Demand Chain Management

DCM/04.2008/SDK-AK

TESCO: An International Expansion Strategy

Despite the recession, Tesco continues on its remarkable journey as one of the
most successful modern retailers of our time. In 2010, it saw an 8.8%
increase in group sales to reach 62,235m £. Further, 324 new stores were
added and underlying profit increased by 5.6% to give the impressive
figure of 3,395m £.

Figure 1(a)
Tesco: Sales and Profits 2001 – 2007

Source: Tesco Website

Figure 1 (b)
Share of UK Grocery Market (2006)

Based on Consumer and Market Insight

Source: Verdict, in UK Competition Commission Report Oct 2007
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Table 1
Number of Stores and Total Retail Space (1000 Sq Feet)

Number of Stores 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
UK 692 729 1,982 1,878 1,780 1,898 1,988 2,115 2,282 2,482
International 215 250 309 440 554 774 1,275 1,636 2,050 2,329
Total 907 979 2,291 2,318 2,334 2,672 3,263 3,751 4332 4811
Total Retail Sq Ft 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
UK 17,965 18,822 21,829 23,291 24,207 25,919 27,785 29,549 31,285 32,991
International 10,397 13,669 18,115 22,111 24,928 29,296 40,404 46,789 57,166 60,994
Total 28,362 32,491 39,944 45,402 49,135 55,215 68,189 76,338 88,451 93,985

Source: Tesco Website

The beginnings of change

At the start of the 1990s, the world of UK grocery1 retail was a different place.
Then, Tesco was experiencing falling sales and slowing profit growth. Tesco was
also under threat from a new breed of discount food retailers entering the UK
from continental Europe. Tesco’s initial response to the tightened trading
conditions had been to extract higher returns through a national cost-cutting
efficiency drive. Far from stemming the rot, however, early figures for 1993 had
shown that things were actually worsening, whilst its closest competitors,
Sainsbury’s, Safeway2 and Asda3 were showing signs of improvement.

To stave off the threat from the new price discounters, Tesco launched the ‘Tesco
Value’ range, initially spanning 70 core products. Also, a series of new customer-
focused initiatives were introduced. Shoppers were recruited to sit on Customer
Panels for half-day sessions, providing an opportunity for local managers to find
out exactly what they really wanted. Signage was improved and a ‘New Look’
programme of store extensions and refurbishment launched. The extra space
allowed new features and product categories to be introduced. Other
improvements included specialised shopping trolleys and fully equipped baby
changing rooms that were available to mothers and fathers alike.

Research had shown that customers disliked queuing most while shopping in
supermarkets, but that they did not consider themselves to be queuing when
there was only one person in front of them when they were busy unloading the
trolley. A total of £15 million was spent in ensuring that Tesco could pledge to
open more tills immediately if at any time there was more than one person in
front of a customer.

Further, each member of the 130,000-strong staff was given responsibility to

look after customers in the way they thought best. At the same time, managers
were encouraged to recognise employee achievements and to set an example by
1
According to the Competition Commission (provisional findings report, 31 October 2007, p68)
groceries include food (other than that sold for consumption in the store), pet food, drinks
(alcoholic and non-alcoholic), cleaning products, toiletries and household goods.
2
Safeway was purchased by WM Morrison in March, 2004
3
Asda was purchased by US retail giant, Wal-Mart in June, 1999

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treating them as individuals, so that they in turn treated customers as individuals

too. Staff were made aware that the average potential lifetime spend of a
customer at Tesco was £90,000.

The TESCO Clubcard

1995, Tesco launched

‘Clubcard’. Sainsbury’s already
had its short-term Saver Card
scheme in place in a limited
number of stores, as did third-
placed rival Safeway. Both
schemes were devised as
tactical promotional devices,
offering small percentage
discounts to shoppers in a bid to boost sales at poorly performing stores.
Analysts estimated the Tesco Clubcard start-up costs at around £10 million, in
addition to the 1 per cent discount on sales (an estimated £60 million “given
away” in the first year). At that time, in a statement to the press, Sainsbury’s
chairman, David Sainsbury, dismissed the scheme: “It will cost at least £10
million just to administer. That’s wasted money… We have no plans to go down
that route”.

Tesco senior management had a different vision. Clubcard would provide them
with a wealth of self-updating information about its customer base. Operational
benefits - such as refined stock selection, display and staffing levels - could be
derived from the data, but the primary purpose of the data gathering was to
facilitate future micro-marketing activities. To get to grips with the deluge of
data generated by Clubcard, Dunnhumby Associates4, a small specialist
marketing data analysis consultancy, was brought in.

Tesco also extended the scheme to include points

for purchases of petrol. This together with a ‘price
pledge’ to maintain the lowest petrol prices
resulted in a surge in petrol sales. In addition to
being the UK’s largest food retailer, Tesco was
now the largest independently owned petrol
retailer, fourth overall behind the big three oil
companies, BP, Shell, and Esso.

2010 saw 7 new countries adopting Club Card, with Dunnhumby continuing to
provide local insight on pricing, stock range and promotions for new adoptee
countries. There are currently more Club Card holders internationally than in the
UK.

Format expansion meets multiple shopping habits

4
www.dunnhumby.com

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By the mid-1990s, the rapid expansion in the number of out-of-town retail

developments was causing concern amongst town planners who had become
aware of the damage it was causing to Britain’s increasingly deserted high
streets. Planning regulations were subsequently tightened, designed to
encourage new retail development in town centres.

In 1994, Tesco had already signalled its response to the changing planning
environment with the opening of its first ‘Metro’ store in London’s fashionable
Covent Garden. This new format was designed for convenience, providing a full
food range for office workers, shoppers and people on their way home. Further,
the Express stores, developed in partnership with Esso, combined petrol stations
with retail sites.

In 1998 Tesco opened a new flagship store at Pitsea in Essex; it was the
prototype for the hypermarket ‘Tesco Extra’ format - vast stores offering the
most comprehensive range of products and services seen in the UK under one
roof. With restrictions on Sunday shopping long since eased and ever longer
opening hours, Pitsea became one of the first Tesco stores to offer 24 hour
shopping.

Tesco continued to experiment with new store formats. In May 2005, the
company announced intentions to drive its non-food sales growth by opening two
trial non-food stores, named Tesco Homeplus. Covering everything from clothes
to televisions, the stores provided a means for Tesco to extend its non-food offer
more widely.

Tesco Lifespace was developed as a solution to the

group’s inability to find appropriate retail space in
China. Developing whole shopping malls instead of
hypermarkets within existing malls allows Tesco the
flexibility of meeting China’s large demand, especially
when expanding into China’s second and third tier
cities. There are plans to develop another 9 such malls
in 2010-11.

Focus on supply chain

In April 1997, Tesco announced in a meeting with its top 300 to 400 suppliers
that it was ending the practice of ‘copycatting’ 5 manufacturers’ brands and that
the suppliers’ endless pleas for in-store data about their brands’ performance
would be granted. Suppliers were invited to put the adversarial trading practices
of the past behind them. Tesco recognised that it could improve its overall offer
to consumers through strategic category management and through tapping into
the consumer insight and marketing expertise of its branded suppliers by
conducting joint marketing programmes.
5
‘Copycatting’ is an alternative term for the practice of ‘passing-off’ own label goods, usually by
closely following the style and design of the packaging of the brand leader.

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Three significant conditions were attached. First, instead of turning out own-
label look-alikes of branded manufacturers’ products, Tesco invited the
manufacturers to collaborate in the redesign of its own-label range. Second, in
exchange for access to sales data, the retailer required branded manufacturers
to set up teams dedicated to developing products specifically for Tesco, in the
same way as own-label suppliers had been doing for years. Third, leading
suppliers would be asked to present an outline proposal detailing how they could
help Tesco maintain a competitive advantage over rival retailers. In November
1997 Tesco announced it would strip out a layer of its senior management -
trading directors - replacing them with marketers responsible for category
management.

From groceries to non-foods and new retail services

In 1994, Tesco introduced a music and home entertainment department, offering

popular ranges of compact discs, videos, books and stationery. By 2004, Tesco
had a 19 per cent share of chart music sales, up from 7 per cent five years
previously. However, during 2007 sales weakened, despite Tesco’s increased
market share, due to the growth in internet downloading.6

In 1995, Tesco offered a range of value for money

clothing for all ages. In 2003, Tesco launched the new
clothing ranges branded as Cherokee, Florence and Fred
and saw its clothing offer grow at four times the overall
market rate. Its ‘Finest’ ranges of cashmere jumpers and
leather jackets were also outselling similar high street
garments by a factor of six to one.7 In 2005, Tesco’s
total clothing sales had reached almost £700 million and
its brands were among the fastest growing in the UK.

Tesco also moved into over-the-counter medicines and

toiletries. In 2001, sales of these items overtook those
of Boots, Britain’s leading health and beauty retailer. It
then boosted its offering in this sector with the purchase of The NutriCentre, a
retailer of alternative remedies. The lure of high margin, non-food sales
appeared to have been justified; Tesco’s non-food sales in the UK now represent
about 25% of total sales generated (excluding petrol)8.

New retail services

Following successful trials in 1996, the company decided to slowly expand Tesco
Direct, a telephone and internet-based grocery ordering and delivery service. The
store-based service offered a ‘clicks and mortar’ platform for Tesco to test and

6
Annual Report 2007, p13.
7
“Jean Genius: How Tesco took on the big name designers and won”, The Observer, UK
30th November 2003, p. 17
8
Ibid. p13.

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grow its internet activities and its range of general merchandise. As the online
service grew, Tesco Direct was renamed Tesco.com. By 2007, Tesco.com had
become the largest e-grocer in the world, with sales growing from £6m in 2000
to more than £1 billion generated by over a million regular shoppers. It has also
become the most profitable (in fact, the only profitable) e-grocery retailer in the
world. Unlike its smaller rival Ocado which delivers Waitrose food from a giant
distribution hub in Hatfield, Tesco.com delivers most of its groceries from local
stores. “We have tended to base the model from stores because they are near to
customers’ homes. The biggest hidden cost with an online business is delivery”,
notes Laura Wade-Gery9, Tesco’s Head of e-grocery.

Tesco Direct, now the company’s non-food direct marketing catalogue and online
store, has yet to make a profit but already generates sales of £150m. It
launched a collection of women’s clothing online at the end of 2007 and has
plans to introduce menswear and childrenswear as well.10 With 15,500 products
available on Tesco Direct, 2 specialist websites for clothing and entertainment
were launched in October 2009. Within weeks of its launch, it became one of the
top 10 most visited clothing websites, and has garnered strong positive
feedback.

The company’s clothing line F&F has made remarkable progress, with 68 million
items sold in the 4 key Central European markets, more than their combined
populations. F&F was launched in China, Malaysia, South Korea and Thailand in
2010.

Tesco also collaborated with DreamWorks in a first-ever venture to cut out the
middleman and sell a short animated film Merry Madagascar direct to customers.
Over one million DVDs were sold in the UK.

2010 saw an increase in international sourcing and expansion of Tesco’s retail

services to international markets, with Discount Brands in 7 markets, F&F
clothing in 10 countries. In the UK, the 910 000 sq ft Teesport distribution centre
was built with a port location and on-site rail infrastructure so as to increase
efficiency and lower the environmental impact of product storage and
distribution.

Financial services

Tesco introduced the Clubcard Plus in June 1996,

which was an interest-paying direct debit savings
account and payment card rolled into one, with the
added benefit of double Clubcard points on
purchases. Tesco offered a wider range of banking
services from July 1997 with the assistance of its
new partner The Royal Bank of Scotland, as the
9
ibid
10
The Sunday Times, November 11, 2007

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original joint venture with NatWest Bank had proved to be unworkable. In this
new partnership, Clubcard Plus was scaled back in favour of Tesco Personal
Finance (TPF). Tesco’s Visa credit card, travel insurance and a high-interest
savings account, designed to appeal to current Clubcard Plus members as well as
the broader saving public, soon followed.

Today, TPF customers have the choice of buying any of sixteen different financial
products in a store, by phone or over the internet. In 2005, some 700,000 new
customer accounts were opened; 1.7 million people held a Tesco credit card and
1.4 million a Tesco motor insurance policy. In the same year, the company also
ventured into the mortgage market for the first time. However, TPF’s net profit
has declined by £39m in 2007 from £139m the previous year due to tough
market conditions.11

Tesco Telecom

In 2003, Tesco extended its range of retail services into telecoms by joining
forces with mobile operator O2 to launch Tesco Mobile, a Tesco-branded mobile
phone service. The 50-50 joint venture hoped to attract up to two million
customers within five years. Customers were able to claim Clubcard points on all
calls. Later in 2003, the mobile service was joined by a discount fixed line service
branded Tesco Home Phone, to compete head-on with British Telecom. A home
broadband service was also launched in 2004 along with digital music sales and
DVD rental services. Strong sales of handsets in 2006 combined with a 30%
share of new business, placed Tesco as the overall largest retailer of branded
pay-as-you-go mobile phones in the UK that year.12 Last year (2007) also
marked a milestone for Tesco Telecom as it moved into profit during the second
half.13 As of the publishing of the 2010 Annual Report, there are more than 2
million Tesco Mobile customers and over 100 phone shops in the UK.

Repeating the formula overseas

Growth in Europe

Tesco concentrated its efforts on the developing markets of four Central

European markets - Hungary, Poland, Slovakia and the Czech Republic - where
opportunities for growth existed through a combination of modest acquisitions,
usually re-branded as Tesco, followed by heavy investments in hypermarkets
carrying the Tesco brand (see Table 2 below).

Despite the recession, profitability in European markets only declined slightly as

a result of Tesco’s commitment to reducing prices and investing in new space.
There are plans to add 3.1m sq ft across the aforementioned 4 countries, Turkey
and the Republic of Ireland.

11
Annual Report 2007, p13.
12
Ibid. p14.
13
Ibid.

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Table 2
Tesco’s expansion into Europe

Sales New Planned

Number Year of
EUROPE area Stores openings
of stores entry
Sq ft. opened 2007/08

Czech Republic 84 4.1m 1996 49 24

Staff 11,786. Tesco’s business in 2007 grew by almost two-thirds and it is now one of the leaders in the market.
Conversion of 11 Carrefour stores is almost complete and some 13% of new floor space will be added this year.
Hungary 101 4.8m 1994 14 24
Staff 17,727. The overall sales grew but profit performance was below expectations in 2007, in large part due to
Government’s austerity measures. Out of 14 new stores, 10 were hypermarkets. Some 15% new space will be added
this year.
Poland 280 6.5m 1995 176 54
Staff 21,491. Tesco is making very good progress. The acquisition of the Leader Price stores from Casino which was
announced last July and completed in December, has accelerated the 1k (10,000 sq ft) format expansion and
contributed to a 37% overall space increase in Poland.
Republic of Ireland 95 2.3m 1997 95 48
Staff 11,087. The new 740,000 sq ft distribution centre at Donabate, North Dublin, opened in April 2007 amid strong
sales growth and improved profits.
Slovakia 48 2.5m 1996 11 17
Staff 8,061. The compact hypermarket format and a strong economy have led to growth in sales and profits. Tesco
introduced the 1k format this year, and has six trading with nine more planned this year. Some 15% space to be
added.
Turkey 30 1.1m 2003 22 49
Staff 3,469. Tesco now has 15 hypermarkets trading with the majority now outside its base in Izmir. The early
introduction of Express has gone well, with 15 stores trading, including three in Antalya. The first major distribution
centre at Yasibasi covering 400,000 sq ft opened in 2007.

Heading further east

Early in 1998, Tesco moved to establish a presence further afield in South East
Asia, beginning with Thailand followed by South Korea, Taiwan14 and Malaysia.

Table 3
Growth in Asia

New
Sales Planned
Number Year of Stores
area openings
ASIA of stores entry recently
Sq ft. 2007/08
opened

China 47 4.2m 2004 8 10

Staff 17,419. In September 2004, Tesco acquired a 50% share in the Hymall hypermarket chain through a joint
venture with Ting Hsin. Tesco trades mainly in Shanghai and the first stores in Guangzhou, Shenzhen and
Beijing (its first Tesco-fascia store) have opened well. Tesco’s new range of over 1000 Tesco own-brand lines
has been positively received.

14
Tesco’s discontinued operation in Taiwan made a profit of £18m for the year of 2007. It was
sold as part of a transaction with Carrefour to acquire its Czech business (Annual Report 2007,
p62).

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Japan 109 0.3m 2003 7 35

Staff 3,405. Following its acquisition of 78 convenience discount Supermarkets in the Tokyo area through C Two-
Network in 2003, Tesco acquired Fre’c, a neighbourhood supermarket chain of 25 stores, specialising in fresh
food in 2004. Retail market was subdued in 2007. Tesco is refining and developing the trial Express-type stores
into an expandable format.
Malaysia 19 1.9m 2001 9 7
Staff 5,820. Excellent progress in 2007, delivering 50% sales growth and moving to profitability. The Makro
acquisition helped achieve a near-doubling of space. Some 22% of new space to be added.
South Korea 91 5.1m 1999 30 51
Staff 11,932. Homeplus continued to do well in 2007. Some 1m sq ft was added. Most of the new selling area
came from large hypermarkets.
Thailand 370 7.5m 1998 151 162
Staff 29,538. Political uncertainty during the second half of 2007 dented Tesco’s progress. Nevertheless, Tesco
Lotus again performed well.

In September 2005, Tesco completed the £145 million acquisition of a 50%

holding in Ting Hsin’s Hymall business in China, which operates hypermarkets in
Shanghai and the North-East of China. Media reports continue speculation about
Tesco’s expansion into India although its ability to establish a presence there is
currently limited by Indian protectionism, which prevents foreign retailers from
operating in the country. Tesco’s joint venture talks with Indian conglomerate
Bharti collapsed in December 2006. Nevertheless, Tesco established an IT
service centre in Bangalore in 2005 to develop software for its IT division and
handle back office finance processes. They are now also supplying back office
support to Tesco’s recently launched Fresh and Easy chain in the US.

Tesco takes on America

News media at the end of 2007 gave extensive

coverage to the launch of Tesco’s Fresh & Easy
Neighbourhood Market stores on the West coast of
the United States in the Los Angeles area, as well as
San Diego, Phoenix and Las Vegas. Tim Mason, head
of American operations, is quoted as saying that
Fresh & Easy was based on the Tesco Express
approach in Britain; featuring fresh produce, alcohol
and an in-store bakery.15 While Tesco’s future
expansion plans in the US are not yet clear, the sizes of its Riverside distribution
centre and another one planned for Stockton, California, will allow it to open
some 1000 stores. Some analysts speculated that eventually Tesco might move
to the East coast. Tesco has noted that its intention is to commit £250 million in
capital to the US venture during 2008/09.

To keep costs low as well as to maintain quality, Tesco has developed an

extensive own-label range as well as its own manufacturing facility for ready-
made meals. It is believed that Tesco will undercut local rivals, such as Whole
Foods and Bristol Farms, whilst offering a wider range of products than Trader
Joe, a Californian chain.

15
Sunday Times, November 4, 2007

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Despite huge losses in 2009, mainly attributed to the recession, 2010 saw
Tesco’s efforts in America taking off, with an impressive 72.7% increase in sales.
Customers welcome the Fresh & Easy kitchen which provides fresh meals ready-
to-go. In response to feedback, Tesco has also added larger family packs and
lower-priced house brands for the American consumer, creating the message
that Fresh & Easy offers both high quality and low prices.

The economic downturn might turn out to be a boon for Tesco, with more
available freehold properties and decreased building costs. There are plans to
increase at a rate of one new store per week in the 2010/11. The company also
believes that losses have peaked now that the infrastructure is in place to
support continued expansion.

This case was originally written by Dr. Helen Peck. It has been adapted
by Professor Simon Knox and Dr. Aamir Khan, Lecturer, Cranfield School
of Management.
© Copywright Cranfield School of Management
April 2008. All rights reserved.

[Note: This version is an abridgement by Dr. Aamir Khan, Lecturer,

Cranfield School of Management, of the long case by Peck, Knox and
Khan]

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