TESCO Background Information:
Tesco is a British multinational grocery and general
merchandise retailer, 8th largest retailer in the world,
headquartered in the UK with about 6800 stores worldwide. Out of which about
3900 stores are located across UK & Ireland with a market (UK) share of
about 30%.
Tesco was started in the year 1919 by John Cohen in London as
a small shop. They opened their first store in 1929, since then it has grown to
be a multinational company with presence in about 12 countries like India,
Hungary, Czech Republic, Slovakia, Poland, Japan, US…
The phenomenal success of Tesco is attributed to number of
factors like Visionary leadership, Organic growth, use of technology and
Acquiring successful brands and branding most of them under one brand (TESCO).
Since 1950s Tesco has acquired about 30 companies and have integrated them
under the Tesco umbrella effectively.
In the last couple of decades Tesco revenue has grown from
£16b to £64b. In the Year 2019 Tesco had a market cap of £25b and revenue of
£64b with net profits of about £1.4b
Some of the businesses Tesco has diversified in the last 2
decades are Banking, Mobile services, Retail Consulting, Restaurants &
Wholesale.
Characterization of the situation &
theories:
Since the beginning of Online shopping revolution, “The
Amazon Effect” most of the retailers across the world has faced tough
competition and had to strategize their Business model around Online shopping
services as one of their main facets. As per the record, Tesco was the first
retailer in the world to offer online shopping services in the year 1995 but
since then the landscape has changed drastically as there are many disruptors
in the market.
The landscape is now filled with new disruptors like Amazon
& Ocado (New market disruptors) who are competing against the traditional
retailers like Tesco.
Our case here addresses the last 10 years of Tesco, how as an
Incumbent – Tesco made decisions and actions to overcome the disruptions and
maintain its Strategic position through its digital transformation initiatives.
Tesco had number of digitization initiatives like a dedicated website Tesco.com,
use of Social media for advertisements, using latest technologies in stores and
providing seamless experience for its customers by introducing Self checkouts,
scan as you go devices, digital wallets, Tesco Pay using mobile phones. Also,
in the UK at Gatwick Airport they have introduced “Tesco Virtual stores” an
easy way for the busy travellers to order Food & other Groceries.
This new avatar of Tesco as a digital retailer is mainly due
to the competition from other traditional retailers from Germany like ALDI
& LIDL – who follow “Stack high & sell at Low margins” which is mainly
a low-end disruption. Players like Amazon have created a much bigger market (by
selling “anything and everything” – The Long Tail revolution) than Tesco by
mainly targeting the non-consumption in the market, which is mainly a New
market innovation.
Aligning with Innovation and Disruption
With this competition Tesco was forced to be innovative both
on Physical (store!) & Online front – on quality, affordability &
convenience. Hence as an Incumbent Tesco’s response to this competition would
be mainly be termed as “Low-end disruption” using its online presence effectively
and matching the price with other retailers in Food Grocery, Electronics,
Gaming & other general merchandise by being affordable at the same time
convenient. Also, the use of technology in-store is mainly sustaining
innovation providing its customers with Seamless interaction, easy to shop
experience, simplicity & convenience
Let’s understand the “Strategic Questions” to which Tesco are
trying to assess their business
1.
What
innovations should we utilize to grow market share and better meet the needs of
customers? (Primary question)
2.
How
can we defend against disruption and learn to harness technology to increase
our rate of innovation? (Secondary question)
Discovering Customer Jobs to be Done - JTBD
The job to be done in this case is “help me to shop
quality food & grocery with convenience & at affordable prices”.
Based on this criteria Tesco has organised its physical &
Online shops to help customers to buy products.
Physical store: The products are clearly labelled
with price and also the aisle is organised based on product category, Geography
& Age. Using the self-check out has improved the customer service as well
the scan as you go service has helped customers to decide on their spending
thus helping customers to have the choice to go for a value product or for an
expensive product.
Online Shopping: Tesco’s website is quite well
organised and its easy for customers to search the products online. Click to
collect service has given flexibility to customers to schedule their deliveries
as well some of the online offers are much better than the rivals including
Amazon. At the online shop the number of products Tesco sell has increased year
on year thus helping customers to have a choice of One stop shop for all their
needs (approx. about 50000 Products)
Both Physical stores and the online shops are organised
around the “Jobs to be done”. But as the Online shopping is increasing day by
day due to the current ongoing Pandemic (CoVid-19), the pressure on online
demand increased, but Tesco responded by scaling their online systems and
responding to the customer demand, which is a good example for their “Emergent
Strategy”. I believe during the last year the relevance of Tesco as a brand has
made a significant impact to local communities across UK by their reliable,
safe online service as well at the physical stores.
Organizing for Innovation
As Tesco’s competitive edge lies in balancing both its
Physical & Online shop presence, it should clearly define its resources,
Processes and Profit formula (RPPs) for both separately. Tesco cannot have the same RPPs for both
Physical & Online stores, as the online market is more competitively fierce
compared to physical store presence where they have to absorb the overhead
costs like rental space, Logistics and other store overheads.
Initially when Tesco started its online operations (late 90s
& early 2000s) the RPP was not distinct. The online orders were fulfilled
by something called “Dark Stores”, where in the instore employees (Tesco
associates) used to run between the aisles of a big Tesco store to fill the
baskets and then load the truck to deliver to its customer homes. This was
Tesco’s “Deliberate Strategy”. This model was good initially as it was
inexpensive to launch and helped Tesco to scale up quickly and they rolled this
to roughly about 330 Stores nationwide.
Tesco didn’t have dedicated resources or efficient processes
to cater to the increasing online demand. This deliberate strategy to use the existing
stores (Dark Stores) was a mistake
1. Each store was able to fulfil only
about 250 orders per day (labour intensive), which was nowhere near the
competition.
2. The stores couldn’t handle high
volume orders due to space constraint and less inventory in their back rooms.
(No dedicated warehouses catering to Online orders)
3. Also, the instore shoppers were not
satisfied with this as they had to compete for the goods with customers who
ordered online
As we have seen in the case of Nypro, due to lack of clear distinct
RPP they couldn’t succeed in their initiative with Nova-Plast. Similarly, Tesco
understood this problem and they managed to recognise this and adopted to this
new emerging opportunity (Emergent Strategy) by clearly allocating resources,
designed processes like having dedicated warehouses catering to their Online customers.
Even though Tesco’s Digital transformation initiatives are
interwoven between both of its physical & online, but the allocation of
resources, Processes and Profit formula for Online is very distinct and clear. The
warehouses catering to Tesco stores (physical) & online orders are
currently different except for remote areas where they still use “dark store
strategy” to maintain profitability.
Maintaining a Disruptive Scope
Tesco in the last 10 years have made significant progress in
Online sales. Now the customers can access Tesco.com using computer, tablets,
Smart phones and also Virtual shops at major airports and subways, thus making
convenience for its customers a top priority.
But they are not resting on their laurels yet…Tesco is “constantly
experimenting” on their offerings both at their Physical and online stores
using latest digital technologies, thus maintaining its disruptive scope. Some
of its initiatives are as below
a) Click & Collect:
Within many urban regions of UK, Tesco offers customers to click & collect (order online and pick-up orders at a local Tesco drive through store). Tesco also offers home delivery with one-hour time slot.
b)
Clubcard
Tesco after creating the dedicated RPPs to the raising need
on online orders, they started using other technologies like Clubcard through
which they collect customer data and profile them for different shopping items.
With this valuable customer data, Tesco has managed to improve their Inventory
and stock items which runs faster and thus making their operations effective.
c) Scan as you shop
Tesco started providing digital experience to its instore
customers by helping them to scan as they shop, giving the flexibility to
customers to choose and spend as per their budget. This attracted many
customers to try this new digital service.
d) Social media
Tesco started effectively using Social media sites like
Facebook, Instagram & Twitter. They promoted their products to customers
based on the individual preferences and also for any customer feedback, they
rewarded customers with Loyalty points which can be used to buy products.
e) Digital Warehouses
To increase the speed of delivery to its online customers,
Tesco have automated most of its Warehouses using Digital technologies like
Labelling, Scanning and to maintain Inventory.
These are some of the initiatives which Tesco has started in
the last decade to maintain its disruptive scope by trying new experiments and
adopting to the changing customer behaviour also in many ways Tesco is changing
the customers buying pattern & behaviour by being the first retailer in the
UK market to introduce new technologies.
Tesco have developed an App called “Tesco Access” with
Microsoft. This app has helped customers to access Tesco stores online via
wireless and mobile devices.
Conclusion & Recommendations:
Tesco in the last decade constantly improved operational performance and the customers’ shopping experience both offline and online using digital technologies. Since the launch of its online flagship store – TESCO.COM have fulfilled as much as about 300million orders.
Due to Covid-19 pandemic the number of online orders has
increased as much as 1million per week with the scope of increasing by about
20% to 1.2million in the coming weeks, Ref [2]
Tesco.com revenue for 2019 was about $2.5billion in the UK and
the worldwide sales was about $4.3billion, Ref [3] & Ref [4] with a scope
of increasing by about 20% YoY. As per
financial times report - Tesco to create 16000 permanent jobs due to projected
online sales growth by 2/3rd to £5.5b, Ref [5].
Figure 1: TESCO.COM revenue in the UK -2019
Through the lens of “theory of interdependence” &
“Modularity”, it is noted that Tesco follow a holistic approach through its
multichannel offering. Even though the RPPs are clearly defined for its
Physical and Online businesses the success of Tesco lies in its integration of
both its offline & Online operations & point of contacts as we have
seen in “Click to Collect” model. The competition is getting modular like Ocado
focusing on Grocery market, Argos focussing on General merchandise & Amazon
on “Anything & Everything”. But based on JTBD theory, Tesco’s strength lies
in its integration of both its In-Store & Online operations and provide
customers flexibility, touch and feel opportunity also the convenience.
Competition is still at large and a coherent strategy is
essential for Tesco to take on this challenge with the Elephant in the Room
(Amazon) …also Ocado another online retailer had been recently valued higher
than Tesco (Ref [6]), Ocado has merged with M&S. Also, Amazon has tied up
with Morrisons.
With these external challenges Tesco should continue to give
Tesco.com more freedom to experiment based on the strategic questions we posed
earlier.
1.
Usage
of technology should be key “Clubcard and big data analytics” / “Warehouse
Automation” initiatives to improve online operations and deliveries.
2.
Low-end disruption – to stack products high
and sell at low margins online.
3.
Create
a focussed department to understand the Digital revolution and adopt
technologies accordingly.
4.
Enhance
its Digital marketing operations with focus on JTBD.
5.
Improve
skill sets of its employees to use and help customers instore as well to handle
customer queries online efficiently.
6.
As
an Incumbent Tesco should aim to be “agile” in understanding changing Retail
landscape and flexible to alter its strategies.
Retail landscape is quite dynamic and changing very fast due
to availability of new technologies. Going forward the success of TESCO.com
lies in understanding the JTBD and employing the right technologies & right
strategy (balance of deliberate & Emergent Strategies) to skate towards the
money/success /profit.
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References:
1.
https://www.investopedia.com/articles/markets/122415/worlds-top-10-retailers-wmt-cost.asp
2.
Weekly online orders - https://www.tescoplc.com/news/2020/tesco-serves-more-than-one-million-online-grocery-orders-in-a-week/
3.
https://ecommercedb.com/en/ranking/gb/food-personal-care => Online Sales figure UK
4.
Worldwide sales extract – Tesco.com – year 2019
& Forecast for 2020 & 2021 – Ref [3]
5.
Jobs
created by Tesco due to Online sales increase => https://www.ft.com/content/1821dca8-5f82-42e6-b136-4977240d7ce4
6.
Competition -
https://www.bbc.co.uk/news/business-54352540
(Ocado & M&S partnership, Amazon & Morrisons partnership)
