Tesco Business Strategy Essays On Love

Sainsbury’s in Egypt, Wal-Mart in Germany, Best Buy in the UK and Marks & Spencer in mainland Europe. The examples are endless and tell the cautionary tale that overseas expansion for major companies is not always a success.

As well as the launch of its Fresh & Easy brand in the United States, one of the most famous examples is Tesco’s expansion in China, where it made its debut into what is now the world’s second-largest economy in 2004 under its eponymous brand.

Failure to launch

However, Tesco failed to make any significant headway in enticing Chinese shoppers through its doors, only managing to capture a very small slice of China’s grocery market, causing it to report years of losses from the operation.

Even an attempt to localise Tesco stores in China by selling live toads and turtles in Shanghai failed to drive sales significantly higher

Even an attempt to localise its stores in China by selling live toads and turtles in Shanghai failed to drive sales significantly higher, and it eventually decided to ditch its solo strategy and team up with a major local player.

In 2013, it announced that it was pulling its solo brand out of China and would merge its 131 stores on the mainland with the 2,986 outlets of China Resources Enterprise (CRE) under the Vanguard brand, leaving Tesco with a 20 per cent stake.

At the time, Frank Lai, chairman of CRE, said the deal would allow the group to gain access to Tesco’s retail expertise, while his side had relationships with the government and knowledge of the local market.

Late to the party

Kunal Kothari, an equity analyst at Old Mutual Global Investors, believes one of the main factors behind Tesco’s failure in China is that it launched relatively late in 2004, behind rivals such as Wal-Mart, which were able to use their first mover advantage to pick better and lower-cost store locations.

According to Mr Kothari, Tesco was also mistaken in its belief that it could win over the Chinese consumer with its Clubcard, which had proved to be extremely popular in the UK.

“Tesco attempted to replicate its tried-and-tested UK hypermarket model by rolling out massive stores very quickly and hoped that Clubcard would prove to be a competitive advantage again as it had been in the UK,” he says.

“This was not the case as Chinese consumers prefer to shop around and often carry multiple store cards. This misunderstanding of the market doomed the economics of these large stores from the outset.”

Misunderstanding the market

Research carried out by Warwick Business School in an Asian market with similar demographics and purchasing power to that of China’s large cities, found that consumers were ill-suited to the Clubcard approach, which Tesco described as its “secret weapon” in its bid to conquer the country.

Almost all consumers participated in at least one loyalty programme and 63 per cent of loyalty participants had cards from four or more retailers, according to the research.

They believed larger choices gave them more power of control, more motivation to make decisions, more chances to have programmes which suited their needs and a more satisfying shopping experience.

Maureen Hinton, group research director at Conlumino, a retail consultancy, agreed there were probably two main reasons for Tesco’s failure in China – timing and not having a full appreciation of the market.

“It was up against strong competition from well-known local brands in the best locations, with established relationships with suppliers and a thorough understanding of the Chinese consumer’s buying habits, as well as a rapid take-up by consumers of online shopping,” she says.

As for the joint venture that was announced back in 2013, it has taken its toll on state-controlled CRE. It reported an underlying net loss of $102 million last year, prompting analysts to speculate it could be several years until the joint venture bears fruit.

This was its first annual loss in about 20 years and CRE has itself cautioned it may take three to five years to turn the business around. Some of Tesco’s 131 supermarkets may be shut down in the process.

On whether Tesco will have another stab at China again on its own, Mr Kothari does not believe it would consider re-entering the Chinese market on its own at the current stage of its recovery, but said there are valuable lessons here for other retailers considering attempting to crack China.

“The painful lesson UK retailers have learnt is that China is large, complicated and a very capital-intensive market to crack. You can’t just execute a text-book store rollout story in a market of 1.3 billion and direct it from the UK,” he says. “Local knowledge is key, therefore partnering with strong local players and suppliers is the best route to success.”

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An example of aligning the Tesco.com digital marketing strategy with retail growth strategy

I was recently speaking at the Internet Retailing Expo and when attending, I noticed Tesco announcing their online marketplace. This has now quietly soft launched in the UK.

This interested me as yet another sign of Tesco responding to online opportunities, in this case by opening a marketplace to sell products from other retailers as part of its Tesco Direct offering. Currently marketplace sellers aren’t explicitly featured as in Amazon product listings, instead, it’s folded into search results for some products:

It looks as if Tesco are testing how to best integrate the marketplace approach now, as part of a soft-launch.

Tesco marketing strategy - 7 core principles for growth

I was also interested that at the show Tesco talked about how the marketplace supported Tesco's core business strategy to support long-term growth. I thought it would be useful to present as often examples of business strategy are not usually published in annual reports and the like and it’s useful to learn.

Rather than creating a new strategy each year, Tesco has a series of common strategy elements that it adds to each year. The online marketplace initiative is one example of this.

It's well-known that Tesco is not currently delivering the financial performance it has previously, the original strategic principles were set out in 1997 when Tesco set out a strategy to grow the core business and diversify with new products and services in existing and new markets (some of you will recognise these strategic goals as part of the review using the Ansoff matrix). It's a good example of strategy development because of the focus on where growth is going to come from.

Since then, this strategy enabled Tesco to grow by entering expanding markets in the UK – such as financial services, general merchandise and telecoms – and new markets abroad, initially in Europe and Asia and more recently in the United States. The strategy now has seven parts and is refined to apply to our five business segments – the UK, Asia, Europe, the United States and Tesco Bank.

Here I will outline the main elements of the Tesco business strategy showing, where relevant, how it is aligned with digital strategy. This is a classic method of developing a digital strategy - to score different strategic options for digital marketing based on how well they align with the business strategy. Of course many companies won’t have such a clearly defined strategy which is another reason for presenting this example:

Growth strategy 1. To grow the UK core

The UK is still the largest business in the Group and a key driver of sales and profit. There are many opportunities for further growth and so growing the UK core.

Tesco Direct and the latest marketplace initiative are clearly aligned with this - Tesco has seen the growth of Amazon and eBay marketplace and is responding to these.

Growth strategy 2. To be an outstanding international retailer in stores and online

This was another the original goals from 1997 - to be a ‘successful international retailer’. In 1997, international businesses generated 1.8% of the Group’s profits, today they represent 25%.

Notice that the online channel is explicitly mentioned as supporting this strategy.

We can expect that if successful in the UK, the marketplace concept will be rolled out in other markets too.

If you want to find out more about how Tesco supports this strategy through technology I recommend following Nick Lansley’s Tech for Tesco blog. Nick was originally involved in the creation of Tesco.com and these days looks at emerging technologies such as mobile.

Growth strategy 3. To be as strong in everything we sell as we are in food

The Tesco Direct and marketplace strategy also supports this

Growth strategy 4. To grow retail services in all our markets

Non-food services like Telecoms and Banking now account for 16% of Group total although these are mainly implemented in the UK. Tesco now say that as many of their international businesses are established, well-known brands in their local market, they aim to grow these further.

Growth strategy 5. To put our responsibilities to the communities we serve at the heart of what we do

This was added in 2007; it’s apparently a response to negative perception about the brand an a corporate social responsibility push. There’s little evidence of this being supported online at a local level - the online presence is still overwhelmingly commercial. However Tesco does run wider CSR initiatives such as the Tesco charity of the year.

Growth strategy 6. To be a creator of highly valued brands

Tesco say: “Our brand has evolved from a logo above a few stores in the UK to a multitude of store, product and service brands across the world. Building brands gives our business more meaning with our customers. On one level, this relates to our Retail brands such as the Tesco brand itself, but it also refers to our Product brands such as F&F and Technika and our Pillar brands such as Finest and Value”.

You can see this relates to development of sub-brands to fit specific market needs. Finding methods to add value to brands is at the heart of all effective digital strategies, so we can expect Tesco expect their brand managers to use digital in this way.

Growth strategy 7. To build our team so that we create more value.

It seems that by team, Tesco refer to leaders to help build the team and achieve growth rather than building a team of all employees. Again, there’s little evidence of this push online.

So, that’s the summary of the Tesco business strategy, at least the public-facing strategy. I think it shows the need for clarity in strategy and my main point, that digital strategy must be shown to support business strategy to get the recognition and resourcing it needs to be effective.

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