Tesco Strategy

UK Grocery Retailing Industry

Macro Influences and Tesco Strategy

1. Abstract

The global retail industry has metamorphosed more in the last seven decades than it has in the last seven centuries. History tells us that the retail business depends on the economic and disposable income levels of the populace that moves from the centres of economic deprivation to the industrialised and prosperous environments.

The last few decades have seen heterogeneous expansion in food retailing in the UK, including the materialisation of innovative shop formats, superior logistics, capital outlays in new technology, sophistication of supply chain processes, and the continuous growth of supermarket chains (Nicholson-Lord, 2004).

The food retail sector in the UK has grown swiftly throughout the last two decades and is one the biggest economic segments of the country by way of revenue, turnover, employment and also by profits (Harvey, 2000, p 15 to 21).The turnover of Tesco during the year 2009 -10 was over GBP 59 billion and employed 468,508 employees worldwide. (Tesco Group, 2010). The food retail sector comprises of disparate entities viz. small groceries, vegetable, fish and meat shops, farmer marketplaces, standalone departmental stores and supermarkets (Harvey, 2000, p 15 to 21).

The UK supermarket and superstore segment continues to successfully attract the attention of the multinational majors for the diverse benefits they provide to the retail customer in terms of quality, convenience, economy and choice. This report further analyses Tesco's strategies and motivation for growth, the basis of the policies and methods initiated and the successful outcome of their implementation.

1. Introduction

Supermarkets reflect, in the United Kingdom as elsewhere, the reality of contemporary economic life and have an enormous and urbane influence over the grocery supply chain (Defra, 2006). The last few decades have witnessed abundant progress in food retailing in the UK, including the materialisation of novel shop formats, superior logistics, investment in the most modern technology, sophistication of supply chain processes, and the unvarying growth of supermarket chains (Nicholson-Lord, 2004).

Supermarkets and superstores retail formats are unarguably the most prominent of the topographical and mercantile contours of the United Kingdom. In a country where four fifths of the outlay on foods is spent within the confines of the five major retail players viz. Tesco, Sainsbury's, ASDA / Wal-Mart, Morrison, and Waitrose, such multinationals wield control over and radically influence customer choices across the board in cities, towns as well as minor settlements (Harvey, 2000, P 15 to 21).

Apparently these high-end humungous retail formats would not have been so successful without satisfying significant customer needs and desires like convenience, quality, prices and variety. The downside is that these very supermarkets invite vociferous criticism from varied quarters that include public s, activist groups, ecologists and apprehensive citizens, for the harmful consequences that they have on the local vendors, local jobs, traffic, groceries wastage, greenhouse gas emissions and wastage of utilities and energy resources.

Tesco has a well-established and consistent strategy for growth, which has allowed it to strengthen its core UK business and drive expansion into new markets ( Tesco Group, 2010). With the present share of Tesco in the grocery market at 29 percent, the possibility of further growth is reduced and the endeavour to augment its share of the non-food market from the existing 6.5 percent appears prudent. The growth strategy of Tesco would also additionally include further forays into global markets and services including personal finance, online shopping, et al. This increase in overseas market share can only be exploited over a limited time frame with the increasing margins and returns on capital (Financial Times.com, 2005).

2. Commentary

Key Economic Factors in the Evolution of UK Supermarkets

The history and development of the retail industry in Britain, unlike that of the United States and France, makes for dreary reading and is punctuated by community need-based and sporadic attempts at planning shopping experiences. The sole exception on the UK retail horizon was Tesco's Jack Cohen who began as a barrow boy and set up one of the earliest pilot self-service stores in St. Albans in Hertfordshire in 1947. He gained prominence in the 1960s for fighting for the abolition of legally maintained manufacturers' retails prices. Earlier in 1942, (Bowlby, 2001, p. 223).

The retail business in the British cities till the 1960s had a hierarchical arrangement and centred on the central commercial districts and was balanced by a comparatively minor number of town or district centres offering a strapping convenience-goods merchandising function and a secondary array of comparison wares for particular city centres (Lowe(Bromley & Thomas, 1993, p. 6).

The next stage of transformation from the mid-1960s onwards, increasing prosperity and disposable incomes, rising levels of vehicle ownership, urbanisation, increased levels of female participation in employment has driven new patterns of consumer behaviour and increased demand for specialised and sophisticated range of goods and services. This transformation has been instrumental in changing the character of the urban retail landscape (Lowe(Bromley & Thomas, 1993, p. 6).

The changing social and political attitudes have also contributed immensely to this paradigm shift in retail formatting. The availability and awareness of the leisure time has increased and this impacts the contemporary social milieu and communication (Lowe(Bromley & Thomas, 1993, p. 3).

The key formats ranged from (a) superstores covering areas of 2,325 to 4,650 m2 developed in the mid-1960s and focusing mainly on grocery retailing; expansion happened from 1977 to 1990, (b) retail warehouses with areas greater than 930 m2were built from the late 1970s, initially selling bulky DIY products from warehouses considered too big and functionally inappropriate for locations in the conventional shopping centres, (c) retail depot parks consisting of a cluster of three or more retail depots housed along a main thoroughfare with areas approximating 37,200 m2 similar in scale to a compact regional shopping centre, (d) sub-regional shopping locations of approximately 18,600 to 37,200 m2 and incorporating a superstore, a minimum of a big non-food retailer and a number of smaller integrated entities and (e) regional shopping centres with areas more than 37,200 m2or 400,000 sq ft planned as entirely integrated, environmentally controlled covered malls; incorporating department stores, the full range of multiple stores and a considerable degree of leisure activities (Lowe(Bromley & Thomas, 1993, p. 8).

Current Market Position of UK Supermarkets

It is significant to observe that the retail business has evolved from an industrial to a post-industrial stage. In the UK, 2.1 million people approximately comprising about 10 per cent of the labour force were working in retail distribution in 1992 (Employment GazetteNovember 1992) and the biggest retailers are now among the major companies (Lowe & Crewe 1991). In 1991, J. Sainsbury engaged about 95,000 people (Sainsbury 1991), while Marks & Spencer had about 61,000 employees (Marks & Spencer 1991). In the USA, even larger organizations are trite. In 1992 Wal-Mart was known to be the largest retailer, with a turnover of $44 billion, 1,700 stores and a workforce of over 365,000 employees (Financial Times, 3 March 1992). (Lowe(Bromley & Thomas, 1993, p. 2)

Self-service stores and supermarkets, retailing an all-encompassing assortment of food, non-food, and household goods in large, cheerfully lit, handily stacked and well planned premises, have brought about significant alterations in the way people purchase food and other household needs (De ChÂtel & Hunt, 2003, P 77).

Wal-Mart is the largest global retail company by way of revenue at $ 401,244 million during the year 2008 - 2009, with Tesco the largest retailer in the UK at $96,210 million and the French retailer Carrefour being the largest in Europe with revenues of $ 127,958 million (Deloitte.com 2010). In the UK, one-third of every pound spent on food occurs in a Tesco store (Ghost Towns, 2006, P1).

Supermarkets in the UK have also been striving hard at trimming product prices in response to the economic downturn's effect on consumer spending capacity (Wallop, 2009, P 1). Both Tesco and ASDA have made substantial price cuts in order to make Christmas 2009 more satisfying to their consumers (Wallop, 2009, P 1). Tesco's loyalty cards, which grant customers attractive discounts dependent upon their buying a certain minimum amount of goods, have proved to be enormously popular (De ChÂtel & Hunt, 2003, P 154).

The financials for the year ended 28 February, 2009 bear testimony to Tesco's astonishing performance in trying times. Appendix 1 details the 5 year summary of financial data from the year 2005 to 2009. The group sales of Tesco amounted to GBP 36,957 million to GBP 59,426 million for the years 2005 and 2009 respectively and the underlying profit before tax rose from GBP 1,925 million to GBP 3,128 million respectively for the same years (Tesco Group, 2010). This represents a turnover and the profit before tax growth of 60.8 percent and 62.5 percent respectively for the said period under reference.

The number of stores under operation globally during the 2005 and 2009 years were 2,334 (1,780 in UK) and 4,332 (2,282 in UK) respectively. The corresponding total sales area under operation was 49.135 million sq. ft. (24.207 in UK) and 88.451 million sq. ft. (31.285 in UK) respectively for the comparable years (Tesco Group, 2010). Appendix 2 details the number of stores by format and the markets that Tesco operates in globally (Tesco Group, 2010).

The UK retail productivity in terms of revenue and profit per employee rose an amazing 17.96 percent and 36.61 percent between 2005 and 2009 (Tesco Group, 2010).

Tesco: Strategy and Growth

Tesco has a deep-rooted and unswerving strategy for growth, which has allowed the fortification of the core UK business and impel growth into fresh markets. The underlying principle of the strategy laid down in 1997 is to enlarge the span of the business to allow the delivery of a sturdy and protracted long-term growth by pursuing the consumer into large expanding domestic markets e.g. financial services, non-food and telecommunications as well as new overseas markets, at the outset in Central Europe and Asia and lately in the United States. (Tesco Group, 2010)..

The objectives of this five pronged strategy are: (a) to be a successful global retailer, (b) to grow the core UK business, (c) to be as strong in non-food as in food retail segments, (d) to scale up retailing services like Tesco Personal Finance, Telecoms and tesco.com and (e) to position community at the heart of what it does (Tesco Group, 2010).

In being a successful global retailer, Tesco has long practiced the commonly used ‘glocal' practices which encompass the ground realities of the local environment with the global best business practices. Being close to the consumers enables quick reaction times, especially in the current downturn, to the local changes as they happen in each of 13 countries across Asia, Europe and the United States (Tesco Group, 2010).

The many man-years spent in developing customer insight skills and buying patterns, especially through dunnhumby, the consumer research entity that enabled Tesco's loyalty scheme, Clubcard, has brought about a deep understanding of the consumers' wants (Tesco Group, 2010). Sharp scrutiny of sales and loyalty card data has enabled Tesco to select the main items for price-sensitive or cost-conscious shoppers. This has enabled the lowering of prices on the most important items to help customers through tough economic times in all the countries by beating the competitors' prices for such critical consumption items (Tesco Group, 2010). This data has also opened the eyes to retail merchandising in displaying goods on shelves by brand rather than by age to enable quicker access to such desired item (Tesco Group, 2010).

The strategy of exploring global markets has benefited Tesco immensely. The investments in Thailand and South Korea have ensured a stronger resurgence from the economic recovery of downturn of the 1990s. Tesco is now the market leader in Thailand and is well on its way to market leadership in South Korea after the acquisition of 36 hypermarkets (Tesco Group, 2010).

Research has shown that the price is the most important factor in pricing decisions. Various effective initiatives have been launched in UK and in the overseas markets to enable Tesco to stay ahead of the customer, especially in its core market (Tesco Group, 2010).

During the last recession, ‘Value lines' was launched in the country to provide the cheapest grocery store, inclusive of discounters. Keeping products' quality in mind, Tesco made the biggest change to their products' range by launching 500 new products as part of their ‘Discount Brands' (Tesco Group, 2010). The unique efficiency saving plan called ‘Step Change' has already delivered GBP 540 million of productivity and other changes which have been ploughed back primarily into productivity projects that encompass the entire business from stores and depots to the office (Tesco Group, 2010). Examples of such improvements include reducing energy consumption in the stores, reducing 52,000 store deliveries by means of larger-fill double-decked means of transportation leading to added savings of 12 million road miles, the introduction of new self checkout technology for stores as well as introducing pioneering technology to allow electronic check-in of bread and milk depot deliveries leading to a sizeable removal of paperwork and administration (Tesco Group, 2010).

Non-food remains an essential component of our long-term approach since it is a market similar in size to food and is a huge opportunity. Empirical data strongly suggests that the consumer will buy, even in bad times, wherever they see value. The best possible prices available to the customers are made possible by economies of scale due to many products being sourced globally, consolidating freight volumes and by investing in buying hubs where there is a critical mass of suppliers and shipping volumes (Tesco Group, 2010).

The global purchasing office based in Hong Kong is accountable for buying 100,000 non-food products for the entire Group and wherever possible, the purchases are sourced directly through factories without involving agents. This sourcing team last year shipped 72,000 containers from 54 ports. The sourcing hubs based largely in Asia and Europe ensure that the goods are delivered from ethical sources, on time and in the best price and quality (Tesco Group, 2010).

The previous year saw new Homeplus stores space of 600,000 sq. ft. being commissioned for non-food in UK and, through Tesco Direct, the widest range of non-food was made available to millions of customers. The Tesco website has around 1.5 million hits per week and Tesco Direct, which is controlled within tesco.com, is effortlessly accessible to customers via the internet and their catalogues (Tesco Group, 2010).

The 12,500 products available online, the 11.5 million catalogues issued last year and the in-store Direct desks, now numbering 231, facilitate the ordering and collection of the items from the local store itself (Tesco Group, 2010).

The strategic Retailing Services comprises the online shopping channels, tesco.com and Tesco Direct, Telecoms, Tesco Personal Finance (TPF) as well as dunnhumby, the consumer research business. Curently all the financial products are offered online and over 50% of our customers opt to buy this in this manner (Tesco Group, 2010). Tesco has set itself a target to grow the profitability of the services business from GBP 400 million approximately in 2007/08 to GBP 1 billion over the next few years (Tesco Group, 2010).

Best of breed Customer Relationship Management (CRM) and Supply Chain Management (SCM) practices used in conjunction with Point of Sale (POS) software has enabled Tesco to manage a paradigm shift in its core retail business and enabling it to reach out to its customers for the Retail Services as well and return repeatedly.

To strategically position the community at the core of what it does has been the critical cornerstone of Tesco's strategy. The Group has taken a leadership role in its efforts towards climate change and environment responsibility and has set ambitious targets to reduce emissions in its own buildings and distribution networks (Tesco Group, 2010).

Tesco is now the first UK retail major to exhibit the full carbon footprint of all its own-label milk ranges, excluding organic milk, and has vowed to footprint 500 products by the year end. Heartening research has now established that 50% of shoppers surveyed now realize the proper meaning of "carbon footprint" as against only 32% of shoppers surveyed in the previous year (Smithers, R., 2009).

The last year has seen continuous initiatives and have reduced their carbon intensity of new stores by 21 percent. Tesco's customers are presently using 50 percent less plastic bags than they did in May, 2006; the saving amounts to saving 3 billion bags since the introduction of the green Clubcard points in August 2006 (Tesco Group, 2010).

Tesco responded more aggressively than competitors to last year's threat from fast-expanding “deep” discounters such as Germany's Aldi. Tesco's “discount brands” initiative launched price deflation in its prices while competitors still had high prices and encouraged its consumers to trade down. This stratagem seemingly achieved its plan and the ‘Deep discounters' market-share increases have ground to a halt and Tesco declares that its UK apple to apple sales growth has aligned with the industry numbers .The prospects to boost UK sales of non-goods i.e. clothing, mobile phones, electrical goods and financial services are still huge and indications are escalating that Tesco can swing back from solid to scintillating. ( Financial Times.com, 2009).

Appendix 3 details the balanced Scorecard approach to managing the business that is known within the Group as the Steering Wheel (Tesco Group, 2010)

The International businesses' performance during the year has been robust, especially considering increasingly complex trading conditions in all the global markets as the economic downturn's effects on customers have swelled and spread around the world. UK retail turnover grew by 9.1% and the footfall numbers and spend per visit grew. The margins also were healthy and profit perked up. The group non-food sales rose a smart 6 percent to GBP 12.5 billion, including GBP 3.8 million in International sales (Tesco Group, 2010).

3. Conclusions

The macro factors that have influenced the UK grocery and non-food retailing industry since the 1960s have been the increasing prosperity and mobility, rapid urbanisation of cities and towns due to rapid industrialisation, rising levels of the female work force, higher leisure times, increasing demand for more sophisticated goods and services as well as the social and the political attitudes (Lowe(Bromley & Thomas, 1993, p. 3).

“As leading grocery experts observe, supermarkets in general and Tesco in particular will have to demonstrate – continuously – that they truly have consumer interests at heart, and that they are not abusing their enormous power just to enrich themselves” (Seth & Randall, 1999) ( Defra, 2006).

The attractiveness of the UK market stems from the still available opportunities in all the non-food and retailing services businesses both on line and off line.

It is critical to note that the total group operating profit margin of Tesco continuously hovered rock-solid around 5.8 percent during each of the 5 years from 2005 to 2009. In the UK the operating profit margin grew from 5.7 percent in 2005 to 6.7 percent in 2009 (Tesco Group, 2010).

“The new businesses which have been created and developed over the last 12 years as part of this strategy now have scale, they are competitive and profitable – in fact we are now market leader in many of our markets outside the UK” (Tesco Group, 2010).

Appendix 1 (Tesco Group, 2010)

Five year summary






53 weeks

Financial statistics

Group sales (including VAT) (£m)






Revenue (excluding VAT) (£m)







Rest of Europe















Total Group






Operating profit2(£m)







Rest of Europe















Total Group






Operating profit margin2







Rest of Europe















Total Group






Share of results of joint ventures and associates3(£m)






Profit on sale of investment in associates


Net finance costs3(£m)






Profit before tax (£m)












Minority interests (£m)






(Loss)/profit for the period from discontinued operation4(£m)




Profit for the financial year attributable to equity holders of the parent (£m)






Underlying profit before tax5(£m)






Enterprise value7(£m)






Basic earnings per share8






Diluted earnings per share8






Dividend per share9






Return on shareholders' funds10






Return on capital employed11






Group statistics

Number of stores






Total sales area – 000 sq ft12






Average employees






Average full–time equivalent employees






UK retail statistics

Number of stores






Total sales area – 000 sq ft12






Average store size (sales area – sq ft)13






Average full–time equivalent employees






UK retail productivity (£)

Revenue per employee14






Profit per employee14






Weekly sales per sq ft15






1. Results for the year ended 25 February 2006 include 52 weeks for the UK and ROI and 14 months for the majority of the remaining International businesses.
2. Operating profit includes integration costs and profit/(loss) arising on sale of fixed assets. Operating margin is based upon revenue excluding VAT.
3. Share of results of joint ventures and associates is stated net of the interest and tax of the Group's joint ventures and associates. The Group's charges for interest and tax have been reduced by these amounts.
4. Consists of the net result of the Taiwanese business which was sold during 2006/7.
5. IFRS underlying profit excludes IAS 32 and IAS 39 ‘Financial Instruments' – Fair value remeasurements, the IAS 19 Income Statement charge, which is replaced by the ‘normal' cash contributions for pensions, IAS 17 ‘Leases' – impact of annual uplifts in rent and rent-free periods and IFRS 3 Amortisation charge from intangible assets arising on acquisition. For further details of this measure,see accounting policies.
6. Results have been restated to reflect the US as a separate segment.
7. Market capitalisation plus net debt.
8. Basic and diluted earnings per share are on a continuing operations basis.
9. Dividend per share relating to the interim and proposed final dividend.
10. Profit before tax divided by average shareholders' funds.
11. The numerator is profit before interest, less tax. The denominator is the calculated average of net assets plus net debt plus dividend creditor less net assets held for sale.
12. Store sizes exclude lobby and restaurant areas.
13. Average store size excludes Express and One Stop stores.
14. Based on average number of full-time equivalent employees in the UK, revenue exclusive of VAT and operating profit.
15. Based on weighted average sales area and sales excluding property development.
16. Excludes one-off gain from ‘Pensions A-Day', with this one-off gain ROCE was 13.6%.
17. Using a 'normalised' tax rate before start-up costs in the US and Tesco Direct and excluding the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies.
18. Excluding 53 US stores and 22 Dobbies stores.
19. Excluding start-up costs in the US and Tesco Direct and adjusting average number of full-time equivalent employees in the UK to exclude US and Tesco Direct employees - profit per employee would be £11,317.
20. Excluding acquisition of TPF and Homever, and India start-up costs, and after adjusting for assets held for sale. Calculated on a 52 week basis, ROCE for 2008/9 is 12.8%.
21. Excluding 24 Dobbies stores.

Appendix 2 (Tesco Group, 2010)

Quick facts

Staff worldwide


Staff in the UK


Stores worldwide


Total stores in the UK


By format...













Number of markets


Which markets

China, Czech Republic,Hungary, India, Japan, Malaysia, Poland, Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, UK, USA

Facts correct May 2009

Appendix 3 (Tesco Group, 2010)


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