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.
Tescos overall strategy should focus on the delivery of
its services
Macawa
7th May 2012

Macawa

Tesco Plc.

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

Word Count/Word Limit

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Executive Summary
Tescos 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 SBUs with their own distinct markets and
competitors. Tescos Finest brand focuses on quality and competes with the
likes of Sainsbury on Focused Differentiation. This is while Tescos Value brand
competes on price and competes with the likes of Asda in a no frills strategy.
Tescos 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 Tescos specific SBUs maintain their
current strategies with Tesco Value focusing on price and Tescos Finest
focusing on Quality. This diversified approach will help ensure Tescos 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 terms, the cost of employing lower-level operational staff such as
checkout assistants. (HM Treasury, 2012)
Economic
The main economic issues affecting Tescos UK operations are the high inflation and
unemployment rates seen in the country.
The CPI rose to 3.5% in March fuelled by rises in food and clothing costs, two of Tescos key
product ranges. This has subdued growth in UK consumption, slowing Tescos 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 terms 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 Tescos 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
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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
support the long-term sustainability of Tescos 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
redesigning 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 Sainsburys were also fined a total of
20.4m. This issue has affected the industries ethical standing and goes against Tescos idea of
responsible trading as set out in its Corporate Responsibility Report. This includes selling its goods
responsibly and ethically and has negatively affected Tescos credibility with its customers.
(Tesco, 2011b)(BBC, 2011)

Five-Forces Matrix
Competitive Rivalry
Tesco has three main competitors in the industry, these being Asda, Sainsburys and
Morrisons. These companies each utilise different strategies in appealing to the consumer. Asdas
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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 terms of individuals, Tescos customers have little power in regards to Tescos 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 Tescos custom for their very survival. This means Tescos 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 Tescos future competitive strategy. (Telegraph, 2012)

Substitutes
Substitutes for Tescos 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)
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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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Tescos 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, Tescos 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. Tescos
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 Tescos 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 Tescos 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 Tescos size, it can also benefit from
economies of scale. (Tesco, 2011a)
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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 Tescos
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 Tescos stores which now account 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 Tescos UK sales which fell by
1.2% in 2011. In the companys 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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(Which?, 2012)

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, Asdas strategy is more price-based while Sainsburys 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, Tescos 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 Tescos
long-term viability.

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Overall Customer Score

5
4
3
2
1
0

3.95

Ocado

2.9

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 SBUs within Tesco. Tescos 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, Tescos

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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 Tescos Clubcard comes into use.
In terms of technological change, if utilised effectively, technology will help keep control of
Tescos 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 Tescos 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, Tescos 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, Tescos 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 SBUs within Tesco, its Value
and Finest brands, maintain their focus on price and quality respectively alongside this new delivery
strategy. This will broaden Tescos customer base ensuring long-term stability.

Clubcard & Redesigning Stores

Tescos 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 redesigning of stores will also give Tesco the opportunity to reduce its impact on
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the environment. This will improve the companys 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 Tescos 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 Tescos
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) Bowmans 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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