Tesco Organic Private Label: Marketing Strategy Analysis

Introduction

Tesco is the leading grocer in the UK, with a 28.15% market 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 does so through 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 maintains a number of different initiatives, including a range of own-branded goods — among them 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 focuses on the Tesco Organic label and the marketing thereof, in the context of Tesco's overall strategy.

Business Model and Private Label Context

In its 2015 Strategic Report, Tesco describes its business model as to "regain that total focus on serving customers" (p. 8). 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 — 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, 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 products that fit this model in a classic way — 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: a store might have a proprietary line of signature sauces that are unique 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, offering 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 second in the world, behind only Switzerland's 45%, and is much higher than in most OECD countries (Nielsen, 2014). For Tesco, the implication is straightforward: to meet the needs of consumers, it must 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 ideal for private labels — and milk also happens to be a popular organic product. In general, when differentiation is low, price sensitivity increases and the opportunity for private labels also increases.

SWOT Analysis

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 position. This size confers 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 at prices lower than other stores. Alternatively, 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 particular organic products. The company's sheer size therefore allows it to offer a broader range of goods, and likely at lower prices, than competitors can match.

Tesco's size also provides two further important strengths. First, the company has the best store footprint. Tesco has more square footage than its competitors nationwide, and it has stores in a variety of formats. This gives Tesco superior access to customers — something other companies have struggled to replicate. Tesco has smaller stores on high streets to access urban markets, and larger stores on the outskirts that serve suburban markets. If Tesco's offering is of equivalent appeal to the competition, it will draw in more customers simply because its stores are more likely to be conveniently situated. The company's size also gives it advantages in terms of financial capacity. According to the 2014 Annual Report, Tesco holds £2.1 billion in cash on its balance sheet, providing considerable financial cushion. This 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 is strategically positioned in the middle of the grocery market. The private label Organic business combines two consumer types — those who seek organic goods and are willing to pay a premium for them, and those who seek low prices. Tesco faces some competition at the high end from companies like Waitrose, but the most immediate pressure is coming from the low end, where Aldi, Asda, Iceland, and others are winning market share by offering very low prices, leveraging the bargaining power of their large international parent companies (Yeomans & Armstrong, 2015).

There are several opportunities for Tesco, however. The company still holds the largest market share, and that means two things. First, it has a significant captive audience it can leverage. Tesco can place renewed emphasis on Tesco Organics and encourage this captive audience to switch from basic product lines to the organic one. Second, its large footprint positions it well to draw in new customers, if it can demonstrate that it meets their needs. Organics shoppers in particular tend to be loyal to a small handful of stores, none of which comes close to Tesco's footprint 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 UK organics market is growing. While the conventional grocery market has been beset by price wars, the organic market has continued to grow — up 4% in 2014 to £1.89 billion (Smithers, 2015). It is a niche market, but a growing one.

There are also a number of threats. First, Tesco's bargaining power does not necessarily surpass that of some of its main competitors. Asda, for example, is owned by Walmart, which has bargaining power vastly superior to Tesco's. Walmart has stated a strategic objective of becoming a major player in organics, placing Asda in direct competition with Tesco in this category (Martin, 2014). Aldi, while smaller than Tesco, also has substantial bargaining power — enough to impact the organic private label market should it choose to do so.

A further threat specific to this line is the availability of organic food. Most food produced is not organic, and if three major grocers all seek to increase their shares simultaneously, supply constraints may result. While Tesco has the buying power to monopolize any one organic product, so do Aldi and Asda. Supply constraints can also create a situation where Tesco's marketing generates demand that the company is unable to meet. Waitrose, while a much smaller competitor, is considerably stronger in the organic market — its organic sales increased in 2014 while Tesco's fell (Smithers, 2015), suggesting that Tesco has been ceding share to Waitrose in this category, perhaps because organic buyers prefer the overall, somewhat more upmarket presentation of Waitrose. On several fronts — including market perceptions and supply constraints — competition remains a significant threat to Tesco in its bid to improve private label organic sales.