Marketing Strategy of Tesco in India - Essay Example

TESCO A CASE STUDY FOR INDIAN OPERATIONS TABLE OF CONTENTS Page 3 2 Introduction 4 3 Marketing Strategy 5 3.1 International Marketing 5 3.2 SWOT Analysis 5 3.3 PESTLE Analysis 7 3.4 Five Force Analysis 9 4 Conclusion 14 5 Bibliography 17 1 Abstract The Indian Retails market has been studied and a SWOT, PESTEL and Five Force Analysis have been conducted to reveal the existing conditions. The outcome is that the Indian market appears to be buoyant and ready to accept large retail chains. The economic progress that has been possible due to liberal policies has opened the Indian market for foreign companies. The background and strategies of Tesco were also studied and it was found that they are in a good position to enter the Indian market. It was found that they will find synergy in their Indian operations and it has been suggested that they should enter this market using the joint venture route with a local partner and leverage their capabilities by organizing a good supply chain. 2 Introduction Tesco is the largest retail chain in the UK with over 11% share of the market and still growing. It is by far the most successful, most resourceful and most profitable of them all. It 2006 sales, worldwide were £ 40 billion with profits of £ 1.8 billion. Of this turnover 75% was generated in the UK and the rest overseas. The UK market is reaching saturation as well as referrals to the Competition Commission may see it slowing expansion or even curtailing some operations in the UK. This gives it the impetus for overseas growth. It is already planning to open up a 100 stores in the US in 2007 but Asia Pacific and especially India holds a great charm due to the huge potential in that region. Tesco covers food, clothing, home-use products and electronics. It keeps expanding its product range and it has a penchant for introducing new sales and channel formats. It is already deep into hypermarkets, supermarkets, convenience stores and petrol retailing. It is less into product innovations but more into retail innovations that has seen it entering into high level Personal Finance, Telecoms, on-line service Tesco.com and most recently the Tesco Direct catalogue. (Euromonitor International). The company presently offers the customers a varied choice of both branded and private label products. It offers amazing discounts to its customers and 1999 was a landmark year where it invested £ 380 millions bringing about price reductions across five separate campaigns. As a result prices were reduced for thousands of products by about 10%. Besides, over 200 stores operated 24x7 to offer its Club card holding customers fantastic deals. Mission Statement The company’s mission statement states that it endeavors to continuously create value for customer for earning lifetime loyalty. To this end its offers value for money through lower prices; customer service through quick and satisfying responses to grievances; rewarding customers for loyalty through Clubcard; ever-increasing product range of quality goods and investing in new retail formats to offer the best shopping experience to its customers. 2 Marketing Strategies Tesco’s main strategy therefore has been to reduce prices and maintain high standards of quality and ambience at its sores. In fact in 2005 the company has invested over £ 2 billion in price cuts that is worth more than its annual profit. It has increasingly relied on its private labels to cut down on costs and has been successful in offering value to consumers It private labels are most popular with its customers. Indeed they have become brands in their own rights. It has also been very successful at targeting all kinds of customers by excellent segmentation techniques and through promotion campaigns. It is very conscious of regional and local requirements and caters specifically to target specific customers. 3.1 International Markets Tesco is already present in the US and several European markets. It entered the Asian markets as well and is now actively looking at India for an entry. 3.2 SWOT Analysis SWOT analysis is an effective way of identifying strengths and weaknesses, and of examining the opportunities and threats the company is likely to face. A SWOT of India as a destination reveals many interesting features. (McCarthy 1964) Strengths Weaknesses 1. India is a fast growing Economy with annual growth in the range of 9% 2. Huge middle income population of 300 million makes a large customer base 3. Hundreds of urban and semi-urban centres with great spending power 4. Vast educated man power pool is available for employment 5. Quality work space available at reasonable prices 6. Several religions have great number of festive occasions which create special marketing opportunities 7. The customer is very price conscious and will favourably look at price cuts 8. Good legal and commercial environment 9. A new high end set of customers are emerging which creates a new an paying segment. 10, Cost of Promotion through media is reasonable but effective 1. Infrastructure is poor 2. There are government restriction on investments in retail by foreign players 3. In as many as five states out of twenty two there is resistance by smaller traders that is backed by local governments against large retail outlets. 4. There is widespread corruption in beurocracy and politics 5. Local taxation is high compared to other destinations. Opportunities Threats 1. The potential of the market is very big 2. With new retail space being built at a fast pace, there is plentiful choice 3. The middle class is educated hence appreciates foreign made goods 4. Western clothing is quite popular and has great acceptance 1. The competition from local players is tough 2. Traditions of Indian customers have to be understood and catered to. 3. Other large foreign retailers have already established themselves and will offer tough competition 4. Local resistance backed by political interests is a problem in certain pockets. 5. Intellectual Property rights not really observed and a big market of fake goods erodes the potential 6. Often price is more important that quality and can disrupt strategies 3.3 PESTLE Analysis In the Indian market context the PESTLE appears as under. Political India is the largest democracy in the world today and has retained a lot of its colonial habits including the education and culture. It is therefore much easier to penetrate into this market as it is not alienated in any way. It embraces and in fact adores foreign products and is very receptive to all things foreign. Largely the political situation is stable, although different political parties rule the different states of India and there are deep differences between them. However there is broad consensus that the economic liberalization that began in 1990 should be carried forward. Economic As a result of the reforms the economy has grown at scorching pace and industry has by and large been unshackled and value has been unlocked. The stock market is at an all time high and the mood is buoyant. Industrial growth is at an all time high and exports and foreign exchange reserves keep growing. The investment climate is very good and largely the Indian government is receptive to foreign investments. There are some restrictions or conditions attached to investments but they are more regulatory in nature and not restrictive. The GDP rate is over 9% and is one of the fastest growing in the world. There is high demand of products of all kinds and international trades are on the increase. A huge number of foreign companies are setting up operations, either as wholly owned companies, or as joint ventures with local partners. Being the second most populous country in the world, India provides both manpower and customers to the foreign companies. Social The country is rich in heritage and culture and there is great cultural diversity in its population. With at least three big religious followings and more that twenty main languages, it presents a diverse market that can easily accept any other culture comfortably. The multi-ethnic communities offer a new marketing challenge and opportunity to those who venture in this region. Technological India has made great strides in the technological field. In the arena of Information Technology, it is admitted that they have been the co-founders of large and new enterprises that dominate the world. Not content at that, they are also the drivers of these hoses of knowledge and technology. Hardly is there any IT company in the world which does not significantly depend on their contribution. India is the hub of Information highway and an important centre in the world today. A host of multinational companies like Microsoft, Google and HP have substantial presence in the country. Legal India has an efficient Judicial and legal structure that is more like the west than any other country. It still draws its legal base from English law and as such is more acceptable to the west than any other country in the east. Special laws have been passed and are constantly evolving to make it easy and profitable for foreign investors to operate in India. Environmental India is blessed with a long coastline extending beyond 3000 miles or 4600 kilometers. It has several international ports on both the eastern and western coasts and has numerous international airports. It various regions are also well connected by rail, road and air. However the infrastructure is of poor quality. Many ambitious schemes are under way for improvement, but they will all take time to fructify. The movement of goods to the interior is slow but available nevertheless. Communications are improving faster with teledensity increasing at a very fast pace due to introduction of mobile phones. 3.4 Five Force Analysis An important method of finding the competitiveness is by using the Five Force Analysis devised by Porter M.E. (1985), often called the Porter’s five force analysis. This will help the management to devise appropriate marketing strategy to take care of vital issues. Porter divides the competitive environment into five forces of ‘powers’, these are Power of buyers, Power of suppliers, Threat of new entrants, Threat of substitutes, Intensity of rivalry between existing firms. (Porter, M. E.1985)1 In fact the Five Force Analysis is the answer to the problem questions posed earlier and therefore can be stated to be a critical constituent of any purposeful marketing strategy. A The Power of Buyers Four different reasons influence a buyers’ decision. They are also known as 4Ps as explained by McCarthy (1964). This needs careful study to understand customer behaviour. 1 Product. The buyer is greatly influence if the product or service is perceived as useful for him. Sometimes it may not be of immediate use but its uniqueness is the attraction. Future valuation is also a decision making factor. 2 Price. The price is not usually a stand-alone factor. It has to be comparable with other products or services but with weight given to factors like quality and after sale service. There is a play on the mind of the buyer that middle ground is best for him. He considers price in context of the privileges attached to it. 3 Promotion. Image plays a very important role. Whether it is the image of the product which enhances value or status or the image of the buyer when he acquires a product or service, both factors are extremely important for the buyer in arriving at a purchase decision. 4 Place or Time of offer. It is of great value to the buyer if a product or service is offered to him at a place and time that suits him. The importance of this can be gauged from the fact that often a deal is concluded at the most awkward time and place just because of the whim and fancy of the customer. This is more applicable when shopping is online. In recent years the 4P concept has come under criticism and as a result different marketing mixes have been put forward by Kotler P,. (1986); Mindak and Fine (1981); and Nickels and Jonson (1976). But the one put forward by Booms and Bitner (1981) to include another 3Ps viz., Process, Physical Evidence and Participants has gained the most acceptability and popularity in marketing literature. 5 Process Marketing and Sales policies are important factors that attract a customer to a product. Warranties offered, after-sales service support and guarantees, quick response from employees are comfort levels that promote a product’s marketability. Some amount of mechanization and customer involvement such as try-outs and experimentation, feel of product or service is eases the point of sale. Segmentation too, has played and important role in targeting intended customers. 6 Physical Evidence This is the defining of the environment where the marketing activity is to take place and is concerned with layout, Furnishings, Colour, and Facilities. It is argued that the general ambience makes for a good marketing strategy as the customer feels comfortable and is more inclined to conclude a deal in congenial atmosphere. 7 Participation Largely neglected earlier, but by far the most important aspect of marketing is the adequate training of the employees that are involved in the marketing process. Their knowledge and confidence builds up an image of robust product and enthuses the customer. The whole attitude and behaviour of involved personnel reflects the concern of the marketing organization in offering a quality product or service and the personal touch is perhaps the final point that concludes a deal successfully. A satisfied customer is the company’s best brand ambassador and word of mouth publicity is the most precious campaign that any company wishes for and this 7th P is no doubt the most important of them all. In India the 7Ps are very relevant as the buyers are very price conscious and are greatly influenced by promotions. A good warranty policy and after sales service will foster customer loyalty. B Power of Suppliers This feature is equally important because if few suppliers control the market the company is likely to face the crunch and will have little control over quality and price. In India this problem is not so acute and diligent buying can assure the company of both quality and price. C Threat of New Entrants Strebel (1966) suggests that evolution is a continuous process; no product can expect to be acceptable to customers in its present form and functionality to be for all time to come. This threat does exist but India being so vast a country with a still growing economy there is enough space for newcomers. There is rivalry but there is also acceptance of sorts. Thus we see many labels holding their own, side by side, in large Malls across India. The customer is the ultimate beneficiary as his choice increases manifold. Here the service, prices and promotions will come into play. D Threat of substitutes At any point in time there is always a possibility that, inspired by the popularity and acceptability of a product, a substitute is offered that will replace it due to its better features or innovative idea (J. Schumpeter 1934). Again this threat is not so real due to the large market with several layers of segmentations, but the real threat is from fakes, over which the authorities themselves have little control. This is where promotion and positioning will count in the company’s favour E Intensity of Rivalry There are many retail chains that have come up during recent times. The main rival in terms of reach and size will be Reliance Fresh and they already have a Pan India presence. There will also be some competition from other smaller retail chains like Subhiksha, but that will be regional. However as stated earlier, the market is large enough and there being too many segments, this threat will not be too much for Tesco. Of course there will remain a threat from small Mom & Pop stores that abound in India, also known as Kirana Stores, that cater to the neighborhood. But this is a different class. India has a relatively poorer class of consumer that accounts for 70% of the population and they cater to mostly these customers, who are not likely customers of the retail chains anyway. However there is a close relationship between developing brand values, building customer relationships, and satisfying corporate goals. (Aaker, 1991, 1992) and this can take care of rivalries 3 Entry in to the Indian Market There are two ways of entering the Indian Market. Either a retailer can offer franchise to local establishments who will then sell his product at predetermined prices with the retailer doing most of the promotions. This is the case adopted by McDonalds and KFC. However in this case the products are not many and there are few schemes or promotions that see through the sales. The disadvantage is that the company cannot really push too far and customer loyalty depends on services that are controlled by the franchisee. This route also cannot be adopted by Tesco as the sourcing of materials locally will not be allowed to them and their entire competitiveness depends of good and economical sourcing. If they chose to import all their products into India, they will out price themselves, especially in the food division. In clothing, accessories and electronics however it is possible to export from outside. The other method is to enter into a joint venture or a partnership with investments from the company and the local partner and retain control over purchase and marketing policies. This way they can source their food products locally and other products may be sourced from local as well as their own overseas sources. This will give Tesco the flexibility that it needs to come up with marketing strategies to suit the occasion and place. Promotions will play an important role for the entry and Indian media as well as the web are comparatively inexpensive sources and should be exploited. It has been suggested by Hoffman and Novak (1966) that the Web provides an alternative and inexpensive advertising and marketing opportunity to the smaller firms. Verity and Hof (1994) confirm that this could be as little as 25% of the cost of normal media advertisements. 2 4 Conclusions Retail is one of the fastest growing industries in India. The changing dynamics of India demography results in the opportunities of this sector. Rising Incomes, increase of working women, huge private sector developments creating more employment opportunities and the increasing levels of education is giving rise to new consumerism and a change from old habits of saving. The concepts of Malls, shopping centres and the new entertainment industry have all given a fillip to a new culture of spending and living standards have soared like never before. These are again not restricted to large cities alone. Most smaller towns are now being looked upon as centres that offer opportunities for larger companies, even multi-nationals for both manpower as well as new consumers. A huge number of the Indian population is now comprised of younger people and they are all eager to live it up. This is in stark contrast to the aging populations of the developed countries and this has made the multinationals sit up, and look hard at these emerging economies, like India, in search of new and bigger markets. According to the commerce department of the government of India, the retail industry accounts for over 10 % of the country’s GDP and according to the labour ministry of the government of India it accounts for about 8 % of employment. It has been reported that the Indian food retail industry generated total revenues of $168 billion in 2006, representing a compound annual growth rate (CAGR) of 5.7% for the period spanning 2002-2006. Within this, the food specialists were the industrys most lucrative segment in 2006, having total revenues of $48.3 billion, which is equivalent to 28.8% of the industrys overall value. On this basis, performance of the industry is now forecast to follow a similar pattern, with an anticipated CAGR of 5.4% for the period 2006-2011. This is expected to drive the industry to a value of $218.2 billion by the end of 2011. (India - Food Retail) The SWOT analysis has shown that there is enough strength in the Indian market for Tesco to make a foray into it. There is a level playing field with competition from pnly one Pan-India player Reliance. Existing competition from others is not so threatening as Tesco’s range of products is much larger and more varied. Tesco will be aiming at a much bigger set of segments and will not be affected by the others. The PESTLE also shows that the conditions in India are stable and the socio-economical-political factors are all favourable. The only thorn in the side is the resistance from the no-organised sector consisting of Kirana stores. Tesco can avoid confrontation by avoiding such states and when things improve, they could venture there as well. Meantime there is a vast market in other regions that is waiting to be tapped. The Five Force Analysis clearly shows that the buyers are looking for good opportunities and they have the buying power that will please Tesco. The suppliers are fragmented and can be tapped by Tesco for mutual benefit. One thing that can be said for Indian suppliers that they are shrewd and they see a good opportunity, Tesco will be assured of a reliable supply chain that is so vital for success. However they must factor in the poor infrastructure while calculating deliveries. They will also need good and efficient warehousing as this is lacking in India. The Indian consumer is now aware of world class food and other retail items and is prepared to spend his new found income. This is the right time for Tesco to go into India for maximum benefit. 5 Bibliography Aaker, D.A. (1991), Managing Brand Equity, The Free Press, New York, NY. Aaker, D.A. (1992), “Managing the most important asset: brand equity”, Planning Review, Vol. 20. No. 5, pp. 56-8. Booms, B.H. and Bitner, M.J. (1981), “Marketing strategies and organization structures for service firms”, in Donnelly, J.H.and George, W.R. (Eds), Marketing of Services, American Marketing Association, Chicago, IL, pp. 47-51 Euromonitor International : Local Company Profile June 2007 Hoffman, D.L. and Novak, T.P. (1996), “Marketing in hypermedia computer-mediatedenvironments: conceptual foundations”, Journal of Marketing, Vol. 60 No. 3, July, pp.50-68. India - Food Retail, Datamonitor (Published May 2007) Kotler, P., Armstrong, G,. Principles of Marketing, Prentice Hall & Pearson Education. McCarthy, E.J. (1964), Basic Marketing, Richard D. Irwin Homewood, IL. Mindak, W.A. and Fine, S. (1981), “A fifth ‘P’: public relations”,in Donnely, J.H. and George, W.R. (Eds), Marketing of Services, American Marketing Association, Chicago, IL,pp. 71-3. Nickels, W.G. and Jolson M.A. (1976), “Packaging – the fifth P in the marketing mix, Advanced Management Journal, Winter,pp. 13-21 Porter, M.E. (1985) "Competitive Advantage", The Free Press, New York, 1985. Schumpeter, J. (1934), The Theory of Economic Development, Harvard University Press, Cambridge, Massachusetts Strebel, P. (1996). Breakpoint; How to Stay in the Game. Mastering Management, Part 17, London; Financial Times. Verity, J.W. and Hof, R.D. (1994), “The Internet: how it will change the way you do business”,Business Week, November 14, pp. 80-88. Read More