Chapter 10.1 Strategic Planning: Tesco - Activity
Tesco is a success story - it was the first UK business to make £2 billion in profits when it
announced the feat early in 2005. Despite this, the share price fell when its results were
announced. Why?
Task
This Activity will provide you with a review of the growth of Tesco over the last 80 years. Use
the information to present a report, using an appropriate format, to assess the future strategic
opportunities open to the supermarket giant.
Tesco opened its first store in Edgware, North London in 1929. It gets its name from the
combination of the founder of Tesco, Sir Jack Cohen and a partner in a firm of tea suppliers
who Cohen worked with, T.E. Stockwell. Since that time, the company has grown and has
reflected the changes in retailing. Prior to the Second World War, most grocery stores served
customers but self service stores were on their way and, once introduced, allowed stores to
grow bigger to become the superstores we know today.
The company floated on the stock exchange in 1947 with an initial share price of 25p. Tesco
became a familiar name on the high streets of the UK and whilst it was able to take advantage
of commercial economies of scale through bulk purchase of supplies, the existence of resale
price maintenance restricted the ability of Tesco to be as competitive as trading conditions
now allow. The system allowed suppliers to insist that retailers sold their products for a set
price. Tesco used other strategies to build customer loyalty including the use of stamps that
could be exchanged for cash or goods.
The Tesco strategy up to this time was encapsulated by the title of Cohen's autobiography,
'Pile it high and sell it cheap', but the increasing affluence of customers and the changing
needs meant that Tesco altered its approach and moved into opening out of town stores with
more attractive interiors. Such refurbishment was also carried out in the existing stores and
with the onset of selling petrol at some of its stores it broke the £1 billion turnover level in
1979.
The 1980s saw a continuation in the growth of new stores and also the development of new
initiatives. In 1985, Tesco announced its Healthy Eating options with nutritional information
and advice on some of its own branded foods. By the 1990s, the move to overtake the other
major supermarkets was well under way. The emphasis was on finding new ways of satisfying
consumer needs and building customer loyalty. A range of new services and facilities were
introduced, including Tesco Metro, a store concept aimed at the high street customer but
offering the benefits of a large supermarket. In some respects, this was Tesco returning to the
high street after selling off many stores in the 1960s and '70s in the move to join the out-oftown shopping trend.
Strategy
"We have continued to make strong progress with all four parts of our strategy - a strong UK
core business, non-food, retailing services and international - by keeping our focus on trying
to improve what we do for customers:




making their shopping trip as easy as possible
constantly seeking to reduce our prices to help them spend less
offering the convenience of either large or small stores
bringing simplicity and value to complicated markets"
Source: Tesco Preliminary Results 2004/5
A similar move saw the advent of Tesco Express, a petrol station with a supermarket providing
local shoppers not only with petrol at competitive prices but also a range of essential grocery
items. This type of approach also extended to the Tesco Extra stores where both food and
non-food items were sold. This proved a direct challenge to some of the larger Asda
supermarkets that had sold non-food items like white goods (washing machines, fridges, etc.),
gardening equipment, kitchenware, clothing, CDs and so on for some time. Sainsbury's
meanwhile kept its food and non-food services separate with the development of the
Homebase chain.
Tesco's Turnover, Number of Stores and Selling Space, 2001-2005
2001
Turnover (£m)
Number of stores
Selling space (000 sq ft)
2002
2003
2004
2005
20,800
23,400
26,004
30,814
33,974
907
979
2,291
2,318
2,365
28,362
32,491
39,944
45,402
51,772
Source: Tesco Annual Review, 2005 p. 2 [PDF, 3.2 MB]
In 1995, Tesco introduced the Clubcard, a loyalty card for customers who were
able to collect points from purchases and use them to exchange for goods. It
also gave Tesco a massive amount of information about the customers who
visited its stores, what they bought, the regularity with which they bought them
and how they responded to the in-store promotions and special offers.
Sainsbury's dismissed the card as a gimmick but were soon to lose out on sales
to Tesco and in the latter part of 1995, Tesco became the market leader with a
market share of 17%.
Throughout the 1990s, Tesco introduced further measures to improve its
service and the range of goods and services it offered its customers. This
included such things as making staff available to help customers pack bags and
take them to the car, having a policy of opening checkouts if there was more
than one person in a queue, linking in with the Airmiles group in relation to its
Clubcard and the provision of facilities such as baby changing units, restaurants
and coffee bars.
Apart from the basic services it was providing, it was building on the range of products it was
offering. It opened pharmacies in some stores, developed a range of financial services
including a Visa card, mortgages, insurance and a bank account all in conjunction with the
Royal Bank of Scotland. The expansion of the non-food side included offering entertainment
goods such as TVs, DVD players and home entertainment systems as well as white goods,
household products, clothing and so on. Its well-publicised battle with Levi's over the selling of
jeans at prices considerably below that of Levi's outlets was lost but not before Tesco had
presented itself as a champion of the customer in its battle to bring quality and value for
money to the retail supermarket scene.
In the new century, further developments pushed Tesco's profits higher still; it introduced
shopping via the Internet and home delivery, Internet service provision, and a range of foods
reflecting different qualities from the 'Value' range which had been introduced in 1993 through
to its 'Finest' products as well as a brand called 'Free from' for customers with special dietary
needs.
Tesco's Summary Profit and Loss Account, 2005
2005
(£m)
2004
(£m)
Sales at net selling prices
37,070
33,557
Turnover including share of joint ventures
34,353
31,050
(379)
(236)
33,974
30,814
(31,845)
(28,925)
Employee profit-sharing
(65)
(57)
Integration costs
(53)
(45)
Goodwill amortisation
(62)
(52)
1,949
1,735
130
97
53
(9)
Profit/(loss) on ordinary activities before interest and taxation
2,132
1,823
Net interest payable
(170)
(223)
Profit on ordinary activities before taxation
1,962
1,600
Underlying profit before net profit/(loss) on disposal of fixed assets,
integration costs and goodwill amortisation
2,029
1,708
Less: share of joint ventures' turnover
Group turnover excluding value added tax
Normal operating expenses
Operating profit/(loss)
Share of operating profit/(loss) of joint ventures and associates
Net profit/(loss) on disposal of fixed assets
Source: Tesco Annual Review, 2005 p. 42 [PDF, 3.2 MB]
Tesco has also taken steps to expand abroad. It has acquired stores in Japan, China, Taiwan,
Poland, Slovakia, Ireland, Turkey, South Korea and Malaysia amongst others and has links
with Safeway Inc in the United States. It continues to try to improve the quality of its
customer service provision and the range of goods and services it is offering. It did make a bid
to takeover the Safeway group when Morrisons initially put in a bid. However, it was unlikely
to ever succeed in this given the market share it now has in the supermarket business.
Given this massive growth, Tesco announced a profit of over £2 billion for 2004 - the first UK
supermarket to break this barrier. The fall in the share price reflects what analysts expect to
happen in the future rather than what has happened in the past. So where does Tesco go from
here? Have they reached a peak from which there is now only a downward trend or are there
strategies that Tesco can put in place to cement their position in the market and continue to
expand in the future?
Tesco's Summary Five Year Record
Year ended February
Group sales
2001
(£m)
2002
(£m)
2003
(£m)
2004
(£m)
2005
(£m)
22,585
25,401
28,280
33,557
37,070
18,203
19,821
21,309
24,760
27,146
1,737
2,181
2,664
3,385
3,818
860
1,398
2,031
2,669
3,010
20,800
23,400
26,004
30,814
33,974
1,100
1,213
1,297
1,526
1,694
70
90
141
184
218
4
29
71
122
152
1,174
1,332
1,509
1,832
2,064
11.0%
10.8%
10.2%
10.4%
11.5%
Turnover excluding VAT
UK
Rest of Europe
Asia
Underlying operating profit
UK
Rest of Europe
Asia
Return on capital employed
Retail statistics
UK
Number of stores
Total sales area (000 sq ft)
Turnover per full-time equivalent
employee (£)
Weekly sales per sq ft (£)
692
729
1,982
1,878
1,780
17,965
18,822
21,829
23,291
24,207
159,678
163,443
160,157
162,459
166,534
21.75
22.43
21.86
22.48
23.89
215
250
309
440
554
68
102
152
194
273
10,397
13,669
18,115
22,111
24,928
International
Number of stores
Number of hypermarkets
Total sales area (000 sq ft)
Source: Tesco Annual Review, 2005 p. 44 [PDF, 3.2 MB]
Market Share of the Top Four Supermarkets (%)
1998
1999
2000
2001
Sep 2003
Apr 2005
Feb 2006
Tesco
22.9
23.4
24.2
22.8
29.8
26
30.6
Sainsbury's
19.8
19.1
18.6
15.8
16.2
15.9
16.3
Asda
14.1
14.8
16.2
12.4
17
16.5
16.6
Safeway
10.2
10.0
10.1
9.3
10
-
-
-
-
-
-
6
12.2*
11.1*
Morrisons
* Follows Morrisons' takeover of Safeway
Sources: BBC News and Yahoo UK
Tesco's Share Price (July 2004 - May 2006)
Price (pence)
Jul 04
262.5
Aug 04
255
Sep 04
265.5
Oct 04
289
Nov 04
290.25
Dec 04
310
Jan 05
321.75
Feb 05
309
Mar 05
308.5
Apr 05
317.25
12 Apr 05
318.5
14 Apr 05
328
20 Apr 05
312.75
27 Apr 05
306
21 May 05
311.75
24 May 06
316.93
Source: London Stock Exchange