How Tesco Became The Biggest Retailer In The UK

How Tesco Became The Biggest Retailer In The UK

In this strategy study, we’re going to dive into some of the principles, decisions, successes, and failures that make Tesco unique and lessons from their vast experience in scaling a retail chain.

There are certain brands that always seem to attract global attention and one of those is Tesco. It’s one of the largest grocery store chains in the world and over its 100-year history, it has gone through a rollercoaster of ups and downs that have brought it to where it is today.

  • Stores: 4,673
  • UK Employees: 336,392
  • The top retailer in the UK
  • Ranks 17th in NRF Top Global Retailers for 2021 
  • Q1 2021 Growth in Online Sales: 22.2%
  • FY21 Sales: £53.4 bn

The Origin Story

The giant corporation that we know today had some very humble beginnings. The idea found its roots back in 1919 when Jack Cohen, the son of Polish immigrants, decided that he was going to sell groceries from a stall in East London[1]. For the first few years, that is all it was – a market stall run by a man with a big dream. But over time, as he gained confidence in what he was doing, he began to think that maybe he was destined for something bigger.

To dip his toe in the water, he opened up the very first Tesco store in 1929 in a small town in Middlesex. The brand took off almost immediately, much to the surprise of Cohen, and he realized that there was room for growth. He had stumbled onto a rather simple premise, in terms of providing food and drink in a very affordable and approachable way, and quickly started to work on expanding the concept as far and wide as he could.

tesco-storefront-1919Source

Cohen’s unique personality and selling style was something that he engrained in those early sales teams, pushing them further than they ever thought they could go. He was someone who valued hard work above all else and believed that if you were out there working to make things happen, things would conspire for your benefit. This ethos is something that still lives in the company today.

In the years that followed, Tesco grew from strength to strength until it got to a stage in 1947 where it was large enough to list on the London Stock Exchange. In the two decades that followed the listing, the company continued to grow organically but it also made some aggressive acquisitions that rapidly increased the organization’s footprint. At the end of the 1960s, there were around 800 stores in operation, all maintaining healthy profitability and a growing customer base.

The strong brand was then leveraged to venture out of food and beverages specifically, and into a range of other areas including clothing, electronics, financial services, telecoms, media, internet services, and software. They also expanded geographically into the rest of the UK, Europe, and a brief but ultimately unsuccessful time in the USA.

The Tesco of today is a corporation much bigger than Cohen could have ever imagined, and that’s a testament to the company that he was able to build and the business philosophy that still undergirds their success to this day.

Creating Their Own Brands

We’ll start this strategy study properly by diving into what is widely considered the most important part of the Tesco strategy – which is the creation and scaling of their own in-house brands. When the company started they acted simply as a retailer, buying products from suppliers and then controlling the end-user buyer experience and distribution thereof. However, as they began to grow they came to the same realization that is so common for these massive product curators.

They realized that they could compete and win against these other brands because they had access to invaluable sales data, a loyal customer base who was tied into their stores, and the distribution required to bring their own brands to a mass market almost overnight. All of this while regaining a significant portion of the margin as they did so.

This is a key trend that we’ve seen across major retail conglomerates, but it’s received even more attention in the online era as Amazon has taken it to the next level. Especially in the case of common household goods where it is quite difficult to differentiate the product itself, brand and price become all that matters.

Tesco’s clothing line and their food brands provide high-quality items at prices that undercut the other 3rd party brands that are trying to win shelf space in the stores. This makes it abundantly clear that by owning the customer relationship and the distribution, you have an immense amount of control in the value chain. Manufacturers are dependent on retailers like Tesco because they need to access the consumer market, and this places all the power in the hands of the retailer.

This business model has been incredibly successful over the past 50 years. Tesco has grown a substantial business that customers trust and whenever they want to win back margin, they can create their own white-label brand and use their pricing power to whittle away at the market share built up by other brands. The big question here though is how long will this last?[2]

In modern times we’ve seen a drastic shift away from brick-and-mortar retail and into online shopping. This was obviously accelerated by the COVID-19 pandemic, but it was something that was coming inevitably anyway. As we move to a future of online shopping, Tesco’s early advantage in terms of distribution becomes less relevant. Manufacturers and suppliers can start to build online presences that give them direct access to the consumer market and thus they can eliminate the Tesco leg entirely, provided they have the brand strength to do so.

This is where the world is moving towards, where the middlemen are eliminated over time and we see a rise of direct-to-consumer brands. This is not to say that Tesco is going to disappear. In fact, their online shopping sales have been incredibly impressive. But they have to think differently about the company they are going to be as we shift into this new paradigm.

It’s definitely something on their roadmap and they are making a lot of investments in this vein, but it’s going to be challenging to transform such a large company with so much tied up in the brick-and-mortar of retail stores. Their ability to adapt and adjust will determine whether they remain a force to be reckoned with in the years to come.

Key Takeaway

If you control the direct relationship with the customer, you have tremendous power in the value chain that allows you to win market share and margins much more efficiently.

Horses for Courses

The next piece of the Tesco strategy that has proven so valuable for them has been their ability to adapt their value proposition for different contexts. When it comes to retail, you have to have a very good understanding of what your customers in that location are looking for, so that you can tailor your offering accordingly.

It’s tempting to think that you can copy-paste a winning formula wherever you want and scale quickly and easily – but that couldn’t be further from the truth. Even with a simple concept like a grocery store, there is a range of different nuances that determine how the store should be set up, what should be stocked, and how they should craft the buying experience.

Tesco operates 5 different types of stores:

  • Tesco Extra
  • Tesco Superstores
  • Tesco Metros
  • Tesco Express
  • One Stop Shop

Each of these stores has a different use case, and it targets a unique subset of their customer base. The company has worked very hard to identify the specific items, and setup that is best suited for each one. For example, the Tesco Extra stores and the Tesco Superstores are the biggest ones in terms of size and aim to carry as much as possible so that customers can do all their shopping in one place. This is in sharp contrast to the Tesco Metros and the Tesco Express stores which are focused on convenience and speed, rather than a variety of choices.

Every part of the experience for each category is intentional and fit for purpose. Even the training that the staff will go on differs depending on the type of store that they’re going to be working in. What remains consistent is the brand, the product quality, and the prices. Everything else varies according to what that particular customer is looking for.

It’s also interesting to note that these store categories have different trajectories and trends. If you look at the last couple of years (ignoring the pandemic), the big retail outlets have been struggling for growth, while the convenience stores are growing rapidly. This shows a clear trend in terms of consumer behavior and because the stores are all set up differently, the company can respond to these changes.

Essentially, each category of store can be thought about as a different company entirely – allowing lots of flexibility to adapt and adjust accordingly. If they didn’t have this clear separation, it would be difficult to understand the data they were receiving, and they would have less chance of successfully diagnosing the nature of changes in customer behavior.

Taking this one step further, it’s clear that their online shopping vertical is a new type of store and will have unique aspects that set it apart from the rest. As Tesco follows the growth of online shopping they’ll be able to shift their efforts to these new channels because they have the data that they need to be able to do this with confidence.

Key Takeaway

Context is everything in business. By separating your operations into subsets that cater to different contexts, you’ll have the data you need to adjust and adapt to changing trends as they arrive.

Sustainability

A key component of Tesco’s forward-looking strategy is to become as sustainable and environmentally friendly as possible. This is not too out of the ordinary in the modern context as companies around the world work towards mitigating climate change, but Tesco has really gone above and beyond to make this a part of their company DNA.

The biggest offenders in their value chain are the delivery vans which are constantly transporting goods from suppliers to warehouses and then eventually to the stores themselves. These vans number in the thousands and they are running almost 24/7 ensuring that stock levels are where they need to be at all times.

Tesco announced recently that they have begun to transition all those vans to electric vehicles in an attempt to minimize the carbon footprint and work towards a more sustainable goal. Their plan is to have their entire delivery fleet transitioned to electric by 2028 which is a very ambitious plan indeed[3].

tesco-electric-delivery-truck-chargingSource

This is but one of their sustainability initiatives that are at the forefront of the company they want to become in the future. They are working tirelessly to integrate this into their corporate ethos for a few reasons:

  • Sustainability matters. We all have to be more thoughtful about what we’re building because the impact we’re having on our planet is significant. So, from pure self-interest, a company needs to embrace this value if they are to be robust and to last over the next hundred years. Without this focus, we might find ourselves in a very dangerous position in a generation or two’s time.
  • Customers demand it. Building on the point above, there is tremendous social pressure for corporations to become more sustainable because of the heightened awareness we now have of the problems that face as a species. Customers are placing sustainability and environmental concerns as key factors in their purchasing decisions and Tesco knows that. So, they are leaning into this as a key value for the future so that they can continue to build the strong brand trust that they have with their existing consumer base.
  • Prices are trending downward. As we shift away from fossil fuels and towards renewable energy, the relative prices will come down and that can have a significant impact on Tesco’s profitability. It might require a lot of investment in the short term, but that will pay off by orders of magnitude as the world shifts and economic incentives work their magic.
  • Competitive Advantage. Getting in on this early and working to build this into the future of the company could prove to be a significant competitive advantage for competing against their competitors. This is a clear trend that everyone can see, so those companies that get ahead of the curve will be able to leverage the early momentum to capture more and more of the market going forward.
  • Opens up opportunities for innovation. Whenever there is a radical shift in thinking, it creates an opportunity to go back to the first principles. For large companies, these moments are few and far between so it’s important to use these natural breakpoints to re-examine your strategy and plot the best path forward. Tesco is definitely trying to do that so that they can remain relevant as we move beyond pure retail and into a hybrid model where you need to serve customers in-person as well as online.

Those are just some of the reasons why Tesco is giving so much credence to how sustainable their operations are. It’s also important to note that they are thinking beyond their direct circle of influence. Another significant contributor to carbon emissions is their customers who drive to the stores themselves. To mitigate this, they’ve begun to roll out thousands of charging points to their larger retail stores to support customers with electric vehicles and encourage more people to move in this direction.

This is something we’ll see a lot more of going forward, and Tesco remains one of those leading the charge, at least in the European context.

Key Takeaway

Sustainability is a key value and operational principle that must be at the forefront of any company looking to remain relevant going forward.

The Clubcard Loyalty Program

It seems that every company these days has some form of loyalty program where they try to reward repeat purchasers in exchange for valuable sales data – but Tesco was one of the first to go this route. Their Clubcard program allows regular shoppers to benefit from automatic discounts that are applied at check-out and it makes the already-low prices even more beneficial. This obviously creates loyalty for their key customers who will use the card to get better prices for their groceries, but the more interesting aspect is what it allows Tesco to do with the data.

tesco-club-cardSource

Before loyalty programs, large retailers like Tesco were unable to tie specific purchases to specific customers. They would be able to access aggregated sales figures about the sorts of items that were being purchased, and they could use that information to adjust their offering accordingly, but you were limited in terms of how useful it could be. Any granular demographic data had to be assumed based on the store itself and this didn’t allow for much nuance.

The modern loyalty programs, like the one that Tesco runs, offer a much more sophisticated set of data that is incredibly valuable for product development, planning, and demand forecasting. By tying each purchase to a specific customer’s card, Tesco gains a range of new insights into purchasing behavior and they can arrive at a much more granular understanding of what is actually happening in their stores.

Here are some of the ways that they can use this data:

  • Demographic Analysis. Tesco can identify specific segments of their customer base and analyze purchasing habits in these unique categories. For example, they can compare their male base to their female base. They can look at how age affects the sorts of items that are purchased. They can look at ethnicity and how that impacts the brands that are most in-demand. All of these slices help to break a massive consumer base into smaller segments that can be more effectively sold into. This affects the marketing messaging, the placement of goods in the store, the outbound sales efforts, and much more.
  • Lifetime Value Analysis. When you’re able to track specific customers over time, you gain a lot of insight as to how they engage with your brand and how that plays out over time. Through a more nuanced calculation of a customer’s lifetime value, it informs how they invest time and resources going forward – to maximize this value and build a strong core of loyal shoppers. This is also vital in the other direction when looking for red flags that might point to something that is going wrong along the way. When you can track this effectively, you’re in a much better position to make long-term strategic decisions that are data-driven and attached to the real-time data on the ground.
  • Shopping Cart Make-Up. If we move up one level of abstraction, we can analyze the make-up of a customer’s shopping cart to understand the relative associations of different items in the store. When Tesco tracks this over time and matches it to key demographic information, they can start to understand the different use cases and common groups of items that are purchased – allowing them to adjust their offering and store placement accordingly.
  • Track the performance of marketing campaigns. When Tesco undertakes various marketing initiatives, it can be difficult to track how well they perform in terms of driving sales in various target markets. The Clubcard loyalty program gives them the data that they need to do this effectively, allowing the company to track whether the marketing message is working with their target audience or if things need to be changed. Once they’ve found a winning formula, they can quickly scale that out across the rest of their stores with a lot more confidence that their investment is going to pay dividends.

Those are just some of the ways that Tesco uses this data to inform their business decisions but hopefully, it gives you a sense of why it’s such an important part of their strategy. The data alone is much more valuable than the discounts that they offer in exchange, making it one of the most impactful revenue generation mechanisms that the company has at its disposal.

Key Takeaway

Granular customer data is worth its weight in gold and anything you can do to gather and process it effectively, should be a priority for your organization.

The Price Match Guarantee

The world of grocery stores is incredibly competitive and unless you have a specific niche focus, there is going to be a lot of competition around price. In 2014, Tesco was going through a difficult period and found itself losing ground to some up-and-coming chains that were doing anything they could to undercut Tesco’s prices and win customers away from the incumbent. Tesco realized that they couldn’t afford this to happen for very long and so they came up with what they call the ‘Brand Guarantee Scheme’ to try and mitigate against this trend.

The idea was that if a customer got to the check-out and their basket of ten or more branded items was more expensive than what could be found at a rival store, customers would receive the difference as a discount when they paid. These prices were independently verified on a daily basis and gave customers the confidence that there were no better deals out there.

This simple psychology was enough to retain the vast majority of their regular customers and removed the one major objection that might convince someone to switch to another brand. It didn’t matter whether the amount was large or small, it provided peace of mind that when you bought at Tesco, you were getting the best deal that there was.

What makes this more interesting though is that this wasn’t the first time they had tried to implement a price match system to enable this sort of deal. Previously, they would go through the same process of matching prices but instead of giving the discount right away, they would offer a gift voucher to the value of the difference between the Tesco price and what it cost at another store.

It wasn’t until they listened to customer feedback and heard that many shoppers never got to use those benefits because they forgot about the vouchers, did they realize that they needed to remove the friction entirely[4]. Creating vouchers just added another step into the process that actually was a point of potential error. And even though it was completely within the customers’ control, the impression was that they were losing out.

When the company took that away and chose to implement the discount immediately as they paid, this completely disappeared and customers found the process quite magical. They didn’t have to do anything, yet they knew that if there were savings to be had, Tesco would make sure that they got them.

Achieving this took a lot of technological investment and considerable expense to do the requisite daily market research, but it made the purchasing experience a delight and that’s what keeps customers coming back time and time again. It sends a signal to customers that you’re looking out for them and will do whatever it takes to make their grocery shopping a breeze. To this day, the Tesco Brand Guarantee is one of those components that is severely underrated in terms of the company’s success up to this point.

Key Takeaway

The more friction you can remove from the customer journey, the more magical the experience becomes, and the more likely customers are to return.

Aggressive Acquisitions

Another key strategy that typifies who Tesco has been as a company has been its track record of large international acquisitions which looked somewhat impulsive in retrospect. They bought a wide range of different brands in countries like Poland, Japan, India, Malaysia, the Czech Republic, Hungary, Slovakia, and more[5]. In each case, they were hoping to grab a piece of the local market and then apply their technology, data, and operational know-how to rapidly scale the operations.

In most cases, they left the brand as is rather than applying the Tesco name to it, giving them diversification but also underplaying the role that they would play in those specific regions. If you look at their growth over the past few decades, a lot of it can be attributed to these deals – though it’s difficult to know exactly how much value was added in the process. Once each acquisition was absorbed under the umbrella, there are just too many variables to make an educated statement on the overall success rate.

What cannot be denied is that this was a very intentional strategy on their part. By taking the financial power that they had built up in the UK, they were able to go into new markets and take risks on brands, knowing that any losses would be subsidized by the market-leading position back home. This might not be the most efficient way to grow, but it does give you scale and speed when certain acquisitions do provide the value you were expecting.

There is lots of debate about the pros and cons of a strategy like this, but Tesco have stuck with it for their entire history and this land-grab mentality rings true today. It’s only possible when you have a significant war chest and an existing set of operations that can sustain the shocks that come with potential market failures, especially when you are moving as fast as they do.

In the next section, we’ll look at an example of where things went wrong and see what we can learn from it.

Key Takeaway

Aggressive acquisitions should only be considered when you have a large war chest and you can manage the downside risks as they present themselves.

The Failed US Expansion

Tesco hasn’t always got it right and we can often learn as much from the failures as we can from the success stories. Back in 2006, the company decided that they wanted to enter the United States and try to replicate some of the success they had found in the UK. The strategy was to open a chain of small-format grocery stores in a few states in the West of the USA, specifically Arizona, California, and Nevada. These stores wouldn’t carry the Tesco name but instead were branded as ‘Fresh and Easy’.

fresh-&-easy-storefrontSource

In the first five months they opened 60 stores, they had 150 by the end of the first year, and over the next 6 years, they expanded to have over 200 at their peak. However, they found it much more difficult to get a foothold in the market than they had originally anticipated.

It’s not entirely clear as to why the stores failed but it’s likely due to a combination of these factors[6]:

  • Unfamiliar Shopping Experience. The Fresh and Easy concept was to mimic the small convenience stores from the UK – offering people a shop where you should shop daily for the food and drinks that you needed. This was a stark contrast to the typical American shopping experience which was to purchase groceries in bulk and shop much more infrequently as a result. This difference in culture meant that they could never really get the traction they wanted, and it didn’t seem to fit the buying patterns of American consumers.
  • Economic Recession. The timing of this expansion was really unfortunate because it happened in the middle of the worst economic crisis that the USA (and the world) had seen for a long time. As the sub-prime mortgage crisis took hold, unemployment soared, and the purchasing power of the middle class was significantly harmed. This effect was further concentrated in these Western states and so there was a disproportionate impact on the overall demand. This was not something Tesco could have predicted or planned for, but it’s a good reminder that you don’t operate in a silo. You’re reliant on economic conditions around you to sustain whatever operations you’re involved in.
  • Misaligned Product Offerings. The one common criticism that the roll-out faced was that the store focused too much on ready-to-go, microwaveable meals – something that was very popular in the UK but had less buy-in across the USA. When it came to convenience food, the US market was much more comfortable with fast-food outlets and that meant that the demand for the Fresh and Easy offering wasn’t as strong as it could have been.

As always, these reasons are purely anecdotal and it’s not entirely clear what role they played, but the key learnings were that you need to deeply understand the psychology and the buying behavior of a new target market before you enter it. If you don’t, you place the entire project at risk and this can have drastic consequences financially as well as from a reputational perspective.

Tesco had reportedly lost around $2bn when they decided to pull out of the country in 2013 and they’ve never gone back. They continue to focus on the UK market which they know very well and select other European and Asian customer bases which provide some diversification.

Key Takeaway

When you’re entering a new market, it’s critical that you understand the nuances and psychology of the customers in that new segment. Without this, you might miss the mark and suffer significant financial damages.

Conclusion

Tesco remains one of the most well-known grocery store brands worldwide and their ability to combine retail dominance, strong logistics capabilities, and sophisticated use of customer data is what will be the foundation that they build their future on.

They face many challenges in the year to come as more and more customers shop directly from brands, but the company is well aware of that and is doing all that they can to pivot the company effectively for this modern paradigm shift. In this strategy study, we’ve aimed to highlight some of the key areas that they’re focusing on with the hope that you can learn from them and apply them to your own context.

As a quick refresh, here are those main takeaways from the Tesco story:

  • If you control the direct relationship with the customer, you have tremendous power in the value chain that allows you to win market share and margins much more efficiently.
  • Context is everything in business. By separating your operations into subsets that cater to different contexts, you’ll have the data you need to adjust and adapt to changing trends as they arrive.
  • Sustainability is a key value and operational principle that must be at the forefront of any company looking to remain relevant going forward.
  • Granular customer data is worth its weight in gold and anything you can do to gather and process it effectively, should be a priority for your organization.
  • The more friction you can remove from the customer journey, the more magical the experience becomes, and the more likely customers are to return.
  • Aggressive acquisitions should only be considered when you have a large war chest, and you can manage the downside risks as they present themselves.
  • When you’re entering a new market, it’s critical that you understand the nuances and psychology of the customers in that new segment. Without this, you might miss the mark and suffer significant financial damages.

Remember to take the necessary time to understand the customer context, leverage the power of data, and invest in sustainability so that you can remain relevant for decades to come.

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