Food Retailing Company Tesco

Introduction

Tesco, the largest food retailing company in the UK, was founded by Sir Jack Cohen in 1924. Utilizing his gratuity from Army service, Cohen started selling groceries in London’s East End markets. The food and drink retail sector is the biggest industry in the UK and employs over three million individuals throughout primary production, manufacturing, and retailing. According to Data monitor (2003), retail contributed 9% to the country’s gross domestic product in 2003.

UK supermarkets have faced increased scrutiny in recent years regarding their treatment of suppliers, particularly for own-label products. However, the establishment of strategic supply networks has been a crucial element in supermarket strategies over the past decade. This report specifically examines Tesco and its examination of the external environment, as well as its evaluation of resources, competence, and culture. Furthermore, it proposes two potential future strategic options based on available resources.

Tesco is a major global food retailer, with approximately 2,318 stores and more than 326,000 employees. It operates online through Tesco.com and has its primary market in the UK. In the UK, Tesco operates under various banners such as Extra, Superstore, Metro, and Express. They offer an extensive range of products including over 40,000 food items, clothing, and non-food products. Tesco also offers their own-label products in three categories: value, normal,and finest which account for half of their sales. In addition,Tesco stores often have gas stations,making them one of Britain’s largest independent petrol retailers. Tesco also provides additional services like Tesco Personal Finance.

Vision

“Our main aim is to offer customers additional value and gain their long-term loyalty. This goal is achieved by following Tesco’s values and code of conduct, which detail our operational approach. Our values can be summarized as ‘we put in maximum effort for our customers’ and ‘we treat others how we want to be treated.’ At Tesco, we are committed to understanding our customers better than any other company and utilizing our strengths to provide unmatched value. We accomplish this through our guiding principle called Every Little Helps, which embodies the core of Tesco.”

Nevertheless, Tesco was previously a thriving enterprise that excelled in its operations. In order to provide better service to their customers, Tesco went above and beyond by seeking feedback on customer preferences. Customers reminded Tesco of an essential truth – shopping is not enjoyable, especially the monotonous task of realizing one’s shortage of sugar or need for additional toilet paper. To enhance the shopping experience, Tesco acknowledged the necessity for improvement. Consequently, Every Little Helps was born, encompassing numerous initiatives such as incorporating nappy changing facilities in stores to aid mothers.

To improve the speed of queues, Tesco started packing customers’ bags and allowing them to swap items, such as melons. This commitment to customer satisfaction is captured in the phrases “no-one tries harder for customers” and “treat people how we like to be treated.” As part of their Every Little Helps initiative, Tesco created a set of promises for customers, including providing desired products, clear aisles, competitive prices, minimal queues, and excellent staff. This seemingly simple approach has proven successful and serves as a guiding principle for Tesco’s mission and goals.

Tesco is a commercial business that aims to be highly successful. However, they also believe in the philosophy of Every Little Helps. By taking care of their customers and providing something that simplifies their lives, Tesco can grow. This approach also extends to their own employees, as seen in our working environment section. Tesco has made similar promises to their employees, such as being respected, assisted at work, and provided with opportunities for advancement. They also encourage creativity and initiative.

Because if Tesco is not taking care of their employees, then Tesco is not taking care of their customers. Therefore, with Every Little Helps, everyone benefits.

Mission

“Creating value for customers, to earn their lifetime loyalty.” The Company Mission Statement of Business Objectives is a qualitative statement that aims to motivate employees, as well as convince customers, suppliers, and those outside the firm of its sincerity and commitment. Tesco has a Company Mission Statement that is visually represented as an image. This statement is at the core of all Tesco’s operations. “Creating value for customers, to earn their lifetime loyalty.” Tesco adheres to two values that guide its business practices: No one tries harder for customers.

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  Understand customers better than anyone
  
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  Be energetic, be innovative and be first for customers
  
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  Use our strengths to deliver unbeatable value to our customers
  
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  Look after our people so they can look after our customers treat people how we like to be treated:
  
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  All retailers, there’s one team… The Tesco Team * Trust and respect each other
  

Tesco Business Objectives

A Company Mission Statement is a qualitative statement of an organization’s aims. It uses language intended to motivate employees and those within the firm and convince customers and suppliers and those outside the firm of its sincerity and commitment. An objectives or goal ssis a target that must be achieved in order to realise the stated aim. It tends to be a medium to long term and set in order to coordinate business activity, guides the actions. Tesco have resent objectives which they are working on to achieve such as:

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  To become a satisfying place to work by giving their staff the opportunity to be themselves, actively encouraging their health and well being and support their work/life balance needs. Tesco’s target is to expand their sale of organic produce to 1 billion pounds over the next five years.
  
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  Tesco now have a 5% market share in Non-food business. Their goal is to be as strong in non-food as in food.
  

Tesco has previously had various objectives, which have included:

In the next five years, Tesco plans to increase its sales of organic produce to £1 billion by supplying and promoting more organic products. This strategy aims to attract a larger customer base and result in higher sales. Tesco surpassed its target of constructing 80% of new stores and extensions on brownfield sites last year, achieving an impressive rate of 90%. The establishment of new stores in countries such as China and Hungary serves as evidence for this accomplishment, which will appeal to local customers and support the company’s expansion efforts. A Pestel Analysis reveals that Tesco operates globally across six European countries: UK, Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey, and Poland.

Tesco is present in various Asian countries, such as South Korea, Thailand, Malaysia, Japan, and Taiwan. The political and legislative environments of these countries and the European Union greatly impact Tesco’s performance. Governments encourage retailers to provide job opportunities for different population groups like students, working parents, and senior citizens. This includes offering both local jobs with lower pay and centrally-located jobs with higher pay. Tesco recognizes the importance of retailing in generating employment and its impact on individuals.

Opening new stores can lead to displacement of other retail jobs or necessitate cost-cutting measures to remain competitive. As a labor-intensive industry, Tesco employs many students, disabled individuals, and elderly workers at lower wages. These employees tend to exhibit greater loyalty compared to the high staff turnover rates commonly observed in this industry.

Economic factors also exert a critical influence on Tesco as they affect levels of demand, costs, prices,and profits.

High unemployment rates have a significant impact on the economy, resulting in a decreased demand for goods. This then affects the required demand for producing those goods. These economic factors are mostly beyond The Company’s control but can greatly affect performance and the marketing mix. Although international business is growing and expected to contribute more to Tesco’s profits in the future, the company still heavily depends on the UK market.

Therefore, if the UK food market experiences a decline, it would have a significant effect on Tesco by exposing it to market concentration risks. The current social and cultural environment suggests that British consumers are increasingly accepting “one-stop” and “bulk” shopping due to societal changes. In order to adapt, Tesco has broadened its product range by expanding into non-food items. Additionally, shifts in demographics including an aging population, more women participating in the workforce, and a decrease in home-cooked meals have influenced UK retailers to prioritize value-added products and services.

Furthermore, there is a growing emphasis on the own-label share of the business mix, supply chain, and other operational enhancements that can lower costs. National retailers are showing increased caution in accepting new suppliers. The preferences for goods and services that consumers desire are shaped by their social conditioning and attitudes. Consumers are becoming increasingly conscious of health concerns, leading to ever-evolving attitudes towards food. Tesco is addressing this by catering to the rising demand for organic products.

The Company was the pioneer in accepting cheque and cash payments at the checkout. Technological Factors, being a significant macro-environmental variable, have played a crucial role in shaping the development of various Tesco products. These innovative technologies have delivered advantages to both customers and the company by enhancing customer satisfaction through improved accessibility of goods, personalized services, and convenient shopping. The implementation of the efficient Consumer Response initiative has led to a noticeable transformation in the management of food supply chains (Datamonitor Report, 2003).

Tesco stores use various technologies such as wireless devices, intelligent scales, electronic shelf labelling, self-checkout machines, and Radio Frequency Identification (RFID) systems. The incorporation of electronic Point of Sale, electronic Funds Transfer Systems, and electronic scanners has significantly enhanced the effectiveness of distribution and stocking operations, allowing for real-time communication with suppliers. Additionally, in 2003, there has been a growing emphasis on the recognition of environmental factors and the need for businesses and managers to act responsibly towards society for the greater benefit of society as a whole.

The major societal issue threatening food retailers is environmental issues, which is a key area for companies to address in a socially responsible manner. Tesco’s corporate social responsibility focuses on going beyond the minimum obligations to stakeholders set by regulation and corporate governance. According to Graiser and Scott (49), in 2003 the government planned to implement a new strategy for sustainable consumption and production with the goal of reducing waste, resource consumption, and environmental damage.

The most recent legislation implemented a new tax on advertising fatty and processed foods, commonly referred to as the ‘fat tax.’ This tax directly influenced the Tesco product selections, leading to adjustments that affected relationships with suppliers and customers. Government legislations and policies play a significant role in Tesco’s performance. The Food Retailing Commission, for example, recommended the establishment of an enforceable Code of Practice that would prohibit certain practices such as demanding payments from suppliers and retrospectively changing agreed prices without notice.

The existence of formidable rivals possessing well-known brands poses a risk of fierce price competition and heightened demands for product distinctiveness. Government regulations on monopolies and efforts to diminish customer leverage could restrict market entry by imposing license mandates and restrictions on the availability of resources. Tesco, in order to enforce price policies that align with political correctness, provides customers with a discount on fuel purchases in direct correlation to their expenditure on groceries at Tesco stores.

While the prices of some promoted goods may be decreased, Tesco balances this by increasing prices for other products in their store. As the leading grocery retailer in the UK and a major player in online grocery shopping globally, Tesco’s success is attributed to its strategic focus on catering to diverse consumers, offering specific products, and constantly innovating both its products and store formats. In the UK, Tesco operates grocery superstores, convenience stores, and an online delivery service; whereas in other areas their primary focus is hypermarkets.

In 2003, the group’s trading record across Europe and the UK has been exceptional. Its strengths include increasing market share, with Tesco holding a 13% share of the UK retail market. The company’s ability to operate in multiple formats allows it to continue growing its share in food, while expanding its hypermarkets helps it gain a higher share in non-food items. Tesco’s general growth and return on investment (ROI) continue to show strong performance. In late 2002, Tesco made a bold move by investing in T&S, a convenience store group based in the West Midlands, marking its aggressive entry into the neighborhood market.

Tesco, after acquiring another company, has become the second largest convenience store chain in the country. Their plan for this year is to open 59 new stores in the UK. The non-food division of Tesco has experienced growth and now accounts for 23% of their total earnings. Additionally, the international business segment is performing well and is projected to contribute approximately 25% of group profits in the next five years. As Tesco expands its geographical presence, it will reinforce its regional dominance.

In fiscal 2003, Tesco Personal Finance achieved the milestone of selling one million motor insurance policies, which makes it the fastest growing provider in this category. The company’s travel insurance program allows Club card holders to conveniently purchase holiday insurance at the checkout. Additionally, their pet insurance covers over 330,000 cats and dogs, while their life insurance policy was recognized as the Most Competitive Life Insurance Provider in the Money Facts Awards 2003. Tesco.com, the world’s largest online supermarket, experienced sales of over £77 million, marking a 29% increase compared to the previous year. Operating in more than 270 stores across the UK, Tesco online covers 96% of the country and has served over a million households. This success provides a solid foundation for further growth in this revenue stream. In the last fiscal year, Tesco’s operations in Europe, Asia, and Ireland saw a 78% increase in profits. The company’s brand image is strong and is associated with high-quality, reliable products that offer excellent value.

Tesco’s focus on enhancing the customer shopping experience and its expansion into finance and insurance have contributed to its success. Since becoming the top player in the UK market in 1996, Tesco has implemented a successful multiform strategy that has further strengthened its position. Its sales in the UK now surpass those of Sainsbury’s by 71%. Additionally, the Competition Commission’s report has made it challenging for competitors to rival Tesco’s scale, effectively thwarting Walmart’s chances of gaining market leadership in the UK. As a result, Tesco holds a dominant position in its domestic market.

One of the weaknesses of Tesco is its reliance on the UK market. Even though the company’s international business is growing and expected to contribute more to its profits in the future, a large portion of Tesco’s revenues (73.8% in 2003) still come from the UK market. While this may not be a significant weakness in the short term, any changes in the UK supermarket industry, such as the successful purchase of the Safeway chain by the Morrison’s group, could potentially shift the balance of power and impact Tesco’s market share. Another weakness is Tesco’s debt, which is not anticipated to be reduced until at least 2006.

Tesco is investing large amounts of capital into new stores, which limits its available cash for other operations. The company’s aggressive expansion strategy suggests that it may engage in multiple acquisitions. With an enterprise value of e 23 billion, Tesco has significant financial resources. Additionally, Tesco offers a wide range of products, making any acquisition justifiable, especially in the UK. While a ‘fill the gap’ strategy could benefit the company, as seen in the UK convenience market, there is a risk of Tesco becoming reliant on acquisitions. This can negatively impact earnings visibility and quality.

Tesco has opportunities for growth in the non-food retail sector. The company’s hypermarket format in the UK is expected to increase its share of retail sales by a significant amount in the coming years. With its high level of foot traffic and cost-efficient structure, Tesco can leverage its improved merchandising skills to drive further growth. Additionally, Tesco’s expansion in international markets will contribute to increased earnings and scalability, providing a positive feedback loop for growth. Analysts estimate that Tesco’s non-food sales will double within the next four years. Currently, the company generates approximately €7 billion in non-food sales worldwide, representing around 23% of its total sales.

Its goal of being as strong in non-food as it is in food no longer sounds like consulting jargon. They are achieving this by focusing on value, choice, and convenience, which have been successful in their food sector. Approximately half of the new space opened in the UK last year was dedicated to non-food products. As a result, the company has increased its market share from 5% to 6% and its overall share of UK retail sales by 100 basis points to 12.8%. The company’s latest endeavor in telecommunications is part of its strategy to develop popular retail services.

Tesco has replicated its successful banking strategy in the health and beauty sector. The company is thriving in the UK market, particularly in skincare, where it is the fastest growing retailer. Tesco also holds a dominant position in toiletries and healthcare, and is the leading retailer in baby goods. In order to maintain value for customers, Tesco constantly invests in pricing across all health and beauty products, allocating a significant amount of £27 million solely for this purpose.

The company now has 19 stores with opticians and almost 200 stores with pharmacies. In addition to the UK, Tesco now operates in six countries in Europe which are the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. Additionally, it operates in South Korea, Thailand, Malaysia, Japan and Taiwan in Asia. Its international sales have increased significantly over the past seven years, from e 770 million to almost e 7 billion, with profits reaching e 306 million. In the current year, Tesco plans to expand its sales area by 2.5 million square feet and potentially enter another major market.

Growing internationally has forced Tesco to focus on hypermarkets, which has had positive implications for growth in the UK. Tesco has formed a strategic partnership with Safeway Inc, a US supermarket, to introduce the tesco.com home shopping concept to the US. Telecoms are the latest aspect of Tesco’s strategy to expand its retail services. Similar to its banking approach, Tesco aims to leverage its brand. In 2004, the company plans to enter the Chinese market due to its status as one of the world’s largest economies and the forecasted significant growth, providing numerous opportunities for Tesco. Threats

Structural changes in the UK market may lead to a price war, with Safeway and Sainsbury becoming aggressive in their pricing strategies due to new ownership and management, respectively. Safeway’s prices have already been reduced by up to 6% by Morrison, while Sainsbury is expected to lower its prices as part of its recovery efforts. This, coupled with Asda and Tesco’s commitment to price leadership, could result in a decline in industry profitability. Additionally, the investment in overseas markets is crucial for Tesco’s growth and higher group returns as each country surpasses the critical mass.

This might not happen, either due to economic conditions, competitor action, or failure in Tesco’s business model. It could also occur as a result of an aggressive expansion into a larger market, such as China or Japan. The challenge from Wal-Mart/Asda Ever since the US retail giant Wal-Mart acquired Asda, Tesco’s position as the leading supermarket in the United Kingdom has been under threat. Asda is now a strong competitor in terms of price and product variety. Currently, Asda is the third largest supermarket in the UK, trailing behind Sainsbury’s and then Tesco.

However, Asda closed the gap on Sainsbury’s in 2003, leaving the company to directly challenge Tesco’s dominance. Tesco is well aware of this, and has actively responded by matching price reductions and offering special promotions like Asda. There is also the possibility that Wal-mart, as the parent company of Asda, may increase its influence in the UK market. This could potentially threaten Tesco’s position as the leading brand in the future. Tesco can combat the competition by utilizing classical Management principles theory, specifically focusing on Scientific management (also known as Taylorism or the Taylor system). This theory examines and streamlines workflows with the aim of enhancing labor productivity.

The core ideas of the theory were developed by Frederick Winslow Taylor in the 1880s and 1890s and were first published in his monographs, Shop Management (1905) and The Principles of Scientific Management (1911). Taylor initiated efforts to enhance worker efficiency during his time as the foreperson at the Midvale Steele Company in 1875. His belief was that decisions based on tradition and rules of thumb should be replaced with precise procedures formulated after careful study of an individual’s work.

Taylorism is an application that relies on a high level of managerial control over employee work practices. It is a form of efficiency that emerged in the late 19th and early 20th centuries, encompassing the broader concept of increasing efficiency, reducing waste, and making decisions based on empirical evidence rather than blindly accepting existing notions. It is a part of a larger narrative that includes other concepts such as thrift, time and motion study, Fordism, and lean manufacturing.

It overlapped significantly with the Efficiency Movement, which was the broader cultural reflection of how scientific management affected business managers. Today, the concept of Taylorism is primarily used in management literature to compare it to a new and improved approach to conducting business. From a political and sociological perspective, Taylorism can be viewed as the extreme division of labor, leading to the worker’s loss of skills and dehumanization of the workplace. Marketing Objective of Tesco Marketing

Tesco may have the following objectives:

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  Profitability, in terms of operating margin (a 10% target)
  
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  Swedish Market share (a 20% target)
  
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  Customer advocacy (the number of customers who recommend Tesco branded clothing, repeat business)
  
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  Respected company (the number of community stakeholders who respect Tesco)
  
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  Employee motivation (the number of employees who feel motivated to deliver Tesco’s goals)
  

Tesco should establish marketing objectives that are measurable, time-limited, achievable, and relevant.

Marketing Strategy

Tesco’s growth strategy is focused on four areas: the core UK grocery business, non-food items, international expansion, and retailing services including financial services, the dotcom business, and telecommunication packages. By leveraging its strong and stable core business, Tesco is pursuing growth in new and potentially risky areas. In the next phase, Tesco plans to expand further into non-food products (Johnson, G., Scholes, K., Whittington, R., 2005). On the other hand, Lidl is currently generating market disruption by selling products at prices below their cost.

Tesco’s generic strategy needs to focus on cost leadership, unless we can successfully differentiate our clothing line to justify charging a higher price. Our marketing strategy involves market analysis and product selection. Implementation of the strategy requires detailed decisions about pricing and distribution methods. Consequently, Tesco must determine its entry model, whether it be through owning stores, online sales, or partnering with a national retailer.

Industry Analysis: Porter’s Five Forces Rivalry among the Competitors

The grocery industry has experienced significant growth in size and market dominance of larger players. These players have larger store sizes, increased retailer concentration, and utilize various formats that have become prominent characteristics of the sector. As mentioned above, a relatively small number of retail buyers hold the purchasing power in the food-retailing industry.

Tosco, a large chain operating in a mature and flat market, has diversified into non-food areas due to the difficulty of growth in such a market. In response to increasingly demanding and sophisticated consumers, Tosco is collecting a significant amount of consumer information for communication purposes (Ritz 2005 Pp. 113). This highly competitive market has driven rapid development, leading UK grocery retailers to be innovative in order to maintain and expand their market share. As a result, various trading formats have been developed in response to changes in consumer behavior.

The dominant market leaders have responded by refocusing on price and value, while also emphasizing the added value aspects of their service.

Threat of New Entrants

The UK grocery market is primarily dominated by four major brands: Tesco, Asda, Sainsbury’s, and Safeway. These brands hold a market share of 70%. There are also smaller chains such as Somerfield, Waitrose, and Budgens, which make up an additional 10% of the market. According to Ritz (2005 Pp. 57), the grocery market has experienced a shift towards supermarket dominance over the past 30 years.

Large chains have become dominant in the grocery market due to their efficient operations, wide range of products, and extensive marketing efforts. This has greatly affected small traditional shops like butchers and bakers, creating a significant barrier for new companies attempting to enter the industry. The high costs and complex supply chains involved make it challenging for new entrants to secure enough funding.

Large chains like Tesco make significant investments in advanced technology for checkouts and stock control systems. This investment affects both new and existing competitors. Tesco and Asda, in particular, create barriers to entry through economies of scale and differentiation. They use aggressive tactics in product development, promotional activity, and distribution to achieve a higher perceived value than their competitors.


Another factor is the power of suppliers, who are influenced by major grocery chains. Suppliers fear losing their business to the large supermarkets.

As a result, this reinforces the dominant positions of stores such as Tesco and Asda in obtaining more favorable promotional prices from suppliers that smaller chains cannot match (Ritz Pp. 59 2005). Conversely, UK suppliers are also at risk as big retailers increasingly acquire products from overseas at lower prices. The Company’s relationship with sellers can similarly limit its strategic flexibility and impact its profit margins. The competitive rivalry has consequently diminished the profit margins for both supermarket chains and suppliers.

Customers Power

Porter (1980) proposed that as products become more standardized or undifferentiated, the cost of switching to alternative products decreases. This gives buyers more power in the market. Tesco’s Club card, a famous loyalty program, is a highly effective strategy for retaining customers and increasing the profitability of the business. Tesco achieves this by meeting customer needs, personalizing services, offering low prices, providing a wide range of options, and continually offering in-store promotions. These factors enable brands like Tesco to maintain control over and retain their customer base.

In recent years, there has been a significant change in food retailing due to a high demand for supermarket shopping from consumers. This has created a greater need for supermarkets to sell non-food items and has also allowed them to expand into new markets like banking and pharmacies. Additionally, consumers have become more aware of fair trade issues and the impact of Western consumers on Third World producers’ expectations and aspirations. The production of environmentally friendly and ethically sound consumer products such as tea, coffee, and cocoa is now possible, and these products are widely available in most large supermarket chains. In the grocery industry, there is a threat of substitutes reducing the demand for a specific product, as consumers may switch to alternatives. This threat is further intensified by emerging trends like the rise of small convenience store chains in the industry.

Tesco, Asda, and Sainsbury’s are attempting to acquire and open Metro and express stores in local towns and city centres, as well as existing small-scale operations (Ritz Pp. 112 2005). Before the establishment of TPF, Tesco had a banking joint venture with NatWest that concluded in February 1997. In July 1997, Tesco Personal Finance was created after J Sainsbury, its primary UK competitor, successfully introduced Sainsbury’s Bank.