Tesco
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Tesco PLC is a United Kingdom based international supermarket chain. Originally specialising in food, it has moved into areas such as clothes, consumer electronics, consumer financial services, internet service and consumer telecoms. In the year ended 26 February 2005 Tesco made pre-tax profits of £1.962 billion on turnover of £33.974 billion (the widely publicised headline profit of "over £2 billion" was "underlying profit" before certain accounting adjustments).
According to TNS Superpanel Tesco's share of the UK grocery market in the 12 weeks to 24 April 2005 was 29.8%. Across all categories over £1 in every £8 of UK retail sales is spent at Tesco, which makes it much more dominant in its home market than Wal-Mart is in the U.S. Tesco also operates overseas and non-UK sales for the year to 26 February 2005 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 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.
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
UK stores
Formats
Tesco's UK stores are divided into in five 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 first Extra opened in 1997 and the 100th 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 66,000 square feet (6,100 m²). As of June 2005 Tesco's largest UK store is in Newcastle and is 120,000 square feet (11,000 m²) a standard Wal-Mart Supercenter in the U.S. is around 200,000 square feet (20,000 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. 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 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 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. Found in busy city centre districts and small shopping precincts in residential areas, and on petrol station forecourts. 546 stores at 26 February 2005 year end. Typical size 2,000 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 ones will keep their old name. There are more than 500 of them. Typical size 1,300 square feet (120 m²).
- Tesco Homeplus : These stores will offer Tesco's non-food format under one roof. The first two are expected to open in Aberdeen and Manchester in October 2005 in warehouse style units on 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 sites for non-food retailing are much more readily available.
Store summary at 26 February 2005
At the end of its 2004/05 financial year Tesco's UK store portfolio was as follows. [1]| Format | Number | Area (ft²) | Area (m²) | Percentage of space |
|---|---|---|---|---|
| Tesco Extra | 100 | 6.6 million | 613,000 | 27.2% |
| Tesco | 446 | 13.9 million | 1,290,000 | 57.4% |
| Tesco Metro | 160 | 1.9 million | 180,000 | 7.8% |
| Tesco Express | 546 | 1.1 million | 102,000 | 4.5% |
| One Stop | 527 | 0.7 million | 65,000 | 3.1% |
| Total | 1,779 | 24.2 million | 2,250,000 | 100% |
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-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. 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." [1] 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 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 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. Tesco sells an expanding range of own brand non-food products, including non-food Value and Finest ranges.
- "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, 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. Tesco rolls out successful UK initiatives in other countries. For example Tesco Financial Services and Tesco Express convenience stores both operate in several markets.
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 or 53 week periods to late February. 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.
| 52/3 weeks ended | Turnover (£m) | Profit before tax (£m) | Net profit (£m) | Earnings per share (p) |
|---|---|---|---|---|
| 26 Feb 2005 | 33,974 | 1,962 | 1,366 | 17.72 |
| 28 Feb 2004 | 30,814 | 1,600 | 1,100 | 15.05 |
| 22 Feb 2003 | 26,337 | 1,361 | 946 | 13.54 |
| 23 Feb 2002 | 23,653 | 1,201 | 830 | 12.05 |
| 24 Feb 2001 | 20,988 | 1,054 | 767 | 11.29 |
| 26 Feb 2000 | 18,796 | 933 | 674 | 10.07 |
| 27 Feb 1999 | 17,158 | 842 | 606 | 9.14 |
| 28 Feb 1998 | 16,452 | 760 | 532 | 8.12 |
Tesco is between the fourth and the sixth largest retailer in the world, depending on how this is counted. The three largest are Wal-Mart, Carrefour and Home Depot. Metro and Royal Ahold are also larger than Tesco based on total turnover, but Metro's sales include many billions of wholesale turnover and Royal Ahold's many billions of foodservice turnover, and their retail turnover is less than Tesco's. On its website Tesco claims to be the third largest retailer in the world. Presumably it is ignoring Home Depot, which as a home improvement company is not in the same business, but is certainly a retailer.
At 26 February 2005 Tesco operated 1,779 stores in the UK 24.2 million square feet (2.23 million m²) and 586 outside the UK 27.6 million square feet (2.54 million m²). Tesco plans to expand UK floorspace by 8% and non-UK floorspace by 20% in 2005/06.
Tesco's market capitalisation on 15 April 2005 was £25.1 billion (equivalent to $47.5 billion at that date), which was the largest of any retailer based outside the United States.
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 £202 million for the 52 weeks to 26 February 2005, of which Tesco's share was £101 million.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 O2 and Tesco Home Phone created in partnership with Cable & Wireless;. Tesco Mobile currently offers only prepaid accounts. 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. In April 2005 it announced that it had over one million telecom accounts in total, including mobile, fixed line and broadband accounts. [1]
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 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 UK.In 2001 Tesco invested in GroceryWorks, a joint venture with Safeway in the United States, which operates 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 claims (in its 2005 annual report) to be able to serve 98% of the UK population from its 300 participating stores. Tesco has delivered to over 1 million households, with more than 120,000 orders per week, by 1,000 local delivery vans. In the financial year ending 26 February 2005 it recorded online sales up 24.1% to £719 million and profit up 51.8% to £36 million.
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 and electricity and DVD rentals. It does not currently sell clothing online. In May 2005 it introduced a clothing website [2], 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 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 unit area outside the UK.
The following table shows the number of stores, total store size in square feet and sales for Tesco's international operations. All the figures are for 31 December 2004 or the year to 31 December 2004, except for the Republic of Ireland data, which is at 26 February 2005 like the UK figures.
| Country | Entered | Stores | Area (ft²) | Turnover (£ million) |
|---|---|---|---|---|
| China | 2004 | 31 | 2,637,000 | Note 1 |
| Czech Republic | 1996 | 25 | 2,145,000 | 386 |
| France | 1992 | 1 | 16,000 | Note 2 |
| Hungary | 1994 | 69 | 3,515,000 | 933 |
| Japan | 2003 | 104 | 385,000 | 266 |
| Malaysia | 2002 | 6 | 584,000 | 83 |
| Poland | 1995 | 78 | 4,212,000 | 691 |
| Republic of Ireland | 1997 | 87 | 2,046,000 | 1,336 |
| Slovakia | 1996 | 30 | 2,053,000 | 326 |
| South Korea | 1999 | 38 | 3,211,000 | 1,585 |
| Taiwan | 2000 | 4 | 452,000 | 108 |
| Thailand | 1998 | 107 | 5,920,000 | 969 |
| Turkey | 2003 | 5 | 406,000 | 146 |
Note 1: The business in China is a joint venture and its turnover is not reported in Tesco's 2005 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.
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 increasing power which retailers have in their relationships with suppliers, especially small suppliers. These points of controversy reflect differences in viewpoint on the healthy functioning of mass retailers in society.
Tesco's 2004 Adminstore acquisition 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 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). Government policy is to treat supermarkets and convenience stores as two distinct sectors. This means that Tesco is able to purchase convenience store chains despite its near 30% share of the overall grocery market, because only its share of the convenience store market is taken into account, and that is less than 10%. Many small shopkeepers and various other bodies believe that the government is wrong to make this distinction and that Tesco should not be allowed to buy convenience store chains.
Tesco also attracts criticism from those who think that more protection should be given to 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. 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.
Related articles
External links and references
- Tesco website
- Supermarket Sweep Up, independent blog dedicated to Tesco's business practices
- Tesco takes £1 in every three we spend at supermarkets Derbyshire, David (12 April 2005). Telegraph
- Tesco Business History
- Tesco buys Japanese retailer, BBC News, 10 June 2003
- Jack Cohen wrote an autobiography Pile it high and sell it cheap.
- Environmentalists target Tesco, BBC News, 17 June 2004
