Analysis of the Strategy of Tesco in the UK - Essay Example

Introduction Globalisation and consumerism have led to the rapid development of the retailing industry. It seems like yesterday a portrait of the typical store depicted a small building specialised only in few types of goods. Today markets of developed countries are overrun by large multinational corporations gradually replacing local entrepreneurs. It seems like tomorrow borders between national markets will be erased once and for all, leading to the united global market - a field of battle for the customer for large corporations. This paper analyses the strategy of Tesco, which has led the company to the position of number one retailing company in the UK. At first an extensive background of the company is given, providing the data on the past of the corporation. Tesco walked through a considerable number of obstacles on its path with a single principle: price is the most considerable factor in retailing. While using 'pile it high, sell it cheap' strategy the firm has made its name on the three main notions: perfect use of online retailing, perfect meeting of customers' demands, and perfect pricing policy. More detail to these factors is given in the next part of the report. After that the report dwells on the market environment surrounding Tesco. Interestingly, another company that used strategy similar to Tesco is also a top retailer in its domestic market environment - it is Wal-Mart. The comparison between Tesco and Wal-Mart is drawn next. The report concludes with forecasting what strategic options Tesco will have in its nearest future. Tesco Background Tesco was founded in 1924. However, the real history of Tesco began in 1931 when the first store was opened. At first the company specialized only in food retailing, which already had some major players, e.g. Sainsbury - a leading company of that time. Despite many differences, such as family issues in controlling businesses both companies had similarities. Both Tesco and Sainsbury families were very influential, however unlike Sainsbury, where all the managerial control belonged to the family, Tesco always had non-family board of directors (Morelli 2004). At the same time, both Tesco and Sainsbury based their success on regional strategies placing their stores in highly concentrated South Western and South Eastern parts of England. In fact, this was one of the reasons of imperfect competition between these tow companies. Tesco became a public license company in 1949. The company has been noted for a rapid and effective use of its investors in compare with its competitors. While Sainsbury's growth was incremental through the use of retained earnings for investment in new stores (Williams 1994), Tesco has been known for the effective use of share floatation to gain the necessary capital for takeovers (Morelli 1996). Sainsbury became a public licensed company only 24 years later in 1973 - the unwillingness of the company to utilize leasing was one of the reasons why Tesco has become a new market-leading company. Meanwhile the industry of retailing was developing rapidly. Upcoming trends of those days were integrated supermarkets, allowing its customers to buy everything they need within one building and self-service, which granted lower expenditures on the retailing personnel. Later, "from the adoption of still larger superstores, computerisation, stock control systems and sub-contracting out of warehousing and distribution in the 1980s, the modem supermarket retailer has been prepared to rapidly develop new organizational approaches" (Morelli 2004, p. 771). Tesco began selling non food goods in 1964. Introducing innovative techniques, such as loyalty cards, banking services, one-stop shopping, etc. has also given Tesco some advantage, although all these methods were quickly imitated by other companies. Pricing was always one of the most important issues in retailing. Being similar among all the major players of the UK retailing industry, prices were hardly anyone's advantage. There were some ways to attract customers, though. For instance, one of these techniques was Green Shield Stamps incentives - collected by customers for money spending in Tesco stores they were later traded for goods in the catalogue, providing customers with effective discounts (Corporate Watch UK 2004). The main strategy of the company called 'pile it high, sell it cheap' worked effectively, bringing the company to the UK top retailer's place. However times and the market have changed, that is why Tesco decided to change its course, which showed no perspectives, in the 1970s. "Under the leadership of Ian MacLaurin, who succeeded Jack Cohen in 1973, Tesco decided to try something dramatic and different: to become an 'aspirational mass retailer'" (Corporate Watch UK 2004). Green Shield stamps were abolished; instead the company has initiated the price war with major competitors, selling goods at the lowest price possible. At the same time it was decided to renovate company's stores. Those that were not modernized were closed. Once again Tesco saw regions as its main field of operations, putting the development of out-of-town supermarkets at the top priority level. Modernization of Tesco in the 1980s included the massive computerisation, centralising distribution systems and own-branded goods. Previously, Tesco was specialised only in retailing, and from that time it was about wholesaling and manufacturing. It was a part of the general strategy of becoming 'aspirational': from that time Tesco was able to control the quality of the product it was selling. Besides that own-branded goods were cut-priced, which was in line with the general mood of bargaining. 1990s was a decade of great expansion for Tesco. In the UK the company has started to open a new store each time a queue exceeded two trolleys: "It cost millions in extra staff, but customers loved it." (Corporate Watch UK 2004). At the same time, the company began to expand overseas. It was an easy task, because foreign markets always were a battle filed of large multinational corporations, such as Wal-Mart or Carrefour. However, Tesco has reached a certain success level by 2004, when it reported that international sales were up 29% to 6.7bn, with a 44% rise in profits to 306m (Tesco 2004). Currently Tesco is a top UK retailer with a market share of 30,5% in the UK (Bevens 2005). As can be seen from the Appendix 1, the company has experienced a stable growth for the last five years with a return on capital employed increasing each year from 10,2% (2003) to 11,5% (2005). Additionally 2005 is the first year of the company when the total sales area overseas exceeded total sales area in the UK (24,928,000 to 24,207,000 sq ft correspondingly), although the turnover statistics (27,146m GBP in the UK against 6,828m GBP in the rest of Europe and Asia) indicates that the UK market remains to be the most significant part of the Tesco's field of operations. It is also should be noted that also the number of stores in the UK has decreased from 2003, total sales area has increased. Therefore, Tesco continues to build larger stores, according to the idea of one-stop shopping. Analysis of Tesco strategy Until now the report has only presented the background data on Tesco without trying to analyse why exactly this company has become so successful This part of the report tries to answer this question. The success of Tesco strategy is based upon three whales: effective use of e-tailing, perfect meeting of the needs of the customers and careful pricing strategy. Let us analyse each of these aspects separately. As it was stated before, Tesco has early began to implement information technologies. For instance it participated in the pilot programmes of testing Intel RFID technology along with Carrefour and Metro (CFO Europe 2004). However the most effective use of IT by Tesco is its on-line retailing activities. In fact, its approach of leveraging brick and mortar assets to widen its coverage to include online shoppers has often been held up as an exemplar in terms of market entry strategy. The figures show the big picture. The company's online arm, Tesco.com, is on track to garner $420 million in revenues this year, and analysts reckon its profits from the online grocery business will be around $22 million. Tesco.com is said to have nearly 1 million registered users, 840,000 orders a year and is expanding into new catagories such as baby products and cases of wine. Tesco.com claims to be the largest and most successful Internet based grocery home shopping service in the world. (Wharton 2001) Tesco implemented an extremely successful e-tailing strategy. The company has never expected that Internet will be able to change customers' behaviour. Instead it was focused on the niche nature of e-tailing not the full-mass market. Keeping costs low with the infrastructure of the retailing industry, Tesco used its brand in the new Internet environment and achieved success. When other retailing companies invested largely into online businesses, building additional storehouses specially for Internet customers, Tesco perceived Internet as just one more delivery channel using its regular stores. The company did not promised ambitious home deliveries at the start, but allowed to order goods online and to take them from the store. It was convenient because customers were able to add to the cart one or several goods after their arrival. At the same time it was cheap for the company. Gradually, Tesco began to unfold its delivery service without freeing customers from delivery charge. The key point was in gradual approach, not trying to reinvent the business right off from the start. The second important aspect of Tesco strategy is the ability to meet customer's demands perfectly. Although Tesco is considered to be a cheap store net, it effectively operates on upper-medium overseas markets distinguishing from its competitors with a high margin. Tesco is neither just about price nor quality - it is about their combination. "In particular, Tesco and Asda have, in the view of consumers, increased perceptions of quality over the last five years while at the same time maintaining competitive prices"(Roberts 2002). Interestingly, Asda is owned by Wal-Mart - a company that is very similar to Tesco. The parallel between those two giants will be made later. Meanwhile, the last important factor giving Tesco a sustainable competitive advantage is its pricing policy, which can be seen as unethical but effective. Tesco is often accused by smaller companies and larger players in selling goods below cost to squeeze its competitors from the market. Keeping strait to the principle 'pile it high' and then 'sell it cheap' "supermarkets are using their market position to squeeze their suppliers without passing on the cost savings to consumers." (BBC News 1999) The second issue related to pricing is even more disturbing than the first one. Yet, it is effective. The company continues its regional policy with a geographical regulation of prices. It means the price of the goods in Tesco stores depends large on the position of a certain store. In that way the company maintains its competitive advantage in every region, and at the same time tries to keep margin as high as possible. We conclude that the practice, when carried on by Safeway, Sainsbury and Tesco, who have market power, operates against the public interest because their customers tend to pay more at stores that do not face particular competitors than they would if those competitors were present in the area. (Competition Commission 2000) The attention of the Competition Commission is devoted to Tesco way too often. Nevertheless its pricing policy allows Tesco to outrun its competitors, which gives the company tremendous competitive advantage, ensuring there is still a lot of room for growth. Market Environment The analysis of Tesco strategy would not be full if there was no portrait of the market environment, in which company operates. To study the market environment for Tesco a PEST analysis tool is used. Additionally a brief industry analysis using Porter Five Force tool can be seen in Appendix 2. Political situation in the UK is rather stable. Despite the recent bombings in London, there are no significant political issues affecting the performance of Tesco, except for the attention of Competition Commission, observed above. The economical perspective on the UK market is more complex, as there are a significant number of major players operating in the retailing industry (see Appendix 2). The closest competitor is Asda owned by Wal-Mart. "Asda is rumoured to be about to acquire Matalan, the giant discount clothing and home furnishing store. Already, Asda's George range of clothing is the best selling brand in the UK" (Corporate Watch UK 2004). Asda has enough potential to compete with Tesco, so most likely it is seen as the most dangerous competitor by Tesco analysts. Sainsbury, once a leading company, and now standing in the top three UK retailers has significant "internal problems and strategic errors" (Corporate Watch UK 2004) - with the share price decreasing this company is unlikely to present a serious threat to Tesco. From the social perspective the market becomes more customer-oriented. With such a fierce competition and high similarity between offerings of different companies it takes a big effort from a retailer to make the customer loyal to its brand. Current market situation shows that price is still the most important factor for choosing a retailer company. While prices continue to decline the concept of an integrated store containing various goods to satisfy customers continues to unfold. Additionally further development of IT technologies makes it possible for new markets to emerge. For instance, with the distribution of various wireless electronic devices, it becomes important to adapt retailing websites for wireless protocols. Finally, technology most likely will be a deciding factor making costs of transportation and logistics decreasing and therefore allowing new price wars. Comparison of Tesco and Wal-Mart Strategies After the analysis of Tesco strategy a number of similarities between Tesco and Wal-Mart become visible. The status of Wal-Mart is exactly the same, except the American origin of the corporation. First, Wal-Mart is also a top retailing company in the United States. Innovations used by this multinational were imitated by its competitors; however no one of them has achieved even half of Wal-Mart's success. "In its own category of 'general merchandise' Wal-Mart has taken a huge lead in productivity over its competitors, a lead of 44 percent in 1987, 48 percent in 1995, and still 41 percent in 1999." (Head 2004) Unlike Tesco having Asda as a serious competitor, Wal-Mart simply has no dangerous rivals o its domestic market: the closest one has twice as small market share. Similarly to Tesco Wal-Mart has made the use of information technologies earlier than most of the other market players: the company was once famous for its early use of computers and scanners to track inventory, and its use of satellite communications to link corporate headquarters in Arkansas with the nationwide network of Wal-Mart stores. (Harrison 2003). Another similarity between Tesco and Wal-Mart is their attention to provinces. When most of the market players were fighting with each other for market shares in densely populated areas, Wal-Mart has easily taken small town throughout the US. One of Sam Walton's wisest decisions was to locate many of his earliest stores in towns with populations of fewer than five thousand people. "This strategy gave Wal-Mart a near monopoly in its local markets and enabled the company to ride out the recessions of the 1970s and 1980s more successfully than its then larger competitors such as K-Mart and Sears" (Huey and Walton 1993). Regional strategy was important part of the general plan, which made Wal-Mart number one on its domestic market. However Wal-Mart strategy is not identical to the one of Tesco. Both companies enjoy high margins achieving this result in different ways. If Tesco uses geographically-dependent pricing, Wal-Mart was often blamed for cutting costs out of employees' salary. "When the productivity of labor rises and its compensation stagnates, then, other things being equal, the cost of labor per unit of output will fall and profit margins will rise. Wal-Mart has carried this strategy to extremes." (Head 2004). For instance, it is achieved through the use of gaps between the preferred budget for employment, assigned by executives to store managers, and the actual budget imposed on each store. Managers receive fewer funds, and therefore have to use smaller workforce for the planned amount of work. Challenges for Tesco This part of the report is devoted to forecasting what challenges await Tesco in its closest future. Among many issues there are three that require attention most of all, that is: development of the system of out-of-town non-food stores in the UK market, further expansion into overseas markets, and making the use of RFID technologies. Let us look more explicitly on each of these issues. The need for out-of-town non-food stores is dictated not only with customers' needs but also with the competitors. For instance, Asda has already begun to build a chain of high street stores for its George range, and is trialing a non-food hypermarket. Considering the current trend of Tesco to decrease the number of its stores while increasing total sales area, large hypermarkets should be expected to be built in the provinces. It should be assessed as a preventive measure against Asda. Next, further expansion into foreign markets should be expected. As it was said in the report 2005 has become the first year when the international total sales area exceeded ones in the UK. The central challenge for Tesco is to carry on with its original Tesco formula, which has proved to be a winner in the UK and to balance it with enough regional touches to appeal to local communities. Many national economies (e.g. China) continue develop with the increasing amount of spending rates among people. Therefore, foreign expansion is an obligatory choice for the company striving towards worlds dominance - and Tesco, no doubt, does strive. Finally, past investments into RFID technology have proved that Tesco sees this technology as a perspective one, allowing to lower expenditures related to logistics. That is why further implementation of this technology in Tesco stores should be expected. Conclusion In this report the analysis of Tesco strategy was conducted. Considering all that was written above several critical success factors of Tesco must be outlined: Positive attitude of management towards innovative technologies; Focusing on regions rather than on city centers; Outstanding investment policy of e-tailing; Differentiated region-based approach to pricing: while the prices are low the margins are high. Price still remains the ultimate force in retailing - and the success of Tesco proves this fact. The performance of number one UK retailer shows no signs of weakness - the company's strategy based on regional policy, pricing, meeting customer's needs, and use of innovations has proven its worth. However, future challenges await: domination on the local market does not guarantee you a place under global sun. Tesco vs. Wal-Mart Who knows References BBC News. (1999). Tesco Sparks New Price War. Published on April 25. Retrieved Novemeber 10, 2005 from http://news.bbc.co.uk/1/hi/business/328352.stm Bevens, N. (2005). 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Appendix 1: Excerpt from Tesco Five Year Summary (Tesco 2005) 2001, m GBP 2002, m GBP 2003, m GBP 2004, m GBP 2005, m GBP Turnover excluding VAT UK 18,203 19,821 21,309 24,760 27,146 Rest of Europe 1,737 2,181 2,664 3,385 3,818 Asia 860 1,398 2,031 2,669 3,010 Total 20,800 23,400 26,004 30,814 33,974 Underlying operating profit UK 1,100 1,213 1,297 1,526 1,694 Rest of Europe 70 90 141 184 218 Asia 4 29 71 122 152 Total 1,174 1,332 1,509 1,832 2,064 Return on capital employed 11.0% 10.8% 10.2% 10.4% 11.5% Retail statistics UK Number of stores 692 729 1,982 1,878 1,780 Total sales area (000 sq ft) 17,965 18,822 21,829 23,291 24,207 International Number of stores 215 250 309 440 554 Number of hypermarkets 68 102 152 194 273 Total sales area (000 sq ft) 10,397 13,669 18,115 22,111 24,928 Appendix 2: Porter Five Forces Analysis of Retail Industry in the UK (Porter 1980) Read More