Tesco UK -- Strategic Report Tesco's Strategic Position (UK Market)

Tesco's Competitive Strategy - Diversification

Domestic U.K. Market

Non-food Goods and Services

Retailing Services

International Expansion

Evaluation of Tesco's UK Strategy

Tesco's growth curve over the last quarter century has involved a revolution in its strategy and image. The company's initial success was grounded on the "Piles it high, sells it cheap" approach (Liptrot, 2005). The company realized that this strategy caused serious disadvantages among certain profitable market segments such as with middle-class customers. In the late 1970s, Tesco's brand image had become perceived as a low quality brand and consultants actually advised the company to change the name at the time. Although Tesco decided not to change its name to change brand perception it was still able to become the largest retailer in the United Kingdom, with close to a thirty percent market share. The next two largest competitors combined, Wal-Mart (Asda) and Sainsbury's, they barely exceed the market share already possessed by Tesco.

Much of Tesco's success can be attributed to the fact that they are able to appeal to a wide demographic with its product mix. Tesco markets to their entire gambit of consumers including upper, medium and low income customers all in the same stores. It is the unique ability to appeal to all segments of the market that has been responsible for Tesco's incredible growth in market share. By contrast ASDA's marketing strategy is concentrated heavily on being the low cost leader, which can damage its image among wealthier demographics even though many of the products it carries are target at these niches. During its reign as industry leader of the U.K. supermarket market, Sainsbury's attempted to maintain its image as a quality focused, middle class supermarket. The organization held the notion that, since they were the quality leader, that they did not need to compete on price and did not incorporate any strategy that targeted lower-income customers. However, Sainsbury was effectively forced to abandon this strategy after losing a considerable amount of market share to Tesco and other firms in the market.

Another factor that has been responsible for Tesco's growth is its use of its branded products. These products include offerings in the entire product lineup including the upmarket "Finest" and low-price "Value." Although many firms often find it challenging to overcome consumer resistance to self-branded products, Tesco has had remarkable success in this arena and as a result has been able to substantial improve operating margins with these products (Food and Agriculture Organization of the United Nations, n.d.). Tesco has also incorporated a long-term focus that embraces sustainable practices to increase customer loyalty. This sentiment is directly embedded in the organizations mission statement which mentions that Tesco should focus on creating value that drives "lifetime" loyalty from its customers.

Tesco's Strategic Position (UK Market)

One of the most interesting developments in the U.K. retail market has been some of the challenges that the organization faces in regards to maintaining dominance in its domestic market. Asda Stores Limited (Asda) is one of Tesco's primary competitors and is a wholly owned subsidiary of the U.S. retailer Wal-Mart Stores Inc.; who is the world's leader in the retail industry. This has been identified as Tesco's largest domestic challenge in the future. Asda has also acted to buy more market share in the U.K. market with the acquisition of Netto. The first challenge that Asda had to face was the Office of Fair Trading in the UK which represents the regulatory body that tries to promote competition (Office of Fair Trading, 2011). Since there are only three or four main competitors in this industry the level of competition is somewhat questionable however Asda was able to clear this challenge.

The argument was made on behalf of Wal-Mart that since Tesco has a market share of about thirty percent and Asda after the acquisition would only consist of roughly eighteen percent market share (Walker, 2012), it is reasonable to believe the acquisition would actually increase competition. As a result of this acquisition, Asda is in a much better position to challenge Tesco's market dominance in the domestic market. Since Asda is financed by Wal-Mart, the acquisition was paid for in cash and Asda also has access to Wal-Mart's seemingly limitless financial resources. Thus it is reasonable to suspect that Asda will proactively continue to try to chip away at Tesco's U.K. market share.

Asda's acquisition of Netto was also interesting because it is differing from its primary core competencies by acquiring a chain of stores that operate with an entirely different business model. Asda...

However, the superstore model seemed to reach a plateau in this market. Therefore, with the acquisition of Netto, Asda could diversify its operations to mirror that of Tesco's different sized retail locations such as Tesco Express as well as market to different demographics.
Asda will immediately try to force more sales out of the smaller retail locations. The retail chain has plans to double the number of staff at each location as well as expanded the product lines that each location carries. Before the acquisition, the Netto locations only carried grocery items. However, after the reorganization and rebranding as Asda stores, the retail locations will also carry clothing items, hair and makeup products, household goods, and whatever else can be crammed into the smaller retail footprint. One report cited the fact that sales were up even though the new strategy received a decrease in the number of shoppers that visited the locations (Baker, 2011). Thus it is reasonable to suspect that the customers that did shop at the former Netto locations were buying more goods than they previously did before.

Given the fierce level of competition from the four major retail grocers in the UK, if Wal-Mart's strategy of the new store size is successful then it is likely that the business will be able to steal sizable market share from Tesco. Asda has already reported financial gains from this acquisition in the most recent press releases which serves as a testament that the strategy has been an initial success (Business Wire, 2012). Other reports have also verified that Asda strategy is acting to steal market share from Tesco and Asda's market share has reached an all-time record high recently (Reuters, 2012). Therefore, the most pressing issue to Tesco's competitive strategy is maintaining its dominance in the domestic market against the new challenges mounted by Wal-Mart backed Asda.

Tesco's Competitive Strategy - Diversification

Domestic U.K. Market

Tesco has had a long history of being both innovative and energetic in finding ways to expand its domestic market share. One example of this was diversifying into the convenience-store model, which many of the other competitors have historically avoided. Yet this model is now being imitated by Asda who is proactively making aggressive moves to challenge Tesco in its home territory. The domestic market serves as the cornerstone for all of Tesco's other operations and it should give this the utmost priority to fend off the mounting challenges from its competitors.

Non-food Goods and Services

Tesco has been exceptionally successful in creating a retail demand for the U.K. non-food markets by leveraging its operational efficiencies, its locations, and its customer loyalty (BBC News, 2006). It has expanded into most areas of the retail market, selling clothes, books, electrical goods and seasonal items such as barbecues and garden furniture. In fact, the company seems set to leapfrog current non-food market leader, Home Retail Group, owner of Argos, with its 2006 results, according to retail analyst Verdict Research (Dangerfield, 2007). However, since this time many of the Tesco competitors have also introduced similar strategies and the competition in this strategy has substantially increased as well.

Retailing Services

Tesco has been a retail forerunner who has diversified into various activities such as personal finance, telecoms, and utilities, to name a few. The company's preferred method of establishing its in new markets is through joint ventures with industry leaders in these sectors; which acts to reduce risk in these ventures. Although this strategy has been often imitated by other retail establishments, Tesco has generally implemented them more effectively and created greater value for its consumers. This represents an ideal method of further diversifying their product offerings in the domestic market since their market share is close to what could be considered a monopolistic position (BBC News, 2006). Given its current market share, Tesco could run into problems with regulators and thus retailing services offers a reasonable alternative to further growing the organization.

International Expansion

The competitive strategy that shows the most promise for future growth for Tesco is undoubtedly through international expansion. Tesco has formerly announced that it plans to double its store space in central and Eastern Europe in another push for international growth (Belfast Telegraph, 2010). Currently the organization has over eight hundred and fifty stores in the Czech Republic, Hungary, Poland, Slovakia, and Turkey which create over seven and a half billion dollars in sales. This type of expansion is definitely Tesco greatest opportunity…