Retail Marketing: Tesco - Case Study Example

Retail Marketing: Tesco Introduction Tesco Plc is an international food retailer with headquarters in the United Kingdom. It has more than 2316 supermarkets, superstores and convenience stores located in 14 countries across Europe, Asia and North America (Telegraph Media Group, 2011). It is the leading food retailer in the U.K. with 1,878 retail stores located throughout the country. The company is currently the third largest retailer globally in terms of revenue earning after Walmart and Carrefour and according to Nwagbara (2011, p. 56), it is the second-largest in profit-making after Walmart. The Tesco group of companies operates five store formats: Tesco Superstores, Tesco Extra, Tesco Metro, Tesco Express and One Stop. Tesco has expanded all of its grocery stores to include non-food items such as books, software, electronics and music. It operates an e-commerce site with over 450,000 registered users in the UK One of the key drivers to success of this global supermarket chain is that it has an efficient Customer Relationship Management (CRM) system that many people envy (Shajahan, 2006, p. 208). In order for it to best target its diverse customer base, Tesco divides the target market into various specific segments. Specifically, the target market for Tesco is divided into different groups of customers with distinct similar product or service requirements or needs. This paper provides a detailed analysis the company in regard to its operations. The specific areas discussed in the paper are Tesco’s store format, store design, advertising and promotion strategies, customer segmentation, customer retention strategy and the current and future challenges and threats. Finally, the paper proposes various changes Tesco needs to make in order to remain successful in future. Store format Tesco executes its marketing strategies through various formats. Most of the formats for Tesco have been there for many years and innovations and adjustments are introduced through formula development. The firm currently operates five types of formats, four of which are branded Tesco. These are Tesco Extra, Tesco Superstores, Tesco Metro, Tesco Express and One Stop. Tesco Extras have a hypermarket format and are primarily located in Asia (Zentes et al, 2011, p. 181). These stores serve large and densely populated catchment areas such as city suburbs and offer both food and non-food items. Tesco Superstores mainly offer food but have a few non-food items, with sub-brands (Zentes et al, 2011, p. 181). This format has two sub-brands namely Tesco Supermarket and Tesco Compact. Tesco Supermarkets take the format of a standard supermarket. Tesco Compact on the other hand is smaller than a supermarket and mainly targets smaller communities. Tesco Superstores mainly provide traditional grocery items as well as banking, insurance, telecommunication products, flowers, books, movie rentals and uniforms. Recently, the firm has expanded all of its grocery stores to include non-food items such as electronics, books, software and music (Zentes et al, 2011, p. 181). Tesco Metro is a city centre supermarket that targets walk-in customers (Zentes et al, 2011, p. 181). The products offered in Tesco Metro are designed to target the needs of the local community. Tesco Metro sells a range of everyday products catering for the increasing number of city dwellers and professional people looking to do important shopping near their workplace. Tesco express on the other hand takes a convenience store format. They focus mainly on the needs of the local residential neighbourhood, selling fresh and convenience foods. Some are located on petrol forecourts and offer gasoline as well (Zentes et al, 2011, p. 181). One Stop is also a convenience store format resulting from Tesco acquisitions. One Stop stores are similar to Tesco Express but smaller. Among the different formats, Tesco Express has been the most dynamic of all the brands in recent years with gigantic developments off the brand in 2000 (Krafft & Mantrala, 2010, p. 76). Store design Store design is central to the efforts of developing the image of and establishing efficient retail operations. The objective is to design a layout that is easy and natural for shopping and which enables a firm to display products and categories to be able to effectively influence customer purchasing behaviour and customer experience (Cant, 2005, p. 59). A superior store design should enhance a firm’s store image. Store image is the overall perception that the customer has of the store environment. The store layout should provide space and arrangement of the facilities according to the desired image objectives and has to be supported by the merchandising. The store layout, design and visual merchandising reinforce the image, products and services of a firm. There are different design layouts that a firm can adopt to display its products such as the grid store layout, free-form layout and loop layout. According to Krafft and Mantrala (2010, p. 76), Tesco adopts a grid layout, which is a linear system of shelving whereby fixtures are arranged to form vertical and horizontal isles throughout the store. The fixtures are placed mostly at right angles. Tesco’s largest stalls such as Meadowhall located in Sheffield stock a full range of products. Customers enjoy a full day of shopping with the stores having various vital facilities such as car packs, toilets, food halls and even changing facilities (Krafft & Mantrala, 2010, p. 77). Substantial city centre stores offer a wide range of products which are placed in different departments. On top of the products offered by the aforementioned stores, smaller stores located in suburban and small town locations store the core boots products (toiletry, beauty and perfumes) and in many instances incorporate pharmacy. Tesco makes modifications in the standard layout in the different chain stores to conform to local requirements and customer needs in different locations. The common feature of the Tesco store design and layout which is evident amongst both the food and non-food items is the concept of experience space (Krafft & Mantrala, 2010, p. 77). Formula design for Tesco has moved beyond the traditional variables associated with the marketing mix to create stores in which the customer is more involved. Customers help in the value creation exercise by being part of the formula. Further, according to Krafft and Mantrala (2010, p. 77), the grid layout is quite methodical, efficient and convenient. It enhances better visibility of merchandise. It also enables customers to go directly to the merchandise where stores are arranged in self-service formats. Further, this design is cost-efficient and enables the customer tracking process to be efficient and traffic control to be more effective. Lastly, it leads to easy maintenance of selling areas. One demerit of this design layout is that it forms a linear repetitive pattern which may not be very appealing to customers since it creates a formal and monotonous environment. Customers may not like to spend much time at the store. Further, the secondary isles get less exposure compared to the primary ones (Plunkett, 2006, p. 133). Advertising/ promotions The most successful marketing campaign approach adopted by Tesco is the use of the Clubcard. Tesco Clubcard is a membership scheme established by Tesco, which enables customers to save money on the shopping they make through providing them with price-off vouchers (Turner & Wilson, 2006, p. 958). The scheme offers customers one point for every pound that they spend in any of the store of Tesco as well as the stores of their partner companies. When a customer accumulates 150 points, these are converted into vouchers which give the customer a chance to save money on shopping. Tesco established relationships and partnerships with well established companies such as Beefeater which is a group of restaurants, Powergen which specialises in supplying electricity and gas, Marriott Hotels, Avis car-hire, Johnson’s Dry Cleaners, MFI and National Tyres among others (Turner & Wilson, 2006, p. 958). This link makes it possible for customers to earn points from shopping on any of these companies. Further, customers can earn points by shopping at any of the Tesco petrol stations and by online shopping to purchase available products such as books, electrical goods, music and flowers. Also, customers can earn points by using Tesco mobile, a home phone which is a product of Tesco. Another way to earn points is by purchasing a Tesco Credit Card and other Tesco financial products. Generally, this makes it easier for customers to accumulate the required 150 points and take advantage of the price-off vouchers. This single reason explains the fact that Tesco has managed to increase and maintain the interest of its customers to the scheme and to the products associated with the Tesco group of companies. According to Turner and Wilson (2006, p. 958), many other retailers have in the past tried relationship marketing strategies and loyalty schemes similar to Tesco’s Clubcard, but they hardly succeed. But Tesco’s Clubcard has worked quite well and helped the firm to surpass its competitors in many aspects especially in the local market. On top of the products displays in the many different stores, Tesco operates an e-commerce site (www.tesco.com) with over 850,000 registered users in the UK alone (Doyle, 2009, p. 105). In this site, Tesco displays the different items that are offered in its different stores. Additional details and options are provided regarding modes and suitable time of delivery to customers’ homes and payment methods. Customers register for the service and can browse through the selected items from a range of more than 20,000 product lines. They are then are sent keys and other details over the internet to enable them to pay by use of a credit card (Doyle, 2009, p. 105). Customers only pay a fixed charge of £5 for the delivery, which is included in their bill. The delivery service is available over quite a wide area in the vicinity of the store. The e-commerce division of this firm makes more than 250,000 home grocery deliveries every week in the UK. By delivering items in the right form and quantities as requested by customers, the e-commerce strategy adds to existing customers’ loyalty for Tesco (Kornum & Bjerre, 2005, p. 66). Further, it attracts new customers and increases the probability for them to become loyal customers in the future. Customer segmentation Tesco targets consumers depending on different demographic variables such as sex, occupation, age, religion, level of education, and income characteristics of different segments of people, (Myers 2004, p. 1). This helps the firm to determine the potential ability of each consumer to purchase their products. As noted earlier, the firm has designed different products and services for every member of a family through the use of different club cards. One of these is Tesco Kids Club which is designed to cater for the needs of children between the age of five and eight, (Humby, et al, 2008. P. 184). In this club, Tesco provides members with the Disney Clubzone Magazine for kids. Additionally, Tesco offers parents with a pack that has free information based on issues such as how the price-of vouchers can be used to purchase various products from the company, healthy eating habits and safety for children. Tesco Baby and Toddler Club on the other hand targets to provide the needs of expectant women or people who have become parents recently (Humby, et al, 2008. P. 184). The members are offered free magazines containing information from experts about safety tips for pregnancy and other childcare issues. They are also provided with free entries into prize draws and are allowed to park their cars near Tesco’s stores. Tesco Healthy Living Club focuses on middle and old aged customers who want to maintain a healthy lifestyle. Members here are provided with a free booklet on ‘40 Steps to a Healthier Life’ and regular magazines containing exercise, diet and other health issues. Price-off coupons are also offered to the club members on food products such as organic foods and daily items. World of Wine Club provides the members who like to drink wine with information about the different wines available at Tesco stores and all over the world. As well, they are offered price-off coupons for shopping at Tesco. Tesco also provides members of this club with information regarding the wine that goes with certain kinds of foods (Humby, et al, 2008. p. 184). Apart from the above club cards, Tesco has in the past introduced cards to cater for specific needs of various groups of customers. For instance, in 1996, Tesco introduced a card for mothers and a student card suited to their needs. Later, Tesco came up with strategies to add value to its products and services. For example, in 1997, Tesco gave expectant mothers a priority to park outside the store and put in place personal assistants to help them (Myers 2004, p. 1). As noted earlier, Tesco introduced online selling strategies where products are delivered at the customer’s door. This added convenience for customers who are unable to travel to the stores, such as disabled persons. In summary, Tesco’s customer relationship management provides multidimensional customer segmentation and tailored communications. By 2009, the firm’s Clubcard was boosting more than 10 million active households in the local market and the number has been growing significantly (Rainer & Cegielski, 2009, p. 359). In 2009, the firm printed and mailed 4 million unique quarterly club mailings with coupons targeted towards very specific customer segments. The greatest advantage of this kind of customer segmentation adopted by Tesco is that it helps to significantly increase total sales and to lower overall operating costs both in the short-term and in the long-term. Within five years after Tesco adopted this move, total sales of the firm increased by 52% and they continue to grow at a higher rate than the industry average (Rainer & Cegielski, 2009, p. 359). Customer retention strategy In order for Tesco to retain customers, it aligns marketing materials and offers the various customer segments with their specific needs and wants. According to Bidgoli (2010, p. 486), Tesco is highly advanced and forward-thinking in the use of customer data and segmentation. As a result, the firm understands its market and customers almost to an individual level better than any of the competitors. The firm collects highly detailed data about its customers, purchases and behaviour with its customer’s loyalty card and matches this with external data (Gamble et al, 2006, p. 204). The Clubcard loyalty programme has been received well in the UK and in fact a third of the households had card by 2010. The firm then uses the data collected from the scheme and the external data to create detailed customer profiles. With millions of customers and terabytes of data, one obstacle that the firm faced in the past was reduction of its data set to a form that the firm’s managers could use (Gamble et al, 2006, p. 204). To address this, the firm recently developed a way of classifying customers’ behaviour across seven characteristics. These include shopping habits; life stage; basket typology (what is in their shopping trolley?); promotional promiscuity (do they purchase products only when they are displayed for sale?); primary channel (do they shop on the store, shop online or both?); profitability; and finally, brand advocacy. According to Gamble et al (2006, p. 204), Tesco then uses algorithms to analyse the deep and rich data they have collected on the customers to place customers in different segments such as price sensitive shoppers, convenience shoppers, and healthy shoppers among others. Thereafter, the firm creates sub-segments within each primary segment. For instance, the healthy segment may be divided into healthy dieters and organic shoppers (Gamble et al, 2006, p. 204). The firm’s knowledge about customer segmentation is then applied in various ways. For example, using predictive analytics, the company creates customised loyalty card statements right down to the individual level using algorithms that analyse behaviour so as to predict what products customers are likely to purchase (Gamble et al, 2006, p. 204). It then creates customised card segments for each customer, with different offers tailored to that individual’s needs, likes and dislikes. The firm then sends out 4 million different loyalty statements meaning that only three or four people are getting the same offer. A good example of this is how Tesco caters for the high-income bracket. Tesco discovered through data analysis that about a quarter of its customers in the high income bracket are not doing all of their shopping at Tesco because it lacked enough high-end products to meet all their needs. As a result, customers often turned to one of Tesco’s competitors, Marks & Spencer. To deal with this, Tesco created a Tesco range offering differentiated high-end products to lure the big spending customers back to its stores (Gamble et al, 2006, p. 204). Challenges and threats One of the challenges of facing Tesco emerges from the constantly increasing costs of raw materials especially for non-food items (Ayling, 2011). This has made it difficult for the firm to keep the prices of its products lower than those of competitors, especially in the international market. Another challenge emanates from the ‘credit crunch’ that has hit the US and UK markets recently. Such economic factors are of great concern to this firm since they usually influence costs, prices, demand and profits. According to Cripps, (2011) the credit crunch resulted into lower discretionary income available to consumers, decreasing effective demand for the company’s products and adversely affecting demand for high priced products. Tesco also faces threats from competitors. The huge numbers of giant competitors of this firm have as well adopted the online delivery services as well as offline retail stores (Ayling, 2011). This means that the competition is likely to become stiffer in this area in the future. In addition, Tesco faces a persistent threat of takeover in the local market from Walmart, the current market leader globally. Further, the firm is constantly faced with export restrictions in some nations in which it has stores especially on some non-food products (Ayling, 2011). This reduces the advantage derived from the mix of different products, which is likely to result into reduced margin rate. Tesco also faces challenges brought about by legislative factors. For instance, the UK government’s policies for monopoly controls sometimes limit entry and expansion in the sector with controls such as restrictions on prices limited access to raw materials and licence requirements. There also are restrictions on prices to operate a petrol station and a grocery at the same time in the UK (Cripps, 2011). As a result, product differentiation in different sectors becomes difficult. Another challenge for Tesco is that the local market is exhausted with limited chances for further growth and expansion (Ayling, 2011). Changes that Tesco needs to make in order to remain successful in future There are several changes that Tesco needs to make in order to remain successful in its international and local retail markets in future. The changes need to focus on maintaining competitive advantage in the areas where the firm has gained a competitive edge. Competitive advantage refers to the set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competing firms (Heene, 2010, p. 127). Tesco can achieve this through offering of lower costs of its products relative to those of competitors, effective product differentiation, advances in technology and innovation of new areas for expansion. A firm that has a cost competitive advantage can produce a product or a service at a lower cost than its competitors while maintaining satisfactory margins (Hall, 2008, p. 18). Tesco can manage to become a cost leader by obtaining inexpensive raw materials, making services and products more efficient, having simple product designs for ease of manufacture, avoiding marginal customers and controlling overhead costs. However, Tesco should apply this strategy only in the short-term since it is most likely going to fail if applied in the long-term. This is because other firms will eventually adopt similar strategies in order to reduce costs of their products as well. Product differentiation tends to offer a long-lasting competitive advantage to firms (Hall, 2008, p. 19). Tesco can take advantage of product differentiation by introducing various brand names, making more reliable products and establishing good product images and services. Through continuous product and marketing innovations and attention to quality and value, Tesco can in producing and offering differentiated products, create an enduring competitive advantage and remain successful in the future. As technology advances, the behaviour or buying patterns of consumers change (Kornum & Bjerre, 2005, p. 98). This will result into product areas requiring evaluation. Thus, there is need to ensure continuous analysis of changes in consumer buying patterns. Finally, since Tesco’s competitors have adopted the online delivery services strategy, the firm needs to be more innovative, seek more opportunities and expand in other areas (Ayling, 2011). Conclusion Tesco Plc has many unique features which have enabled it to outdo most of its competitors and to become a successful international brand. As noted in this discussion, Tesco operates five different formats namely: Tesco Extra, Tesco Superstore, Tesco Metro, Tesco Express and One Stop. The formula adopted by Tesco leads to different contents in the different store formats, triggering different experiences to consumers. Further, Tesco adopts a grid layout in its store design. This layout increases involvement of customers with the content in stores and adds experience to them. Tesco’s promotions through the use of the Clubcard programme and the application of e-commerce has enabled the firm to increase its market and profit figures tremendously over time, making it a prime example of how product differentiation coupled with a human touch can provide great experience to customers. The process of market segmentation has helped Tesco to ensure that the elements of the marketing mix (prices, products, distribution, and promotion) are designed to meet the particular needs of different customer groups. Additionally, the company has allowed itself to focus on specific customer needs in the most effective and efficient way. The firm aligns marketing materials and offers the various customer segments with their specific needs and wants in order to retain customers. Tesco experiences numerous challenges in its operations both locally and internationally, threatening its position in the global retail industry. To maintain a competitive edge, the company needs to implement various changes to the current operations as described in the above analysis. References Ayling J 2011, ‘In the money: Tesco faces clothing challenge,’ Accessed 7 February 2012 from, http://www.just-style.com/analysis/tesco-faces-clothing-challenge_id110886.aspx Bidgoli, H 2010, The Handbook of Technology Management: Supply Chain Management, Marketing and Advertising, and Global Management, John Wiley and Sons, London. Cant, 2005, Introduction to Retailing, Juta and Company Ltd, Cape Town. Cripps, P 2011, ‘Taking on Tesco: the credit crunch has created the ideal environment in which Aldi can radically grow. But MD Paul Foley has set his sights still higher. 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