GENERAL RETAIL

Tesco is Britains leading food retailer and the third largest

in the world. Its first store was opened in 1929 in London
and by the early 1960s Tesco was a familiar feature of
most UK high streets. After joining the eighties trend for
large out-of-town supermarkets, in the 1990s the
company started pioneering many new innovations. It
developed new store concepts such as Tesco Metro, a city
centre store meeting the needs of local shoppers, and
Tesco Express, the first UK petrol station convenience
store. In 1995 the company introduced its Clubcard, the
UKs first customer loyalty card, and two years later
formed a joint venture with the Royal Bank of Scotland to
offer a range of financial services. 2000 marked the start
of Tesco.com which was built on the back of existing
stores and, with low capital spend, was profitable from
the start a key internal requirement. Tescos
international operation, which started in 1994, has
steadily expanded and now accounts for half of its total
retail space. Since 2000 there has also been an increasing
focus on building non-food sales both in store and online
with the result that, for example, Tesco is now the UKs
largest CD retailer.
Pragmatic, customer focused
innovation, driven by
tangible insights and
delivered with class-leading
efficiency
TESCO
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Innovation in Tesco is seen as key for its customers and also to its
business. As such the company focuses equally on product as well as
process innovation. Core to Tescos innovation success has been its
focus on managing margins. Right from the start the companys
obsession with efficiency has been used to keep prices low and, in 2007,
Tesco managed 1.8% deflation across its product lines. The company
has also focused on making the shopping experience as easy as possible
for customers be it in hypermarkets, small stores or online. Tesco
Express has led the move of food retailing back into the community and
Tesco.com now generates sales of more than 700 million and profits of
more than 35 million for the business. In the UK, the service reaches
96% of the population and handles more than 170,000 orders a week.
Like some of its peers, Tesco also aims to improve service and provide
better value rather than concentrate on pricing alone. These principles
are carried across the business into non-food, services and its
international operations. To enable this, the company pays considerable
focus on harnessing the creativity of its workforce and encourages staff
to come forward with ideas. The companys prowess in process
management applies just as much to its idea management as it does to
logistics and store layout.
A key ingredient to Tescos growth is the use of well-targeted own-label
brands including the up-market Finest and low-price Value labels. To
drive this Tesco has led the field in market insight. Its Clubcard, the most
successful loyalty card in the sector, provides Tesco with a class-leading
ability to spot emerging trends, attract consumers and influence the
behaviour of secondary customers to bring them into the fold.
Another influence has been a coherent strategy for international
expansion. As well as expanding into emerging markets in S.E. Asia and
Eastern Europe, Tesco is now also tackling the US where its first Fresh &
Easy stores opened in 2007. The companys innovative format
differentiates it from existing, homogenous American supermarkets,
whilst capitalising on a gap in west-coast grocery retailing. Tesco's
expansion of its Fresh & Easy business is hard to go unnoticed. The
promise to deliver its 'Every Day Low Price Plus' strategy is set to ensure
that Fresh & Easy is well placed to capitalise on US customer's search for
quality and value, especially as consumer spending decreases. As it drives
growth in new territories and dominates its domestic market, Tesco sees
that innovation success is down to four issues - trying new things; not
being complacent; being prepared to change; and being determined that
no other business will achieve more for customers.
Tesco Key Data 2007
Total Revenue 46.6bn
Revenue Growth 10.9%
Pre-tax Profit 2.7bn
Profit Growth 20.3%
# Stores 3263
# New Stores 591
UK Revenue / Sq Ft 1,325
UK Revenue / Employee 177k
Innovation Scorecard
Innovation Culture 8
Strategic Innovation Focus 8
New Products 9
Managed Growth 9
Product Margin 7
Investment in Innovation 8
Innovation Brand Impact 7
Innovation Peer Review 9
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SECTOR OVERVIEW
The supermarket and the one-stop-shop transformed the dynamics
of the food and general retail sectors. Pioneered by the likes of
Sainsburys, Safeway, Carrefour and Wal-Mart, the advantages are
clear; securing large volume discounts allows supermarkets to under-
cut traditional stores and greater space means they can offer as good
if not better selection of produce. In recent years, there has been a
focus on multi-format capability and blurring of formats as retailers
mix and match to increase effectiveness and offer customers a
reason to shop at their stores. Linked to issues such as out-of-town
planning constraints this has led to consolidation including the
opening of smaller stores within communities, the incorporation of
pharmacies, post offices and travel agencies, joint retail ventures with
the likes of BP, Shell and Exxon and the growth of on-line shopping.
In addition, the rise of own-label products and an increasing
migration to non-food have fundamentally changed the product mix.
By 2010, the value of the European private label market is forecast
to reach 430.8 billion, up from 298.1 billion in 2005.
With price deflation and commoditisation a threat in most markets,
genuine innovation remains the key for many retailers. In more
mature markets there is a growing appreciation that a 'one size fits
all' approach is no longer valid. Some retailers are adapting by
focusing on other differentiation than just price using new channels
to develop tailored products and services to suit more sophisticated
customer requirements. Growing consumer spending and a hunger
for modern retail in emerging markets such as China, India and Russia
also provide significant opportunities for growth. Large international
and regional grocers are acquiring market share across the world at
a remarkable rate with the top 100 retailers already capturing 45%
of the world's modern grocery distribution. Companies like Wal-
Mart, Ahold, Carrefour and Tesco now face the challenge of
managing increasingly complex supply chains, building critical volume
in different countries and maintaining comparable levels of product
quality and customer experience.
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In this highly competitive arena, innovation is rife. From introducing new
technology and broadening the product portfolio to positioning the
brand and deepening customer relationships, there are several key
drivers gaining widespread attention. Todays two main technological
sources of innovation are the on-line provisions market and an
improved supply chain-focused technology such as smart tags. Both are
addressing improved efficiency of goods supply and provision, but are
also areas of consumer-focused innovation around convenience and
traceability. In terms of broadening the product mix, the migration of
food to general product supply has been followed by service
development using the retailer brand as the focal point. Starting with a
limited range of joint venture financial products, this has spread to loans,
insurance, holidays, car retail and, most recently, energy supply, virtual
mobile phone operations and real estate. All are usually delivered in
partnership with leading existing suppliers, but are positioned around
the increasing levels of trust that consumers have with their favorite
retail brand.
Many retailers are using the migration of their loyalty cards into their
joint venture services and relationships such as Nectar in the UK to gain
new information about their wider customer base that feeds into
detailed segmentation analysis and opportunities for cross selling.
Retailers can now find out what their customers spend their money on
outside the store and can use this to develop new branded service
propositions and improve the levels of cross-selling between groups.
Together these are all providing the leading retailers with the
opportunity to take consumer-centric innovation to a whole new level.
Lastly, as efficiency is such a driver of margins in this sector, internal
process innovation is a correspondingly key area of focus. Customers
largely see the visible impacts from innovation in terms of new products,
services, store layouts and website usability. But as new technologies hit
the supply chain it is the companies that can best manage the flow of
materials that will win the day. As such an efficient IT infrastructure is
vital and this has been a major area of spend in recent years for the
main players.
INNOVATION DRIVERS
Wal-Mart
The worlds largest retailer has been through a number of challenges
over recent years but is now making a major success of its innovation
focus on the sustainability agenda: Wal-Mart has an ambitious strategy to
reinvent itself as a champion of the environment. The company plans to
eliminate 30% of the energy used in stores, reduce solid waste from its
U.S. stores by 25% within three years, and invest up to $500 million in
sustainability projects. Wal-Mart is creating competition in its supply base
around being green that is already having significant impact on
innovation in packaging and waste management.
WuMart
At the other end of the scale at the moment, Chinas WuMart is seen
by some as the future of retail. The company has only been around
since 1994, and although only having $320m of sales and 500 stores at
the moment, this is one of the fastest growing retailers in China with
grand expansion plans and a different take on customer service. The
company tailors stores to suit local tastes and fresh food is a major
feature, aware, for example, shoppers can pick live fish to have for
dinner. With 700% growth predicted for retailing in China alone over
the next decade, WuMart is intent of having a major role in this.
ONES WE ARE WATCHING
GENERAL RETAIL
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