UK marketing activities and private label brands at Tesco

Tesco is the leading grocer in the UK, with a 28.15 share, putting it ahead of ASDA (16.6%), Sainsbury's (16.1%) and Morrison's (10.8%) (Statista, 2015). The company sells a wide variety of goods, including non-grocery items, and it does so with stores in a wide variety of formats. The competitive environment is intense, with low-cost providers aggressively targeting market leaders like Tesco in a bid to gain market share from cost-conscious consumers (Yeomans & Armstrong, 2015). Tesco's strategy, as the market leader, is to appeal to as broad an audience as possible. As part of this strategy, the company has a number of different initiatives, including a range of own branded-goods. These include Finest, Organic and Healthy Living. Organic is tied into the drive to appeal to customers who are less price-sensitive, as purchasers of organic products have demonstrated a willingness to pay a premium for a specific attribute, in this case organic production. Organic is a growing segment of grocery markets worldwide, and the UK is no exception. This paper will focus on the Tesco Organic label, and the marketing thereof, in the context of Tesco's overall strategy.

Business Model

In its 2015 strategic Report, Tesco describes its business model as to "regain that total focus on serving customers" (p.8). To that end, the company defines this as "listening to, understanding and reaching out to customers to create the best possible offer," "working with growers and suppliers to make great products" and "working across different channels to get those products to customers in the most convenient way possible." The company alludes to a fresh start, which is essentially a recognition that it has been losing market share because other companies have been more responsive to the needs of customers. This can be operationalized in many ways, but one of which is responding to trends in the market.

The case for own-brands is a strong one in the grocery business. Stores typically offer own-brand products at prices below those of national brands. The goods in question are typically staple goods that are either undifferentiated or poorly differentiated. There are numerous producers, and customers are highly sensitive to price, with little to no brand loyalty. When grocery stores began own-branded lines, those were usually for product that fit this model in a classic ways --tins of kidney beans, bags of rice, cola, and other similar products. However, own-branding has become more sophisticated over the years. Clothing stores will work with specific designers for house branded goods that are differentiated. Something similar has occurred in the grocery business, for example a store might have a proprietary line of signature sauces that are unique to other products in the market, but are still own-branded goods. The rise in private label groceries has occurred in direct response to consumer demand for quality goods at a lower price (Nielsen, 2014).

In general, private labels are viewed by consumers as a good alternative to name brands, offer lower prices, and good value for money. In the United Kingdom, private labels account for an estimated 41% of the market, a share that ranks 2nd in the world only behind Switzerland's 45%, and is much higher than most OECD countries (Nielsen, 2014). For Tesco, the implication is simple -- to meet the needs of consumers it needs to offer a wide range of goods as private labels, in order to ensure that consumers perceive Tesco as a place to get value for money. The best goods for private label are those with high price sensitivity and high purchase frequency. Products such as milk are often cited as the ideal for private labels -- and milk just happens to also be a popular organic product. In general, when differentiation is low, price sensitivity increases and the opportunity for private labels also increases.

SWOT

Tesco has a number of strengths on which to build its Tesco Organic private label strategy. Tesco is the biggest grocer in the UK by market share, and is not seriously challenged for this positon. This size allows it certain advantages. First, Tesco has economies of scale in purchasing. This is a distinct advantage in private label goods, as Tesco can negotiate lower prices and therefore offer its private label goods for prices lower than other stores. Alternately, Tesco can deliver higher quality goods. Specific to Organic, Tesco may find itself in a position to effectively corner the market on the supply of certain organic goods by virtue of its buying power, which could give it a monopoly on those particular organic goods. So the company's sheer size allows it to offer a broader range of goods, and likely at lower prices, than competitors can offer.

Tesco's size also gives it two other important strengths. First, the company has the best footprint. Tesco has more square footage than its competitors do nationwide, and it has stores in a variety of formats. This provides Tesco with superior access to customers, something that other companies have struggled to deal with. Tesco has smaller stores on high streets to access urban markers, and larger stores on the outskirts that help it to access larger suburban markets. All told, the footprint means that if Tesco's offering is of equivalent enticement to the competition, Tesco will be able to draw in more customers, because its stores are more likely to be closer and more conveniently situated. The company's size also means that it has advantages in terms of financial capabilities. According to the 2014 Annual Report, Tesco has ?2.1 billion in cash on its balance sheet, something that gives it considerable financial cushion. That allows the company to take risks, and make strategic investments where needed; Tesco has no meaningful financial constraints to increasing investment in the Tesco Organic line.

In terms of weaknesses, one that has emerged in recent years is that Tesco fits strategically in the middle of the grocery business. The private label Organic business combines two elements -- consumers who seek organic goods and are willing to pay a premium for them, and consumers who seek low prices. Tesco faces some competition in the high end, from companies like Waitrose, but ultimately most of its competition at present is coming from the low end, where Aldi, Asda, Iceland and others are winning market share by offering very low prices to consumers, leveraging the bargaining power of their very large international companies (Yeomans & Armstrong, 2015).

There are several opportunities for Tesco, however. The company still has the biggest market share, and that means two things. First, it means that there is a significant captive audience it can leverage. Tesco can place renewed emphasis on Tesco Organics and induce this captive audience to switch from basic product lines to the organic one. The second thing is that with its large footprint, Tesco is well-positioned to draw in new customers, if it can demonstrate that it has the ability ot meet their needs. Organics shoppers in particular likely are loyal to a small handful of stores, none of which even come close to the footprint that Tesco has in the marketplace. If Tesco can offer organic staples at lower prices, it can increase its share of the organics market. This is a significant opportunity because the organics market in the UK is growing. While the conventional grocery market has struggled with price wars, the organic market has continued to be a growth business, up 4% in 2014 to ?1.89 billion (Smithers, 2015); it is a niche market, but a growing one.

That said, there are also a number of threats in the market. First, Tesco's bargaining power does not necessarily best that of some of its main competitors. Asda, for example, is owned by Walmart, which has bargaining power vastly superior to that of Tesco. That company has stated a strategic objective of being a major player in organics, which puts Asda directly against Tesco in this initiative (Martin, 2014). Aldi is not as large as Tesco, but also has substantial bargaining power, enough to impact the organic private label market should it so desire.

A further threat specific to this line is the availability of organic food. Most food produced is not organic, so if three major grocers all try to increase their shares, they may run into supply constraints. While Tesco has the buying power to monopolize the market in any one organic product, so do Aldi and Asda. Supply constraints can also create a situation where Tesco's marketing creates demand that the company is unable to meet. Waitrose, while a much smaller competitor, is much stronger in the organic market. Its sales of organics increased in 2014, while Tesco's fell (Smithers, 2015), indicating that Tesco ultimately lose share to Waitrose in this market, perhaps a reflection that organic buyers prefer the overall offering of Waitrose, which is a somewhat posher presentation overall. So on a couple of different fronts, including market perceptions and supply constraints, competition is a threat to Tesco in its bid to improve sales of Tesco private label organics.

Competitive Situation

The competitive situation for Tesco Organics is that it presently has been losing share. While major competitors are the biggest threat, the current competitive situation is more than buyers of organics tend to be luxury buyers, and prefer shopping at stores like Waitrose or specialist organic shops. The mainstream organic buyer still exists, but Tesco has failed to differentiate itself with this market, which is what the recommended marketing strategy will seek to remedy. Most stores offer some sort of private label organics line, but none are especially comprehensive in the way that Tesco seeks to be. This is an opportunity that Tesco can exploit.

Presently, markets, Waitrose are established players, but the strongest growth in the market is coming from the discount outlets. Lidl and Aldi have increased their share of the organics market by around 20% in 2014, the fastest growth rate in the industry, and both have a long-established presence in this sector in Europe (Smithers, 2015). What this means for Tesco is that it will need to compete on price with those companies, but will also need to find a way to differentiate itself from them in order for the consumer of organic products to respond positively to Tesco Organics' new initiative. A further competitive threat comes from Ocado, which sells online. That company saw its organic sales increase by 14% (Smithers, 2015). This again hints at opportunity for Tesco, as Ocado likely sells to people who lack a reliable local source for organic goods, something Tesco is unlikely positioned among UK grocers to remedy.

Segmentation, Positioning and Targeting

While Tesco overall appeals to a broad range of consumers, the organic market is narrower. Yet, this market can fit within the scope of Tesco's appeal. First, segmentation will be done on the basis of psychographics and behavior. The Tesco Organics target is somebody that is a soft organic buyer. This buyer is interested in organic products, and expresses a desire to buy organic, but ultimately only buys organic sometimes, and only certain products. For example, the buyer may have read something about milk, and decided to buy organic milk, but does not buy exclusively organic goods. This buyer is critical to the organic market for two reasons. First, the more serious, dedicated organic buyer may not be a Tesco shopper -- evidence suggests that this is the case. The target market initially will be among the captive audience -- the people who already shop at Tesco. The strategic objective will be to convince existing customers to purchase organic goods more frequently.

The soft organic buyer fits well with the current Tesco customer base. They are interested in organic products, but not necessarily willing to go out of their way to buy them, nor will they pay a substantial premium to do so. Yet, this is a customer type that in general believes organic products are healthier, buys them occasionally, and is receptive to the idea of buying more if they can still obtain value for money. Tesco Organics, as a private label, offers these customers the opportunity to trade up to organic products with little opportunity cost. The customer can still shop at the same store, and only spends slightly more than they otherwise would. For example, if a tin of Tesco kidney beans is 25p, and organic ones are 40p, that is only a different of 15p. Most people within this target market can be convinced to spend that; on aggregate they might add five pounds to their grocery bill over a large variety of staple goods.

The first target market for this initiative, demographically, will skew towards younger, educated consumers. There are a couple of reasons for this. First, such consumers likely have a little bit more disposable income, but as younger people not that much more. Second, younger consumers are the most likely to buy express an interest in buying organic goods. Since they work, they are not necessarily capable of making long trips to specialty stores, but can be convinced to buy organics in the context of their regular shopping. These consumers, the millennial generation, are inherently interested in organic products, and they have not yet solidified their shopping patterns, so they are consumers who can be swayed. Over the course of their 20s and 30s, their incomes will increase, which gives them the confidence to improve the quality of the food that they buy.

The second target market are older consumers, the so-called "enlightened environmentalists." This groups tends to be middle class or wealthier, and they have enjoyed successful careers. As they age, they have taken more interest in eating better, and living healthier lifestyles. Switching to organics is part of this trend. These consumers are increasingly aware of environmental lifestyles and are willing to incorporate that awareness into their purchasing decisions (Rudarakanchana, 2013).

Marketing Mix

The elements of the marketing mix are price, promotion, product and place. With respect to price, the objective with Tesco Organics is to fit the price point lower than equivalent branded organic products. This is consistent with the private label strategy for conventional products. Typically, pricing in the grocery business is done using a cost-plus strategy, so the key for Tesco is to source the products at a price point that allows the company to meet its price range targets (in between the conventional product and the branded organic product). Thus, the key element of pricing strategy is the sourcing strategy. This will also affect the product strategy, as Tesco will need to avoid products that it cannot bring in at the desired price point. By positioning the product in this specific price range, the company continues to gain a higher markup on its organic goods, while undercutting the name brands. In essence, if the customer would normally buy that tin of kidney beans, Tesco would go from making 12.5p on the tin to making 20p on what is the same amount of food going out the door.

The product strategy, as noted, has to flow from the price strategy in some respects. Tesco needs to be able to find products that it can fit within the stated price range. It is expected, since organic goods cost more than conventional ones, this should be possible with a wide range of staple products. Given that private label products are 41% of the UK grocery market, Tesco should target a broad range of products for the Tesco Organic line. Keeping in mind that the products best suited for private labels are those that are undifferentiated, the range should include grains, breakfast cereals, coffees, sugars, flours, honey, canned and frozen produce and legumes, eggs and dairy products. These products will be the core of the Tesco Organic line, but the line has to appeal to clients who are more discerning, so there should also be a range of speciality products.

One benefit is that this would allow Tesco to sell some commodities as value-added products, which serves as a hedge against price fluctuations in organic goods. For example, suppose organic tins of black beans are unavailable at a reasonable price point and the company does not think they will sell. A line of Tesco Organic branded soups, however, could include Cuban Black Bean Soup. This sort of value-added product would not only provide the company with a broader and more distinctive range of goods but would also allow Tesco to sell products under the Organic brand that are higher margin, and maybe ones that would not otherwise be economic to sell. The downside to this strategy is that more attention and money will need to be spent working with suppliers on product development. However, with the organics market heading over ?2 billion in value, there is considerable incentive for Tesco to make this sort of investment.

The third element of the marketing mix is place. There are two approaches to place. One is internal merchandising and the other is store placement. Internal merchandising reflects where the products will be placed within the store.. There are two approaches common in the grocery business -- putting organics in a separate section, and putting them alongside conventional products, on the same shelf. Tesco should adopt the latter approach. The upside of having a dedicated organic section is that this section appeals to serious organic shoppers by making shopping convenient for them. The downside is that it does not fit with the strategy that Tesco has, which is to convert people who are buying conventional products into people who buy organics. Tesco needs to place the organic goods beside the conventional ones in order to make its sales pitch to consumers to buy organic -- the target market would otherwise likely skip the organic aisle altogether, but Tesco needs to get its organic products in front of the target audience.