The rise of Tesco, from a mediocre supermarket company into an outstanding, world-class, multi-faceted organization, has been a remarkable one. Since 1929, when Jack Cohen opened the 1st Tesco store, the company has seen tremendous growth and success. Customer centric approach, which has been adopted by the company since its very inception, along with strategic vision and innovation under the leadership of CEO Terry Leahy has been some of the underlying factors of Tesco’s sustained success. Leahy was the architect of the idea “The Tesco Way”, which included the company’s core values, principals and goals among other things and which aimed to establish Tesco as a “Value retailer”.
Right from the concept of store formats to the investment in information technology to the diversification of products and services, Leahy emphasized on innovation in all aspects of business. The Tesco Clubcard, which was first launched in 1995 to analyze consumer purchase data and target appropriate promotional offers, increased customer loyalty by leaps and bounds.
Tesco created different formats of stores to cater to the different segments and different needs of its customers. Tesco’s strategy to gain international presence through expansion has been one of the cornerstones of their success. The company expanded in countries of Eastern European and in emerging economies of Asia and in all these countries it aimed for market leadership ahead of profitability and based their strategy into such distinct elements which led to sustained growth. Being flexible and unique to each market, acting local, maintaining focus, using multiple formats, developing capabilities and building brands were some of the strategies used to form a long lasting relationship with customers. The fact that Tesco strategically added new products and services in its portfolio worked to its advantage. In addition to its popular in store food and beverage selection, Tesco diversified into financial services, telecommunication services and travel services.
The launch of Tesco’s online grocery store made the company, Britain’s largest online store. So to summarize strategic vision, innovation and lasting customer relationship has helped Tesco to become the most dominant UK retailer and the third largest retailer in the world. Tesco had all the technical know-how, expertise and experience needed to succeed in US retail market. The strategy the company adopted while expanding in international markets is very much applicable to the US retail market as well. Tesco’s policies of acting local and catering to local customers and cultures along with leveraging the brand value of the company to attract customers are of prime importance if it has to succeed in US. Tesco’s decision to enter the U.S. market as Fresh and Easy was very feasible and based on sound theory, research, and projections. However, the company’s expectations did not translate into similar performance. Based on prior research, the company had identified a geographic niche market in California, Arizona, and Nevada where there was no dominant player.
Tesco had even sent employees to live with 50 families and conducted 200 focus groups at one of the company’s facilities. Despite prior unsuccessful attempts by other British companies to enter the U.S. market, Tesco presented a compelling case regarding its ability to penetrate the U.S. market in California, Arizona and Nevada. Overall, Tesco did not enjoy the success it had anticipated because it did not account for cultural and perceptual differences between the U.S and Europe. Although Fresh and Easy was right to include a higher percentage of produce in its stores, many other strategies found in Exhibit 12 from the case, likely prevented additional sales and growth. For example, presenting a merchandise mix comprised largely of store-label brands combined with an everyday low pricing strategy likely caused American consumers to perceive Fresh and Easy as lower in quality and overall value.
The consumer could go to a competitor and purchase a more familiar name brand on-sale from a larger selection of items. Other strategies for which success did not translate from the U.K. to the U.S. were the overnight inventory stocking plan and the carrying of fewer items than traditional grocery stores. As seen in Exhibit 12 from the case, typical American consumers make fewer visits to the grocery store per year than do their counterparts in the U.K and Europe. If an item is out-of-stock one day, the American consumer is much more likely to visit a competitor than come back the next morning as is customary in the U.K. Fresh and Easy’s value proposition was the sale of fresh, healthy food that the majority of people could afford and catering to an “increasing consumer interest in wellness, in health-conscious food choices and a continuing trend towards on-the-go consumption.” Also of value was the feel of a “neighborhood market” where customer service was superior and employees genuinely enjoyed their work.
These elements are very appealing to consumers in Arizona, Nevada, and especially California, where healthy, green living is a growing trend and the average commute time spent in a car is much greater than in other parts of the country. The move to open stores in the United States was a promising plan on paper. Tesco also had the financial resources to build a successful operation in their new target market. Their actual performance, however, either fell below the expected performance or was of negative value in almost every metric (Exhibit 1). The main areas in which Tesco’s financial performance were evaluated were number of new stores opened, revenue, and profitability. The number of Fresh and Easy stores opened in the US was 145 at the end of 2010. The expectation was to open 200 stores by February 2009. Fresh and Easy had only generated $30 million in targeted sales versus the expected $100 million in the spring of 2008.
In the year 2008, Fresh and Easy had a loss of £62 million and it yielded a profit margin of -308%. Even though the profit margin increased the following years, 2009 and 2010, it was still a negative profit margin. The cause of Fresh and Easy’s poor financial performance had to do with a slow growth of the operation. An operation is only able to grow from the sales that it generates, especially in the introductory phase. The only way that Fresh and Easy would be able to meet its objective of opening 200 new stores by February 2009 would be to have almost all stores in the existing operation be profitable. This was not the case as profit margin was -308% in 2008. Fresh and Easy also faced high fixed costs by maintaining their distribution center, which has the capacity to service 500 stores. This resulted in excess capacity. The cause of their poor sales numbers was the fact that they were pricing too low.
The average Fresh and Easy customer spends only $15 per visit versus $41 for the customer of an average supermarket. To be profitable, Fresh and Easy stores need to get at least three times the volume of an average supermarket. Both of these factors were drivers for Fresh and Easy’s negative profit margin in all three years of its operation in the United States. We have identified some of the causes that Tesco could control regarding its financial performance. They began their operation, however, in the midst of an economic recession. There is no doubt that any economic recession would decrease overall demand. Food items, however, are a necessity regardless of the economic state of the nation. Tesco should have been more proactive during these times by expanding store locations and being more accessible to consumers.
The lease costs and new store construction tend to be lower during these periods of economic hardship. More Fresh and Easy locations would result in increased accessibility and ultimately more sales. Their low prices during times of economic hardship would drive more customers into Fresh and Easy locations as they would stray away from their pricier existing supermarket and perceived quality becomes slightly less of an issue. Tesco has a great product line with the Fresh & Easy chain opening in the US. This chain caters to the healthy food trend emerging in the US and is in direct competition to Whole Foods, the more expensive alternative. Perception is reality. To the consumer, Fresh & Easy has not lived up to its name. Tesco should make the stores “greener” so that the look of the stores’ interior matches the brand image.
Consumers who purchase healthy organic food want to feel like they are shopping in an environmentally conscious store. In addition, Fresh & Easy offers a limited assortment of goods that are unfamiliar with US consumers. In exhibit 12 from the case, data shows that consumers visit Fresh & Easy stores less frequently than its competitors. This is because competitors have weekly sales on familiar brands that US consumers want. Fresh & Easy should stock familiar brands to get US consumers in the door. Once the consumer is in the Fresh & Easy store, free samples and direct price comparison with well-known US brands should give Fresh & Easy brands an advantage.