An Insight Report on TESCO Plc. By Aanca Georgiana

Table of Contents
I. II. III. Executive Summary .................................................................... Page 3 Trade Barriers ............................................................................. Page 4 Technological Advances .............................................................Page 4 a. Information Technology ......................................................... Page 4 b. Retailing Technology ............................................................. Page 5 c. Operation Systems Technology ............................................. Page 5 d. Recommendations ................................................................ Page 6 IV. Adapting to Local Markets ........................................................... Page 6 a. Retailing Services ..................................................................Page 6 b. Marketing Strategies .............................................................. Page 8 V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. Mistakes of Tesco......................................................................... Page 8 Fixed Costs ..................................................................................Page 9 International Trade & Comparative Advantage ........................... Page 10 Political Factors .......................................................................... Page 11 Operation Pressures.................................................................. Page 13 Local Adaptations ....................................................................... Page 14 Strategy ...................................................................................... Page 15 Business Development Strategy ................................................. Page 15 Success of Strategy....................................................................Page 17 Human Resource Management ..................................................Page 17 References………………………………………………………….Page 19 Malley 2

2| Tesco PLC

Executive Summary
Over the past 20 years, Tesco has brought its corporations to new heights in the supermarket industry by currently placing as the number 1 supermarket in the UK and number 3 worldwide amongst competing grocery chains. Their surge of success has much to do with advancing the corporations technology, such as CRM (Customer Relationship Management) software, this includes the highly successful Tesco Clubcard. Allowing Tesco to build their information technology with customer databases allowed them to develop their stores matching their customers' wants and needs, which is critical to the industry. Factors such as declining trade barriers and adapting to local Tesco environments by incorporating tactics such as, comparative advantage theory, allowed Tesco to profit in their global products and establishments in the foreign market. This also has allowed Tesco to operate with low fixed costs but as a supermarket company, Tesco experiences high variable costs including components such as production costs, suppliers etc... As Tesco's foreign direct investment has substantially increased over the past ten years. By 2009, Tesco invested a little over £46 million pounds combining inward and outward investment. By 2009, Tesco's outward investment totals were 35 percent of their total investments, demonstrating Leahy's clear direction of wanting to spread the corporation further into the foreign markets. Much of Tesco's success can easily be contributed to the outstanding leadership direction of Sir Terry Leahy. For almost 14 years, Leahy has been the CEO of the Tesco Corporation, launching the company into tremendous success not only for the UK but across the globe. There has been endless discussion as to what the future success of Tesco entails since Leahy will be retiring in Spring 2011. There has been much debate if Tesco will be able to continue to dominate in the foreign markets, as their ventures such as the United States Tesco's Fresh and Easy stores, are presently continuing to lose profit with little signs of improvements. Philip Clarke will be stepping in as Tesco's new CEO and his first year decisions will be crucial as to whether Tesco should continue or pull out of the American markets. Malley 3

3| Tesco PLC

Trade Barriers
Tesco supermarket is one of the largest food retailers across the UK and by 2010 they have expanded their stores across 14 other countries including Asia, Europe and the United States. The decline of trade barriers across the globe has allowed Tesco not only the ease of expanding their business worldwide but incorporating global products. This has also allowed for the company to establish a fair trade system of their goods while maintaining better relations with their suppliers. Malley 4

Technological Advances
During the 1970's and 1980's, Tesco was barely making profits on their chain until Sir Terry Leahy stepped in as CEO. Recognizing the company needed a complete makeover, Leahy quoted as his first step, "Know you customers, know your store." Technology has helped provide Tesco with its global success through: I. Information Technology a. Customer Database i. Tesco Clubcard - The Tesco Clubcard has revolutionized Tesco's customer service operations. The Clubcard gives Tesco direct access to the customer's shopping behaviors and on how to improve the store's products to match the customers wants and needs. ii. By building this database, Tesco was able to recognize their errors and fix them accordingly. • For example, customers were more inclined to purchase a more expensive version of their "normal" product (ex: wine) during the holiday season. This allowed the company to expand

4| Tesco PLC

their wine selection to include a fine wine selection. II. Retailing Technology The company's ability to adapt and integrate technology has lead to significant increase in company profits and a large consumer base. The Tesco Corporation has tailored technology to their needs by incorporating: a. Tesco.com • Initiated in 2000 and obtains 1 million active users in the UK. • By 2009, 50 percent of Tesco's customers used online grocery shopping. b. Tesco Telecoms c. Tesco Clubcard d. Self-checkout machines These technology services have given the company the opportunity to branch out to their consumers shopping needs in a faster, more efficient climate. Recently in August 2010, Tesco launched the first "drive -thru" supermarket in United Kingdom. Allowing their "time-conscious" consumers who cannot wait for their delivery of goods, allows them the convenience of online grocery shopping with the option of the store's drive-thru pick up service. III. Operation Systems Technology Through the use of electronic shelf labeling, Electronic Point of Sale(EPOS) and Electronic Funds Transfer Systems(EFTPOS) Malley 5

5| Tesco PLC

allows the corporation to keep a better track of their inventory goods. In turn, this notifies its employees the correct stocking measurements while, also corresponding to their suppliers what goods are in demand. IV. Recommendations Tesco.com has proven to be a success for the corporation but currently is only operating in the United Kingdom, the Republic of Ireland and South Korea. For Tesco to maintain and improve their business it would be beneficial for all their foreign stores to incorporate online shopping for all their customers. Malley 6

Adapting to Local Markets
As Tesco stores continue into global markets, it is essential for Tesco to alter to the specific consumer market. In order to accommodate to the customer Tesco's adjustments are made through their retailing services and marketing strategies.

I. Retailing Services a. Cultural Tastes By using comparative advantage theories, each Tesco branch can adhere to each country's specialized products. Each country's consumers maintain specific staple products that Tesco must be able to adapt to their consumer's preferences when exporting their products to their global branches. Such

6| Tesco PLC

as, incorporating increased levels of curry products in India or enlarged rice products in China. b. Cultural Shopping Not only does taste affect consumer's choices but consumer's shopping habits. • Shopping Forms o Tesco's India branches are "cash and carry" stores, which sells its products by bulk to its wholesale consumers. o Tesco's international stores located in South Korea

Malley 7

and China, these branches are "hypermarkets," which not only incorporate a large variety of food products but a very large amount of non-food products as this consumer base prefers to do all their shopping at one store1. • Interactive Shopping o In China, fish is a staple product to the consumer and is sold in a non-western manner. Where as instead of packaged fish, live fish is placed in a tank and the customer catches' their own live fish • Organic Shopping o Tesco branches in Japan must rotate stock products constantly as these customers will buy fresh items and produce several times throughout the week. o In Thailand, Tesco branches incorporate a "Fresh Market Hall," where local vendors sell fresh produce and local specialties. Thus, Tesco has achieved being the number 1 grocery competitor in the Thai market by adapting to its customers.

II. Marketing Strategies Tesco's marketing strategies vary between countries to adapt to its customer base. For instance, the Tesco Clubcard is incorporated in many

7| Tesco PLC

of their branches worldwide but have operating differences between countries. For example, Tesco's South Korea branches offer clubcard points to customers who travel by bicycle to their stores. Tesco's first quarter sales of 2010 increased 8.2 percent as international market revenue rose 11.9 percent. To continue growth and expansion in the food service industry, Tesco must rank the importance of adapting to their local branches is critical. Thus on a scale from 1 to 10, Tesco would rank at a high 8. Malley 8

Mistakes of Tesco
In 2007, Tesco launched its supermarkets in the United States as a convenient store, Tesco's Fresh and Easy. Since its opening, these stores have received poor performance levels and non-profitable returns. This may be attributed to not fully understanding its American consumer base or to the global recession. Leahy is still hopeful that stores will turn around and make a comeback in the United States. The issue that might even be of bigger

8| Tesco PLC

consequence is current CEO, Sir Terry Leahy, will be retiring in 6 months, leaving this issue unresolved and into the hands of a new CEO.

Fixed Costs
Tesco's 2009 Costs

Fixed Costs £m Variable Costs £m Total Costs £m 2,514 50,109 52,623 Tesco's corporation operates on a low fixed costs platform due to the high

variable costs associated with the company. These fixed costs include building permits including rent and utilities, executive salaries and manufacturing costs such as land maintenance and transportation device maintenance. About 95 percent of Tesco's costs are variable costs due to production costs including suppliers and hourly employees wages. British Airways 2009 Costs

Fixed Costs £m 694

Variable Costs £m 220

Total Costs £m 914

The supermarket's industry overhead is not as severe as the air transportation industry. For example, British Airways must accommodate their business strategy accordingly to high fixed costs factors, which account for 75 percent of British Airways total costs. These fixed cost factors include fueling, aircraft maintenance, runway fees and government taxations. These fixed costs are not only expensive but the airline industry is easily affected by the high and

low fluctuating demand period. Thus, Tesco's fixed costs are low compared to the airline industry.

Malley 10

International Trade
As the Tesco corporation continues to grow and expand their stores into foreign markets has led for a necessary movement of understanding international trading policies. To maintain low operating costs, Tesco must comprehend and practice comparative advantage theories for their business. • Using Ricardo's comparative advantage theory is beneficial for Tesco to use in the production and exporting of goods to each country. This will further educate the company as to which goods should be bought from local vendors and what needs to be exported in for the specific store.

o For example, Japan has a lower cost production in producing rice thus it

would be cheaper and more efficient for Tesco to buy rice from Japanese wholesalers than exporting it into the country. In China, Tesco can produce part of their clothing line fabrics specifically for outdoor and extraneous labor cheaper than in India. In India, Tesco produces their more ornate fabrics than China because it can be done faster and cheaper.

As Tesco develops in foreign markets, it is critical for the company to practice efficient international trading and profit from using the specialization techniques used in comparative advantage theories. This is done control costs to a minimum and keeping prices low for their consumers.

10 | T e s c o P L C

11 | T e s c o P L C

Political Factors

Tesco's inward investments have undergone scrutiny as the corporation continues to expand and grow across the UK. Tesco's ability to capitalize on many of the UK's land banks to establish more stores across the area developing into "Tesco Towns." I. Political Contributions • Government parties, especially the Labour Party, have come under attack for letting superstore grocery store chains, such as Tesco, monopolize and bully small businesses in the UK. In 2003, Tesco

Malley 12

12 | T e s c o P L C

has donated a little more than £20,000 pounds between the Labour and Liberal Democrat parties. Even Ursdaw, Tesco's prominent union for their workers, were only given £16,000. As for the rest £5,502 was allocated to the Conservative Party, £1, 300 to the Plaid Cymru, £1,203 Fianna Fail. • Not only has Tesco made sufficient political contributions, but has hired many prominent political advisors as key employees for the company. For example, Philip Gould, one of Tony Blair's chief advisors, was hired to improve Tesco's lobbying practices giving an extreme advantage to obtain government insight. II. Committees • During the early 2000's, the Tesco corporation had members sitting on six different government committees. This was a significant increase compared to their other supermarket competitors, thus coining phrases such as "Tescopoly," to develop as competitors were becoming more jealous of the market share Tesco was monopolizing. • Local Planning Commissions in the UK have tried to control Tesco's acquisition of numerous land banks to try and stimulate local markets, example convenience shops. This has been unsuccessful as these commission officers' terms are very short and the planning requests take longer than most officers can finish a term, thus permission is usually always granted to Tesco. III. Millennium Dome • In 1998, The Observer, speculated Tesco donated £12 million to the new government project, The Millennium Dome, as a "quid pro

Malley 13

13 | T e s c o P L C

quo" situation. At the same time, legislation was undergoing for a tax to be stipulated on car parks for shopping centers, which would cost Tesco almost £40 million pounds. After the donation was made, the tax fell through and was not passed.

Malley 14

It is a question of power and how much should be allowed and what is deemed unfair. Tesco's practices are of a strong, independent company who has developed the supermarket industry as a thriving business. Should Tesco be punished for giving consumers the option of either buying from their store instead of local stores, ultimately it is the consumer's decision where they shop and many consumers cannot argue with Tesco's low costs and wide product selection.

Operation Pressures
i. Tesco generally operates with low cost pressures running business operations, but maintains high cost pressures from consumers to ensure that product prices remain low. Currently Tesco has had some struggles with sustaining their low prices to consumers as the recession increased inflation amongst various countries, thus leading to a difficult trading market. ii. Tesco faces pressures more from their consumers and base success off of customer retention. Hence, the initiation of Tesco's loyalty program, the Clubcard to act as a switching cost for the company. The Clubcard gains access to important information while providing substantial incentives to customers allows for high consumer retention in their market. By creating incentives in this program, promotes Tesco's products beyond groceries,

14 | T e s c o P L C

opening consumers to all of Tesco's markets, such as financing, telecom mobiles and non-food items.

Malley 15

Local Adaptation
i. Tesco's working practices remain the same across countries. Through their supply chain, management and processing tasks are completed in the same manner. When entering the global market, Tesco formulated their operations and technology as "Tesco in a Box," to allow for implementation ease across countries. This contains technology for store inventory purposes, Tesco's Clubcard etc. ii. Although set up is somewhat simplified, Tesco's main concern is adapting to the local market of consumers. The pressure to meet customers needs are very high and a must for Tesco to succeed in that market. Adaptations include not only considering food and cultural tastes amongst countries but different types of shopping stores. a. In Asia, Tesco implemented "hypermarkets," which are mega supermarkets that carry an equally high amount of food and nonfood items. In the United States, "Fresh and Easy" stores are convenient-like, organic shopping stores. India manages "Cash and Carry" stores to provide bulk shopping to consumers and suppliers iii. Shopping habits vary across countries, which is the reason Tesco emphasizes on market research to help determine what their customer wants and needs. As a result, the Tesco Clubcard helps further their

15 | T e s c o P L C

research within each country deciphering if consumers are money conscious, how often a customer will shop and which brands they prefer.

Malley 16

Strategy
i. Tesco maintains a transnational strategy, with an emphasis on local markets and cost reduction pressures, especially from their consumers. This is the optimal strategy for businesses and the right strategy for Tesco. Therefore, it is critical for Tesco's business to continue focusing on local market needs and cost pressures specifically from their consumer's viewpoint, to provide low prices to their products, as theses strategy's help the business grow and develop while maintaining their high position in the supermarket industry.

Business Development Strategy
i. Which Market's to Enter and When : a. Tesco examines stores underperforming in hopes to acquire them for potential profit growth. Mainly by attaining favorable markets where the economy is stable and the political environment is secure. b. Tesco will usually enter a market early but will only buy at the market's lowest selling point, to increase their turnover. ii. Scale of Entry a. In many cases, such as China and other Asian countries, Tesco entered on a large scale entry method to stay ahead of competition, such as Walmart and Carrefour, and to expand international stores. b. In 2002, £377 million pounds buying acquiring T&S stores located in China. Also an additional £140 million pounds was produced for store expansion and redevelopment in Shanghai.

16 | T e s c o P L C

c. In 2008, Tesco nearly spent £1 billion pounds in South Korea through store acquisition purchases alone, which has led Tesco close to succeeding their number one competitor in South Korea, Shinsegae markets. Entry Mode a. Tesco international success can be attributed to their developmental strategy of acquiring international firms and reconfigure these stores to the Tesco model. ■ While Tesco was increasing their expansion internationally, in 2004, Tesco entered into a joint venture with Topland, a property group, of £650 million pounds of Tesco's UK property. This was to improve Tesco's credit rating and a way for the company to pay off their expanding debt. b. When entering a new market, Tesco has always followed an acquisition model, except in the United States. Tesco decided to pursue an organic growth entry mode, which has proven to be so far, unsuccessful and costly for the company. By entering in a limited scale by opening shops across California, placed Tesco in a high risk operation, where profit turnover would need to be quick and incur a large revenue of profit. By expanding into the US market would not only create profits for Tesco but there would be a high reward of further establishing the competition between Tesco and Walmart, in hopes for Tesco to gain profit off of "Walmart's territory". Instead of following their previous models, Tesco has

Malley 17

17 | T e s c o P L C

had to pay for the mistake where in the first year Tesco lost 208 million dollars in its first year of operations.

Malley 18

Success of Strategy
i. Therefore, it is easy to register the success of Tesco's development growth specifically in Asia and Europe, by following their company's subsidiary skills. Tesco's risk of enforcing a new business developmental strategy in the US has cost Tesco significantly. Tesco may have had better success in the US market if they acquired a US supermarket chain and reform the business to the Tesco's supermarket model.

Human Resource Management
i. Tesco employees 380,000 people worldwide, with 260,000 employed within the UK equating Tesco as the largest private sector employee corporation2. Thus, Tesco places human resources management highly and as part of their core competencies to integrate a geocentric policy for the corporation. By attaining a large number of employees due to their expansions across the globe, it was necessary for Tesco to retain a significant quantity of employees, as each store requires many employees to help run daily operations smoothly. Part of their management technique is to ensure managers know a significant amount of detail of their specified market, this is extremely important when they open an international branch to ensure that the local knowledge of a new market is implemented within the store's daily resources. For Tesco to operate at it's current pace and size, Tesco has had to hire employees in 5 key areas of business, such as "store management, site location analysts, marketing and financial personnel, supporting and sustaining international

18 | T e s c o P L C

operations". These sectors are necessary for Tesco to establish success in many diversified cultural markets of their business

Malley 19

References: • Tesco PLC - Country Highlights. Accessed on 14 September 2010 http://cr2010.tescoplc.com/country-hi ghlights .aspx • Tesco PLC - Retailing Services. Accessed on 15 September 2010 http://www.tescoplc.com/plc/about us/strategy/services/ • "Tesco Trials Nations First 'Drive-Thru' Supermarket Service," 23 August 2010. http://www.tescoplc.com/plc/media/pr/pr2010/2010-08- 23/ • Friedlos, Dave. "Tesco to extend electronic labeling," 13 July 2006. http://www.computing.co.uk/computing/news/2160215/tesco-extend• electronic • Tesco PLC - Retailing Services. 15 September 2010 http://www.tescoplc.com/plc/about us/strategy/services/ • Felsted, Andrea. "Tesco expects US arm to break even," Financial Times. 6 October 2010. http://www.ft.com/cms/s/0/32273f0a-d047-11df-afe1- 00144feabdc0.html • Howker, Ed. "The Big Question: Is Tesco now to powerful in Britain, and can it's growth ever be checked?" 5 March 2009. The Independent. 19 October 2010. http://www.independent.co.uk/news/business/analysis-and-features/the-big-question- istesco-now-too-powerful-in-britain-and-can-its-growth-ever-be-checked-1637575.html

19 | T e s c o P L C