tesco

Tesco PLC is a United Kingdom based international supermarket chain. Originally specializing in food, it has moved into areas such as clothes, consumer electronics, consumer financial services, internet service and consumer telecoms. In the year ended 28 February 2004 Tesco made pre-tax profits of 1,600 million on turnover of 30,814 million. According to TNS Superpanel Tesco's share of the UK grocery market in the 12 weeks to 2 January 2005 was 29.0%. Across all categories 1 in every 8 of UK retail sales is spent at Tesco's, which makes it much more dominant in it's home market than Wal-Mart is in the U.S. Tesco also operates overseas and non-UK sales for the year to 28 February 2004 were 20% of total sales.

History

Tesco was founded by Jack Cohen, who sold groceries in the markets of the London East End from 1919. The Tesco brand first appeared in 1924 after Jack Cohen bought a large shipment of tea from T.E. Stockwell and made new labels by using the first three letters of the supplier's name and the first two letters of his surname forming the word "TESCO". The first Tesco store was opened in 1929 in Burnt Oak, Edgware, London. The firm was floated on the stock exchange in 1947. The first Tesco self-service store opened in 1948 in St Albans and is still trading as of 2004. The first Tesco supermarket was opened in 1956 at a converted cinema in Maldon, Essex. It has been said that it began own label canning at the former Goldhanger Fruit Farms factory which is sited a few miles from Maldon, in the village of Tolleshunt Major despite Goldhanger being another nearby village. The factory has since been sold. It is now a transport depot with several other business units on the site. Tesco's first "superstore" was opened in 1968 in Crawley, West Sussex. It began selling petrol in 1974 and its annual turnover reached one billion pounds in 1979. It introduced a loyalty card in 1995 and later an Internet shopping service. During the 1990s it expanded into Central Europe, Ireland and East Asia. In July 2001 it became involved in internet grocery retailing in the USA when it obtained a 35% stake in GroceryWorks. In October 2003 it launched a UK telecoms division, comprising of mobile and home phone services, to complement its existing ISP business. In August 2004, it also launched a broadband service. In addition to opening its own stores, Tesco has expanded by taking over other chains, including:

Victor Value, England, 1968 (sold again in 1986)
William Low, Scotland, 1994
Quinnsworth, Stewarts and Crazy Prices stores, Republic of Ireland and Northern Ireland from Associated British Foods, 1997
13 HIT hypermarkets in Poland, 2002
T & S Stores, owner of the UK convenience store chains One Stop and Day & Nite, 2002
C Two-Network in Japan, 2003
A majority stake in Turkish supermarket chain Kipa in 2003.
Lotus in Thailand

Tesco has bought and sold other companies including T & S which was an amalgam of firms who owned principally newsagents, stores that were originally owner managed. The T & S group was sold on in the summer of 2004 and is now owned by the group that trades as Martin's the newsagent.

Store formats

Tesco's UK stores are divided into in four formats, differentiated by size and the range of products sold.

Tesco Extra are larger, out-of-town hypermarkets which stock all of Tesco's product ranges. The number of these is being increased by about 20 a year, mainly by conversions from the second category. Typical size 90,000 square feet (8400 m).
Tesco stores are standard large supermarkets stocking groceries plus a much smaller range of non-food goods than Extras. The "standard" Tesco format, accounting for the majority of UK floorspace. Most are located in suburbs of cities or on the edges of large and medium sized towns. Typical size 40,000 square feet (3700 m).
Tesco Metro stores are sized between normal Tesco stores and Tesco Express stores. They are mostly located in city centres and on the high streets of small towns. Typical size 10,000 square feet (900 m).
Tesco Express stores are neighbourhood convenience shops, stocking mainly food with an emphasis on higher margin products due to lack of economies of scale, alongside everyday essentials. Found in busy city centre districts and small shopping precincts in residential areas, and on petrol station forecourts. The largest category by number of store, but a minor part of the estate by total size. Typical size 2,000 square feet (190 m).

Corporate Strategy

Tesco's growth over the last two or three decades has involved a transformation of its strategy and image. Its initial success was based on the "Pile it high, sell it cheap" approach of the founder Jack Cohen. The disadvantage of this was that the stores had a poor image with middle class customers. In the late 1970s, Tesco's brand image was so negative that consultants advised the company to change the name of its stores. It did not accept this advice, yet by early 2005 it was the largest retailer in United Kingdom, with a 29.0% share of the grocery market according to retail analysts TNS Superpanel, compared to the 16.8% share of Wal-Mart-owned ASDA and 15.6% share of third placed Sainsbury's, which had been the market leader until it was overtaken by Tesco in 1995. Key reasons for this success include:

An "inclusive offer". This phrase is used by Tesco to describe its aspiration to appeal to upper, medium and low income customers in the same stores. By contrast ASDA's marketing strategy is heavily focused on value for money, which can undermine its appeal to upmarket customers even though it actually sells a wide range of upmarket products. Up until at least 2004, when a new chief executive launched a new customer focused strategy which was closer to that of Tesco, Sainsbury's retained an image as a high-priced middle class supermarket which considered itself to have such a wide lead on quality that is didn't need to compete on price, and was indifferent to attracting lower income customers into its stores.

One plank of this inclusivity has been Tesco's use of its own brand products, including the up market, "Finest" range and the low price "Value" range. The company has taken the lead in overcoming customer reluctance to purchase own brands, which are generally considered to be more profitable for a supermarket as it retains a higher portion of the overall profit than it does for branded products.

Customer focus: Tesco is a highly effective money making operation, but Sir Terry Leary, chief executive since the mid 1990s, has taken the bold step of trying not to focus on the usual corporate mantra of "maximising shareholder value". The company's mission statement reads, "Our core purpose is, 'To create value for customers to earn their lifetime loyalty'. We deliver this through our values, 'No-one tries harder for customers', and 'Treat people how we like to be treated'". The underlying aim is of course to make higher profits, but there is a clear focus on customer service at the top level of the company. It remains to be seen whether Tesco will be able to maintain this focus now that it is widely perceived as a great corporate success story and the dominant company in the United Kingdom retail market, or will succumb to corporate arrogance as sometimes happens to dominant companies.

Diversification: The company has a four pronged strategy:

"Core UK business" That is, grocery retailing in its home market. It has been innovative and energetic in finding ways to expand, such as making a large scale move into the convenience store sector, which the major supermarket chains traditionally shunned.
"Non-food business" Many United Kingdom supermarket chains have attempted to diversify into other areas, but Tesco has been exceptionally successful. By late 2004 it was widely regarded as a major competitive threat to traditional high street chains in many sectors, from clothing to consumer electronics to health and beauty to media products.
"Retailing services" Tesco has taken the lead in its sector in expanding into areas like banking, telecoms, and utilities. It usually enters into joint ventures with major players in these sectors, contributing its customer base and brand strength to the partnership. Other supermarkets in the United Kingdom have done some of the same things, but Tesco has generally implemented more effectively, and thus made most profit.
"International" Tesco began to expand internationally in 1994, and in the year ending February 2005, its international operations are expected to account for over 20% of sales, or about 7 billion (approximately $13 billion). It has focused mainly on developing markets with weak incumbent retailers in Central Europe and the Far East, rather than on mature markets such as Western Europe and the United States. The medium term aim is to have half of group sales outside the United Kingdom.

Overall Tesco's success is probably based mainly on getting the basics of retailing right slightly more often than most of its rivals.

Financial performance

Tesco is listed on the London Stock Exchange under the symbol TSCO. It also has a secondary listing on the Irish Stock Exchange with the name TESCO LTD. All figures below are for the Tesco's financial years, which run for 52 week periods to varying dates around the end of February, eg "2004" is the Year Ended 28 February 2004. For the period to 31 March 2006 and later years the company is planning to switch to 12 month accounting periods to the 31 March.

Year	1999	2000	2001	2002	2003	2004
Net Revenues (m)	17,158	18,796	20,988	23,653	26,337	30,814
Net Profit (m)	606	99	722	830	946	1,100
arnings per share (Pence)	9.10	10.18	10.87	12.33	13.54	15.05

At 28 February 2004 Tesco operated 1,878 stores in the UK (23.3 million square feet / 2.2 million m) and 440 outside the UK (22.1 million square feet / 2 million m). The average number of employees in the year was 310,411 (annual full time equivalents 223,335). Tesco's market capitalisation on 20 December 2004 was 23.8 billion (equivalent to $45.6 billion at that date).

Internet operations

Tesco operates on the internet in the UK, the Republic of Ireland and South Korea. Grocery sales are available within delivery range of selected stores, goods being hand-picked within each store. This model, in contrast to the warehouse model initially followed by UK competitor Sainsbury, and still followed by UK internet only supermarket Ocado, allowed rapid expansion with limited investment, but has been criticised by consumers for the high level of substitutions arising from variable stock levels in stores. Nevertheless, it has been popular and is oversubscribed in some areas. Tesco claims (in its 2004 annual report) to be able to serve 96% of the UK population from its 270 participating stores. Tesco has delivered to over 1 million households, with more than 120,000 orders per week, by 1000 local delivery vans. In the financial year ending February 2004 it recorded online sales of 577 million (1.87% of total sales, 2.33% of UK sales), and profit of 23 million (1.44% of total profit before tax; 1.73% of UK profit). In 2001 Tesco invested in GroceryWorks, a joint venture with Safeway in the United States, which operates in California, Oregon and Washington states. GroceryWorks has stepped into the void left by the collapse of Webvan, but has not expanded as fast as initially expected. Concerned with poor web response times (at the time of its launch in 1996, broadband was virtually unknown in the UK) Tesco offered a CDROM-based offline ordering program which would connect only to download stock lists and send orders. This was in addition to, rather than instead of, ordering via web forms, but was withdrawn in 2000. Outside the grocery department, Tesco also sell other products on the web, from wine, flowers and consumer electronics to utilities (gas, electricity) and holidays.

Telecoms

Tesco operates ISP, mobile phone and home phone businesses. These are available to UK residential consumers and marketed via the Tesco website and through Tesco stores. Though it launched its ISP service in 1998, the firm didn't get serious about telecoms until 2003. It has not purchased or built a telecoms network, but instead has pursued a strategy of pairing its marketing strength with the expertise of existing telcos. In the autumn of 2003, Tesco Mobile was launched as a joint venture with mmO2 and Tesco Home Phone created in partnership with Cable & Wireless. In August 2004, Tesco broadband, an ADSL-based service delivered via BT phone lines, was launched in partnership with NTL. Tesco announced in December 2004 that it has signed up 500,000 customers to its mobile service in the 12 months since launch.

Operations outside the UK

Outside of the United Kingdom Tesco also operates in the following countries:

Many British retailers which have attempted to build an international business have failed. Tesco has responded to the need to be sensitive to local expectations in foreign countries by entering into joint ventures with local partners, such as Samsung Group in South Korea, and appointing a very high proportion of local personnel to management positions. In late 2004 the amount of floorspace Tesco operated outside the United Kingdom surpassed the amount it had in its home market for the first time, although the United Kingdom still accounted for more than 75% of group revenue due to lower sales per square foot outside the UK.

Controversy

Like many leading companies, Tesco attracts some criticism. As the market leader in its sector, Tesco is an obvious target for people in the UK who disapprove of certain trends in contemporary mass-retailing, for example the risk of anti-competitive behaviour such as extracting unfair prices from suppliers and customers by monopolising distribution channels. These points of controversy reflect differences in viewpoint on the healthy functioning of mass retailers in society. Tesco's 2004 Adminstore acquistion led to a number of local protests on issues such as congestion. Tesco's other store openings and expansions are sometimes contested by energetic campaign groups, as are those of most if not all major retailers. These have not hindered Tesco's or other retailer's expansion programmes much. Another point of controversy is the recent expansion of Tesco into the convenience store market. Government policy is to consider market share as distinct in the supermarket and convenience store sectors that Tesco operates in. This means that Tesco's 29% retail market share is not considered as such for the purposes of investigating anti-competitive behaviour. If it were, this would have necessitated much more attention from the UK Office of Fair Trading. Tesco also attracts criticism from those who believe it should do more to protect farmers and other small suppliers. The company responds by claiming that it follows industry best practice and sources locally where it can to meet customer demand. Following the March 2005 publication of an audit by the UK Office of Fair Trading, independent food producers' groups and campaign groups, including the Women's Institute and Friends of the Earth have called on the UK Government to act on what they call "supermarket abuses of power".

Supermarkets in the United Kingdom
TNS Superpanel