Strategic marketing management: Tesco case study analysis

Tesco PLC Case Study

Tesco is the third largest retailer globally behind Wal-Mart and Carrefour, and as of March 2011, operates 4,811 stores across 14 countries including Asia, many European countries, UK and the U.S. Tesco is also the leading food, sundry and grocery retailer in the UK and has established itself as the leading provider of ancillary services through the retail channel to Western Europe (Hackney, Grant, Birtwistle, 2006). Tesco has also initiated many extensive information systems projects and pilots to enable their supply chains to be more efficient than competitors (Lindgreen, Hingley, 2003). These include an innovative use of Radio Frequency Identification (RFID) for expediting orders throughout their supply chains and greater levels of coordination throughout their extensive warehouse systems and networks (Bitel, 2011). Tesco concentrates on a very localized approach to expanding markets, go so far as to create ethnographic studies of the potential customers in a given geographic area, as the case study alludes to in the Southern California market. The approach to retailing expansion is unique and quite contrarian to the approach taken by Wal-Mart and their French competitor, Carrefour (Rogers, Ghauri, George, 2005). As of March 2011, the company employs 472,000 globally had attained revenues of £56,910 million ($90,445.4 million) during the latest fiscal year reported. The company attained a net profit of £2,327 million ($3,698.2 million) in the latest fiscal year. The challenges to expanding globally have not specifically affected their revenues in the latest financial period, yet long-term the lack of execution in global markets is a strategic weakness the company must deal with in order to continue profitably growth. The intent of this case analysis is to analyze and recommend how Tesco can grow profitably over time in the U.S.

Table of Contents

Background and Introduction

What environmental trends created the opportunity for Tesco to build its dominant position in the UK market? Analyse the internal and external environment using appropriate strategic management models.

Evaluate Tesco's marketing mix in the UK vs. The U.S. What are its strengths and weaknesses? Why has Tesco been so successful in the UK?

Choose and outline an appropriate marketing strategy (using SAF or another analysis) for Tesco to adopt to increase profit in the short-term and the long-term in the United States.

Bibliography and Reference List

Background and Introduction

As one of the global leaders in retailing, Tesco has divided its investments in store structures and formats Express, Metro, Superstore, Extra and Homeplus formats. As the case indicates, the majority of retail floor space is in the Tesco Superstore (42%) and Tesco Extra (42%) formats. As of March 2011, the company also has 961 Express stores that are configured to 3,000 square feet, with a variety of fresh food at high traffic locations throughput suburban and urban locations. The Express stores sell up to 7,000 products including fresh produce, wines and spirits and bakery products. The next category of retail locations are the 174 Metro stores, which range in size from 7,000 to 15,000 square feet in size and are predominantly in suburban locations. These stores are designed to support families whose time is at a premium and who need to pick up ready-to-eat meals and dinners. Tesco also only 448 superstores as of March, 2011 that range in size from 20,000 to 50,000 square feet, which have selections comparable to its global competitors in this range of store size. Food, sundries, DVDs, books and low-end electronics are sold throughout these stores. Tesco also has 177 Extra stores that are 60,000 square feet or larger and have a full range of food, sundries, electronics, clothing, garden, and automotive products and services. The Extra Stores have proven to be the most challenging to expand globally with, just as Wal-Mart has learned with its comparable format of store (Gripsrud, Benito, 2005).

Tesco also has an extensive range of services (Internet, telephone, insurance and travel services) sold through all of their channels and stores, including tesco.com. Tesco continues to see gains in their customer loyalty initiatives by having Tesco.com and Tesco Direct compliment the loyalty card programs with special deals for the most active customers (Child, 2002).

What environmental trends created the opportunity for Tesco to build its dominant position in the UK market? Analyse the internal and external environment using appropriate strategic management models.

There are a variety of factors that led to Tesco being successful over decades of expansion as the leading grocery retailer in the UK and eventually one of the top three globally. Using the Five Forces Model from Dr. Michael Porter to explain the dynamics of the internal and external environment on the performance of the company over time provides a useful framework for analyzing their competitive advantages over time. Figure 1, the Porter Determinants of Competitive Advantage Model (Porter, 1985), illustrates how the competitive rivalry is influenced by the bargaining power of suppliers, threat of new market entrants, bargaining power of buyers and threat of substitute products or services. Tesco has learned how to navigate through the trade-offs exemplified in this model first in the UK market and later globally. This ability to create competitive advantage is also what has led to their ability to selectively enter the U.S. market.

Figure 1: Determinants of Competitive Advantage or Five Forces Model

Sources: (Porter, 1985) (Porter, 2008)

Using this model as the framework for evaluating the environmental trends and putting them into context from an internal and external standpoint provides insights into how Tesco was able to sustain competitive advantage over the long-term. Analyzing the internal and external environmental factors within this framework also indicates which areas of the company's business are contributing the most and least to competitive rivalry or strength, a point that Dr., Porter has made in the latest iteration of this model (Porter, 2008). The Determinants of Competitive Advantage Model's components are considered balanced between internal and external factors, as the supply chain components (suppliers) and customers (buyers) are balanced with the that of competitors emerging as entirely new market entrants or from substitute products and services from adjacent areas of a company's industry or adjacent industries (Porter, 1985).

When this model is applied to Tesco and the facts presented in the case, it is clear how complex of a value chain this business has and how difficult the balancing of competitive dynamics is to maintaining competitive advantage over the long-term. It is also evident how powerful pricing is within their markets, as it acts as both an accelerator of supply chains and the defining attribute of elasticity on the buyer dimension of the Porter Determinants of Competitive Advantage Model (Top, 2006). Pricing is an attribute of the Tesco business model that must be managed not as a promotional strategy or inducement, but as a means to arbitrate segments, define differentiation of store type, and most importantly, communicate value (Palmer, 2004). The internal and external factors that put pressure in price are potentially lethal to profitability and create the illusion of elasticity in emerging markets including the western U.S., where the company's focus is during the time period of the case study. The internal and external factors driving the company to consider moving to these new markets are partially influenced by price which at one point in the case study is misconstrued as saturation of present markets. For Tesco, misreading pricing signals can be especially detrimental, as in many instances they could raise prices, gain market share, increase differentiation, and become even more of the premier brand they aspire to (Palmer, 2005). The Determinants of Competitive Advantage Model also shows Tesco managers that even if they are successful with their expansion efforts in the U.S., they still must be very precise in how they balance their core business that fuels the many ancillary store formats, services, and financial services programs they are offering. Tesco must stay focused on the performance of their supply chains, specifically ensuring they stay agile enough to respond to customers' varying tastes, preferences and requirements if they are to stay relevant as a retailer for the pong-term, and this applies in the UK as well as globally (Jones, Clarke, 2002). The internal and external factors influencing Tesco, including the ones that are obfuscating their efforts to expand into the use, are more supply chain systemic and less about price elasticity than the management team can see in the context of the case study timeframe.

The internal and external factors that force the company to pursue local sourcing for fresh meats, vegetable and produce, in effect creating their own strategic sourcing strategy and infrastructure in California, illustrates how adept the company is at supplier collaboration, a key success factor in any distributed order management system in retailing (Hadaya, Cassivi, 2007). Tesco has an innate strength with supply chains, sourcing and the ability to motivate its most proven supply chain partners to create global outposts to support their development efforts, as is evidenced in the case study with Wild Rocket and 2 Sisters. This innate strength of the company however is not taken far enough; for the supply chains in these remote locations to be successful, they must also be more customer-driven than they are. The innate value of a customer-driven supply chain to increase inventory turns, alleviate stock-outs and be a key contributor to long-term customer satisfaction is a core requirement of any retailing operation (Jones, Clarke, 2002). The pivotal nature of supply chains to the Tesco business model emerges when the internal and external factors are analyzed and put into the context of global expansion. Further, using the Porter Determinants of Competitive Advantage Model to rank order the Return on Invested Capital (ROIC) of various locations would have given the company executives valuable insight into which regions to invest in first (Porter, 2008).

Finally, the internal and external factors also underscore just how critical the sustainability of a high margin, high inventory model is to Tesco's continued growth. The high value orientation the company has aspired to for so long in the UK and is attempting to accomplish with the Fresh & Easy store launches in the U.S. are critical for the long-term strategy of transitioning out of foods into other merchandise. With so much on the line strategically from the U.S. expansion in terms of moving into higher-margin products, the internal and external environmental factors point to the need for creating the most streamlined Sales & Operations Planning (S&OP) process possible (Barrett, 2007). While the internal and external factors seem to indicate that pricing elasticity is the path to success in the new U.S. markets of interest, in fact creating the most efficient supply chain, sourcing, and S&OP process foundation is far more important. The lesson learned from using the Porter Determinants of Competitive Advantage Model to analyze this area of the case study is that supply chain resiliency is much more of a critical success factor and more systemic to the product mix and pricing strategies in the Fresh & Easy venture success, based on comparable results in parallel industries (Rowat, 2004).

Evaluate Tesco's marketing mix in the UK vs. The U.S. What are its strengths and weaknesses? Why has Tesco been so successful in the UK?

The Tesco marketing mix in the UK has concentrated on creating a stratified series of stores that were designed for specific buying needs, demographic and economic factors of each customer segment, differentiated at the product offering level. This further strains the company's supply chains and forces a continual focus on streamlining the Sales & Operations Planning (S&OP) functions and strategies that must remain agile for the company top continue to grow (Palmer, 2005). Taking the case study and analyzing it at a more fundamental level to the company's operations shows that this ability to deal with a very broad array of product selections is what differentiates each of the store formats in the UK market. The product dimension of the marketing mix is what is the largest single differentiator overall in the UK. The other aspects of the marketing mix including pricing, promotion and place or distribution all play an essential role in the unique value proposition and differentiation of Tesco. The catalyst that holds the entire marketing strategy and mix together however is the supply chains. Moreover, within that, the S&OP process, as is often the case in industries with high inventory turns (Barrett, 2007).

Pricing in the UK is used as a differentiator to connote quality and to position Tesco as an aspirational brand relative to other low-price retailers. In addition, pricing is also varied across the various locations to define gradations or levels of stores and their relative position in the services strategy Tesco has. The promotional strategies also vary across the positioning of stores and across the regions of the world Tesco operates in as well (Rogers, Ghauri, George, 2005). Pricing then is just as much of a differentiator and positioning point of reference as the promotional strategies and place or distribution approach the company takes.

The Porter Determinants of Competitive Advantage Model shows how pricing is not however the greatest potential competitive advantage the company has. What the greatest catalyst or source of differentiation for the UK marketing mix is their supply chain and S&OP process that consistently sets and exceeds expectations with customers as to the availability of products at a price point they expect. These two process areas are the most critical for the company long-term, and how they choose to position the benefits of a very streamlined supply chain and S&OP process will determine the quality level of the customer experience in their stores. Ultimately, the truest measure of success for Tesco is how consistent they meet and exceed customer expectations as part of the broader customer experience of shopping in their stores. Translating marketing mix attributes into an exciting and memorable shopping experience is critically important for ensuring a very high level of customer loyalty over time (Puccinelli, Goodstein, Grewal, Price, Raghubir, Stewart, 2009). Tesco has been able to do this in certain segments of their business and has been very successful financially as a result. For Tesco to overcome its weaknesses it needs to concentrate on perfecting the customer experience over time, not relying on price. The greatest weakness that Tesco has is that they rely on price too much and have lost opportunities to expand in ironically some of the most price-sensitive countries in Europe as a result, including Eastern European nations (Rogers, Ghauri, George, 2005). This reliance on price has also led to the company sacrificing the customer experience in an effort to gain greater perceived competitive advantage through price elasticity, which never actually materialized in segments of the market they targeted. Moving away from price and focusing on the customer experience can save Tesco form making major strategic blunders in the future as well. The utilitarian approach to decorating the U.S. stores is a case in point.

Using appropriate models of strategic marketing list five possible strategies for both the short-term and long-term for Tesco in the U.S.A.

Using the Boston Consulting Group Growth/Share matrix (BCG) Model to define five possible short- and long-term strategies for Tesco, the relative growth opportunities for each store format and geography have been assessed. The BCG matrix compares relative market share to relative market growth segmenting product lines into four quadrants (Proctor, Kitchen, 1990). These four quadrants include high growth and high profitability potential, high growth and small levels of profitability, small market growth and high profitability, and small growth potential and little opportunity for profitability

(Proctor, Kitchen, 1990). Aligning each of the potential store types of Tesco to their potential geographic areas for growth produces the following five strategies for short- and long-term growth.

The first strategy is to use the Metro concept throughout regional areas of the U.S. where freshness of meats, fruits and vegetables is underscored with more of an enhanced shopping experience than was executed in the initial program completed. This strategy needs to focus on how to enrich the in-store experience with more unique products, more use of in-store demonstrations, and a reliance more on differentiation, hard-to-find yet healthy convenience foods.

The second strategy is to concentrate on creating a strong presence in travel locations and shopping centers with the Express concept. This is designed to further capitalize on the time shortage many people have when going from one location to another. The Express concept, to be successful, needs to be much more aligned to a demand-driven supply chain strategy than is the case today (Barrett, 2007). This strategy could easily be global in scope, across all relevant high growth locations in Asia, Europe and throughout the U.S. And UK.

A third strategy is to use more precise approach to defining the Homeplus stores throughout the regions of the U.S. not accessible to Wal-Mart and even more lucrative than the major suburban and urban areas of the U.S. that the U.S. retailing giant operates in today. These regions of the country where Wal-Mart does not have a supercenter or equivalent store is not due to oversight, it is due to the same factors that caused them to fail in Germany and other nations outside the U.S. (Christopherson, 2007). Their supply chain operations cannot deal with mixed pallet mode shopping and must have a sequenced series of distribution points to break down inbound orders so they can be shelved (Hadaya, Cassivi, 2007). This lack of flexibility on the part of Wal-Mart in high growth population centers in the U.S. not accessible through traditional supply chain operations presents a unique and potentially highly profitable opportunity for Tesco. To successfully move into these secondary, less-served markets in the U.S., Tesco would need to rely on mixed pallet mode shipping, which would include the use of Radio Frequency Identification (RFID) tags on cartons and Less Than Load (LTL) based shipments from suppliers (Romanow, 2004). Wal-Mart cannot scale easily across a broad geographic region using these technologies as of 2011, yet Tesco could accelerate these technology innovations and gain a significant advantage. These underserved regions of the American market could become a foundation for more efficient supply chains throughout the U.S., as well over the long-term.

A fourth strategy is to consider moving into the Chinese market ahead of other competitors, using the five store concepts as the foundation for customizing a store strategy specific to this market. Using the Hofstede Model of Cultural Dimensions (Hofstede, McCrae, 2004) to define the marketing mix, positioning, unique value proposition and test the store concepts, Tesco could significantly increase the probability of succeeding with this strategy. The Chinese market is going to demand much smaller stores than Tesco is accustomed to creating as the majority of the more affluent members of the population live in Shanghai, Beijing and other coastal cities that tend to have much greater per capita incomes than other regions of the country. Tesco will need to concentrate on streamlining the S&OP process specifically for the Chinese market as the needs in this region of the world are significantly different and will require a cultural and process-driven shift in operations (Dennis-Jones, 2007). This strategy also will require an intensive level of compliance and ethics training as the approach to supply chain operations in China varies from UK and the U.S. (Barton, 2007). In addition to all of these factors, the planning and execution of the supply chain operations must take into account variability in the infrastructure of the Chinese and Asian transportation and logistics operations (Rowat, 2004). The redundancy of logistics, transportation systems and suppliers is going to be critical for this strategy to succeed.

The fifth strategy is to take the existing Fresh & Easy stores in the western U.S. markets and change the product mix, promotional strategy, and enhance the customer experience to a much greater level than has been in the context of the case study. This strategy also requires that the stores also create a more effective S&OP process to capture the unique requirements of customers in the region and make the mix of items reflect preferences more precisely than is the case today. Ethnographic studies failed to capture the existing aspects of the items being offered, and based on the lukewarm of the stores, there is just not that much excitement or interest in what makes the Fresh & Easy stores unique. In short, the entire user experience as defined by the supply chain decisions and customization of items needs to be completely redefined if these stores are to succeed (Puccinelli, Goodstein, Grewal, Price, Raghubir, Stewart, 2009). The differentiating element needs to be the shopping experience as supported by a more precise understanding of the preferences and needs of shoppers in the western U.S. markets Tesco has invested heavily in already. This fifth strategy concentrates on turning around the existing stores in place throughout the western U.S., gathering feedback form customers to make the turn-around as effective as possible.

Choose and outline an appropriate marketing strategy (using SAF or another analysis) for Tesco to adopt to increase profit in the short-term and the long-term in the United States.

Tesco has failed to transform their supply chain and S&OP expertise into a unique customer experience, and the appropriate marketing strategy is to re-focus on the Fresh & Easy stores in the western U.S. region and change the customer experience by making the product selection more accurately reflect customer preferences. The lack of excitement with the new store launches also shows that the new store introduction process is lacking in focus and intensity. The stores need to be also be re-launched to introduce the more existing experience and eclectic nature of items, with the new store development closely tied to each local launch (Burkett, 2007). The marketing strategy needs to also rely on a more effective approach to redefining the in-store experience to be more differentiated than the utilitarian-like experience of shopping in a Fresh & Easy during the time period of the case study as well. Using the SERVQUAL (Service Quality) methodology the in-store experience and level of satisfaction needs to also be measured to see what can be improved (Ravichandran, Prabhakaran, Kumar, 2010). SERVQUAL can be extremely effective for measuring and quantifying the differences between expectations and experiences, and providing a well-defined series of areas to improve service over time (Ravichandran, Prabhakaran, Kumar, 2010). Tesco needs to delve into why the Fresh & Easy stores are not measuring up to customer expectations, and also understand why the utilitarian-based approach to decorating the stores that pervades the entire in-store experience needs more fully understood. Comparable stores in the region the size of a Fresh & Easy are often much more distinctive and have their own identity as a result. Trader Joe's is a case in point, which has successfully differentiated itself with a more unique shopping experience and a far greater selection of healthy entrees for shoppers in the region who have perpetual time shortages.

Another aspect to this marketing strategy is the more effective integration of the supply chain and more specifically, the timeliness of deliveries of unique and highly differentiated items. Fresh & Easy needs to consider how to use RFID to accelerate the delivery of fresh fruits, vegetables and meat products from suppliers not only in the western U.S. But globally as well (Mohamed, 2004). This approach of making the supply chain performance part of the unique value proposition of the store itself will be very effective in further differentiating the existing stores from the many competitors in this market. Finally Tesco needs to more fully integrate suppliers into this strategy requiring them to provide the RFID tags on highly unique, differentiated items for sales in their stores, as previous studies done by the company indicate this delvers the highest possible Return on Investment (ROI) of any alternative (Hadfield, 2006). In conclusion, the strategy of differentiating at the selection level needs to be integrated with completely revamping the experience of visiting a Tesco Fresh & Easy store.