TESCO – The Customer Relationship Champion

Introduction

TESCO plc is based in the United Kingdom and is one of the largest international retail chains in the world. It competes with the likes of retail giants such as Wal-Mart (of USA) and Carrefour (of France). The significance of TESCO can be scoped by the fact that it is classified as the second largest retail chain behind Wal-Mart but ahead of Carrefour, on the basis of profits. Originally it started with product offerings based on grocery item like food and drinks but now TESCO has evolved in to a true juggernaut of the retail sector with products ranging from telecommunication solutions to financial services. Amongst a host of highly effective and efficient supply chain, management and marketing strategies, a highly innovative and creative Customer relationship management strategy (based on the TESCO club card) has propelled TESCO to new heights of success and has enabled it to post growth in sales (both in UK and Internationally) when others in the industry are showing a decline.

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Competitive Environment for TESCO

We can analyze the competitive environment in which TESCO operates by using the five forces model of Michel E Porter in order to determine whether retailing is an attractive place to compete.

Industry Competitors

TESCO plc is a truly global company both in its size and magnitude of operations. The drawback to this is that it faces stiff competition from established rivals both in the United Kingdom as well as in the International market. Some of Tesco’s competitors include ASDA Group Plc, Safeway Inc., Wm Morrison Supermarkets, J Sainsbury Plc (based in the United Kingdom), Carrefour S.A., Marks & Spencer Group and Wal-Mart Stores Inc. to name a few. As we all know all of these competitors are highly established and reputable business in their own rights and due to fact that many of them are increasingly similar to TESCO in scale and capacity of their operations, the competition in the industry is very intense. The rivalry is further intensified by the fact that the products being offered by the major players are very slightly differentiated and thus the customer has no particular incentive or cost to look out for when switching from one brand to another. TESCO might be posting gains but its is a fact the growth of the overall retailing industry is slowing down which means that all the major players grab any of the limited opportunities of growth that they are presented with and this in turn increases rivalry. Like TESCO some of its rivals also rely on price cuts and other tools to attract customers and increase the number of units sold (ivythesis.typepad.com). This not only increases the competition but also drives the industry margins lower and lower. Thus in order to gain a competitive edge TESO has to rely on the effectiveness and success of its Strategic Management Policies and how they create value for the company in the overall environment it operates in.

Potential Entrants

There are considerable barriers to entry in the retail sector imposed upon potential entrants. Most of the retail companied like TESCO, Wal-Mart and Sainsbury are truly giants and are well established firms which have a lot of experience regarding the working of the retail market. Such type of information will not be easily available to a new business. Secondly since these businesses are highly established they might have already captured the market for a particular item and thus would have a highly efficient supply chain working to ensure that its dominance stays the way it is. The new entrant will find it very difficult to compete with these businesses on these items and may face problems like not being ale to secure a reliable and cost efficient supplier of thee goods. Economies of scale are another major barrier to entry. Due to the size and scale off their operations most of retail companies like TESCO, ASDA and Carrefour have a major cost advantage in the production and marketing of their goods a compared to a business that has just started and is operating at a narrower scale. New business will also face the challenge of using effective and low cost distribution channels as they would have already been taken up by the established firms. These firms will face an increasingly difficult task of finding or developing new distribution channels to distribute their products. Furthermore the Retail Industry has matured over time, with stiff competition and intense rivalry between the major players, thus it will be very difficult for a new entrant to survive in these business conditions. Due to factors mentioned above potential entrants will face considerable barriers to entry if they try to enter a mature and well established retail market.

Buyer Power

As mentioned in the case the customers in U.K at least are price sensitive, if sugar is expensive at TESCO they will shift to Sainsbury. This ensures that the prices stay down. Furthermore the output of the industry is fairly standardized with little differentiation; the customers do not hesitate from readily switching from one brand to another. However the fact that the there are a large number of buyers and a few sellers and the fact that it is economically feasible to buy from a single retailer than from multiple retailers; keeps the market disciplined and helps prevent the retailing companies from cutting each others profits in an all out price war (321books.co.uk). Thus the bargaining power of the customers is limited by the nature of the Industry and the fact that they are few other competitors that operate at the same scale as TESCO.

Supplier Power

The main advantage to TESCO and the other major players in the market when negotiating with suppliers is the fact that these large retail giants cater to a very large customer base and thus order in large quantities. Therefore they are able to dictate their terms of prices and quantity supplied. This greatly limits the power of the suppliers because if they refuse to cater to these large and established retail companies than they will be loosing a very large market and then only the small supermarkets will be left for them to serve. Furthermore the products being supplied are fairly standardized and giants such as TESCO feel no hesitation in switching from one supplier to another if their terms are not met. Additionally there are many other suppliers that are willing to gain Tesco’s attention in the event that it wants to change its suppliers. Thus the suppliers in the retail industry do not exert as much power as they would have liked.

Substitutes

As mentioned above the products being offered are fairly standardized and there is high level of rivalry in the retail industry which helps to keep the prices down. The other companies operating besides TESCO are also very competent, for example ASDA can match Tesco’s product pricing as well quality, thus making the element of substitutability relevantly high in the retail industry. Furthermore one-off costs of switching from one retailer to another are very low for the customers; therefore they can easily switch from one retailer to another. All of the above factors relating to the substitutability in the retail market should encourage TESCO to invest in solutions that reduce cost, improve quality and give their products a distinct position in the minds of their costumers.

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The retail environment is an ever changing and dynamic one. TESCO needs to be adaptive of the trends emerging in the market and quickly capitalize on them. The challenge for TESCO now that it has become a giant is that it should not loose its customer centred focus and its flexibility and versatility in serving them what they need. As the retail industry gains maturity TESCO should invest in finding a competitive position that it can be recognized for and it should also be able to defend that position in the future. Overall the limited supplier and buyer power, huge barriers to entry and rivalry kept in check due to a few other powerful retailers the future looks bright for TESCO. The main advantage to TESCO and the other major players in the market when negotiating with suppliers is the fact that these large retail

The TESCO Way – CRM

In today’s highly competitive business environment it is becoming increasingly expensive and difficult to attract new customers. Therefore nowadays organisations are increasing their focus on customer relationship management strategies investing in activities that help them manage their relationship with their existing customers (university-essays.tripod.com). Two of the most prominent CRM initiatives taken by TESCO that sets it apart from its competitors and have attributed to increases in customer equity and lifetime values are the creation of its customized magazine and its very popular club card (loyalty card).

Customized Magazines

Using the vast amounts of data and customer profiles it collected through the use of its advanced IT resources (Dunhumby and TESCO Club card), TESCO was able to design product offerings, ranges, help gauge a better understanding of what consumers want and develop marketing strategies that identified and attracted distinct consumer segments and encouraged loyalty. One such activity was the creation of a TESCO magazine that the company ensured that its customer received every three months. What set this magazine apart from others was the fact that TESCO was able to mass-customize it to suit the nature and need of the targeted customer segments and thus able to supply them with material that suited their requirements. This meant that each magazine had unique combination of articles, advertisements and promotional coupons with over 150000 variants of the magazine being produced to satisfy the customer it was targeted at. This CRM activity definitely motivated customers to be loyal and increased customer equity because this particular activity was very personalized at the same time as being a low cost imitative for customer retention. These highly effective measures were possible due to the loyalty card scheme TESCO introduced that laid the foundation for its CRM framework that truly made TESCO stand out.

Tesco’s Club card

The loyalty card scheme was launched in 1995. The data collected from the use of these cards helped TESCO design a more customer focused and personalized product portfolio that appealed to the various customer segments TESCO offers its services to. Using the vast amounts of data and customer profiles it collected through the use of its advanced IT resources (Dunhumby and TESCO Club card) TESCO was able to shift from the shotgun approach (targeting them as a group) to a more focused rifle shot approach and thus TESCO was able to develop highly focused marketing strategies (icmrindia.org). In order to get a club card customer had to register with TESCO. After the club card is obtained the customer can accumulate points by spending on any companies that were part of the TESCO group or companies that TESCO had built partnerships with such as AirMiles Travel Company. Once 150 points were accumulated they could be converted into TESCO price off vouchers. What made Tesco’s loyalty card scheme stand out from the rest was the fact that TESCO cultivated relationships with other companies like AVIS and Marriot and thus customers could also accumulate points by spending at these companies’ stores. This meant that the customers could regularly get price off vouchers by reaching the minimum number of points frequently and this kept their interest in the scheme and thus encouraged and increased customer lifetime value and customer equity.

TESCO introduced different clubs that its customers could register with to get benefits and personalized services. This initiative resulted in the creation of the Kids, Baby and Toddler, Healthy Living, Wine and AirMiles Travel Company Clubs. TESCO used these clubs to instigate loyalty in its customers belonging to different segments. For example TESCO gave free information on child safety and health for children to parents belonging to the Kids club. By doing this it created credibility in the heats of the parents and also targeted children at a earlier age then most of its customers. By giving parking spaces nearer to the store, offering advice on safety tips in the pregnancy period and showing concern for people belonging to the Baby and Toddler club TESCO made strong relationships with these people. These people were just starting a family and if catered to in the right manner they could continue being its customers for a very long time (addressing the concerns of customer equity and lifetime values). TESCO used the Healthy Living Club to promotes its image as a health conscious company and used the used the Wine Club to promote the wide variety of wine available at its stores.

Therefore in my opinion TESCO owes a lot to its Club card loyalty scheme. The sheer simplicity and reliability of the scheme made the club card very popular with the customers and also limited them from switching over to other brands. With this simple CRM initiative TESCO was able to address different consumer segments and by producing personalized retail solutions it was able to attract customers from all segments to its stores. Couple this with its simple and easy to use internet resources; TESCO was able to convert its CRM initiatives from simply being a marketing gimmick to a product that customers valued.

Value Creation

TESCO is one of the most innovative and effective company in creative value for its customers which is evident from its success. TESCO has proven that it is a brand of the people by emphasising on value, low prices and focusing on customer satisfaction. This approach has allowed TESCO to target almost all of the customer segments belonging to different age, sex, race and cultural brackets. The range of the Product offering from good, better and best is so comprehensive that it satisfies the needs of virtually every customer regardless of the segment they belong to. Furthermore serving customers belonging to different races in the U.K (like Chinese and Indians) gives TESCO experience and knowledge about the needs of these customers, their buying behaviour and spending patterns that can be used to tailor more effective and customer focused marketing strategies and product offerings and ranges in their respective home countries. Another forte of TESCO is operating at a local level while being global retail giant. Stores in different localities have different value chains compared to others. This is made possible by Tesco’s excellent data collection and management that enables them to learn what type of product offerings are valued where and in what combinations. In order to be this knowledgeable and flexible about different localities and cater to them effectively TESCO had to change the paradigm and shift from a centralized and highly structured retail management and logistics model to a more decentralized, simpler and quicker model (Fernie and Sparks, 2004).

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TESCO keeps the price of the products down while maintaining an optimal level of quality through economies of scale which enables it to dictate its terms to its suppliers. This pushes the suppliers towards adopting low cost high value creating alternatives, the benefits of which are ultimately passed on to the customer. TESCO has reaped major benefits from the effective utilization of its IT resources first by the use of its loyalty card scheme and secondly by launching Tesco.com. The competitive data collected by the help of the loyalty card scheme regarding consumer buying behaviours, preferences and dislikes has enabled TESCO to produce highly personalized services that cater to the need of the individuals being targeted. This means customers are offered products that they need and the ones most suited to their requirements. His ensures very high customer loyalty and satisfaction and has enabled TESCO to obtain a differential competitive position in the retail market. TESCO also reaped huge benefits with the launch of its online retail website Tesco.com. Tesco.com continues to show growth and provides the organisation with a platform to have a truly modern and global reach, plus it also provides TESCO with an outlet to offer non-food items such as telecommunications, insurance and financial solution to its customers at the convenience of a click of a button. TESCO also creates value for its customers both in the United Kingdom and globally by inventing different retail formats that provide customers with greater convenience and choice as to how they want to shop. Retail formats currently being employed by TESCO include metro, convenience, express and superstores). Thus TESCO goes out of its way in providing its customers with value and this fact is reflected in the fact that it is the third largest retail chain in the world by revenues and second largest retail chain the world based on profits.

TESCO – SWOT

Strengths

First on Tesco’s many formidable strength includes the strength of its brand or its powerful brand equity. Customer associate highly personalized, convenient, value for money, good quality and varied services and product offerings with the brand. TESCO also has a wide range of in-house labels that cater to a very wide customer base. These in-house labels have helped improved Tesco’s profits substantially. TESCO is a true global giant with stores in countries ranging from China, France, Japan and USA. Due to its global base it can source suppliers internationally and dictate its term as well, on the basis of economies of scales and the large volumes it trades in. TESCO also has a growing and profitable online retail business from which it can sell its non food items. TESCO also has a much diversified product portfolio with products ranging from food items and drinks to telecommunication and insurance solutions. The TESCO club card is one of the most popular CRM initiative adopted in the retail industry. Not only does it instils and encourages loyalty but it also provides TESCO with competitive intelligence in the form of consumer buying behaviour and patterns. It has a strong and ever growing non food items market, particularly insurance and clothing.

Weaknesses

The company has adverse relationships with the farmers union and some of its suppliers due to its powerful bargaining position, shaped by the market forces. TESCO also has a lot of debt that it had acquired for its aggressive expansion plans. Couple this with the adverse financial and economical conditions in the finance and insurance markets, TESCO has taken hits in shapes of credit card arrears and insurance claims. Some of its mid to high range products that consumers classify as non essential have taken hit due to the current global; recession as people have lower disposable incomes and limited buying power. Tesco’s position as a Price Leader might lead to falling profit margins if tries to maintain this position in the face on intense rivalry in both local and international markets. Furthermore TESCO is a giant of a corporation which employs a large number of people and caters to almost all segments of consumers present in the market. This also means that TESCO might not be as flexible or provide highly specialized services as compared to some of its smaller and more focused rivals.

Opportunities

TESCO could use its mammoth finances to aggressively expand into profitable but unexploited markets and gain first mover advantage. Also it could use the funds at their disposal to acquire or to enter in a merger with specialized and focused organisations to enter into product lines that they have yet to explore. The non-food company’s product lines have a huge growth potential, especially TESCO clothing line. As the people all around the world grow more health and lifestyle conscious, beauty and health products are on the rise. These producers have the huge growth potential and also provide retailers with suitable margins. Tesco’s online website has immense growth potential and the company can use it as a platform to offer previously unexplored products.

Threats

The current Credit crunch has greatly reduced the spending power of the Tesco’s customers which means sales of mid to high end products are threatened. Margins will also be adversely affected by rising cost of supplies and production. Being the market leader in U.K and the 3rd largest retailer in the world means that TESCO is specially targeted by other companies for competition. Wal-Mart and Carrefour both have the products, funds and motive at their disposal to cause the company problems. The Monopoly and mergers commission is one of the major threat to TESCO and its expansion plans which is trying to limit Tesco’s aggressive expansion. There is also a social implication because some people are threatened by the rise of supermarkets that is driving out smaller retail shops.

Conclusion

Overall TESCO is a very powerful company with immense growth potential. It should further improve its golden strategy of CRM involving its loyalty card Scheme and develop better and more innovative relationship management initiatives. Tesco’s emphasis on relationship building and maintenance with the different stakeholders it is concerned with is of prime importance for current and future growth. However TESCO is not allowed to be content with the present situation, issues like not being able to fully capitalize and capture the student market segment, have to be addressed quickly and effectively. Only through continuous improvement will TESCO be able to survive, compete and grow in a market dominated by giants such as Wal-Mart, Carrefour and Sainsburry.

Bibliography

John Fernie & Leigh Sparks (2004) “Logistics and retail management: insights into current practice and trends” 2nd Edition. Pp. 118

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