Tesco Strategy Report

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Copyright © 2001 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professor Kannan Ramaswamy, with research assistance by Mr. Gennady Dikalov, MIM 2000, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. Tesco, PLC: "From Mouse to House"

in Online Grocery Retailing
We have got a two-year lead over our competitors on the Internet and we intend to exploit that. We are the largest grocery internet retailer in the world.
Mr. Terry Leahy, CEO, Tesco, PLC. April 2000.
It was a bright sunny morning in May 2000 as Mr. Tim Mason, e-commerce Director for Tesco, was driving through the lush English countryside on his way to work at company headquarters in Cheshunt, Hertfordshire. He was running through alternative scenarios of the competitive battle that was just emerging in online grocery retailing. In April, Mr. Leahy, the CEO, at a meeting of stock analysts had observed that Tesco.com (Tesco's online retailing venture) was two years ahead of its rivals in implementing its online strategy. He was convinced that Tesco.com would clearly be the winner. It would be Mr. Mason's responsibility to deliver on that promise.

Tesco had grown from stride to stride to become the largest brick and mortar grocery chain in the U.K. In 1995 it overtook the venerable Sainsbury's, an entrenched leader in the market since the late 1800s. Since then, there had been no looking back for Tesco. For the fiscal year 2000, Tesco reported sales of £18.7 billion and net income of £1 billion, an increase of 11% (Exhibit I). It controlled just over 15% (Sainsbury's 12.5%) of the fragmented grocery industry in the country; although, in densely populated areas in the south and southeast, Tesco and Sainsbury's together held between 45% and 57% of the market. Much of this meteoric growth resulted from a combination of astute real estate planning, excellent location strategy, creative execution of multiple format stores and above all its ability to keep pace with prevailing customer trends. "Pile it high and sell it cheap" was the slogan that launched Tesco and the company was leaving no stone unturned to offer its customers the best value for their money. It was against this backdrop that the company decided to enter the world of e-commerce. The e-venture was a carefully planned strategic move for Tesco. It originated in September 1996 when a conventional telesales mail order service was launched. This was followed by a shop-at-home alternative that was built on a CD-ROM-based catalog that consumers could use to generate a shopping list before uploading it to Tesco's servers.

In little over a year, the company had decided to enter into cyberspace with a direct Internet-based service. Tesco premiered its completely online grocery shopping experience to herald its entry into the world of cyber retailing. After its debut the company had attracted 500,000 online customers, accepting online orders at 100 of its stores. Although the company had not reported specific financials for the eventure, it reportedly lost £11.2 million in fiscal 2000. Despite this setback, the company had announced that it would extend its network of e-enabled stores to another 300 locations, covering 90% of the U.K. population shortly.1 In anticipation of this growth burst, it planned to create 7,000 new jobs. 1 "Tesco outlines ambitions to expand online," Financial Times, May 26, 2000. 2 A07-01-0011

It even started its own Internet Service Provider (ISP) arm as a prelude to bringing more customers online. The path to profitability was not going to be easy, however. As the traffic light turned green, Mr. Mason's thoughts focused on Tesco's online competitive advantage. There were many questions that needed to be addressed. Although Tesco had shown tremendous technological savvy in launching its Web site on a shoestring budget with a group of Dell...
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