baby changing units, restaurants and coffee bars (Biz/Ed 2006)." Also a part of the company's effort to deliver more value to customer is the launching of an online shopping service through Tesco's website. Aside from the basic products it is currently providing, Tesco also "opened pharmacies in some stores, developed a range of financial services including a Visa card, mortgages, insurance and a bank account (Biz/Ed 2006)." The company launched its Clubcard, a loyalty card for the customers which allows them to accumulate points through their purchases and use these points to exchange for goods and services. Clubcard is regarded as one of the competitive advantages of Tesco as it the data gained from the loyalty program are eventually used to track the preferences of the customer. IV. Foreign Operations Tesco's fourfold strategy is stated as follows: "Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK, to expand by growing internationally, to be as strong in non-food as in food and to follow customers into new retailing services." It can be seen that the company's focus is based on its four divisions namely, core UK, international, non-food, and retailing. However, this section will only focus on how Tesco smoothly manages its entry and operation abroad. Thus, we look at Tesco's strategy in conquering the global retail market. Tesco is currently expanding around the globe in order to find new markets and boost its sales trend. To date, Tesco has 814 stores spread throughout the globe in major economies like Japan, China, South Korea, and France (Tesco 2006). The retailer reports that it is eyeing to enter the United States and battle head-on with Wal-mart, the world's largest retailer (Clarke 2006). In fact, international food and grocery analyst IGD forecast that Tesco will continue to look for growth abroad and that by 2010, nearly half of its stores will be operating overseas (IGD 2006). As an international retailer, Tesco should consider certain factors and issues when doing business abroad. The company recognized this by laying out six elements in its entry to foreign markets. Be flexible - each market is unique and requires a different approach Act local - local customers, local cultures, local supply chains and local regulations require a tailored offer delivered by local staff - less than 100 of Tesco's International team are ex-pats Keep focus - to be the leading local brand is a long term effort and takes decades, not just a few years Be multi-format - no single format can reach the whole of the market. A whole spectrum from convenience to hypermarkets is essential and you need to take a discounter approach throughout Develop capability - developing skill in people, processes and systems and being able to share this skill between markets will improve the chances of success in challenging markets Build brands - brands enable the building of important lasting relationships with customers. From here, we can see that Tesco's operations abroad are significantly different in its operations in the United Kingdom. As the company tries to blend with the local culture and market, the company essentially diverts from its local operations. These are advantageous as these strategies follow the core marketing principle of focusing on customers needs (Kotler 2001). Two different operations are given by Tesco: 1. In Thailand, customers are used to shopping at traditional wet markets, interacting with vendors and rummaging through piles of produce to choose what they want. Rather than adopting the Western approach of neatly packaged, convenient portions, our Rama IV store in Bangkoktries to meet local customers' expectations. 2. In Tokyo, customers like to shop for small amounts of extremely fresh food, every day. Existing hypermarket formats don't meet the needs of local customers, so Tesco's entry into the Japanese market was through the acquisition of a discount supermarket operator. The Ansoff matrix is a management tool which can help in assessing how Tesco go about with foreign expansions. Since, we only focus on Tesco's move on conquering new markets, we will only look at two possible market entry strategies which includes market development and diversification. Market diversification means offering new markets the same products that a retailer sells, while diversification means serving new markets with entirely new products. The Ansoff Matrix Source: marketingteacher.com Tesco follows a market development strategy in its entry to foreign markets. We can see that wherever it go, the company is a retailer of what it offers in the United Kingdom especially food and household items. As the core UK ventures in new and diverse product lines, diversification strategy is unthinkable as it will loss focus. V. Societal Marketing One of the focuses of retail marketing nowadays is the promotion of the societal responsibility of the firm. This is often called societal marketing and is often related to what is coined as "ethical marketing." The rapid growth of Tesco has been criticised by commentators which sees the presence and operation of the retailer as degradation in the market environment. Tesco has been through lots of controversies which threatened its position in the world's retail giants. Smith (2006) had boldly commented on the marketing strategies launched by Tesco especially its Loyalty Card which is solely used for the benefit of the retailer by gathering more information than what is willingly given by the customer. Smith (2006) sees it as the company's way of entrapping customers into purchasing goods and sourcing services from Tesco. Furthermore, he states that Tesco uses deceptive advertising by not telling half of the whole story. Another drawback of Tesco's rapid growth is its effect on the industry competition. As the company is able to price lower than its competitors who have a relatively small share in the market through economies of scale, the presence of Tesco is seen as detrimental to food producers, suppliers and smaller competitors. As these players in the industry do not have bargaining leverage held by Tesco, they become vulnerable to its tactics. Some are forced to lower prices or close down in order to avoid huge losses. Tesco's acquisitions are often contested by various groups. An example is the 2004 Adminstore acquisition. Opening of stores are also met with protests. Linklater (2006) observes that, "Whenever it moves in on small towns, the life-blood is steadily drained from their high streets, small businesses are undermined and the network of local suppliers and traders on which communities depend is broken." If these controversies persist, Tesco will ultimately "crumble and fall." Thus the company needs to find a way to minimize the harmful effects of these issues. One of the possible things it can do it intensifying its effort in promoting marketing ethics program such as Computer for Schools initiative. The Computers for School initiative of Tesco has become the benchmark for CRM in the UK. Through the program 84 million worth of information communication technology equipment were delivered in the entire Britain for the last 10 years. This was made possible by the shoppers who have collected vouchers which were then exchanged to equipment by their respective schools (Ramrayka 2004). Another thing which it can do is the promotion of societal marketing which will give the customers accurate information, education, and protection on a specific product. It can be seen that these efforts are not directly tailored to confront the criticisms for Tesco. However, these programs are sure to promote good image which will somehow lessen the bad publicity that it currently faces. Competition cannot be prevented. As Kotler (2001) puts it, markets are operating in a hypercompetitive environment. Retailers should seek to build stores in good locations, source inputs from lower priced suppliers, and price more competitively. VI. Conclusions The success of Tesco is based on its competitive strategy which includes on "inclusivity," overcoming customer's reluctance in buying Tesco's own brand, customer focus, covering geographical presence by building more stores, and selling almost anything. Its marketing mix is also a huge factor on its phenomenal success. Considerations in entering a new market was discussed which focus on three essential processes. It was also shown that though a lot of issues and controversies are faced by the company, it can foster a good image by improving on its societal marketing technique. 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