Tesco Case Study
A Case Study Documenting Tesco’s Success and Challenges.
Tesco is the UKs biggest retailer having 6,784 stores as of March 2014 and in excess of 597,784 staff working for them over half of this in the UK alone. Currently Tesco's have stores in 12 countries, and is growing internationally with more than 27 million Tesco Clubcard holders outside of the UK. Beyond the core grocery business Tesco has a large presence in non-food items, financial services and telecommunications markets. Due to fierce competition Tesco saw its first drop in profits in 2013 partially due to its commitment to reducing prices for customers and offering the best value. For 2013, sales were just under £71 billion and Tesco's held roughly a 30% of UK market share.
The foundations of Tesco's success:
The success of Tesco can be attributed to the strength of its brand and customer loyalty. With Tesco's ongoing commitment to providing high value and low
prices they make it extremely clear that their primary focus is their customers. This customer focus has led to extremely loyal customers which has helped
Tesco to diversify their range of products and services and establish in new markets such as banking which they entered into in 2009.
Tesco's have done a great job of expanding their products and services so much so that one pound in every seven spent in retail was at Tescos. To support their expanding range of products and services Tesco has taken a local approach to marketing ensuring that they build their profile in customer catchment areas in the local community rather than taking a generic national approach.
The relationship Tesco holds with its customers is fundamental to its success, over the years Tesco has expanded its product lines to cover different demographics with ranges of products from the Value range through to Tesco's Finest. This success started with its Value range of products which were launched in midst of recession in 1993. This product line alone accounts for over £1 billion of turnover for Tesco and helped to improve its profits
Overseas expansion has also helped Tesco to improve its profits, with great success in Eastern Europe, China and South Korea. Tesco also entered the U.S. in 2009 with the fresh & easy brand however this venture failed, a failure which many attributed to differences in consumer behaviour in the U.S. A large part of fresh & easy product line was in ready meals which are not as popular overseas with a booming takeaway industry in the U.S.
Tesco starting small in the U.S. also meant that it could not benefit from the same scale economies as it does in the UK. With Tesco holding a 30% market share it has massive buying power due to the volumes in which it purchases this helps to keep prices down and supports the low price strategy targeting the broad consumer market.
Recently there have been some issues relating to the management of suppliers as Tesco have pushed too hard to drive prices down which has resulted in very public clashes with farmers unions especially for dairy products. The growing opposition to supermarket because of its size and ability to dominate the market prices has been strong enough to encourage the government to become involved through the Monopolies and Mergers Commission to ensure the market remains competitive in the UK.
Another areas in which Tesco have always been strong is innovation, historically Tesco were the first supermarket to bring self-service to the UK which was a concept taken from the US. Seeing growth in online retail Tesco also gained a large advantage when it launched Tesco.com being the first supermarket to make this move. Currently its online business is growing massively with a slowing increasing market share, it's proven to be an excellent way to sell other non-food items giving easier exposure to other products through the Tesco Direct segment of the website. Online has also proven instrumental to the success of Tesco in segments such as banking.
With such a large base of customers, strong Clubcard update and large online presence it's no surprise that Tesco make use of all of this data to improve its decision making. All of this data gives Tesco an unsurpassed understanding of the different UK consumer segments and shopper profiles helping it to further build brand loyalty and develop new product lines and promotions directly targeted to specific consumer segments. Tesco has also made excellent use of its data to target offers and promotions all the way down to individual customers this sophisticated use of Tesco Clubcard data helps it retain its position as market leader inside the UK.
Currently Tesco offers a extremely wide variety of products including food, fuel, clothing, banking services, TV and movies streaming services, household items, telecommunications services (Tesco mobile), gold exchange and fine wines and spirits. Profits from this wide range or products and services is often invested to support further research and development of new products as well as to further push international expansion.
Challenges and threats for Tesco:
Competition is extremely intense within the UK with a price driven market and very little currently differentiating Tesco from their competitors, this may explain the dip in profit for Tesco in 2013 due to being forced into heavy price competition with Asda, Morrisons and Sainsbury's.
With roughly 75% of market share tied up in the big 4 supermarkets it's clear that the retail market is oligopolistic in nature which means it's easy for each supermarket to remain aware of the others actions as they don't need to monitor many competitors. Contrary to the norm in oligopolies competition is driven by price increasingly so now that there is external pressures from small competitors such as Aldi and Lidl which hold 4.6% and 3.4% of market share respectively and continue to drive further price reductions.
As prices are driven down its vital that Tesco continues to look at increasing. Cost savings have been sought from better management of the supply chain, however its vital that Tesco continues to try and drive efficiency through the better use of IT. One example of this in action is Tesco's push in store to further self-service through the introduction of 'Scan as you shop' Teco made a £1 billion investment in 2012 into the improvement of current stores with much of these funds being invested into expansion of the current Self Checkout system and introduction of the new Scan as you shop equipment.
Due to low competition the market is highly regulated. The monopolies and mergers commission has monitors the market to ensure fair competition which is an ongoing threat to all of the big UK supermarkets Tesco included. This has also resulted in bad local press with small businesses struggling following the introduction of Tesco into smaller towns and villages. This was especially the case between 2007 and 2009 with wide scale press covering debating whether Tesco was becoming a monopoly and discussion on how the monopolies and mergers commission was going to ensure that fair competition wasn't being inhibited.
With many local businesses feeling the pinch from the expansion of Tesco there has been increasing pressure for planning restrictions to slow down the rate of new store openings. Currently growth is being seen from furthering brand loyalty and expansion of the range of products any growth from new stores tends to be coming from overseas.
Success in the retail industry is still dependent upon how well Tesco can meet the customer needs. In 2013 Tesco saw its first drop in profits which some retail analysts attribute to senior management taking their eye off the ball and focussing too heavily on international expansion rather than further diversification of products in Tesco's primary UK market.
On a final note price competition is perhaps the largest risk to Tesco. Even though we are exiting the recession household budgets are still tight, so it should not be surprising to see Tesco respond further to price competition from smaller competition such as Aldi and Lidl during 2014 perhaps expanding current marketing campaigns such as the price match promise to cover these growing competitors.