Marketing Strategy at Tesco - Assignment Example

Marketing Strategy at Tesco 1. Tesco’s market share in 2009 was 30.1%, which registered an increase of 0.1% from the previous year. In the year 2007, it had sales of £42,600 and a sales growth of 21.9% (www.bbc.co.uk). ASDA, owned by the U.S. giant retailer, WalMart, was next in line, with a market share of 16.9% in 2009. This grocery retailer has however recently snapped up the budget outlet NETTO for a sum of £778 million, which has placed it in a position to potentially offer strong competition to Tesco in the future (www.bbc.co.uk, 2010). Morrisons benefitted from its acquisition of Safeway stores in 2003 in terms of presence in the market, but has not been able to successfully manage its operations. The Company has been gaining market share but has been adversely impacted by actions such as the recent loss of its Chairman, Mark Bollard, to the Marks and Spencer chain of stores (www.fool.co.uk). Sainsbury’s profits were pushed up by 30% to £342 million in 2009 due to its strong sales drive, and this upward rise in profits has continued into 2010, with the retailer registering a 17% annual hike in profits.(www.walesonline.co.uk). Tesco’s strong international presence has also been an invaluable aid in providing a competitive edge. Despite a severe recession in the U.K., the Company’s profits were up as detailed above. Several new stores were opened in the U.K., but almost half of its profits were derived from its stores overseas, rather than most of the profits being drawn in from the U.K.(www.bbc.co.uk). As a part of its growth structure, the Company is also opening 11.5 million square feet of retail space outside the UK. In comparison, among Tesco’s competitors, Sainsburys has only one store in Calais, France which is a beer and wine outlet, while Morrisons is restricted to the U.K. Asda has outlets in Scandanavia and Northern Europe and can also benefit from Walmart’s stores in the United States, since its acquisition by Walmart. In terms of competitiveness, Tesco and Asda are therefore placed in a much better position than the other two chains, because they can capitalize from sales abroad. On the basis of the above, it may be concluded that Tesco operates in a highly concentrated market; an oligopoly in which four major grocery chains operate, namely Tesco, Asda, Morrisons and Sainsburys. Asda appears to pose the most significant levels of competition for Tesco, both in the international markets as well as the domestic market, especially after its recent acquisition of the Netto chain of stores. While Sainsburys is growing and expanding due to its strong sales drive and Morrisons has benefited from its acquisition of the Safeway group of stores, Tesco is emerging as the market leader, both in terms of its hold on the market as well as consumer preference for this particular retail outlet. Tesco has reached the market leader position mainly due to the following factors (emerald): (a) Building up a strong brand equity; it has steadily built up a reputation for value, low prices and a customer focused approach. (b) An aggressive policy of overseas expansion and opening markets in eastern Europe, China and the United States among other nations (c) A customer centric approach which has resulted in the formation of different kinds of stores such as Tesco Metro, fresh and easy stores, which are mid sized stores. (d) A pioneering and innovative marketing approach, such as for example being the first store to open online outlets for customers to shop online and providing the Tesco clubcard, which is not only a loyalty card but also collects data on the kinds and quantities of goods which consumers purchase; their preferences and tastes. (e) Economies of scale by buying products in large quantities None of the four stores identified above as the major elements of the oligopoly remain food stores alone, they have all branched out into non-food products; as a result, Tesco faces competition from each of the other three retail outlets. In terms of countervailing power, Walmart already has a strong presence in the international markets on non food products and since its acquisition of ASDA, poses the biggest threat to Tesco in terms of countervailing power. Walmart has been praised is in achieving lower prices for customers and its supply chain inefficiencies that have allowed it to gain a strong competitive advantage in the market (Hughes et al, 2006: 4). Since Wal-mart has gained such a degree of dominance in the world marketplace, it is in a position to demand cost cuts from its suppliers which translates into cost efficiency. Most of Wal-Mart’s suppliers are located in China, which supplied about $18 billion worth of goods in 2004. As Anderson (2005) points out, there are rampant violations of worker rights in Chinese factories that produce goods for Wal-Mart, with workers being treated unfairly and harsh working conditions. Asda is therefore able to benefit from Walmart’s ability to secure lower prices from its long established suppliers, and thereby poses the most potent threat to Tesco’s countervailing power. It’s market share however remains below 25%, but ever since Tesco’s market share has jumped over 25%, it has been placed in a position where the Competition Commission could define it as a monopoly and restrict its activities on the grounds that it is functioning against consumer interests (Baxendale, 2007). Tesco’s reputation for consistently working in the consumers’ interest through various initiatives, does however stand it in good stead, helping it to combat the advantage Asda has by virtue of being in the second position with its profits still falling below 20% of the market. 3. In assessing the acquisition of Safeway by another retail chain, the Competition Commission considered what would be the outcome in terms of affecting competitiveness in the market, if either of the major players in the market took it over. Safeway was a chain of stores mostly concentrated in the southern part of the country, offering petrol and convenience shopping in combined outlets. The Competition Commission pointed out that the monopoly factor that would work against the notion of Asda, Tesco or Sainsburys taking over the Safeway stores (Competition Commission report). The Commission contended that the existing high levels of one stop grocery markets would be intensified. The net effect of this, as pointed out by the Commission, would have been to provide Asda and Tesco with very substantial market shares, thereby increasing seller power rather than buyer power. The acquisition by Tesco or Asda would have reduced the number of major players in the market to only three and Tesco’s acquisition of Safeway would have provided it a market share almost as high as the other three players put together. On these grounds, the Commission rejected Tesco’s bid as well. Had Tesco sought to challenge the decision of the Commission, it would have been required to prove that its acquisition of Safeway would not have raised it to a monopoly that would impact adversely upon the interests of consumers. This would create a situation where the monopoly could arbitrarily affect price raises, per figure below (www.competition-commisison.org.uk) and impact negatively upon customers: Price: Acquiring a monopolistic position would fall under the provisions of Article 82 of the EC Treaty and the abuse of a dominant position. The EC Treaty makes it clear that the competition rules which were formulated in order to establish “a system ensuing that competition in the internal market is not distorted.”1 In order to promote these goals, one of the objectives is to promote and foster competition within the economy of the European Union by encouraging innovation and pushing prices down. As a part of this initiative, Article 81 of the Treaty is geared towards preventing anti-trust initiatives so that business actions such as formulation of cartels and monopolies would be prohibited under the provisions of this article, and the assumption of a dominant position in the market would not be favoured under the terms of the EC Treaty. The dangers of ascending to a position of such supremacy in the market arises when buyers and sellers, through the weapon of mergers combine their resources in a manner that is not geared towards promoting efficiencies but are rather geared towards promoting their own objectives of gaining profits. In such an instance, the goals of corporations do not synchronize with the goals of the EC Treaty, which is to promote the common market. Tesco would need to focus upon the advantages arising out of the dominant position that it would have acquired in the market from a merger with Safeway. Monti (2000:257) has spelt out some advantages, namely: optimal allocation of resources, incentives to pursue innovation , efficiency and quality and the optimization of customer welfare. Firms that are in a dominant position are able to secure advantages drawn out of economies of scale and reductions in advertising costs which enable them to divert those resources towards ensuring that the maximum levels of customer efficiency is gained. This would help to ensure that the goals of the EC Treaty are met and that the goals of competition are fostered. Tesco’s submission to the Commission would need to cite such sources; it could also put forward the example of other mega-corporations such as Walmart, IKEA and Turner Broadcasting to show how customers have been able to benefit from the economies of scale and the increased facility for innovation to enjoy better services and prices. Tesco itself offers a brilliant example; its activities support its advertising of “every little helps” – because it is constantly putting forward initiatives to improve customer interests, such as online shopping, its clubcard, home delivery, variety in products all available at one stop. As a result, a merger could have improved customer efficiency and lowered prices, rather than resulting in higher prices, price fixing and other detrimental effects. 4. The secret of Tecso’s success has been highlighted in an article in the Economist.(“Sceptered”, 2005). Tesco focuses on its customers, through its club card offered under its customer loyalty scheme. The customer’s purchases are recorded through the use of a special barcode on the card and Tesco then makes efforts to stock the products that its customers consistently buy. According to martin Hayward who manages the Tesco customer information, “We believe we have one of the largest databases anywhere in the world.” (“Sceptered”, Economist 2005). Tesco analyzes customer purchasing patterns and then offers them discounts on the products that they purchase frequently, Additionally, this facility also enables Tesco to shock the shelves of its local branches with the products that are favored by the residents of a particular area. The clubcard, purportedly a loyalty card, is thus one that collects a considerable amount of information on customer preferences in products. The Company is also able to gather demographic information on buying patterns among specific localities, age groups or different age groups. Additionally, Tesco also has a presence online, wherein customers are able to order products and provide personal information to support their purchases. There are four major ways in which such information could be useful to Tesco. Firstly, the availability of such an extensive amount of data on buying patterns over a long period of time. Such data could be organized by location or by demographic group over a sustained period of time to determine purchasing trends, i.e, which products five rise to higher levels of demand. The data collected would generally be input into an extensive database and the data could be sorted out to categories of customers based on age, gender, location, frequency of purchase, kinds of products purchased and similar data. The Company would be able to identify trends on this basis, and determine which products have a high demand level and in which locations by what kind of customers. It thus helps the Company to forecast the potential demand for their products with a reasonable degree of accuracy; products for which there appears to be poor demand can be stopped, while arrangements can be made for additional production of those items that appear to be selling well. Secondly, the Company could also use such data collection to analyze the response from customers to new products that it introduces. Information could be collected from shoppers about what kinds of additional products they would like to see in the stores and then these products could be introduced and customer response could be assessed by analyzing purchase patterns. It enables the Company to easily segment the market according to various demographic groups and target these markets by producing appropriate products for each segment. The Company can also regulate the elasticity of demand by offering its own substitute products to replace branded items offered by other companies which appear to be popular among customers and offering attractive promotions to encourage such purchases. Theoretically, the notion of estimating demand fairly accurately is an attractive marketing concept, because it would ensure high levels of sales. The difficulties arising in making any kind of effective prediction is the practical execution. A demand curve seeks to numerically assess the relationship between price and quantity and as Haughton (1998) points out, when this process is being carried out on an annual basis, the conventional position is to assume that supply is infinitely elastic and the demand curve estimates figures based on the intersection points between the demand and supply curves based on the prices. As Haughton(1998) points out however in his figure 1, supply as well as taxes could change from year to year, therefore the equilibrium points on the respective curves would tend to vary every year as the supply curve moves up or down, thereby making it difficult to accurately forecast demand. Hence, any estimation that could be made would be a fairly close, rough estimate at best, rather than an accurate projection because when the variables change, the curves would change accordingly. In particular, with VAT recently having been increased to 20% from January 2011 in the UK, demand would become more difficult to predict accurately with the projected rise in prices. 5. The financial performance of Tesco: The four major retail chains with a significant share of the market are Tesco, Asda, Morrisons and Sainsbury. For each of these companies, the following financial information is provided, in order to assess financial performance: As stated earlier, Tesco’s profits have been steadily inching upwards for the last three years as given below (www.tescoplc.com): 2007 - £42,600 million 2008 - £51,773 million 2009 - £59.426 million Earnings per share were as follows: 2008 - £27.02 2009 - £28.92 2010 - £29.20 A recent projection of earnings for last six months from May to December 2010 based upon share prices and P/E ratios are provided below, comparing Tesco to Sainsburys which has been enjoying the benefits of an aggressive sales program : (Source: www.fool.co.uk) Company Share price Forward P/E ratio Forecast EPS growth Forecast PEG ratio Forecast dividend yield Morrison 271p 12 14% 0.9 3.4% Tesco 420p 13 11% 1.2 3.4% Sainsbury 326p 14 8% 1.7 4.7% Sainsburys: Net profits: 2008/9 - £519 million 2009/10 - £610 million Earnings per share: 2008/9 - 21.2 p 2009/10 - 23.9 p On the basis of the above, it may thus be noted that Tesco has far outperformed Sainsburys, both in terms of total profits gathered, as well as in terms of its earnings per share. Its sales have provided it a market share of 30%, while the second in line, Asda, only reached 16.9%, despite being taken over by a top world retailer, Walmart. Tesco is the third largest retailer in the world and the largest in Britain, employing more than 250,000 people (“Sceptered”, Economist 2005). While it originally started out, it was primarily a grocery store that catered to the lower classes. However around the 1990s it has emerged as the biggest retailer in Britain through its diversification into sales of other products and its huge customer database, emerging as the store that serves one third of Britain’s population. J. Sainsbury’s served the upper section of the market, but while it was one the earlier supermarket outlets that offered self service, it has long been overtaken by Tesco, primarily through features where the retail giant has secured a first mover advantage, such as Tesco’s customer loyalty program and offer of ethnic food products. Spence (1981) highlights the importance of the learning curve that gives rise to a strong First Mover Advantage in the case of technological leadership. A strong learning curve effect exists if an increased cumulative volume results in sharply reduced costs. This is perhaps one of the most notable advantages offered by most supermarkets but especially Tesco, which has been directly responsible for their assumption of the First Mover Advantage position. Tesco has been the first mover in various aspects, such as the offer of products at lower prices, offer of food products targeted at specific ethnic groups such as Asians and Caribbeans and branching out into international markets, all of which have also impacted upon its financial position. The facility of catering to local tastes was perhaps one of the most important aspects that has fuelled Tesco’s growth. The Tesco outlet in Brixton of South London for example, which has a primarily Caribbean population stocks bananas, while the outlet in central London does not stock these items, instead they offer hot lunches and dinners, thereby adjusting the store to suit the convenience and preferences of the local clientele while simultaneously offering the multinational’s facility of bulk buying and economic logistics (“Sceptered”, Economist 2005). The advantage that discount retailing offers as compared to the traditional entrepreneurial set up is the facility of offering a section of products at significantly lower prices. When examining the dynamics of pricing and marketing, it may be noted that since a supermarket like Tesco purchases items in bulk quantities that very few other buyers can offer, they are also able to obtain the items from producers at prices that are much lower than that accorded to other supermarket chains, which they are able to pass on to their customers. Since they purchase in bulk and thereby avail of large discounts, they are also not so deeply affected by any losses, since their margins of profit are much larger. Colla (2003) classifies the kind of discounts that may be offered by various retail outlets on the basis of several factors, that has the end result of bringing the goods to the consumer at a much lower price than other outlets. One of these factors is the number of products carried. Supermarkets offer a wider selection of goods and therefore a greater possibility of a consumer finding what he or she needs at that outlet itself, instead of having to continue the search. Additionally, Gilbert and Newberry (1982) have stressed the importance of possession of R and D technology to increment quality of products and thereby improve sales. Some examples of such developments in R&D technology may be noted through the use of enhanced food processing, storage and display processes, that have produced increased customer sales. Tesco thus appears to be enjoying a strong position as the market leader in the retail sector, with its focus on the customer serving to keep them shopping at their stores despite the dangers of a monopolistic market position. Tesco has faced accusations of unfair trading practices, by using its size and bulk to undermine its competitors, but its focus on the consumer appears to be paying off because many of Tesco’s customers remain loyal to the chain, boosting its business despite the danger of a monopoly. (“Sceptered”, Economist 2005). Tesco’s strength is also reinforced by its innovation, for example through the introduction of online retail shopping and introduction of club cards to collect customer data. Lastly, its strong presence in the international markets and its ability to supply niche and ethnic products, are additional factors that appear to have helped cement its position as the market leader. 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Retrieved December 14, 2010 from: http://www.tescoplc.com/annualreport09/abouttesco/financial_highlights/ “The secrets of Tesco’s expansion success: How the U.K.’s largest supermarket is creeping up on Carrefour and Walmart”, Strategic Direction, 21(11): 5-7 Read More