Business Strategy Tesco 3u405l

Business Strategy Tesco Plc. – Pan UK Supermarket Retail “The key drivers of change will be economics based in the short-to-medium term and technological in the long-term.” “Tesco’s overall strategy should focus on the “delivery” of its services” Macawa 7th May 2012

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Table of Contents Executive Summary..................................................................................................... 2 Macro-Economic Analysis............................................................................................. 3 Pestel Analysis........................................................................................................ 3 Five-Forces Matrix................................................................................................... 5 Strategic Analysis........................................................................................................ 7 Foundations of Strategic Capability.............................................................................. 7 SWOT Analysis....................................................................................................... 8 Strategic Drift......................................................................................................... 9 Strategic Evaluation................................................................................................... 10 Value Curve.......................................................................................................... 10 Benchmarking....................................................................................................... 11 Strategic Clock...................................................................................................... 12 Conclusions.......................................................................................................... 12 Recommendations..................................................................................................... 13 Strategy of Delivery.......................................................................................... 13 SBU Strategy.................................................................................................... 13 Clubcard........................................................................................................... 13 New Technology................................................................................................ 13 Dual Delivery Stream........................................................................................ 13 References.............................................................................................................. 14 Signatories........................................................................................................... 15

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Executive Summary Tesco’s short-term macro-economic concerns are economics based. This includes falling customer purchasing power driven by high inflation and falling incomes. In the long-term, these concerns will be more social and technologically based. This includes changing consumer lifestyles and the impact new technology is having on both, the consumer and Tesco. This includes using technology to cut staffing costs and increasing revenue streams through use of the internet. Power of suppliers remains low, but the power of customers is relatively strong when acting as a collective. This means Tesco must make effective use of its “Clubcard” to understand current customer trends and adapt its strategy as appropriate. Threats of new entrants and substitutes relate largely to the rise of the internet, but due to the current economic environment, the rise of discount stores has also become an issue of concern. Tesco has recently experienced strategic drift which saw its UK sales decline in 2011. This is due to placing increasing focus on its growth in the US and Asian markets which distracted it from its UK operations. This caused Tesco to announce a £1bn investment into “revamping” its UK stores to improve the “customer experience”. Tesco has no overriding strategy that sets it apart from its competitors. However, Tesco does have different SBU’s with their own distinct markets and competitors. Tesco’s “Finest” brand focuses on quality and competes with the likes of Sainsbury on Focused Differentiation. This is while Tesco’s “Value” brand competes on price and competes with the likes of Asda in a no frills strategy. Tesco’s overall strategy should focus on “Delivery” to the customer. This includes using information gathered from its “Clubcard” to redesign both its online and in-store retail outlets to improve customer convenience utilising new innovative technologies. This is while Tesco’s specific SBU’s maintain their current strategies with “Tesco Value” focusing on price and Tesco’s “Finest” focusing on Quality. This diversified approach will help ensure Tesco’s long-term success and sustainability.

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Macro-Economic Analysis Pestel Analysis Political The main political issues for Tesco relate to changing employment law and tax changes brought in by HM Treasury. In the 2012 budget, Chancellor George Osborne announced a reduction in corporation tax to 24% with further reductions of 1% a year until April 2014 ending at 22%. This will save Tesco approximately £25m in the financial year 2011/2012. (Tesco, 2011a) (HM Treasury, 2012) It was also announced that future increases in the national minimum wage will be below inflation. This will reduce, in real , the cost of employing lower-level operational staff such as checkout assistants. (HM Treasury, 2012) Economic The main economic issues affecting Tesco’s UK operations are the high inflation and unemployment rates seen in the country. The I rose to 3.5% in March fuelled by rises in food and clothing costs, two of Tesco’s key product ranges. This has subdued growth in UK consumption, slowing Tesco’s growth in the country. The UK unemployment rate currently stands at 8.3%. A fall from the previous month, but significantly higher than the rate pre-economic crises. This has further subdued UK consumption, restricting company growth. However, this also increases the talent pool for future recruitment, reducing hiring costs. (BBC, 2012a) Social The main social issue is that of changing customer tastes, especially in regards to people leading healthier lifestyles. In of food, last year, Tesco sold £33m worth of its “Free from” range, emphasising the need to take advantage of this change in customer tastes. (Tesco, 2011b) In order to take advantage of this change, Tesco first has to keep track of it. Tesco has done this through the use of its “Clubcard”. This level of market research will help keep Tesco informed of these changing customer trends allowing them to tailor corporate activities specifically to current customer tastes. (Tesco, 2011a) Technological Technology has significantly changed the way supermarkets compete in recent years. The first of these is the increasing role the internet is playing in shaping customer spending habits. This includes Tesco’s online sales increasing 15.2% in 2011. However, this not only acts as a new distribution channel, but as a new line of scrutiny allowing customers to more easily compare Tesco Macro-Economic Report and Strategic Analysis

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with its competitors in regards to price and products offered. Another consideration is the introduction of self-service checkouts which will significantly reduce long-term staffing costs. This will help the long-term sustainability of Tesco’s corporate activities. (Tesco, 2011a) Environmental As a major retailer, Tesco recognises its obligation “to create more sustainable ways of doing business”. This saw Tesco open its first “zero-carbon supermarket” in 2009 with the aim of becoming a zero-carbon business by 2050. Tesco has similarly reviewed its supply chain allowing it to source £1bn of its product sales from local sources. Tesco also announced a £1bn investment in “revamping” its UK stores to provide “a better shopping environment” for its customers. This will involve redeg stores to better improve customer convenience and improving energy efficiency. (Tesco, 2011a)(BBC, 2012b) Legal One of the legal issues affecting Tesco in recent years has been that of competition law. Last year, Tesco, along with eight other companies, was fined £10.4m for collaborating in the increase of milk and cheese prices, costing customers £270m. Asda and Sainsbury’s were also fined a total of £20.4m. This issue has affected the industries ethical standing and goes against Tesco’s idea of “responsible trading” as set out in its Corporate Responsibility Report. This includes selling its goods “responsibly” and “ethically” and has negatively affected Tesco’s credibility with its customers. (Tesco, 2011b)(BBC, 2011)

Five-Forces Matrix Competitive Rivalry Tesco has three main competitors in the industry, these being Asda, Sainsbury’s and Morrison’s. These companies each utilise different strategies in appealing to the consumer. Asda’s Macro-Economic Report and Strategic Analysis

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strategy focuses on providing value for customers while Sainsbury focuses more on providing a better quality service. Adapting to this shifting competitive environment, Tesco has changed its strategy from that of “pile it high, sell it cheap” to a “hybrid” strategy balancing both, price and quality. (Which?, 2012) Power of Buyers In of individuals, Tesco’s customers have little power in regards to Tesco’s overall corporate strategy. However, as a collective, customers wield significant power due to the low cost and ease of switching retailer. This is why Tesco has placed so much effort into understanding its customers through the use of its “Clubcard”. This allows Tesco to accurately track changing customer trends and adapt its strategy as appropriate. This has resulted in a significant increase in customer loyalty to the Tesco brand over recent years. (Tesco, 2011a) Power of Suppliers History has shown suppliers to be relatively weak in regards to working with Tesco. This has included Tesco forcing their suppliers to “share the pain” in relation to cutting prices on the shop floor. This is due to Tesco working with multiple farmers rather than a single large supplier. This allows Tesco to adapt their supply chain and change supplier with relative ease. This is compared to many farmers who often rely on Tesco’s custom for their very survival. This means Tesco’s suppliers have little power in regards to pricing and the products they offer. (Independent, 2012) New Entrants In is becoming increasing difficult for small retailers to survive in the retail market. This is due to the sheer dominance of the “Big Four” supermarket chains with Tesco controlling 30.7% of the market. This has led to many new entrants changing the way they do business including the increasing role of co-operatives. These co-operatives increase the threat of new entrants and will be a key consideration in determining Tesco’s future competitive strategy. (Telegraph, 2012)

Substitutes Substitutes for Tesco’s main business model include discount stores and online retailing. This has given rise to companies such as Ocado. Due to the current financial situation many consumers are facing, the use of discount stores has grown significantly. This is the business model previously used by Tesco, but in recent years, Tesco has broadened its strategy to include its “Finest” quality-based product range alongside its “Value” products aimed at the price sensitive market. (Tesco, 2012) Macro-Economic Report and Strategic Analysis

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Tesco is also extending into online retailing, but its main focus still remains the physical store format. Therefore, online retailing will remain an increasing threat which will have to be mitigated. This will involve Tesco integrating this new business format into its overall business strategy. (Tesco, 2011a)

Strategic Analysis Foundations of Strategic Capability Physical Resources Tesco “endeavours” to management its property around the needs of its customers with the aim of creating long-term value for shareholders. This sees Tesco own stores of multiple formats from its small “Metro” stores to its large “Extra” stores built in line with local demand. (Tesco, 2011a)

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Tesco’s main other physical resource is inventory. Tesco had £3bn worth inventory at the end of 2011, enough to last roughly 3 weeks. Due to swift inventory turnover, this resource has to be carefully managed and maintained to ensure customer demand is saturated with minimal wastage. (Tesco, 2011a) Financial Resources In 2011, Tesco’s cash balance fell 34% to £1.9bn. This fall can be of concern if sustained over a long period of time. However, it can be argued that this money may be better invested elsewhere. Therefore, as long an appropriate level of cash is maintained, this should not be an issue of serious concern. (Tesco, 2011a) Liabilities also fell to 53% of assets as compared to 57% in 2010. Due to the current economic environment, this is positive news as it gives Tesco more room to manoeuvre in times of future economic uncertainty. (Tesco, 2011a) Human Resources UK unemployment has risen in recent years, this sees the pool of potential candidates for future recruitment increase in regards to lower level operational roles such as checkout assistants. This greater choice in candidates may allow Tesco to reduce long-term staffing costs. This is due to the power Tesco has a potential employer to reduce staff pay and benefits. (Tesco, 2011a) Intellectual Resources As with any business, intellectual property is of significant importance to Tesco. Tesco’s Finest and Value brands both currently generate over £1bn in revenue each year. This means that these two brands are now the two largest food brands in the UK, ahead of brands such as Coca-Cola. This level of brand loyalty has helped Tesco maintain high levels of growth ensuring long-term shareholder value. (Tesco, 2011a)

SWOT Analysis Strengths Strong growth in product diversity and international expansion reduces Tesco’s reliance on a single market or product line. This creates stability in the long-term which has become increasingly important in the uncertain economic environment. This is coupled with strong customer retention techniques such as Tesco’s “Clubcard” creating long-term customer loyalty. (Tesco, 2011a) Tesco has also seen its debt liabilities steadily fall over the last three years. This increases the level of credit available to fund future expansion. Due to Tesco’s size, it can also benefit from economies of scale. (Tesco, 2011a) Macro-Economic Report and Strategic Analysis

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Weaknesses Tesco is heavily reliant on its UK market in which 60% of its sales are made. This is compared to Wal-Mart and its British arm Asda. This is why in recent years; Tesco has put much more focus on its international growth rather than in the UK where the market is already heavily saturated with a highly competitive environment. This growth in customer base and product range has also reduced the clarity as to what Tesco actually does and what it stands for, distancing itself from its core customer base. (Tesco, 2011a) Opportunities The retail industry has increasingly utilised technology to boost sales and cut costs. This includes customers being able to buy their shopping online rather than in-store. This increase in customer convenience can significantly boost sales if implemented effectively. This has also boosted Tesco’s product range into more heavy goods such as dishwashers. Tesco has done this through the launching of its “Tesco Direct” catalogue. Staffing costs have also been kept down with the integration of selfservice checkouts into Tesco’s stores which now for 10m transactions per week. (Tesco, 2011a) Threats Threats include the stagnation in future growth opportunities for Tesco in the UK. This includes low growth figures for the UK retail industry. There is also the issue of EU competition law which has limited company growth in the past when Tesco tried to acquire the British retailer Safeway. (This was blocked by the European Commission) Therefore, new growth opportunities will either have to come from new markets or expansion into new industries such as banking. (NYTimes, 2003)

Strategic Drift Tesco has encountered recent strategic drift in the UK due to their increasing focus on their US and Asian operations. This has contributed to the recent decline in Tesco’s UK sales which fell by 1.2% in 2011. In the company’s view, this was partly down to the aggressive sales strategy of their competitors. (BBC, 2012b) Therefore, Tesco has started to refocus their UK strategy. This will involve investing £1bn into “revamping” their UK stores and hiring 8,000 new staff to improve customer service. This will form part of their strategy of “overhauling” rather than expanding their UK operations. (BBC, 2012b)

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Strategic Evaluation Value Curve

Value Curve - Supermarkets 5 4 3 2 1 0

Sainsbury's

Tesco

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Asda

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Value Curve - Online 6 5 4 3 2 1 0

Ocado

Waitrose

Tesco

(Which?, 2012) These value curves show that customer perception of Tesco is poor in comparison to its competitors. Here, Asda’s strategy is more price-based while Sainsbury’s is quality-based. This is while Tesco appears to have no clear differentiation strategy in regards to customer perception. This is more apparent when comparing Tesco to its online competitors who have clearly defined their differentiation strategies. Therefore, Tesco needs to consider how it intends to differentiate itself in the future in regards to customer perception.

Benchmarking

(Tesco, 2011a) As we can see, Tesco’s growth rate in recent years has far exceeded that of its competitors. This increase in custom has been matched with a high customer loyalty rate. This helps ensure Tesco’s long-term viability.

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Overall Customer Score 5 4 3 2 1 0

3.95

4

Ocado

2.9

4

2.45 3.5 2.45 3.2

Waitrose Sainsbury's In-Store

Tesco

3.2 2.95 Asda

M&S

Online

(Which?, 2012) In regards to overall customer satisfaction, Tesco has performed relatively poorly compared to the rest of the industry. This is surprising in relation to the high customer loyalty we saw earlier. Therefore, Tesco should use the time it has to improve customer satisfaction ensuring long-term customer retention.

Strategic Clock

Tesco

Tesco Finest

Tesco Value

(Marketing Teacher, 2012) Here, it is important to distinguish the different SBU’s within Tesco. Tesco’s “Finest” brand is more quality based focusing on customers with greater purchasing power. This fits the category of Focus differentiation with a perceived added value leading to a price increase. In contrast, Tesco’s

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“Value” brand focuses on low cost alongside low perceived value, appealing more to the pricesensitive customer. This fits more with the low frills category on the Strategic Clock. (Tesco, 2012) This suggests that overall; Tesco has a Hybrid strategy, focusing on both, price and strategy.

Conclusions In conclusion, the key drivers of change will be economics based in the short-to-medium term and social and technologically based in the long-term. The economic issues include the reduction in purchasing power of its UK customers leading to a slowdown in industrial growth. This will prevent natural growth for all companies involved in the industry, both Tesco and its competitors. This means the only way to grow in the UK market is to take market share from competitors. This will require an understanding of customer needs and wants, which is where Tesco’s “Clubcard” comes into use. In of technological change, if utilised effectively, technology will help keep control of Tesco’s long-term running costs and increase the range of revenue streams available to Tesco. This includes the use of self-service tills, reducing the need to hire new staff. This is significant as staffing is generally the largest cost faced by many companies. Also, the increasing use of Tesco’s “Clubcard” and online retailing service will help Tesco understand current customer trends. This will help it adapt quickly and effectively to changing customer needs, giving it a key competitive advantage.

Recommendations Strategy of “Delivery” As we saw in the Strategic Evaluation, Tesco’s competitors focus either on price or on the quality of their products. Therefore, in order for Tesco to differentiate itself from its competitors, it will have to develop a much broader strategy. Based on the Value Curve, Tesco’s overall strategy should focus on the “delivery” of its services, both online and in-store, improving the customer experience.

SBU Strategy This is while the different strategies utilised by the different SBU’s within Tesco, it’s Value and Finest brands, maintain their focus on price and quality respectively alongside this new “delivery” strategy. This will broaden Tesco’s customer base ensuring long-term stability.

Clubcard & Redeg Stores Tesco’s “Clubcard” will play an important role in this “delivery” strategy. The “Clubcard” will provide Tesco with information regarding how to plan the different aspects of such a strategy. This will include improving the layout of its stores to improve customer convenience and reduce shopping times. This redeg of stores will also give Tesco the opportunity to reduce its impact on Macro-Economic Report and Strategic Analysis

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the environment. This will improve the company’s long-term sustainability, reduce long-term costs and improve stakeholder perception of the company.

New Technology This will include utilising new technologies as they are developed to help control long-term costs and promote growth. These technologies will include extending the use of self-service checkouts to reduce staffing costs. This reduction in staff recruitment should be implemented naturally over time as to avoid the negative publicity associated with making short-term redundancies. This should see staffing levels grow at a much slower rate as compared to revenue. This strategy should also extend into Tesco’s online retailing. This will include making it easier for customers to use its online services and should be coupled with a reduction in delivery times.

Dual Delivery Stream This dual delivery stream will differentiate Tesco from its competitors who generally have specialisms in either online or in-store retailing. This broadening of retail streams will extend Tesco’s appeal to a wider customer base allowing Tesco to increase its market share in a stagnant UK market.

References BBC (2011) Tesco to fight dairy price-fixing fine from OFT Available at: http://www.bbc.co.uk/news/business-14473931 [Accessed: 20th April 2012] BBC (2012a) Economy Tracker. Available at: http://www.bbc.co.uk/news/10613201 [Accessed: 14th April 2011] BBC (2012b) Tesco unveils profits rise and £1bn investment in UK. Available at: http://www.bbc.co.uk/news/business-17752194 [Accessed: 14th April 2012] BBC (2012c) David Cameron says UK must build 'a better economy'. Available at: http://www.bbc.co.uk/news/uk-politics-16626707 [Accessed: 25th April 2011] HM Treasury (2012) Budget 2012 [Online]. Available at: http://www.hmtreasury.gov.uk/budget2012_documents.htm [Accessed: 28th March 2012] Independent (2012) Tesco suppliers in price warning. Available at: http://www.independent.co.uk/news/uk/home-news/tesco-suppliers-in-price-warning-2361187.html [Accessed: 25th April 2011] Marketing Teacher (2012) Bowman’s Strategic Clock. Available at: http://www.marketingteacher.com/lesson-store/lesson-bowman.html# [Accessed: 25th April 2011]

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New York Time (2003) Britain Blocks Big Chains From Taking Over Safeway. Available at: http://www.nytimes.com/2003/09/27/business/international-business-britain-blocks-big-chains-fromtaking-over-safeway.html [Accessed: 25th April 2011] Telegraph (2012) Tesco recovers UK market share. Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9224301/Tesco-recovers-UKmarket-share.html [Accessed: 25th April 2011] Tesco (2011a) Annual Report 2011 [Online]. Available at: http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf [Accessed: 14th April 2012] Tesco (2011b) Corporate Responsibility Report 2011 [Online]. Available at: http://www.tescoplc.com/files/pdf/reports/tesco_cr_report_2011.pdf [Accessed: 14th April 2012] Tesco (2012) Our Brands. Available at: http://www.tescorealfood.com/our-food/our-brands.html [Accessed: 25th April 2011] Which? (2012) Grocery prices: what you need to know. Available at: http://www.which.co.uk/money/bills-and-budgeting/reviews-ns/grocery-prices-what-you-need-toknow/top-of-the-online-supermarkets/ [Accessed: 25th April 2011]

Signatories We commend this report to Ipag to be delivered on or by 7th May 2012 and laid out on 10th May 2012. Jason Cates

Isaac Arjona

Maria Teresa Roman

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Sabrina Borza

Inmaculada Galvan

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