Tescos Company Analysis And Ebusiness Model Marketing Essay

Published Date: 23 Mar 2015

Introduction

The study conducts an audit of the internal and external environment of Tesco. Internal audit will be conducted through SWOT analysis. Analysis of the external environment will be done through PEST analysis. Once this is done, Tesco's e-business strategy will be discussed and examined in detail.

Company Overview

Tesco is one of the biggest names in food retail across the world and is the biggest food retailer in UK. Its operation is not limited to food retail but extends to electrical appliances, clothing and financial service. It operates 4,331 stores in 14 countries worldwide. Its store formats consist of Express, Metro, Extra. It has 960 Express stores which offer fresh food at convenient locations. It has 170 Metro stores which are located in town and city centres locations. In addition, it also has 175 superstores called Extra and Tesco's Homeplus stores which are dedicated to non-food, including clothing (Datamonitor, 2009).

Internal Audit

SWOT

Strengths

Market Share and Customer Share

Latest industry reports published in 2009 suggested that Tesco's held 31.6% of the UK grocery market (Tesco Company Reports, 2009). This easily makes it the biggest retailer in UK and the third biggest in the world. Tesco's scale of operations means it can easily acquire or drive competition out of the market and get huge economies of scale. Its strong and loyal supplier network and 30 strong distribution centre makes it a potent force to compete against.

Store Formats

Tesco operates in different store formats; Extra, Metro, Express, Superstore and hypermarkets. The various store formats are strategically chosen in order to meet varying customer needs and compete against big and small retailers at various levels (Tesco Company Reports, 2009). Eg. Tesco Extra competes against the big out of town retailers like ASDA and Morrison's. Tesco Metro competes against the like of Sainsbury's Central. Tesco Express competes with local retailers. All three formats also fulfil different customer demands. Eg. Extra is used by weekend shoppers, Express is used for emergency and 'on the day' shopping while Metro is used for 'top-up' shopping. Store formats give Tesco the power and opportunity to reach to various target audience and fulfil the demand and market need at various levels. While, there has been a lot of negative publicity against Tesco Express Stores, which, critics believe are driving local retailers out of the market, this store format continues to grow.

Relationship Marketing Strategy

One of Tesco biggest strengths lies in the collection and use of data. Tesco collects customer's transactional data through the Club-card (Tesco's loyalty scheme) which is converted into information and actionable knowledge in DunHumpy. This knowledge is then used to target existing customers with relevant offers. Tesco also increases customer loyalty by rewarding existing customers through a quarterly Club-card voucher mailing in return for their data exchange (Cheung et al., 2003). Data collected though the Club card helps Tesco divide customers into various segments and profile these segments in order to create customer personas (Jacob & Mui, 2004).

Brand Trust and Prominence

Tesco not only has a strong brand but also a 'trusted' brand. Various brand tracking studies conducted by (Okumura, 2009) revealed that Tesco is well positioned to gain from the financial crisis. People trusted Tesco more than any other financial service providers which mean Tesco's brand extension into mortgages and loans can prove successful. Tesco's brand is also associated with quality, value and good shopping experience.

Price and Product Range

As with store formats, Tesco's broad price and product range means it caters to most market segments. Its price range includes 'Value', 'Discount 'and 'Finest' range. Its product range includes financial services, DVDs, video rentals, stationery, clothing, electrical, kitchen appliances and food. Wider price and product range makes Tesco a 'one stop' shop for customers. It also widens the scope for cross-selling and up-selling to customers entering the store and increase foot-fall.

Tesco.com

Tesco's online retail store Tesco.com is the fourth largest online grocery store in the world behind Amazon, Dell and Argos (Datamonitor Report, 2009). Online store and its delivery service attract customers which are geographically inaccessible for retail stores. It also targets 'time-poor' consumers who prefer to have their grocery delivered at their doorstep. Tesco.com complements Tesco's strategy very well and delivers the same customer experience.

Weaknesses

Reliance on UK and European markets

While Tesco is one of the most successful and well known brands in the UK and European markets, it is yet to make a significant impact on the Asian and US markets. In FY2008, it derived 73.7% of its total revenues from the UK, 14.5% from the rest of Europe and 11.7% from Asia (Datamonitor Report, 2009). Walmart, on the other hand, has got a much more wide profit distribution and draws 24.2% of its revenues from its international operations. With UK and Europe being considered a mature and saturated market, much of the opportunity lies in the developing markets of Brazil, India and China. Tesco's low market penetration of these countries can be considered a major weakness.

Weak inventory management

Tesco's inventory management is one of its few operational weaknesses. Its inventory turnover ratio for FY2008 was 19.5 which are significantly lower than its close competitors; Sainsbury's (26.2) and WM Morrisons (29.3) for the same period. In order to remain competitive and maintain its market share, Tesco needs to rotate its inventory faster and make the management of its inventory much more efficient and effective.

Opportunities

International Expansion

Some of Tesco's weakness can be converted into opportunities. It is currently exploring opportunities in India which is the second fastest growing economy behind China. The strong economic growth of India has led to higher personal incomes, which are fuelling demand for consumer goods. Forecast for Indian retail industry is very encouraging as it is expected to grow by14.6% annually.

Online Retail

The online retail sector is seeing a continuous and rapid growth with the amount of money spent online by consumers in the UK increased to £14.7 billion (approximately $28.8 billion) in 2007 (Datamonitor, 2009). Tesco has a very strong online proposition in Tesco.com and is set to take advantage of this opportunity. 2009 will also be remembered as the year when online advertising exceeded TV advertising and Tesco.com can also bring in more revenue through affiliate advertising opportunities.

Private Label, Organic and Fair Trade Segment

Among other growth sectors are the private label, organic and fair trade sector. Private label sector has seen a significant growth and the market penetration of 'own-labels' is forecasted to grow to 40.2% by 2011 (Tesco Company Reports, 2009). Tesco product portfolio includes 400 Value products and more than 1,000 standard own-brands. The increased emphasis on business ethics after the credit crisis has also led to the rise in 'Fair trade' products. Coffee retailers like Starbucks have jumped on the bandwagon to take position themselves within the fair-trade sector. Changing consumer choice and preferences have meant that both private label and fair-trade goods offer good opportunity.

Threats

Cost of operations

As suggested previously, bulk of Tesco's revenue comes from the UK and European market. UK has seen a rise in labour costs recently with the rise in minimum wage rate. According to the Department of Business Enterprise and Regulatory Reform, the adult minimum wage rate rose to £5.73 per hour in October 2008 from £5.52 per hour in October 2007 (Datamonitor, 2009). This means that retailers like Walmart (Asda in UK) are able to compete more in terms of price as their cost is spread between UK, Europe, US and Asia. The slowdown in the economy has also led to food price rises. The rise is more prominent in UK as compared to other European countries. This is a major threat for all UK based retailers as UK has a small farming sector and relies more on import food than any other major economies (Data monitor Report, 2008).

Rising Competition

Grocery retail has always been an intensely competitive market. Falling value of the pound has meant that imports have become even more expensive. This, coupled with the rise in cost of fuel, has significantly increased costs for retailers who rely on the UK markets. The economic crisis also saw discounters like ALDI and LIDL gaining market share at the expense of Tesco and Sainsbury's. Morrison's has also come out as a clear winner during the economic recession. Various only businesses have also entered the already cluttered market. OCADO is one such only business which is seeing rise in revenues. High-end retailers like Marks and Spencer and Waitrose have also introduced 'Basic' ranges to compete against the likes of Tesco, Asda and Sainsbury's. Competition is only going to increase in this sector and there is a serious threat to Tesco's market share.

PEST Analysis

Political

Tesco's dominance due to its size and market share has raised a lot of issues with competition commission and Office of Fair Trading (OFT). In the past, Tesco has been accused of squeezing its suppliers and not paying fair price to the farmers.

There has been a lot of uproar in the political circles about Tesco using its dominance in driving out local retailers and corner shops. Local groups have protested this and there is a lot of public disquiet about this.

Current economic crisis has led the government to pump in more money into the economy and help to encourage local retailers and small and medium enterprises. Competition Commission has been closely scrutinising Tesco's expansion if it's Express stores. There has been a lot of momentum to support independent retailers and a large hue and cry against Tesco's expansion plans.

Tesco's pricing policies have also raised some concerns with the European commission which is looking to clamp down on big retailers predatory pricing strategies.

Government has also imposed planning restrictions on out of town planning facilities leading to retailers struggling to buy land for supermarkets.

Economic

Tesco operates majorly in UK and European markets which is mature, cluttered and intensely competitive market

Market Size had reduced because of current recession. The market has been affected by negative inflation and the fall in retail price index.

The sector has seen increased demand for convenience stores rather than supermarkets

Increased demand in developing economies like India and China.

Socio-Cultural

Ageing UK demographic might mean a resurgence in local stores

Past few years have seen the rise of the new ethical consumerism. Consumers have started to pay more attention to the ethics associated with businesses. The current decade has seen the rise of consumers who believe in fair trade and a large proportion of consumers now believe that businesses have a societal role to play.

Consumer preference towards convenience and local stores rather than big out of town stores

Government's campaign on healthy living has helped to increase awareness about the fat and salt in foods. Consumers now want more information about the food they eat and have become more health conscious.

Technological

Technology has become one of the critical success factors in the retail business. Business intelligence and data analytical tools, techniques and technology will continue play a critical role in driving response and getting better Return of Investment (Wall et al., 2005)

The rise of digital marketing channels means that retailers rely more on technology to integrate online and offline data to understand customer's behaviour and attitude.

With distribution networks becoming more complex, the use of technology and its deployment can give the firm a competitive advantage. E.g. Walmart's technology deployment in its in distribution centre is second only to Pentagon (Jelassi & Leenen, 2003)

Task 2

E-Business

Technology has facilitated the creation of an entirely new way of doing business-the eBusiness model. Kalakota and Robinson (2001) state that eBusiness is not simply eCommerce transactions or the buying and selling on the web. They argue that it is the overall strategy of redefining old business models, with the aid of technology, to maximise customer value and profits. In a similar vein, Desruelle et al. (2000) describe digital business design as 'transforming the way you do business by taking advantage of the new strategic options enabled by digital technologies'.

There is some confusion in literature with regards to interchangeable terms like e-business and e-commerce. In order to avoid, confusion this report will use Lee and Whang's (2001) definition of e-business which states that e-business is the use of Internet-based computing and communications to execute both front-end and back-end business processes. While the concept of e-commerce is limited to the front end of the business, e-business takes the whole business cycle including supply chain integration. Fatt (2002) describes e-business as the application of information technology to facilitate buying and selling of products, services and information over standard-based networks.

Tesco's E-business process is well integrated right from its supplier network to its customers. Its various E-business applications and processes are described below.

Supply chain management

Tesco uses both upstream and downstream processes for its supply chain integration (Ghiassi, & Spera, 2003) and makes use of different web technologies to manage to manage its supply chain network. The network involves integration of e-procurement with all other supply-side cycle, starting from initial product design and the procurement of raw materials, through production, shipping, distribution, and warehousing until a finished product is delivered to a customer (Caskey et al., 2001). All the purchasing process is also managed via electronic means. This means that all the inquiries, orders, invoices, payments and other activities within Tesco are transacted directly through its computer system. The adoption of high end systems then allows Tesco to integrate the procurement process to the value chain which results in automation of passing information to the suppliers (Kendrick & Fletcher, 2002). Intelligent Supply Chain management systems also allow helps to reduce direct and indirect costs.

Customer relationship management (CRM)

E-CRM system transforms existing customer data into real sales, sales opportunities and marketing insights using new technologies (Wall et al., 2005). As mentioned in the internal analysis, CRM is one of the major strengths of Tesco. Tesco's integration of customer data through its CRM and e-CRM (electronic customer relationship management) system helps it to analyse customer's offline and online purchase behaviour. Its e-CRM system helps it to create a 'single customer view'. The system tracks customer's onsite behaviour and links it back to the data warehouse. It's e-CRM system which includes the Club card helps it to learn more about the customers' needs and behaviours in order to develop stronger relationships with them (Roman, 2007). The output and intelligence from this system is then used to construct customer personas which eventually results in relevant targeting of customers on an individual level.

Closely related to Tesco's e-CRM system is its business intelligence application which provides it with a means of understanding and modelling business problems and mapping these models to other tools and applications (Huang, 2002). Business intelligence systems are decision support technologies used by top and middle management as a basis for making key strategic and tactical decisions (Huang & Chung, 2003). Both business intelligence and eCRM systems are used together to know more about its existing customers and prospects. One of the interesting insights that this system offers is to give Tesco email addresses of prospects / customers which have visited its website but have abandoned the shopping basket. Tesco then sends out emails to these customers with a link to complete their purchase. The response to these types of intelligent campaigns is very high.

Front End eBusiness applications

Apart from the different back end e-business applications, Tesco uses a lot of different digital media to target customers. It makes extensive use of Emails to existing customers in order to update them on price, products and offers on a monthly basis. Tailored Emails are sent out to customers at regular intervals. Its e-business strategy and technology allows it to send thousands of various permutations of the email so that only relevant emails are sent to customer's inboxes.

The economic crisis has also seen a rise in the number of people purchasing through the money comparison sites. Tesco has launched its own comparison site called Tesco Compare which helps customers find the cheapest deals on various financial products online. Other customer end e-business strategy also includes partnering with other websites and making use of affiliate networks in order to drive traffic (Camarinha-Matos, 2001). Tesco also makes use of display advertising which involves online banners and skyscrapers. Banner advertising helps it to increase brand awareness and also drive traffic. It also engages in search engine marketing. Search engines create their listings by crawling across the Web to gather information from existing pages. Pay-by-click methodology is widely adapted by organizations as it is believed to give better return on investment in the form of better response and take-up rates. It is concerned with enabling a website to have a link placed directly into search engine results for specific keywords, phrases etc. With a huge increase in the use of search engines (Google's profit has soared over the last five years), the probability of a customer looking and clicking at an advert is much higher.

Tesco's e-business model

Simmons (2007) seems to agree that eBusiness is more than the application of technology to an existing business model but includes the creation of new eBusiness models that are based on the use of new technology. Fatt (2002) defines the business model as providing architecture for product, service and information flows where the sources of revenue are described and the benefits to the various business actors are clear. While this is a reasonably clear definition, Allen (2001) defines a business model in even simpler terms. He sees a business model as being the method by which a company can sustain itself through revenue generation and suggests that it should spell out the way in which a company makes money by specifying where it is in the supply chain. In the past few years, a number of new business models have emerged which could not have been imagined prior to the recent digital technology developments.

There are various e-Business models adopted by retailers. Tesco uses an interactive model called the Market Portal Model. The model integrates the buyer and the supplier side and adds functions and features which enables both the groups to do business effectively. This type of model is also used by companies like Walmart as it's very effective in inventory management and distribution. The Market Portal model is a transactional model where the books the purchase through the Tesco website (which is security enabled). The information with regards to consumer's transaction goes the suppliers and Tesco simultaneously. Suppliers only see the information they need to see and other customer details are hidden. The supplier, then directly deals with the distribution and delivery. Market Portal model requires a fully integrated website like Tesco.com.

Market Portal Model (Source: E-commerce Models)

Tesco e-business application also includes the financial value chain management which tracks the pricing, invoicing and payment cycles.

Areas of Improvement

As demonstrated in the internal and external audit, Tesco's strength lies in its ability to look inside customers shopping basket and analyse what they are buying. It is widely believed that customers past and present behaviour is a good predictor of their future purchase intentions. While, the Club card might be serving as a vital tool for Tesco now, there is some improvement to be made. The Club card only captures 'what' customers are buying and not 'why' they are buying. It looks at things 'after the event'. So, in essence, it captures customer's behaviour and not their attitude. In order for a full understanding of the customers, Tesco needs to understand customer's behaviour before the event. It needs to understand 'why' customers are buying what they are buying.

The rise of the new 'ethical' consumer also means that Tesco needs to do more work for the benefit of the society. Its rapid expansion of convenience stores is closely watched by the Competition commission and the Office of Fair Trading.

While Tesco has a very intelligent business intelligence system on its website which recommends relevant offers to customers when they login to their account in Tesco.com, its recommendations are still based on customers past behaviour. It needs to evolve into a more Amazon like model where the technology can predict future behaviour not only based on the customers past behaviour but on the basis of what other similar customers have bought.

Conclusions

Tesco gains sufficient competitive advantage through the technologies that it deploys both at the back and the front end. It use of data and technology is second to none and as long as data plays a critical role in business decisions, Tesco is poised to maintain its market share. But, it has to be mentioned that just the deployment of technology does not ensure a successful e-business strategy. Successful e-business strategy requires integration of the all the applications and building on the proven principles of effective strategy. Irrespective of which technology is used, retailers like Tesco need to make sure that technology is always concerned with improving the execution of existing business transactions and communication. The retail market in the UK is only going to become more competitive during the coming years and Tesco needs to expand its operations quickly to the developing countries in order to compete against the likes of Walmart.