Tesco Plc Case Study.

TESCO PLC CASE STUDY ML00001-041/Published 12/2011

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MarketLine Case Study

Tesco plc Case StudyHow Tesco Became the UK's Largest RetailerReference Code: ML00001-041

Publication Date: December 2011

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OVERVIEWCatalystTesco is the largest retailer in the UK and dominates the UK food and grocery market, accounting for almost a third of all grocery sales. This case study examines the factors that have led to the growth of the company as the UK’s number one retailer.

SummaryIn 1995, Tesco overtook Sainsbury’s to become the UK’s largest retailer. Since that time the company has grown from strength to strength, widening its lead year on year.

The unrivaled success of the Tesco Clubcard in building customer knowledge and generating loyalty has been fundamental to the rise of Tesco.

The company has created a powerful brand and a number of valuable sub-brands including store, product and service brands.

Tesco’s grocery product brands tend to center around a three-tier branding system, allowing the company to appeal to a mass market.

Tesco has been a forerunner in the price competitive environment of the UK food and grocery market, utilizing its economies of scale to lead price wars with other supermarkets.

The company has grown inorganically, buying out various independent grocers and supermarket chains over the years.

The wide range and sheer number of stores has been a significant factor in driving sales growth for the company.

Tesco has diversified from traditional food retail, selling a wide range of products including clothing, electrical goods, homewares, fuel and much more. Non-food products tend to have much bigger profit margins than traditional groceries.

Tesco has been the leader for change in the UK food and grocery market, introducing such initiatives as 24 hour shopping, self-checkout, and online retailing.



TABLE OF CONTENTSOverview ............................................................................................................................................................................... 2

Catalyst.............................................................................................................................................................................. 2

Summary ........................................................................................................................................................................... 2

Analysis ................................................................................................................................................................................. 5

Tesco has an effective marketing strategy ........................................................................................................................5

Tesco's marketing strategy centers around Clubcard....................................................................................................5

Tesco has created a valuable brand..............................................................................................................................6

Tesco competes intensely on price................................................................................................................................7

Tesco invests in growth .....................................................................................................................................................8

The company has grown inorganically...........................................................................................................................8

Tesco has a wide range and number of store formats...................................................................................................8

Tesco has diversified from being a traditional grocer ........................................................................................................9

Tesco is a successful non-food retailer..........................................................................................................................9

Tesco has led industry change ......................................................................................................................................9

Conclusions......................................................................................................................................................................... 10

Difficult times ahead for Tesco? ......................................................................................................................................10

Appendix ............................................................................................................................................................................. 11

Sources ........................................................................................................................................................................... 11

Further Reading............................................................................................................................................................... 11

Ask the analyst ................................................................................................................................................................ 11

About MarketLine ............................................................................................................................................................ 11

Disclaimer ........................................................................................................................................................................ 12



TABLE OF FIGURES Figure 1: Leading UK Food Brands, £ bn, UK Food Sales 2010 ..........................................................................................6

Figure 2: Number of Stores in the UK, 2011 .........................................................................................................................8



ANALYSISTesco has an effective marketing strategyThe rise of Tesco to the UK’s number one retailer can largely be attributed to its marketing strategy; and in particular the launch of the Tesco Clubcard, creating a powerful brand, and being highly price competitive.

Tesco's marketing strategy centers around ClubcardIn 1995, Tesco became the first supermarket to introduce a unique loyalty card; the Tesco Clubcard. At first other supermarkets were doubtful this initiative would be successful; however the Clubcard has been central to the rise of Tesco as the number one UK retailer. In 1995, the same year the Clubcard was introduced, Tesco overtook Sainsbury's to become the market leading supermarket in the UK.

Clubcard enables effective targeting of different customer segmentsThe Tesco Clubcard has become an important tool for the company in the collection of invaluable customer data, providing the company with insight in to customer transactions. Using this information the company can see what customers are or are not buying and where in the store they are spending their money. This customer intelligence has differentiated Tesco from other UK supermarkets and has been a key factor in the growth of the company. It has changed the relationship Tesco has with its consumers and guides important business decisions. The Tesco Clubcard essentially uses knowledge of customers to drive sales.

Detailed customer insight has enabled the company, through marketing data specialist Dunnhumby (of which Tesco owns 83%), to identify customer trends. Dunnhumby analyzes the sales data in-store and links these with the personal details from Clubcard members and on the basis of this constructs marketing strategies and promotional campaigns. Tesco states in the 2010 annual report that from the Clubcard they “can develop tailored ranges, promotions by country or region – in fact right down to the individual customer via their Clubcard mailing”. There are millions of variations of Tesco's quarterly Clubcard mailings. This ensures that promotions and discounts are specific to the customer.

As part of the Clubcard scheme, customers can join various clubs which include: baby and toddler, food, wine and Christmas clubs. This enables the company to segment consumers in to lifestyle categories providing opportunity for targeted promotions and marketing initiatives. The Christmas saver club enables customers to save any Clubcard vouchers throughout the year and use them at Christmas time. Furthermore, customers can add to their Christmas savings at the till by topping-up their vouchers. The Christmas saver club is important for the company in that it ensures that Tesco will receive spend from these customers in an important retail period.

Other retailers couldn't replicate the success of ClubcardDespite initially being very skeptical of the Tesco Clubcard, other retailers attempted to replicate the success of the initiative with their own loyalty programs. Companies such as Sainsbury's recognized how important the Clubcard had been for Tesco in terms of boosting customer knowledge and developing strategies and promotions on the basis of this knowledge. Sainsbury's and Safeway both attempted to launch loyalty cards. However, they quickly realized that collecting customer data may be simple; however developing customer intelligence is a different matter. Safeway quickly abolished its loyalty card, while Sainsbury's scrapped theirs in favor of entering in to into a cooperative scheme called Nectar.

Tesco differed in that it used Dunnhumby to analyze the data and find patterns that would guide future marketing initiatives. Dunnhumby made the decision to analyze only 10% of the data and apply the findings from these to the other 90%. The task of analyzing all of the data was just too great. Dunnhumby used the insight from the analysis of customer transactions to generate successful marketing and retailing programs.

The Tesco Clubcard has given the company an advantage over competitors in that it allows the identification of consumer trends, the company can send out targeted mailings and, furthermore, the company can measure which promotions are the most successful.



Tesco has created a valuable brandTesco's success can be partly attributed to its powerful brand image. Under the main ‘Tesco’ brand, the company has created various sub-brands, including store, product and service brands. Creating a strong brand is crucial to success and this is exactly what Tesco have done.

From quantity to qualityTesco's success first began under a 'pile it high and sell it cheap' formula imported from the US. The late 1970s saw price cuts, which helped to rapidly increase Tesco's market share. However, Tesco's brand image was flagging, with cramped stores, poor customer service and limited merchandise selection. Following this, the company effectively re-branded itself. Many stores were enlarged and upgraded, lighting was improved and aisles were widened. Furthermore, Tesco began to stock higher quality merchandise, which appeared to be in-line with what consumers wanted.

Tesco has a brand for everyoneTesco’s grocery product brands tend to center around a three-tier branding system, which includes its Value, Tesco, and Finest own brands. In this way the company strategically appeals to a mass market. This three-tier branding enables the company to compete with discount supermarkets such as Lidl and Aldi, as well as high-end retailers such as Waitrose and Marks & Spencer, covering a wide market base.

The strength of Tesco’s grocery brands can be seen in the company's claim that it’s Finest and Value ranges are the two largest food brands in the UK, bigger than Coca-Cola.

Figure 1: Leading UK Food Brands, £ bn, UK Food Sales 2010

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0.6

0.8

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Walkers Crisps Warburtons Coca-Cola Tesco Value Tesco Finest

SOURCE: Tesco Annual Report, 2010 M A R K E T L I N E

Tesco has other own food brands including Organic, Light Choices (healthy eating), Free From (for allergies/intolerance), and a Tesco Kids range. In this way the company ensures that it caters for the whole market.

Tesco's focus on service has improved the brand imageExtensive market research carried out by the company has enabled them to respond to what customers want. In this way they have continued to steadily increase their market share. The company has built a reputation for value, low prices and for being focused on what customers want.



Throughout the 1990s the company introduced a range of measures to improve its service. This included such things as opening a new checkout if there was more than one customer in the queue, having staff available to help customers pack their shopping bags, and the introduction of a range of facilities such as baby changing areas, and in-store cafes.

Tesco advertising campaigns appeal to consumersSpear headed by the 'Every Little Helps' advertising slogan launched in 1992, Tesco has tried to create an image that suggests they care about their customers. The company has added an emotional component to their advertising campaigns in an attempt to create a connection with the consumer.

Tesco competes intensely on priceTesco has a long history for price competitiveness. This began in the company’s early days when the ideal was to sell lots of products as cheaply as possible. This has taken on a whole new dimension in more recent years, with Tesco able to utilize its massive economies of scale to drive prices down.

Tesco embarks on price warsPrice competition is common in the UK, particularly within food retail. Tesco has been a forerunner in this competitive environment. The company was traditionally seen as a low-price retailer, which helped to attract customers. Jack Cohen, who founded the company in 1919, had a 'pile it high and sell it cheap' philosophy. The company operated under this objective until the 1970s. After this the company launched 'Operation Checkout' which saw the company cut prices and embark on a price war with their major rival Sainsbury's. Price wars have been an essential tool in the rise of Tesco as the leading UK retailer and widening the gap between Tesco and other retailers.

More recently, there has been the launch of the 'Big Price Drop' (October 2011), which saw prices cut on 3,000 items by the equivalent of £500 million ($772 million) a year. Tesco has also introduced a price check website where prices are checked against its current biggest rival, Asda. If shopping is found to be cheaper at Asda then Tesco will refund the difference. This is a direct retaliation to Asda's price guarantee. The Asda price guarantee is a price-checking initiative that promises that comparable grocery items will be 10% cheaper than Tesco, Sainsbury's, Morrisons or Waitrose. If it is not then the company will refund the difference with a voucher.

Tesco utilizes its economies of scaleTesco became a well-known retailer in the UK from early on in its history. The company was able to benefit from commercial economies of scale through buying in bulk from suppliers. However, the practice of resale price maintenance (RPM) hindered Tesco's ability to be highly competitive with other retailers. RPM enabled suppliers to insist the retailers sold their products at a set price. The company relied on other strategies such as the use of Green Shield Stamps that could be exchanged for cash or purchases in order to generate customer loyalty.

RPM was abolished in 1964 allowing retailers to become more competitive. The large size of Tesco has meant that it benefits from economies of scale. This relates to areas such as buying in bulk, transportation, distribution and marketing. It has been suggested that Tesco drive down the prices they pay to their suppliers. In this way they can compete more intensely with other companies on price.



Tesco invests in growthAt IGD's annual convention for the retail sector in October 2003, David Reid, the then Tesco Chairman, stated that "you cannot save your way to prosperity". He stressed that growth is crucial to business and must be carried out in a controlled manner. Investing in growth has always been part of the Tesco strategy and has been a contributory factor in the rise of Tesco to the UK's number one retailer.

The company has grown inorganicallyInorganic growth is evident from early on in Tesco's history. The company expanded by buying up rival grocers. In the 1950s and 1960s the company was buying hundreds of grocery stores and small grocery chains. In May 1987, Tesco bought out rival supermarket chain, Hillards plc., in a hostile takeover.

More recently, in 2004, Tesco bought 10 of the 52 Safeway stores that Morrisons had acquired. In 2008, the company bought some rival Somerfield stores on remote Islands in Scotland. Such expansionary zeal has led to Tesco having a presence in every single postcode area in the UK bar one. The only area without a Tesco is Harrogate; however in September 2011 the company announced plans to build its first superstore in the area. This has effectively made Tesco a 'local' store to the whole of the UK.

Tesco has a wide range and number of store formatsNew space has been a significant factor in driving sales growth for the company. The company currently has five different store formats in the UK: Express, Metro, Tesco, Extra, and Tesco Home-Plus. These different formats are strategically placed in towns, cities and out of town areas, resulting in coverage of the whole of the UK. The launch of Tesco Metro in 1992 and Tesco Express stores in 1994 enabled the company to enter the growing convenience store sector. The distinction between the supermarket sector and the convenience store sector has meant that Tesco has been able to exploit this loophole in anti-monopoly laws.

Tesco now has 2,715 stores around the UK. This makes Tesco by far the dominant retailer in terms of store numbers compared to its major competitors.

Figure 2: Number of Stores in the UK, 2011

SOURCE: MARKETLINE M A R K E T L I N E

As the chart shows, Tesco has a vast number of stores in the UK compared to its rivals making it difficult for other companies to compete. Consequently consumers will often have limited choice as to which supermarket to shop at. It may simply be the case that Tesco stores are in closer proximity to the majority of consumers.



Tesco has diversified from being a traditional grocerTesco has diversified from traditional grocery retail and sells a wide range of products and services in a variety of retail formats. This has helped to contribute to the success of the company in the UK retail market.

Tesco is a successful non-food retailerTesco started out in 1919 when its founder, Jack Cohen, began selling groceries from a market stall. The company now sells a wide range of products including clothing, electrical goods, homewares, fuel and much more. The company also operates within the financial services and the telecoms sector. Non-food products tend to have much bigger profit margins than traditional groceries and so have been an important driver for growth for the company. In 2010, the company had a 4% share of the non-food retail sector.

Tesco is the largest independent fuel retailer in the UKIn 1974, Tesco entered in to a deal with Esso to begin selling fuel on the grounds of some of its superstores. By 1991 the company had become the largest independent fuel retailer in the UK. Convenience, the Tesco Clubcard and cheaper prices have contributed to the company's success in the fuel retail market.

Tesco gas stations tend to be coupled with Tesco Express stores. This is essentially a filling station with a small supermarket providing customers with competitively priced petrol along with a range of grocery items.

Tesco Extra stores enable cross-shoppingFirst established in 1997, Tesco Extra stores are large retail formats that sell the majority of Tesco products. These stores enable consumers to buy a wide variety of food and non-food items under one roof. This created direct competition to larger Asda stores that sold a range of non-food products such as homewares, clothing and CDs. Sainsbury's were not competing on this front as they kept food and non-food products separate with the launch of its Homebase stores (sold in December 2000).

Tesco has led industry changeTesco has developed in to the leading UK retailer and continued to increase profits by introducing new developments and initiatives such as 24 hour store openings, self-checkout, shopping via the internet and home delivery.

Tesco is the largest e-grocer in the UKTesco.com was launched in 2000 and has become the largest e-grocer in the UK. The format of ordering groceries online and having them delivered to the home has proved a success for the company. Tesco has gone on to launch Tesco Direct (2006) to sell its general merchandise, clothing and electricals through the internet and catalogues.



CONCLUSIONSA turning point for Tesco came with the introduction of the Clubcard. As the saying goes, ‘knowledge is power’ and this is where a large chunk of Tesco’s success lies. The Clubcard enabled the company to build up a picture of their consumers and their behaviors. This in-depth customer knowledge has been used since 1995 to guide key business decisions, promotions, and marketing campaigns. Furthermore, the introduction of the Clubcard saw a large number of consumers changing from occasional visitors to loyal customers.

The success of a company often hinges on its ability to create a strong brand. The Tesco brand is a very powerful one, and moreover it has a range of valuable product and service sub-brands. Branding of its food products is based on a three-tier system, aimed at the low, middle, and high-value ends of the market. In this way the company strategically placed itself in competition with discount retailers such as Lidl and Aldi, and as well as high-end retailers such as Waitrose and Marks & Spencer, covering a wide market base.

Tesco’s competitiveness when it comes to price has helped to propel the retailer to the number one spot. The company is at the forefront of price wars with other retailers and utilizes its economies of scale to drive prices down.

The successful diversification in to non-grocery products and services has been a key factor in the rise of Tesco to the UK’s number on retailer. Non-food products tend to have higher price margins, and furthermore large Tesco Extra stores have encouraged cross-channel shopping with numerous retail goods available under-one-roof. The rise of Tesco.com and Tesco Direct has also played a key role, with Tesco now being the world’s largest e-grocer.

In conclusion, Tesco’s success in the UK has been built on creating customer loyalty, value for money, offering a range of store concepts and expanding into other retail goods and services. The company has effectively expanded from a grocery retailer into a consumer goods company.

Difficult times ahead for Tesco?Tesco may face difficulty in the coming years in maintaining its market share. Other companies, such as Asda and Morrisons, have more potential for growth in terms of new store openings. The fact that the Tesco store portfolio covers the whole of the UK means that it is likely to be impacted by competitor store growth. The company has less growth potential compared to its competitors, which may prove to be a problem going forward.

The company will need to remain innovative in terms of promotional strategies, store layouts, service etc., in order to maintain a competitive edge going forward.



APPENDIXSourcesVerdict Retail (2011) Grocery Retailing in Europe: Market Size, Retailer Strategies, and Competitive Performance

Verdict Retail (2011) UK Food & Grocery Retailers 2011

Verdict Retail (2011) How Britain Shops 2011

http://www.fundinguniverse.com/company-histories/Tesco-plc-Company-History.html

http://www.bized.co.uk/educators/16-19/business/strategy/activity/strategic1.htm

http://www.profesores.ie.edu/enrique_dans/TESCO/TESCO.pdf

http://www.corporatewatch.org/?lid=252

http://ar2011.tescoplc.com/business-review/our-strategy.html

https://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Consumer%20Business/GlobPowDELOITTE_14%20Jan.pdf

http://www.dailymail.co.uk/news/article-2045430/Tesco-UK-sales-worst-20-years-shoppers-tighten-belts.html?ITO=1490

http://www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html

http://www.retaileconomics.co.uk/top-10-retailers/

http://www.moneyweek.com/news-and-charts/how-tesco-became-britains-top-supermarket

http://www.customerthink.com/interview/clive_humby_tesco_shines_at_loyalty

Further ReadingVerdict Retail (2011) Grocery Retailing in Europe: Market Size, Retailer Strategies, and Competitive Performance

Verdict Retail (2011) UK Food & Grocery Retailers 2011

Verdict Retail (2011) How Britain Shops 2011

MarketLine (2011) Industry Profiles: Food Retail in the United Kingdom

Ask the analystWe hope that the data and analysis in this brief will help you make informed and imaginative business decisions. If you have any questions or further requirements, MarketLine's research team may be able to help you. The MarketLine Research team can be contacted at [email protected].

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http://www.fundinguniverse.com/company-histories/Tesco-plc-Company-History.html

http://www.bized.co.uk/educators/16-19/business/strategy/activity/strategic1.htm

http://www.profesores.ie.edu/enrique_dans/TESCO/TESCO.pdf

http://www.corporatewatch.org/?lid=252

http://ar2011.tescoplc.com/business-review/our-strategy.html



http://www.dailymail.co.uk/news/article-2045430/Tesco-UK-sales-worst-20-years-shoppers-tighten-belts.html?ITO=1490

http://www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html

http://www.retaileconomics.co.uk/top-10-retailers/

http://www.moneyweek.com/news-and-charts/how-tesco-became-britains-top-supermarket

http://www.customerthink.com/interview/clive_humby_tesco_shines_at_loyalty

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