Tesco: Difference between revisions

This article refers to Tesco PLC - the international retailer with headquarters in the UK, see also Tesco (Disambiguation)

Tesco PLC

File:Tescologo.svg
Company type	Public
Industry	Retail (Grocery)
Founded	1924
Headquarters	Cheshunt Hertfordshire
Key people	Terry Leahy (CEO)
Products	Grocery, general merchandise, financial services, telecoms
Revenue	£38.3 billion GBP (52 weeks to 25 February 2006)
Operating income	1,046,000,000 pound sterling (2016)
Net income	129,000,000 pound sterling (2016)
Number of employees	360,000
Website	http://www.tesco.com

Tesco PLC (LSE: TSCO) is a United Kingdom-based international supermarket chain. It is the largest British retailer, both by global sales and by domestic market share, and the fourth largest retailer in the world behind Wal-mart of the United States, Carrefour of France, and Home Depot of the United States.

Originally specialising in food, it has moved into areas such as clothes, consumer electronics, consumer financial services, internet service and consumer telecoms. Tesco's revenue for the 52 weeks to 25 February 2006 was £38.3 billion. In 2006 it adjusted the accounting date for its non-UK and Ireland operations, and including 60 weeks of non-UK and Ireland operations revenue was £39.5 billion. Group profit before tax was £2.210 billion for the 52 week period and £2.235 billion including 60 weeks of non-UK and Ireland turnover.

According to TNS Superpanel Tesco's share of the UK grocery market in the 12 weeks to 29 January 2005 was 30.6%. Across all categories, over £1 in every £8 of UK retail sales is spent at Tesco. Tesco also operates overseas, and non-UK revenue for the year to 25 February 2006 was 24% of total revenue.

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. The name derived after Jack Cohen bought a large shipment of tea from T.E. Stockwell (formerly Messrs Torring and Stockwell of Mincing Lane), he 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". There is a wide mis-conception that the name is an abbreviation of the name of Jack Cohen's wife, Tessa Cohen, becoming TESCO - however this is wrong as Jack was never married to a Tessa.

In the late 1990s, the typeface of the logo was changed to the current one shown on the top of the page with stripe reflections underneath the typefaces as Tesco used them on their carrier bags.

Early Days

The first Tesco store was opened in 1929 in Burnt Oak, Edgware, London. The firm was floated on the London Stock Exchange in 1947. The first Tesco self-service store opened in 1948 in St Albans and is still trading in 2006 as a Tesco Metro store. The first Tesco supermarket was opened in 1956 in a converted cinema in Maldon, Essex.

It has been said that it began own-label canning at the former Goldhanger Fruit Farms factory, 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. Also In 1975 Tesco opened one of its first Hypermarkets in Irlam. The first Hypermarket under the "Extra" name opened in 1997.

=The drive to win the consumer

Tesco founder Jack Cohen was an enthusiastic advocate of trading stamps as an inducement for shoppers to patronise his stores; he signed up in 1963, and became one of the company’s largest clients. But Cohen was a fan of pile it high and sell it cheap, and in the mid-70's Tesco faced many cost problems associated with not properly intergrating it's purchased chains of stores. In 1977 Tesco launched Operation Checkout, an across the board price cutting campaign aimed at countering the threat from the new breed of discounters such as Kwik Save. A key decision was to abandon Green Shield stamps, thus saving some £20m a year and helping to finance price reductions ^[1]

Expansion

In 1994, the company took over the Scottish supermarket chain William Low. Tesco successfully fought off Sainsbury's for control of the Dundee-based firm, which operated 57 stores north of the border, paving the way for Tesco to expand its weak presence in Scotland. To the present day, Tesco has based its Scottish headquarters at the former Wm. Low offices in Dundee. From small beginnings in Scotland - Inverness was recently branded as "Tescotown"^[2][3], since an estimated 50p in every £1 is believed to be spent in the three Tesco stores within the city^[4]. (Nationally, it is estimated that 1 in every £8 is the proportion spent) It introduced a loyalty card branded 'Clubcard' 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 internet service provider business. In August 2004, it also launched a broadband service.

On 9 February 2006 Tesco announced that it plans to move into the United States by opening a chain of convenience stores, starting on the West Coast in 2007.^[5]. These will be based on its Tesco Express format (see below). The initial planned capital expenditure is up to £250 ($436m) million per year. CEO Terry Leahy stated, "We have committed serious resources to developing a format that we believe will be really popular with American consumers". Due to the poor track record of British retailers in the United States the investment community reponded with some scepiticism to the project, with a small fall in the company's share price on the day of the announcement^[6].

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^[7]
• A majority stake in Turkish supermarket chain Kipa in 2003.
• Lotus in Thailand
• Hillards, North of England 1984
• 21 remaining Safeway/BP stores in late 2005, after Morrisons (the new owners of Safeway plc, the British supermarket chain) dissolved the Safeway/BP partnership

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 the 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 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. According to Citigroup retail analyst David McCarthy, "They've pulled off a trick that I'm not aware of any other retailer achieving. That is to appeal to all segments of the market"^[8]. By contrast ASDA's marketing strategy is focused heavily on value for money, which can undermine its appeal to upmarket customers even though it actually sells a wide range of upmarket products. During its long term dominance of the supermarket sector Sainsbury's retained an image as a high-priced middle class supermarket which considered itself to have such a wide lead on quality that it did not need to compete on price, and was indifferent to attracting lower-income customers into its stores. This strategy has been abandoned since losing the no.1 spot to Tesco and particularly since the arrival of Justin King as CEO in 2004 who has established a new customer-focused strategy closer to that of Tesco.

• One plank of this inclusivity has been Tesco's use of its own-brand products, including the upmarket "Finest" and low-price "Value". The company has taken the lead in overcoming customer reluctance to purchasing 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: Sir Terry Leahy, 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 if it 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 have 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. Tesco sells an expanding range of own-brand non-food products, including non-food Value and Finest ranges. It also has done quite well in non-food sales in Ireland. CDs are one of the best examples, with Tesco Ireland promising to sell all chart CDs (except compilations) for €14.95 compared with HMV Ireland or Golden Discs selling the same for just over or under €20.
  • "Retailing services" - Tesco has taken the lead in its sector in expanding into areas like personal finance (see below), telecoms (see below), 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 them 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 accounted for just 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 and now in 2006 they are going to branch out in the United States. The medium term aim is to have half of group sales outside the United Kingdom. Tesco rolls out successful UK initiatives in other countries. For example Tesco Financial Services and Tesco Express convenience stores both operate in several markets.

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

UK operations

Formats

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

• Tesco Extra are larger, out-of-town hypermarkets that stock all of Tesco's product ranges. The first Extra opened in 1997 thanks to the Tesco Hypermarkets that opened in 1976 with a flagship store in Irlam (this store was later demolished to make way for a smaller Tesco Extra). The 100th store opened in the 2004/05 financial year. The number of these is now being increased by about 20 a year, mainly by conversions from the second category. Typical size 68,000 square feet (6,300 m²). As of January 2006 Tesco's largest UK store is in Slough and is 190,000 square feet (18,300 m²). This store is unusual in being raised on stilts to maximise space utilisation. For comparison a standard Wal-Mart Supercenter in the U.S. is around 200,000 square feet (18,400 m²).
• Tesco stores are standard large supermarkets, stocking groceries plus a much smaller range of non-food goods than Extra. They are referred to as "superstores" for convenience, but this word does not appear on the shops. It is 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. The typical size is 31,000 square feet (2,900 m²).
• 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 is 12,000 square feet (1,100 m²).
• 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. They are found in busy city centre districts and small shopping precincts in residential areas, and on petrol station forecourts. There were 654 stores at 25 February 2006 year end, with a typical size of 2,100 square feet (190 m²).
• One Stop The only category which does not include the word Tesco in its name. These are the very smallest stores. They were part of the T&S Stores business but, unlike many which have been converted to Tesco Express, these will keep their old name. There are more than 500 of them. Typical size 1,350 square feet (125 m²).

In May 2005 Tesco announced a trial non-food only format^[9], and the first store opened in October 2005:

• Tesco Homeplus : These stores offer all of Tesco's ranges except food in warehouse-style units in retail parks. Tesco is trying this format because only 20% of its customers have access to a Tesco Extra, and the company is restricted in how many of its superstores it can convert into Extras and how quickly it can do so. Large units for non-food retailing are much more readily available. It plans to open at least three more Homeplus stores in 2006. [1]

Store summary at 25 February, 2006

As of 25 February 2006, at the end of its 2005/06 financial year Tesco's UK store portfolio was as follows.

Tesco Personal Finance

Tesco has a banking arm called Tesco Personal Finance, which is a 50:50 joint venture with the Royal Bank of Scotland. The products on offer include credits cards, loans, mortgages, savings accounts and several types of insurance, including car, home, life and travel. They are promoted by leaflets in Tesco's stores and through its website. The business made a profit of £139 million for the 52 weeks to 25 February 2005, of which Tesco's share was £70 million.

The Tesco Personal Finance has grown to now offer a wide range of financial products under the Tesco brand. Currently for 2006, Tesco Personal Finance offers a range of insurance policies, Tesco branded credit cards, loans, mortgages and savings options. This move towards the financial sector has diversified the Tesco brand and cemented sustainable growth that is not dependent on a single market sector.

Telecoms

Tesco operates ISP, mobile phone, home phone and VoIP 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 did not 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 autumn 2003 Tesco Mobile was launched as a joint venture with O2, and Tesco Home Phone created in partnership with Cable & Wireless. Tesco Mobile offers both prepaid and PAYG (pay-as-you-go) accounts. In August 2004 Tesco broadband, an ADSL-based service delivered via BT phone lines, was launched in partnership with NTL. In January 2006, Tesco Internet Phone, a Voice over Internet Protocol, VoIP, service was launched in conjunction with Freshtel of Australia^[10].

Tesco announced in December 2004 that it has signed up 500,000 customers to its mobile service in the 12 months since launch. In December 2005, it announced it had one million customers using its mobile service. In April 2006 it announced that it had over one and a half million telecom accounts in total, including mobile, fixed line and broadband accounts. [2]

Internet operations

Tesco has operated on the internet in the UK since 1994 and was the first retailer in the world to offer a robust home shopping service in 1996. Tesco also has Internet operations in the Republic of Ireland and South Korea. Grocery sales are available within delivery range of selected stores, goods being hand-picked within each store. In contrast to the warehouse model followed by Waitrose's home delivery service partner Ocado, this model, which is now also applied by competitor Sainsbury's, allowed rapid expansion with limited investment, but has been criticised by some customers for a high level of substitutions arising from variable stock levels in stores. Nevertheless, it has been popular and is the largest online grocery service in the world.

In 2001 Tesco invested in GroceryWorks, a joint venture with the American Safeway Inc. (who had long since sold-off their UK subsidiary and Tesco's rival, Safeway plc), operating in the United States and Canada. 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.

Tesco claimed in its 2005 annual report to be able to serve 98% of the UK population from its 300 participating stores. Tesco delivers to over 1 million households, with more than 120,000 orders per week, by 1,000 local delivery vans. In the financial year ended 25 February 2005 it recorded online sales up 31.9% to £948 million and profit up 54.9% to £56.2 million. [3]

The Tesco.com site is also used as a general portal to most of Tesco's products, including various non-food ranges (under the "Extra" banner), Tesco Personal Finance and the telecoms businesses, as well as extra services which it offers in partnership with specialist companies, such as flights and holidays, music downloads (as of June 2005 Tesco claims a 10% UK market share), gas, electricity and DVD rentals. It does not currently sell clothing online. In May 2005 it introduced a clothing website^[11], but initially at least this serves solely as a showcase for Tesco's clothing brands, and customers still have to visit a store to buy.

Operations outside the UK

Many British retailers that 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 Charoen Pokphand in Thailand (Tesco Lotus), 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 unit area outside the UK. Tesco regularly makes small acquistions to expand its international businesses. For example in its 2005/06 financial year it made one in one in Korea, one in Poland and one in Japan. [4]

In September 2005 Tesco announced that it was selling its operations in Taiwan to Carrefour and purchasing Carrefour's stores in the Czech Republic and Slovakia. Both companies stated that they were concentrating their efforts in countries where they had strong market positions. Tesco is the grocery market leader in the Republic of Ireland, with a reported November 2005 share of 26.3%^[12]. On their Irish website, they also claim to be the largest purchaser of Irish food with an estimated €1.5 billion annually.^{[citation needed]} Tesco plans to enter the $600bn US grocery market, starting in 2007 on the West Coast, where it will roll out a new format of express stores modelled on the Tesco Express chain, a small-shop format. It hopes to break even in 2009.

The following table shows the number of stores, total store size in square feet and sales for Tesco's international operations. The store numbers and floor area figures are as at 25 February 2006 but the turnover figures are for the year ended 31 December 2005, except for the Republic of Ireland data, which is at 25 February 2006, like the UK figures. This information is taken from the 2006 final broker pack.

Note 1: The business in China is a joint venture and its turnover is not reported in Tesco's 2006 brokers' pack.

Note 2: Tesco owned a French chain called Catteau between 1992 and 1997. Its existing single store in France is a wine warehouse in Calais, which opened in 1995 and is targeted at British day trippers. Wine is much cheaper in France than in the UK because the duty is far lower. Turnover is not reported separately.

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 PLC.

All figures below are for the Tesco's financial years, which run for 52 or 53 week periods to late February. Up to the 26 February 2006 period end the numbers include non-UK and Ireland results for the calendar year ended on 31 December in the accounting year. For the 25 February 2006 period end the non-UK and Ireland accounting date was brought into line with the UK and Ireland. The figures in the table below include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. Including 60 weeks of non-UK and Ireland sales the figures to 25 February 2006 were: revenue £39,454 million; profit before tax £2,235 million; profit for year £1,576 million; basic earnings per share 20.07 pence.

As of its 2006 year end Tesco was the fourth largest retailer in the world. The three largest are Wal-Mart, Carrefour and Home Depot. METRO was only just behind and might move ahead again if the euro strengthens against the pound, but METRO's sales include many billions of wholesale turnover, and its retail turnover is much less than Tesco's.

At 25 February 2006 Tesco operated 1,897 stores in the UK (25.9 million square feet, 2.395 million m²) and 814 outside the UK (32.8 million square feet, 3.02 million m²).

Tesco's market capitalisation on 31 December 2005 was £26.035 billion ($44.8 billion), which was the largest of any retailer based outside the United States.

Controversy

Tesco is increasingly a target for people in the UK who disapprove of the effects supermarket chains can have on farmers, suppliers and smaller competitors.

The group has also been criticised for its tactics, including allegedly misleading consumers with a "phoney" price cut ^[13] (this claim was made by a rival retailer, which wished to assert that its own price cuts were better; all the major UK supermarkets are experiencing price deflation).

Tesco's 2004 Adminstore acquisition led to local and national protests. Tesco's other store openings and expansions are sometimes contested by campaign groups. These campaigns have not hindered Tesco's expansion programme very much.

Another point of controversy is the recent expansion of Tesco into the convenience store market. When a company controls more than 25% of a business sector in the UK, it is usually blocked from buying other companies in that sector (but not from increasing its market share through organic growth). The Office of Fair Trading currently treats supermarkets and convenience stores as two distinct sectors - although this definition has been challenged by smaller retailers, including the Association of Convenience Stores^[14].

Tesco is also criticised by those who think that it infringes upon the interests of farmers and smaller suppliers. The company responds by claiming that it follows industry-best practice and sources locally where it can to meet customer demand. In March 2005 the Office of Fair Trading published an audit of the workings of its code of practice on relationships between supermarkets and their suppliers. It reported that no official complaints had been received against Tesco or any of the other major supermarkets, but the supermarkets' critics, including Friends of the Earth, contested that suppliers were prevented from complaining by fear of losing business, and called for more rigorous supervision of the supermarkets. A further report by the Office of Fair Trading in August 2005 concluded that the aims of the Code of Practice were being met.

In May 2004, Tesco announced it was reducing sick pay in an attempt to reduce levels of unplanned absence, which led to concerns over employees continuing to work despite poor health (faced with a reduced income otherwise).

In December 2005, a committee of UK MPs produced a report accusing Tesco of "riding roughshod over planning rules" ^[15]. The accusation stemmed from the company's building of a store in Stockport that was 20% larger than the company actually had permission to build.

In January 2006 it was revealed that the Scottish city of Inverness was where the highest amount of spend per consumer (estimated at over 50p of every £1) was within Tesco stores - to the point where Inverness has been nicknamed "Tescotown", sparking further fury at the company's dominant position, and controversial plans to construct yet another store in the city.

In March 2006 the Office of Fair Trading (OFT) proposed to refer the UK grocery market to the Competition Commission for a new inquiry and called for the Commission to be thorough but swift in its investigation^[16].

In March 2006 the company was criticised when workers at the Dundee Baird Avenue depot (previously the base of William Low) in Scotland found out that all 432 jobs were to be moved to Livingston, 58 miles (93km) away. Staff, some of whom had been with the company for over 10 years, were later told that they had to choose between the move or redundancy.

See also

• Supermarkets in the United Kingdom
• TNS Superpanel
• Tescopoly

References

External links

Official

• Tesco website
• Tesco Corporate website
• Tesco Personal Finance Site
• Tesco Broadband

Press coverage

• Tescopoly, Nerve, 7 April 2006
• Retail star hit by tall poppy syndrome - a free market argument from The Times 11 November 2005.
• Small retailers revolt over the 'Tesco-isation' of the high street. Independent, 19 October 2005
• Wal-Mart calls for probe into dominant Tesco, The Sunday Times, 28 August 2005
• A Bridge too Far, The Times, 2 July 2005
• Environmentalists target Tesco, BBC News, 17 June 2004
• Tesco Juggernaut to storm America, The Times

Critical sites

• Supermarket Sweep Up Independent blog / campaign asking questions about Tesco's dominance
• Very Little Helps, Independent Tesco Community Forum
• Tescopoly.org, Friends Of The Earth site criticizing Tesco
• everylittlehurts.org.uk, campaign to stop closures of sub post offices in shops Tesco has bought.