FTSE 100 (Financial Times Stock Exchange) is the London stock exchange index for 100 companies with highest market capitalisation. The performance of the largest companies in UK, one of the worlds leading economies, is measured with FTSE 100 market index (Staff, 2019). The price index of Tesco was 242.10 (Londonstockexchange.com, 2019).
2. Introduction of Tesco:
The story of Tesco began in 1919 in East end of London by the founder Jack Cohen by selling surplus grocery from a stall. The first Tesco brand was Tesco Tea.
The name Tesco was derived from the initials (TES) of the tea supplier, Thomas Edward Stockwell, and the first two letters (CO) of his surname (Tesco plc, 2019a).
In 1929 the first Tesco store was opened in Burnt Oak, Edgware, North London (Tescoplc.com, 2019a). Now after 100 years of its foundation, Tesco is one of the leading retailers in UK. With over 6,800 stores all over the world and about 660,000 colleagues of Tesco working together, Tesco is serving better every day (Tesco plc, 2019b).
At present the Chief Executive Dave Lewis is leading the company with its core purpose: Serving shoppers a little better everyday (Tesco plc, 2019c).
Apart from being a leading food retailer, Tesco has diversified in non-food range like household goods, clothing, petrol, electrical goods, banking sector, restaurants, internet, telecoms and many. Many of its diversifications have survived and flourished and were the reason for Tescos growth but some of them were divested from after recognising them as non-supporters in the growth of Tesco. Investment and divestment will be discussed later wherever and whenever it is required to point out that particular incidence.
Tescos UK shops portfolio is in the following formats Tesco Extra, Tesco Metro, Tesco superstore, Tesco Express and Dotcom only (Tesco plc, 2019d). These formats are designed by considering customers choices, requirements and convenience. Dotcom only stores were dedicated for handling of the orders through tesco.com.
Evolvement of the digital technology inspired multi-channel retailing and hence the grocery retailer are using internet platform to mark the presence online. Tesco has very well established its online retailing platform and is growing.
Tesco marked its presence in 12 international markets Czech Republic, Slovakia, Poland, Hungary, Ireland, Japan, India, China, Malaysia, Thailand, South Korea and USA. Though some of the expansions were not successful and Tesco had to drop out of the market by selling the market to other companies.
3. Recent Past Strategic Development
A recession is when the economy declines significantly for at least six months. That means theres a drop in the following economic indicators: real GDP (Gross Domestic Product), income, employment, manufacturing and retail sales (Amdeo, 2019).
Considering the period of recession and its consequences on Tesco, we shall discuss the implementation of turnaround strategy and to what extent it was supporting the growth of Tesco.
Retail industry plays a crucial role in the UKs economy. In 2017, the retail industry generated ?395billion worth retail sales in UK (Smith, 2019).
During recession more or less all industries were affected by it. Though Tescos growth sales figures of the sales value of UK stores were the worst figures in the 15 years, the worldwide sales growth grew by 11.7%. The Tescos sales growth had almost halved because of the aggressive pricing policy of the competitors like Asda, Morrisons in UK, the German discounters, Aldi and Lidl. Tesco reacted to this by introducing the discount range for the customers and by doubling the point value on the Loyalty club card (Recession hits Tesco, 2008).
According to Phillip Clarke, the CEO of Tesco (2012), the group lost its attention and under-invested in the core business of UK while focussing on the expansion in international markets, banking and internet (Peston, 2012).
The growth in the international expansion of Tesco was achieved at the cost of the home market of UK. The resources and all strategies were focussed on international growth and the home market, undergoing recession, had considerable shrinkage in the sales growth. The reactive responses on the price and promotion of discount coupon card did not help Tesco. The CEO Phillip Clarke, who took over Sir Terry Leahy, opted for the situational leadership and turnaround strategy to improve the structural flaws which existed.
An overwhelming investment of 1 billion pounds (Davey and Hoskins, 2012) in the UK market is an attempt to regain its depleting market position. To strengthen its home market the different measures undertaken were recruiting more staff and training them, improving the customers experience in the stores by redesigning the internal structure of stores, concentrating on pricing and varied product range. It was the first time in 20 years (Wood, 2012) that Tesco was facing the profits fall because of the huge investment. Profits were squeezing not only in the home market but also internationally. Tesco in South Korea and Fresh and easy US chain were failing to earn profits. The consumers in Europe as well were reconsidering to spend on non-essential goods.
Tesco implemented the diversification strategy, by entering a joint venture with The Royal Bank of Scotland in 1997, and then buying the RBSs share of the business and created its unique identity of Tesco Bank in 2008 which is now the subsidiary fully-owned by Tesco (Corporate.tesco.bank.com, 2019). The gap created in the market by the loss of confidence in the financial institutions during recession, was picked up by Tesco and the launch of current accounts by Tesco Bank was the positive step in using its network effect.
Adapting the Retrenchment strategy(See Appendix), Tesco sold its Fresh and Easy supermarket chain in US as it had incurred a loss of 1.2 billion pounds and also the attention of Tesco executives were diverted from the core market in UK (Kirka, 2017).
The depleting sales growth and the account scandal of Tesco lead to profit fall by 92% (Wood, 2014). In all this chaos, Dave Lewis was the new appointed CEO and brought in the skills and experience of 27 years from Unilever. Lewis adapted the reconstruction type of strategic change in response to the continuous decrement in the performance of Tesco in the market. This strategy is more apt as it is implemented in the situations which need urgent calls like economic recession, sudden collapse of core business.
The implementation of strategy was clearly handled by reducing the prices of the products to become more competitive, focusing on the products the customer needs by reducing the range and creating space for the top-selling lines (Tescoplc, 2019e).
To gain the investment for the core food business, Tesco sold several businesses in the UK like Giraffe Restaurants, Dobbies Gardens, Harris + Hoole, Tesco Opticians, Blink-box on-demand video service and Talk Talk. The international markets, the South Korean business, Homeplus and the US chain of Fresh and Easy were also sold out because those were non-profit generating markets due to the recession. All these divestments helped Tesco to gain investment in its deteriorating local market.
The closure of 60 non-profit generating stores and the closure of the head office located in Chesnut are depicting the cost-cutting strategy of Lewis.
To overcome the economic crises, the period of recession and the period after recession, Tesco adapted the hybrid of Retrenchment strategy and Investment Strategy namely, Ambidextrous strategy (See Appendix) which are particularly implemented during the recession, to grow organically in the Tesco bank segment and winding up the business seeking more attention and resources to concentrate on its core retail business in UK.
4. Current Strategies of Tesco
Michael E. Porters Five Forces analysis model is a strategic management tool that evaluates the effects of external factors that determine the competitive landscape of the industry. (Greenspan, 2019)
Porters Five forces defines the strength and weakness of the company based on competitive rivalry, the threat of new entry, the bargaining power of buyers, the bargaining power of suppliers and the threat of substitutes. Depending on the strength of the competitive forces and the weakness, if any, the companys strategic plans are defined.
Determining the competitive strengths of Tesco in the following:
4.1. Competitive Rivalry:
Tesco has a tough competition from Asda, Sainsburys and Morrisons which are UK based companies and also from German low-cost companies Aldi and Lidl. Asda, a subsidiary of Walmart, enters the competition by competitive price strategy where the priority is to maintain lowest prices. Sainsburys is known for its products of good quality. Aldi and Lidl implement the aggressive price strategy (Downie, 2018).
So, the competitive rivalry force is strong because of many firms with varied range exists with aggressive strategies.
4.2. The Threat of the New Entry:
Tesco and other well established food retailers of UK and Germany discounters are taking the most of the retail market share of the UK economy. The struggle for higher market share among these retailers is so intense that no chances are left for the new entry. The quality, the geographical locations and the established brand identity are the high barriers which cannot be easily cracked through.
The scale and experience of these firms stimulates high barriers for any new market entry. The supply and distribution channel of the firms are structured. The domestic UK market has already reached the saturation point in the retail sector; this had inspired Tesco to make international presence to grow effectively. Waitrose is also the competitor in the retail segment but the focus is mainly on premium products and so the image of expensive food retailer.
The intensity of the threat of the new entrants in the retail industry of UK is weak.
4.3. The Threat of Substitutes:
In grocery market there are low chances of substitutes for particularly food items. Non-food items have more chances of substitutes compared to that of food items. The concept of organic food which has gained a lot of popularity in the recent decade can be seen as a threat if the current organic products of Tesco do not engage in cost leadership. As the consumers shopping trends are widely influenced by the quality rather than the pricing, there are chances that the move towards organic food can raise an issue if the consumers are able to switch easily to the other competitors.
But the non essential product ranges of Tesco are prone to face the threats from the sector outside the industry, an example which can be discussed is for clothing. Though Tesco has everyday value for clothing line but the most probable substitute Primark, an Irish fashion retailer headquartered in Dublin, which has its noted presence in Europe and US can be threat as it offers new fashion at low prices.
The threat of substitutes is moderate in core business of Tesco, food sector, but is strong in non-food items.
4.4. The power of Buyers:
The power of buyers is very strong in UK, which had been understood in the recession phase of the UK economy. Tesco faced a great challenge in the price war with the low-cost retailers, Aldi and Lidl. The bargaining power of buyers increases when they have options for easy switch.
The bargaining power of buyers is strong.
4.5. The Power of Suppliers:
Tesco has many suppliers so there are very less chances of the dominance of the suppliers on Tesco. The recent merger of Tesco and the UKs largest wholesaler, Booker created a largest UKs food group enhancing the range of quality suppliers.
The strong position in the UK retail market helps Tesco to bargain over price and get the lowest price for the quality product from the suppliers.
Thus, the power of suppliers is weak.
5. Understanding the current strategy in context with Resource Based View
Resource Based View is model and way to achieve sustainable competitive advantage where endowment of the firms internal resources to enhance the performance.
The appropriate deployment of internal resources, the turnaround strategy and the leadership of Dave Lewis are working to improve from the effects of recession under the turnaround strategy.
An effective way in which the Loyalty club card, the brand of Tesco is used to get an insight of the needs and trends of its customers and which helps to provide the customers the better than the other competitors.
The profound group of 660,000 colleagues of Tesco are all dedicated to serve the customers better by delivering the quality service.
Tesco reaches to the customers through its spectacular global network of 6800 stores and the online home shopping mobile app which are very unique for any of its competitors to copy.
The merger with Bookers has given immense strength to its supply chain as Bookers are the largest wholesalers of UK.
Tesco launched a discount supermarket chain in 2018 called Jacks, named after Jack Cohen, the founder of Tesco, to handle the threat from the competitors of Germany namely, Aldi and Lidl (Jordan, 2018).
Tesco express format of Tesco with everyday essentials and concentrating on food products with limited stocks is efficiently used to reduce the threat posed by the small shops on the corner of the streets in the neighbourhood.
Thus, Tesco is working immensely on the turnaround strategy and to reconstruct its damaged brand image through deployment of all its resources to create a sustainable competitive advantage to the business.
6. Future Development Plans and Strategies
Tesco has evolved and grown gradually over the last 4 years under the leadership of the CEO Dave Lewis and the execution of turnaround strategy.
There has been an increment in the group sales by 11.5% compared to the last year (Tescoplc.com, 2019). The following are the strategies which can help Tesco rebuild its dominating position in the retails market of UK.
1. Making use of the database and the information of customers by Loyalty club card, predict the consumers behavioural changes and the requirements and work intensely to provide it before the competitors can just even imagine and thus gain the benefits of being first-movers. Tesco can reap the scale benefits by mass production before the competitors enter in.
2. The demand and attention of the consumers is diverted to organic foods and products. Working in the organic food section by implementing cost leadership will encourage the consumers of organic food to switch to Tesco.
3. Implementing the combination of cost leadership and high differentiation will help in targeting the price sensitive consumers and also the quality seeking buyers.
For this joining hands with Waitrose will be a good option as it is well known for its premium products and is almost dominating in this division.
4. The launch of Jacks, a discount supermarket chain, in 2018 was the attempt to compete the German discounters, Aldi and Lidl but the number of stores compared to them are very few and it comes out to be a long term plan.
The immediate action plan will be the in-store space allocation for Jacks most desirable products on the shelves of the existing Tesco stores and this will play a vital role in letting the customers acknowledge the brand. By the time number of stores of Jacks equals that of the rivals, Aldi and Lidl, the Jacks brand will have been already established.
5. A transient advantage is a strategy that prioritizes fast innovation to build a pipeline of competitive advantages. (Mar, 2013)
When the market is saturated with the price war and attaining sustainable competitive advantage is difficult because of the products being quickly copied, the concept of transient advantage will come to the rescue. It is not to be misunderstood that this strategy is not defined for the long term and is not profitable to the larger companies. The need for transient advantage strategy arises when attaining sustainable competitive advantage is not possible.
It is like innovating continuously, coming up with new ideas and products reap out the competitive advantage of the new idea till the competitors get access to it. Meanwhile the innovation is continuous going process thereby coming up with again a fresh idea. Thus the cycle goes on. Of course the life of the cycle depends on how fast the competitor is able to match it. So this indirectly gets the complete organization at heels. Organisation culture, leaders and colleagues everyone needs to be aggressive in planning the strategies and also seeing the strategy in action.
6. If Brexit takes place then it may give rise to recession in UK that again in turn will be place Tesco in a difficult situation, considering the current growth trend of the competitors Aldi, which has goal for reaching 1200 stores by 2025 and the focus is given on the premium range (Aol.co.uk, 2019).
Brexit was to happen at the end of March but has got postponed because of some political issue.
Tesco had booked refrigerated containers for holding the stock of frozen food for the year ahead to handle the emergent situation where in lies the opportunities. The containers needed larger spaces with parking facilities and that too which were not far from the market (Eley, 2019).
Tesco was depicting the situational strategy while stocking the frozen foods.
Considering the same uncertain situation ahead regarding the Brexit, Tesco should be prepared to face the situation and the CEO Dave Lewis should again adapt the situational leadership.
7. Utilising the in-store space as food outlets creates the consumers feeling more connected with Tesco. Upgrading the outlets and the products in accordance with the consumers desires works best. Introduction of healthy dishes along with the health information leaflets will attract not only the consumers but will increase the satisfaction of consumers on their investment for the purchase and so will be encouraged to look for more better options which will be made available by Tesco.
8. The current trend of consumers all around the world is focussing on the health benefits of the product they consume and are ready, to some extent, to pay the premium price. This trend can encourage a lot more range of products under the healthy products range. And the introduction of healthy range targeting the consumers who are already suffering health related issues will exhibit the strong essence of corporate social responsibility.
9. After the complete turnaround in UK, Tesco can again focus on expansion of international markets.
The above measures and strategies will support Tesco to regain its leading retailer position in UK.
Tesco had gone through very tough times during recession by facing the competition from German discounters and also from the Sainsburys and Asda and after the recession the growing downfall of Tesco had forced Tesco to undergo turnaround strategy and still going. Tesco is regaining the growth but may take some time to re-establish the brand value. Implementing the above discussed strategies and suggestions will help Tesco in rebranding itself.