Tesco.com: E-Business and E-Commerce Management

Management Summary

Tesco Plc (Tesco) is one of the largest retailers with a presence in-store and online spheres. Its retail stores offer the widest possible range of products which includes both food and non-food items, clothing, health-care and beauty products, electronic items, home appliances, stationery, furnishings, etc. In the late 1980s, the non-food element of Tesco’s business was given more priority so as to add a new chapter to the already established brand Tesco Brand. In the non-food sector, for building business, Tesco utilised the significant brand loyalty which it had been able to develop among customers over a longer period of time. At the beginning of the 1990s, the company’s strategy towards the market had shifted from the food sector to non-food sectors along with its ambitious international expansion. Tesco had envisaged the use of Information & Communication Technology for improving its customer related operations and providing information, financial detail and delivery of services via the internet. Tesco expansion policy began with its entry into financial services and successfully leveraged its brand value. It offered a range of services such as savings account, travel and motor insurance and several other financial products (Coriolis Research, 2004).

This document has been developed for providing information related to Tesco. The details given here include Tesco’s customer centric approach based on business policy, its position in the current globalised world, its SWOT analysis and 5 Porter’s Industrial analysis and e-business strategy.

Introduction

The beginning

In 1918, amid the ruins of the First World War, the biggest thing that happened in the history of the United Kingdom’s retail industry was the beginning of the supermarket giant Tesco. It was the eastern end of London, which witnessed the modest beginning of this great organisation when Jack Cohen opened a grocery stall. The same went on to become the first Tesco store in the year 1929 and henceforth later termed as the birth of a UK retailing entity. The beginning mentioned above later became a revolution, and in the rest of the 20th century, the number of Tesco stores went on increasing every year. By the last quarter of the 20th century, Tesco became the most extensively spread retail chain while maintaining the simple philosophy of providing low-cost grocery items to customers across the nation. As per Jack Cohen in his autobiography, the above-mentioned philosophy is recognised as “Pile it High, Sell it cheap”. The continued growth and expansion of Tesco got substantiated through the emphasis that was being paid on products and services; physical environment as well as the location of stores, and the continuous analysis and review of concepts of retail management by experts around the globe while keeping a continuous eye over the psychology of shopping as well as shoppers (Coriolis Research, 2004).

Tesco.com: a revolution in online retail

Tesco has led the UK grocery retail sector with the simple philosophy that is continuous improvisation in customer service. There is a permanent procedure through customer feedback to inculcate processes for providing a better shopping experience to the customer. Following its drive to deliver new services in present and future, Tesco’s humble entry into e-commerce based online shopping of grocery products through Tesco.com has now transformed into an online revolution. Now, Tesco.com is the world’s largest online grocery store with several million registered customers. The warehouse that undertakes online orders is large enough to cater around 4000 plus orders in an hour across the whole of the UK. Utilising its store as warehouses for delivering orders made through Tesco.com, the company registered sales of over £1 billion through its web portal in the 2005-2006 fiscal year (NMA, 2005).

The most recent addition to Tesco.com business process is the launching of a dot-com store in Croydon, the UK, with a similar feature to that of any normal Tesco store but is only for catering online orders for registered users availing service in South London. These stores would remain out of reach for the common public. This arrangement is in sharp contrast to the previous arrangement in which local Tesco stores were supposed to cater to online purchase requests. This new arrangement shows highlight Tesco’s commitment towards its online customers for a quick and comfortable shopping experience. However, the store is supposed to cater for a vast area and hence requires extensive knowledge of the immediate road network. As Tesco stores have the reputation of responding quickly to customers’ needs; to maintain a similar approach for its online customers, Tesco.com is now coining to develop a single, integrated solution and using the navigational system so that accuracy in delivery schedule could be maximised (Microsoft Corporation, 2006). Tesco is now providing its customer with all possible access to its stores. And hence, on average, 1/8th of every pound spent by UK consumers goes into Tesco revenue (Datamonitor, 2007).

Situation Analysis

SWOT analysis

Tesco Plc (Tesco) is one of the largest retailers with a presence in-store and online spheres. Its retail stores offer the widest possible range of products which includes both food and non-food items, clothing, health-care and beauty products, electronic items, home appliances, stationery, furnishings, etc. As the company’s financial condition has been well described earlier, its strong performance in financial terms, market share and growth prospects projects Tesco as a strong player in the global retail sector. Several changes in consumer’s preferences, the tendency of expanding market and Tesco’s response to the fast-paced global market appears to be something which is more than sufficient to ensure a strong future for the company. In short, one can say that Tesco has a very robust market image. But still, the uncertainty factor seems to have some impact on the overall future projection of Tesco in terms of business and profitability. Despite foraying in a number of sectors as well as rapid expansion through the opening of new stores, its overall revenue growth has received beating due to declining margin and liquidity position. In its highly praised entry into the financial sector, it is facing challenges in the form of high regulation that defines financial services business. In another sector, the major contributor to Tesco’s reduced revenue growth is the rapidly changing global economic situation, intense competition with companies with specialisation in only non-food product categories or only food product categories (World Market Intelligence, 2009). Hence Tesco’s SWOT analysis provides the following major details:

Strengths:

• Strong Growth Prospects
• Leading Market Player
• Strong Financial Performance

Weaknesses:

• Limited Liquidity Position
• Limited Operating Margin

Opportunities:

• Opening of New Stores
• Expansion of Personal Finance Business
• Increasing Opportunities in Online Retailing
• Increasing Demand for Private Labeled Products

Threats:

• Decreasing Demand for Non-food products
• Intense Competition
• Highly Regulated Financial Services Business
• Rising Manpower Costs

Tesco plc Strengths

• Strong Growth Prospects: At the end of the fiscal year 2009, Tesco was traded at a P/E ratio of 13.28, which is much above S&P 500 companies’ average of 9.2. This is a clear indication of the high growth prospect of Tesco in terms of revenue and profit as compared to other companies (World Market Intelligence, 2009).
• Leading Market Player: Tesco is a leading market player as it is the third-largest Groceries retailer in the world. With continuous expansion plan and constant focus on strategies related directly to increase market share, Tesco presents itself as a strong player in almost 14 countries that include the UK, Ireland, Hungary, Poland, Czech Republic, Slovakia, Turkey, Thailand, China, South Korea, Japan and India (World Market Intelligence, 2009).
• Strong Financial Performance: Tesco’s financial performance in the last few years has been quite strong. Its performance in the fiscal year 2008-2009 in terms of revenue has been bettered 14.9% to that of the previous year while operating profit of the company saw an increase of 15% to that in the fiscal year 2007-2008. There has been considerable growth in the contribution to this revenue from sectors like online sales, sales of non-food products and Tesco’s international operations (World Market Intelligence, 2009).

Tesco plc Weaknesses

• Limited Liquidity Position: Tesco’s current ratio in the fiscal year 2009 was 0.76, which is way below industry average S&P 500 companies of 1.4. A current ratio with a value lower than the sector average is a clear indication that Tesco has a weaker financial position than other comparable competitors in the retail sector (World Market Intelligence, 2009).
• Limited Operating Margin: Tesco’s company operating margin in the fiscal year 2009 was 5.9% which is again below S&P 500 companies’ average of 14%. This is a clear indication that Tesco follows relatively weak cost management as well as a weaker pricing strategy. Its administrative expense has increased by 21%, and hence overall operating performance and company’s profitability has received a beating (World Market Intelligence, 2009).

Tesco plc Opportunities

• Opening of New Stores: Tesco needs expansion for improving its market share. It must open new stores across various geographical locations like India, South Korea, China, Thailand, Malaysia and other major untapped markets. The opening of a store must follow proper market research as per the customer’s buying capacity and requirement (World Market Intelligence, 2009).
• Expansion of Personal Finance Business: As through the Finance business, Tesco has made a successful entry into the services sector, it now needs to put more stress on the Personal Finance business. Though it is well capitalised and a profitable unit, it now needs an increased list of product portfolios to increase its market share in the financial sector (World Market Intelligence, 2009).
• Increasing Opportunities in Online Retailing: Tesco’s presence in the retail sector is both in the form of its stores as well as a website. A better understanding of this Information Technology supported the globalised world. It has forayed into online retail way back in 1995. But now, the need of the hour is to adopt a strategy through which the contribution of online retail business towards its total revenue growth should increase. Rising internet penetration and increasing familiarity of online shopping among the masses provides a larger opportunity for Tesco to leverage its online brand in transforming efforts into profit (World Market Intelligence, 2009).
• Increasing Demand for Private Labeled Products: Demand for Private Labeled Products is always a key to better profit. Tesco has already introduced its own private brands like Technika in electrical, Cherokee and F+F in clothing. But the actual opportunity lies in providing a run for the money to those companies which have an established name in the above-mentioned product sectors. Discounts and greater shelf presence in stores hold the key to a successful private label. The products must meet all necessary regulations and safety norms and should be made available at a lesser price (World Market Intelligence, 2009).

Tesco plc Threats

• Decreasing Demand for Non-food Products: Global slowdown has lessened the interest of customers in non-food products. The overall tendency of the consumers is towards the necessary grocery items. Tesco’s financial performance might get adversely affected due to this depreciation in people’s preference in shopping non-food products, and this sector generates a significant amount of revenue for Tesco (World Market Intelligence, 2009).
• Intense Competition: Tesco has a very well defined expansion plan across a number of nations in Asia and Europe, but at the same time, in these markets, the company is facing intense competition from local players as well as other international players who have already made a well-entrenched entry to the retail sector of these markets (World Market Intelligence, 2009).
• Highly Regulated Financial Services Business: In this sector, Tesco’s flagship company, i.e., Tesco Personal Finance, needs to follow all regulations as provided by the FSA, which includes satisfying certain necessary things like capital adequacy and liquidity ratios. Any single instance of non-compliance would result in heavy penalties from FSA, and the company might even have to close its financial services business. Being a high-risk sector, a single human error or system failure would cause massive losses in terms of finance as well as reputation (World Market Intelligence, 2009).
• Rising Manpower Costs: Retail industry is always employee intensive sector. Tesco has a strength of more than 470000 employees, and the company has to follow all necessary regulations related to labour laws like government mandated minimum wages and employee benefits. Even in developing nations, the minimum wage is on the rise. The company had to incur a 10.8% rise in its employee costs in the fiscal year 2008-2009. This increase would certainly hamper the operating profit of Tesco (World Market Intelligence, 2009).

Industrial analysis: Porter’s 5 Forces

Porter’s five forces based industrial analysis focuses on five factors; Supplier Power, Buyer Power, Rivalry, Barriers to entry and threat of substitute. Beginning with the rivalry factor, if we look into concepts of classical economics, the rivalry between firms could drive profits to zero. The reason behind this could be partially shared by the threat of substitutes. Here, in the case of Tesco Plc., the company is facing extreme competition from companies like Sainsbury in the UK market while local retailers are fighting neck to neck in other international markets where Tesco is operating its stores. As Tesco rivals in the UK, as well as other nations, are selling similar products, therefore substitution factor is playing its role. For example, if the cost of beans in Tesco is high, then the customer would prefer to move to another superstore where he could get the same product at a cheaper rate. But still, Tesco is not going to suffer due to above mentioned two forces as all the competitors are superstores, and as active market players, they are mature enough to understand that a disciplined approach towards price-setting policy will prevent all retailers from destroying each other in a price war.

Supplier power gets displayed when suppliers refuse to sell their goods to the retailers when their demands are considered by retailers. But Tesco is one of the largest possesses an overwhelming advantage of sales volume and hence can easily dictate terms as per their wish. As it commands a much bigger market, the supplier could be at a loss if it refuses to supply its goods to Tesco, and it will be left with a much smaller portion of the market.

Buyer power is one of Porter’s five forces which show how the buyer dictates the market. It’s the buyer who decides the success and failure of a product and retail store. And the most interesting thing is that despite all sorts of loyalty programs and preference related offers, the customer always wants to shell out less money out of its wallet. Here, in the case of Tesco, the approach of business has always been customer-centric, with strategies being decided and implemented in such a way that it’s the customer who gains. The company has developed itself in a longer period stretching almost three-quarters of a century and almost all sectors, it has a footing, and the customer has accepted it readily. Tesco enjoys enviable customer patronage in the UK market and is now the company trying to follow a similar approach in its business interest across the world.

Entry to the already developed sector is quite difficult, as there are several government-notified regulations that need to be followed and hence act as barriers. Tesco had faced several barriers when it made entry into the financial sector and now is a force to reckon with in the personal finance sector. Also, its existence is itself a barrier to several international chains like Walmart when they try to get into the retail business in the UK. Similarly, Tesco is also facing considerable barriers from local players in its most ambitious plan to expand in various Asian nations like India and China.

E-Business Strategy & Implementation

E-Business Strategy

In the late 1980s, the non-food element of Tesco’s business was given more priority so as to add a new chapter to the already established Tesco Brand. The sole purpose was to build a business in the non-food sector over the significant brand loyalty Tesco enjoyed among customers. At the beginning of the 1990s, the company’s strategy towards the market had shifted from the food sector to non-food sectors along with its ambitious international expansion. Tesco had envisaged the use of Information & Communication Technology for improving its services to customers while providing information, financial detail and delivery services via the internet (Coriolis Research, 2004). And leveraging upon its much-established brand as a retail giant, Tesco forayed into online services in the year 1995 and thereby enabling its customers to place orders to their local Tesco store through the internet. Tesco later used this access to its customers in establishing itself as an Internet Service Provider (ISP) and expanded its online presence through Tesco.net. The initial investment in providing its customers access to its online store all across the UK was just £25 million as Tesco utilised the warehouse and supply chain of the local Tesco store for which the order was placed. The concept that was driving Tesco.com online service is quite simple. Customers are supposed to pay some extra pounds for getting their groceries delivered at home. The order, once taken online, was processed centrally and was later messaged to the store located near the customer’s residence. Tesco stores have to engage a part of the staff who used to gather the items present in the list. The gathered groceries are now assembled at the delivery point for distribution during the given time slot (World Market Intelligence, 2009).

In most cases, customers have to make payments through online channels, and every Tesco store can update information related to the price and availability of any product. Substitutes list is also provided in case of any unavailability. Initially, everyday grocery items like bread, fruit, vegetables and milk had been the most popular item requested online for home delivery, but later Tesco.com was extensively used for non-food items like CDs, electronic goods, books, Rental movies etc. Tesco’s online presence and growing demand for online purchases and home delivery have added “convenience” as the most important chapter in an individual shopping experience.

Tesco has taken the help of various IT enabled tools like Database Management System based MIS or DSS to maintain a track of products’ self-life, demand and customer’s preference. It also provides online chat support to guide its customers in making a selection of products and placing orders. Feedback through an online web page has also provided sufficient details related to customers and their views towards Tesco’s online store and services (World Market Intelligence, 2009).

Since 2005, Tesco.com has made significant growth in its online operations. Since January 2004, under the leadership of CEO Laura Wade-Gery, the number of grocery orders fulfilled by Tesco.com have been more than 150,000/week and is offering a number of intangible products like e-diets and music downloads. Any new customer would have to spend just 35 minutes to complete its first online purchase. Tesco now aims to improve the online experience of its customers. As per customers’ feedback and improved policy, Tesco.com is continuously improving its website for improved customer’s experience. A number of new services are being introduced at the continuous interval. Partnering with Video Island, by May 2005, Tesco.com had registered more than 30,000 customers. Other services include home delivery of bulk wine and white goods. Tesco.com has also collaborated with eDiets.com and promoted this partnership through the Tesco Clubcard loyalty scheme. Tesco utilised this partnership for promoting its dieting business and improve sales at Tesco.com as well as in-store (Hitwise, 2005).

Tesco.com has been in profit since 2002-03 and is perhaps one of the few dot-com initiatives of the late 90s which are generating profit for its parent company. Tesco has proved that with smart business and managing policy, dot-com business could be a profitable venture, and at the same time, it has proved to its detractors that grocery products can be sold through online web portals. Though Tesco is not as big as Wal-Mart, it is perhaps the most innovative retail player with an extensive understanding of customers’ needs and buying tendencies. Tesco.com later successfully expanded its online operations in Ireland and South Korea and again proved that it is not just a UK-centred retail entity but actually the most innovative retail MNC which can understand the pulse of consumers across the globe. Tesco.com is continuously venturing into new areas and is also gaining appreciation from various analysts and strategists (Chaffey, 2008).

Implementation

Tesco e-business strategy also includes web based marketing and promotion through new offers or products and strengthening its capability as a reliable retailer through proper utilisation of customer relationship management (CRM). Strategy related to the customer’s general experience with the company is the very basis for successful implementation of CRM (Humby & Hunt, 2003). It actually requires the amalgamation of people, processes and technology in the most efficient way, with the system purposefully aligning the processes that are employed by the management. The overall purpose of CRM has been redefined from an entity meant to ensure customer satisfaction to customer service management which stresses change management balanced upon company processes and renewed objectives. Tesco has a clear understanding that customers must be realised that patronising Tesco as the favourite online retail store provides them unparallel importance in the company’s services and operations (World Market Intelligence, 2009).

The success of Tesco.com’s CRM shows the smart managerial policy, which focused heavily on what customers want and how they can be provided quickly. Supply chain policy in Tesco.com has been a case of study for the revolutionary changes it made in making dot-com business profitable. With the UK being the only major market of Tesco.com, Tesco’s action of reducing the in-stores control over the shipment quantity while taking the larger portion of the responsibility for online stores has now become an ever guiding policy of supply chain management. The supply chain in Tesco.com requires the involvement of many third-party distributors. The Tesco management analysing the pattern of customer’s demand and that of distributors has sharp differences. The company saw very wide fluctuations in the demand pattern of the distributors while the customer’s response was much less sharp and unusual (Simchi-Levi, Kaminsky & E. Simchi-Levi, 1999).

Tesco.com CRM has been developed over the customer base and brand loyalty that Tesco has gained in the last fifty years. As per the marketing department of Tesco.com, its Clubcard loyalty scheme’s customer base is the most valuable asset for building an online business. Tesco.com relies on in-store advertising, marketing as well as mass e-mails for attracting its customers to make an online purchase through Tesco.com. Special offers and several promotional schemes are introduced at several stages for persuading customers to make an online purchase.

As per Dave Chaffy, a renowned expert in Internet Marketing, Tesco.com has devised a ‘commitment-based segmentation’ based on the last purchase date, the frequency of purchase and the value of the purchase (2008). The six life-cycle categories devised to target communications are:

1. ‘Logged-on’
2. ‘Cautionary’
3. ‘Developing’
4. ‘Established’
5. ‘Dedicated’
6. ‘Logged-off’ (the aim here is to win back).

Tesco electronic CRM has been designed in such a way that to encourage the customers for making purchases. It depends on an automated event-triggered messaging system. The aim of this event-triggered messaging system is to convert its customer’s profile from a first-time purchaser to a regular purchaser.

This sequence based approach begins with event T1 when the customer registers on the site but doesn’t make any purchase. The auto-response system makes response R1 after two days in which phone assistance is offered, and on any trial first purchase, a discount of £5 is provided. The next sequence begins with event T2 in which the customer makes its first online purchase. CRM makes Response R1 confirms the order receipt, and after five days, CRM makes Response R2 which asks for feedback of product, service and delivery. After 14 days of first purchase, CRM initiates Response R3, in which the company offers tips for extensive use of online store along with a £5 discount on the next purchase. Response R4 provides information related to new offers on several products purchased through a web portal. Response R5 is a bi-weekly alert offering a personalised offer to the intended customer. After sixty days, through Response R6, another discount of £5 is offered. Response R7 gets initiated every quarter, which offers coupons for repeat sales. Another trigger event 3 is for monitoring the dormancy state of customers. After detection of dormancy as trigger event T3, a Response R1 gets initiated in which a survey e-mail is sent to the customer along with a £5 incentive. Response R2 is later initiated for encouraging shopping after a considerable break period (Chaffey, 2008).

Legal and ethical issues

E-commerce has now become the fastest way to maximise the retailing capability of any industry or sector. From highly valuable banking and financial products to the shopping of regularly utilised fast moving consumer goods, e-commerce has transformed the complete buying-selling experience of customers as well as the retailers. The scope of a store in the online system is unlimited, and customers all across the world could be targeted. Rapid growth in the number of people using the internet is also on the rise and hence provides more business opportunities to companies. But with this growing community of customers utilising online services for purchase, certain legal and ethical issues related to e-commerce need to be addressed by corporations. As millions of people are now accessing e-commerce facilities provided by Tesco, the company has to pay attention to a number of legal and ethical issues that could affect the large volume of customers utilising e-commerce facilities. The huge volume of transactions would also imply possibilities of financial impingement (World Market Intelligence, 2009).

The privacy issue is perhaps the most important area of concern as Tesco requires its customer to provide all necessary details through an online form while making any online purchase. The details, once exposed to any individual or agent, might get misused without the consent of the concerning individual and hence causing a breach of their privacy. This private information could be sold to other agencies, who often treat customers as fodder for targeted advertisements. Internet users could face targeted e-mail advertisements without their consent, with advertisements making false promises about the services and products with the sole intention to sell fake things despite the fact that the intended target might not need any such product. During online purchases, there have been instances of phishing and important details pertaining to customers’ credit cards and bank accounts have been stolen by the company involved or its employees. Tesco needs to be very careful in providing its customers with a complete safety shield as any of the above-mentioned breaches not only diminish Tesco’s brand image but may bring in some serious legal hackles (World Market Intelligence, 2009).

Conclusion

Tesco’s customer centric policies while managing retail stores and online portals have transformed into strong financial performance, market share and growth prospects. The yearly result for the fiscal year 2008-2009 clearly shows that Tesco is a strong player in the global retail sector. The company has designed policies as per changes in consumers’ preferences, the tendency of the expanding market and the response needed in this fast paced global market. As a whole, the current scenario suggests that the policies and growth of Tesco are more than sufficient to ensure its strong future. In short, one can say that Tesco has a very robust market image. But still considering some uncertainty factors which might cause umpteen effects on the overall future projection of Tesco in terms of business and profitability, the company needs to develop strategies for relatively new sectors like finance and e-commerce as well as international retail. Figures suggest that despite foraying in a number of sectors as well as rapid expansion through the opening of new stores, its overall revenue growth has received beating due to declining margin and liquidity position. In its highly appreciated entry into the financial sector, Tesco needs to redefine some of the aspects of its business as per regulations specified by the government. In other sectors like the non-food product as well as only-food product categories, Tesco needs to redesign far-reaching policies so that it can compete with those companies which are specialised in only non-food product categories or only food product categories.

References

Chaffey, D. (2008). Case study 9.1: Tesco case study & Tesco.com case study for E-commerce & Internet marketing, E-Business and E-Commerce Management, UK

Coriolis Research (2004). Tesco: A case study in Super market Excellence, Coriolis Research, Aukland, New Zealand

Datamonitor (2007). Tesco case study: non-foods hold the key to Tesco future growth strategy, Datamonitor, London, UK

Humby, C. and Hunt, T. (2003) Scoring points. How Tesco is Winning Customer Loyalty. Kogan Page, London, UK.

Hitwise (2005) Press release: The top UK Grocery and Alcohol websites week ending October 1st, ranked by market share of web site visits, from Hitwise.co.uk. Press release available at www.hitwise.co.uk.

Microsoft Corporation (2006). Tesco.com Ensures Accurate Delivery Schedules Across U.K. Capital with CoPilot Live and Windows Mobile, CoPilot Live, USA

NMA (2005) New media age. Delivering the goods, New Media Age, Article by Nic Howell, 5.5.05.

Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. (1999). Strategic Partnering in Supply Chain Management, McGraw-Hill, New York, United States

World Market Intelligence (2009). The Future of Retailing in the UK: Market Intelligence Report, World Market Intelligence, London, United Kingdom