Tesco's Strategy and Financial Performance

Categories: Business Economy Tesco

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Tesco was founded in London's East End around 1919 by Jack Cohen, who started selling groceries at markets. The name TESCO first appeared on labels in 1924 when Cohen bought a large tea shipment from T.E. Stockwell and merged the initial letters of the supplier's name with his own surname. The inaugural Tesco store launched in 1929, and currently, the company runs 1,800 stores in the UK as well as branches in 12 other countries.

Tesco is the largest retailer in Britain based on both global sales and domestic market share.

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It holds the fourth position globally, trailing behind Wal-Mart from the United States, Carrefour from France, and The Home Depot also from the United States. Originally focusing on food sales, Tesco has expanded its product range to include clothing, electronics, financial services, DVD and CD sales and rentals, music downloads, internet services, and telecommunication products for consumers.

Introduction

Tesco's popularity in the UK has steadily increased, with over 13 million customers served weekly. The range of non-food products and services has continuously grown, making Tesco.com the largest home delivery service worldwide.

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Operating in 12 countries and with plans for further expansion, Tesco attributes its success to a strategy centered around customer satisfaction.

Tesco differentiates itself from other retailers by placing a strong emphasis on creating value for customers and cultivating their loyalty, rather than solely concentrating on profits. The 2005 Tesco Interim report emphasizes the importance of establishing lasting relationships with customers as a key component of their strategy, showcasing a customer-centric approach across all areas of the company.

The corporate strategy of this retailer comprises four main parts: UK Core Business, Retail Services, Non-Food, and International.

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The annual report shows increased profits in each of these areas. Profits in the UK Core Business rose by 14.9% compared to a previous increase of 12.7%. Retail Services saw profits rise from £40 million to £70 million. Non-Food market share was expected to be 6% but is actually 7%. The company now operates in 12 countries overseas.

It is necessary to analyze the success of this strategy to provide evidence of Tesco's effectiveness in various aspects.

UK Core Business - Tesco has got a strong UK Core Business because this is where everything started from and gradually as the years went on the retailer was able to exploit opportunities. This was done through innovation and having the energy in finding ways to expand. After five years there were only 728 stores in the UK (Tesco Account Watch, 2002). However, now that numbers has dramatically increased to 1,800 stores (Tesco, 2006) with more then 260,000 employees. From this it can be seen that Tesco idea of expansion was a huge success and this is reflective in the profitability where the sales are £32.7 billion pounds and the operating profits are £1.788 million pounds.
Non-Food - This is seen as being important for Tesco because in the future they would like be in front of their competitors. This can be seen in an annual report of 2002 where it state that "..in the long term would like to be as strong as it is in food to have 6% market share within the next three years." (Tesco Account Watch, 2002)However Tesco have succeeded the expected market share by gaining a market share of 7%. (Tesco,2006) The main reason why this has gone up is due to the fact that Tesco has been able to offer over 100 new products including CDs, electrical goods, clothes etc at low prices and at good quality. By doing this, it will allow this retailer to keep customer loyalty for a long time as well.
Retailing Services - The effective way of implementing this according to Tesco is through joint ventures with major players in the sector they want to operate. Bu doing this it allows Tesco to the ability to contribute it customer base as well as brand strengths to the partnership and vice versa.This has been done exceptionally well since Tesco were able to "follow customer" (Tesco Account Watch, 2002) by offering a wide range of products/services not just to existing customers but to new one as well. Tesco offer three things so far; Tesco Personal Finance (TPF), Tesco.com and Tesco telecom. All these have done well with the increase profits of £70 million pounds for TPF, Tesco.com sales nearly £1 billion pounds and the telecom is serving over half a million customers.
International - The expansion of Tesco overseas first took place in 2004 where it was decided that Central Europe and the Far East would be first to have a Tesco. Since this retailer was so successful in the UK it did not enter the market in the Western European and USA because it was not ready since it didn't know the market, culture, etc. However expanding in Central Europe and Far East was a good choice to start off with because it allowed them to use the best practice suitable for them for developing stores efficiently and at minimum cost. It also allowed them build the store as soon as possible since "a range of store formats that can be rolled out quickly as required" (Tesco Account Watch, 2002).

Since its inception in 2004, Tesco has grown to operate in 12 countries and is now expanding further in Western Europe and the USA. The expansion strategy includes six crucial steps: flexibility to adjust to each market's specific traits, local engagement to connect with residents and build rapport, and unwavering focus on operational tasks despite the challenges of entering a new market.

4th - It is important to be able to adapt to various store formats because one format alone may not reach the entire market. 5th - Developing capabilities such as training employees, building relationships, and sharing information is crucial for success. 6th - Building brands enables the establishment of long-term relationships with customers.

It can be observed from the information above that Tesco's strategy is closely linked to providing customers with the best service through offering a variety of products at affordable prices and in various locations. By focusing all efforts on meeting customer needs, Tesco can surpass profitability expectations.

Tesco Strategy

From analyzing Tesco's strategy, it can be determined that they follow a deliberate approach, characterized by intentionally thinking before acting (Wit & Meyer, 2004). This intentional strategy is evident in their emphasis on frequent customer contact and the construction of new stores in the UK to cater to different customer requirements. As a result, profitability within the UK has increased, demonstrating the effectiveness of this approach. Additionally, Tesco's international strategy and focus on non-food products and services have also contributed to enhanced profitability.

Tesco's original strategy of "pile it high and sell it cheap" was unsuccessful, but they later shifted their focus to earning customer loyalty for life, which has proven successful and remains a crucial aspect of their operations.

Tesco's emergent strategy included expanding into non-food products such as telecoms and internet services to capitalize on market opportunities. Failure to seize these opportunities could have given competitors an advantage, leading Tesco to adapt in order to stay competitive (Elsevier bookshop, 2006).

Tesco's strategy is classified as rational planning because it has a clear vision, mission, and specific goals that are determined through various assessments including analyzing the external and internal environment along with its current position.

Financial Analysis

Profitability Ratios

The ratios comparing Tesco Store Plc and WM Morrisons Supermarkets PLC are as follows.

Return on Investment

Tesco Plc

WM Morrisons Supermarkets PLC

The Annual Report of 2006 stated that a percentage of 20.08% was reported.

The percentage of 5.55% is shown in the 2006 annual report.

The above ratio illustrates how effectively management utilizes company assets to drive revenue. Specifically, Tesco Plc boasts a 20.08% earning, significantly outperforming WM Morrisons Supermarket PLC at 5.55%. This stark contrast underscores Tesco's operational management's superior efficiency in maximizing asset utilization to boost sales.

Gross Profit

Tesco Plc

WM Morrison's Supermarkets PLC

7.7% was reported in the annual report of 2006.

24.58% (Fame-analysis)

The ratio mentioned above is a critical indicator of profitability, evaluating a company's efficiency in trading and profit generation. WM Morrisons Supermarkets PLC surpasses Tesco Stores PLC in this regard, showing that WM Morrisons Supermarkets PLC is more efficient in producing and distributing goods, leading to a higher gross profit percentage compared to Tesco Stores PLC.