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Part I
Introduction
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UK Grocery Retailing, 1987-2005
Clubcard
Tesco.com
1987 1990 1995 2000 2004
Tesco 8.5 9.8 13.6 16.1 19.2
Sainsburys 10.0 11.3 12.5 11.6 10.8
ASDA 4.9 7.0 7.2 9.5 11.2
Safeway 5.9 7.1 7.2 7.7 9.7
Morrison 1.5 1.7 2.4 3.2 9.7
Other 69.2 63.1 57.1 51.9 49.6
Source IDG, TNS, Keynote, Frontier
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Tescos Growth Strategies
Products
Expanded non-foods
Services
Financial services
Hypermarkets
How to increase sales
Convenience stores
Internet
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Part II
Clubcard
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Why do retailers invest in loyalty programmes?
Key goal is to increase customer loyalty
Champion

• All customers can be placed at some point in this
  3-D cube
• A customers location in the cube suggests
  actions suitable to earn his/ her lifelong
  loyalty
• Contribution profitability today
• Commitment future value
• - likelihood of remaining a customer
• - headroom
• Championing ambassador

Commitment
Consumer
Contribution
Scoring Points (2003), Humby et al
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Why do retailers invest in loyalty programmes?
For a loyalty programme to be effective, it must
increase contribution, commitment, and championing
Attitudes that must be created by programme Behaviour generated by attitudes
Retailer becomes customer's first choice   Retention of existing customers Recruitment of new customers
Customers spend larger share of wallet in the retailer's stores instead of rivals' stores Volume of buying increases
Customers buy additional products and services from retailer Diversity of products increases
Customers are willing to recommend retailer Recommendations attract new buyers
Customers have high overall satisfaction Disinterest in switching to alternatives
Contribution
Championing
Commitment
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But if everyone does the same thing, isnt it a
zero sum game?
If all retailers are able to copy one anothers
moves, we would not expect customers to become
loyal to a particular retailer
But by 2005, Vodafone and Barclaycard had exited
the Nectar group and Nectar is struggling to
catch up with the Clubcard phenomenon
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Tesco has been able to outwit and outlast most
competitors
After lagging Sainsbury for many years, Tescos
newly launched Clubcard programme allowed it to
leapfrog the leader in just 6 months in 1995
1995 Jan Feb Mar Apr May
Sainsbury 19.4 19.0 19.1 18.7 18.8
Tesco 18.1 18.5 19.3 19.9 19.4
Supermarket UK market share () (Source Taylor
Nelson Sofres)
The launch of Clubcard increased Tescos sales by
28 and reduced Sainsburys sales by 16 in 1995
alone
By 2005, Tesco's Clubcard has more than 10
million members who collectively make up 75 per
cent of the company's UK transactions and 82 per
cent of its UK turnover.
What is so unique about the Clubcard that has
allowed Tesco to achieve such overwhelming
success?
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To underpin the success factors, we conducted
some research
Based on a questionnaire with a sample size of
100, we identify key areas in which Clubcard has
performed significantly better than other loyalty
cards
Mean
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You are What you Buy Innovative Customer
Segmentation
It is Tescos creative approach to customer
segmentation that has allowed it to offer more
personalised treatment and relevant rewards than
competitors
Data insights are the foundations of Relevance
(1) Tesco does data mining (2) Identifies
customer profiles/ lifestyles (3) Responds to
different segments needs with tailored
rewards (4) Improving product lines based on
Clubcard data
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You are What you Buy Innovative Customer
Segmentation
(1) Data mining Key advantage of the Clubcard
scheme is the ability to gain data insights from
customer behaviour
Now possible to infer why customers make certain
decisions, not just who, what, when, and how much

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You are What you Buy Innovative Customer
Segmentation
Finest pre-packaged Chicken Tikka Rice Someone
who values quality and lacks time to prepare food
Tropicana orange juice Someone who is not very
price sensitive and values quality
Expensive pre-cut, prepared fruit Someone who is
not price sensitive and values convenience
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You are what you buy innovative customer
segmentation
(2) Customer profiles/ lifestyles
Average Score
Product Attributes
Easy to consume
Classified as non-budget/ convenience lifestyle
High quality
Healthy
Innovativeness
Cooking from scratch
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You are what you buy innovative customer
segmentation
Source Coriolis, 2004
Source Coriolis, 2004
Brands launched to target segments
Customer segmentation
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You are what you buy innovative customer
segmentation
(3) Tailoring rewards to various customer
segments
People who join loyalty programmes expect
relevant rewards
Each member of the Clubcard scheme receives a
personalised pack containing a mailing,
product-specific advertisements, and vouchers
Our research indicated that many people ranked
Clubcards rewards as more relevant than those of
competitors
This is because Tesco tailors its rewards Tesco
has 8 million variations of its quarterly
mailings sent out to 10 million Clubcard members,
with targeted vouchers and advertisements
catering to their differing lifestyles and
geo-demographic circumstances For instance, Tesco
ensures that it does not send meat vouchers to
health conscious vegetarians, and focuses on
issuing vouchers for low-calorie products and
articles on keeping fit
Tesco also has dedicated clubs (eg. Baby club)
that cater to different customers in various
lifestages
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You are what you buy innovative customer
segmentation
(4) Improving product lines based on Clubcard
data
If Tesco identifies that Special Dietary Spreads
are doing poorly in growth, they can use Clubcard
data to identify the problems
Source Dunnhumby website
Healthy consumers are skewed towards Special
Dietary Spreads
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You are what you buy innovative customer
segmentation
Tesco can examine which customer groups are
driving category performance since healthy
consumers were shown to be extremely loyal
towards Special Dietary Spreads (SDS), we would
predict the highest growth in spend on SDS to
come from the healthy group if the SDS product
line is relevant to them
Source Dunnhumby website
BUT actual results show that growth of SDS is one
of the lowest in the healthy segment this
implies that Tesco may be selling the wrong SDS
products in its stores, and thus it has to
improve its SDS selection to improve growth
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You are what you buy innovative customer
segmentation
Identifying new opportunities in SDS
Source Dunnhumby website
Healthy customers are increasing their spend
mainly on 2 products within SDS (Benecol and
Pro-Activ) Tesco can lock in healthy shoppers
by launching new Benecol and Pro-Activ products
(eg. 1Kg versions)
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Loyalty programmes are costly
Loyalty programmes are extremely expensive. Even
if a loyalty scheme can increase sales revenues,
it can lead to reduced profits if the costs are
not minimised.
But Tesco has been successful in minimising costs
as well!
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Why Clubcard is more cost - efficient than others

• More value from marketing expenses

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Clubcards cost effectiveness (1/3)
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Why Clubcard is more cost - efficient than others

• 2) Discounts are mainly supplier funded

According to the Competition Commision Report
Tesco engages in the practice of requiring or
requesting suppliers permanently to reduce the
previously agreed wholesale price of products in
support of the marketing initiatives with which
the price initially was associated
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Why Clubcard is more cost - efficient than others

• 3) Clubcard data facilitates targeted pricing
  strategies

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Part III
Tesco.com
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UK Online Retail Grocery Market, 2005
Source Verdict, Keynote, Hitwise
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Tesco.com VS Sainsburystoyou.com
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Tesco.com

• First mover advantage
• Switching cost
• Shopping basket (used by 92 of shoppers)
• Customer management (touch strategy)
• Convenient and efficient site design
• Offline advertising in store for Online offer
• Clubcard low cost of winning new customers
• Integrated offer of non-foods goods, partnering
• Ebay way of introducing new categories
• Industrialisation of the picking process
• Picking trolley, shelf identifier, lean supply
  chain management

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Comparison of alternative grocery models
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Why didnt Tesco outsource e-grocery logistics?
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Which e-grocery mode is better? (1/2)
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Which e-grocery mode is better? (2/2)
High growth (p .5)
In-store picking
238
282
238
-44
167.5
Low growth (1-p .5)
97
181
Go online
97
0
167.5
High growth (p .5)
Dedicated warehouse
178
178
291
-113
105.25
Low growth (1-p .5)
167.5
32.5
145.5
32.5
Brick mortar only
0
0
0
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UK Retailers Online Delivery Strategies
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The predicted value of UK E-Commerce (1997)
quoted in Foresigth, 2000, Retail E-Commerce
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Tesco.com as a niche market
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Part IV
Non-Food
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Expansion into Non-Food
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Why Tesco has Targeted Non-Food
Core Grocery Market Saturation Stagnation,
intense competition price deflation seek
alternatives.
Diversification Opportunities Potential to
exploit weaker competition and higher margins
(cross-subsidize core groceries).
Threat of Competition Industry trend Asda
already established, others to follow.
Early-mover advantages.
Synergies Benefit from existing resources and
competencies inc store networks, distribution
logistics infrastructure, management experience.
Competitive Advantage Key competitive
differentiator. Offer attractive diversified
product lines set goal of being as strong in
non-food as we are in food.
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Shares of Non-Food Market
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Tescos Virtuous Cycle of Non-Food Expansion
Scale economies
Growth / expansion
Virtuous Cycle
Control of Supply chain
Lower prices higher margins
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Consumer N-F Products Apparel (Clothing)

• Clothing is the most important market for Tesco
  within non-foods, with sales accounting for 40
  of the total non-food portfolio.

The UK Market is highly competitive with a range
of traditional high street and discount
retailers. Supermarket entrants have driven price
deflation and captured market share
Tescos clothing sales grew 28 in 2004 to 700m,
doubling its market share from 0.9 to 1.8

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Clothing Brand Comparison
Source Goldman Sachs Non-Food and Convenience
Analysis (2005)
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Factors Driving Tescos Success in N-F Apparel
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I. Pricing Strategy
Consistent Strategy Tesco has extended its low
price positioning in core groceries across
non-foods lines to undercut competition. Low
price / high volume. Price Key Competitive
Advantage Tesco is between 40-60 cheaper than
the industry average. Market Research low price
factor highest correlation in choosing
Tesco. Competition Intense price competition
with discount retailers and closest rival, Asda
George brand (launched 1990) based on
successful concept of affordable fashion.
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Average Pricing Competitiveness
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II. Purchasing Costs and Logistics
Buying Power bulk buying discounts critical
mass drives down costs. Direct Sourcing (65 UK
clothing) eliminates intermediary agent mark-up
captures greater percentage of gross
margins. International Purchasing low cost
factors of textile production (labour, materials)
in Asia (India, Sri Lanka, China,
Indonesia). Distribution Initially utilized
existing purchasing and distribution channels.
Subsequent development of efficient dedicated N-F
infrastructure warehouses, logistics and
specialized management systems.
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III. Product Range Tescos Clothing Brands (1/2)
In Contrast to Asdas , Tesco has chosen a
multi-brand differentiated format to appeal to a
wider range of consumers and niche sub-markets,
including
Other niche lines include Sixteen-Twenty-Six
(plus size), Greenbaby (infant), childrens wear
branded sports apparel.
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Product Range Promotion (2/2)
Most successful in niche categories of childrens
wear and value lines standardized products in
most price sensitive categories. Less successful
in mainstream women and menswear. Suffers from
relatively negative fashion / brand image status.
Tesco has attempted to incorporate fashionable
trends, employing well known designers and rival
firm management emphasizing rapid product design
and production. Heavy in-store merchandizing
external promotion (inc TV advertising) to
stimulate demand, build awareness create brand
name equity.
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Presentation (Format)
Expansion New stores / adding space to existing
locations. Trial of N-F only stores (Homeplus).
40 of new N-F floor space dedicated to apparel.
Convenience High store footfall one stop
shop for all grocery and other N-F lines also
attracts customers to apparel. Consistent with
current UK retailing trends. Synergy in Demand
Apparel has become a key driver of customer
traffic in its own right, spillover effects on
demand for other product categories .
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Evaluation of Non-Food Strategy Threats
Over-Diversification management need to keep its
eye on the ball and may lose focus on its core
grocery business, over-stretched
resources. Competition anticipated entry and
imitation by other supermarket retailers
(Sainsburys Morrison's) will increase price
deflation and reduce profit margins. Price
retaliation. Cyclicality Non-Food expansion
increases likely cyclicality of demand and
exposure to economic downturns. However may be
beneficial with value image. Lack of
Competencies move in to unfamiliar products /
markets may lack resources, proprietary skills
and required knowledge overcome by partner
involvement. Quality may be sacrificed in
pursuit of low costs.
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Why financial services?

• Additional competitive advantage
• Additional source of revenue
• Meeting customers needs
• Synergies with core business
• Exploiting existing information about customers

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TESCO Personal Finance

• Established in 1997
• 50-50 joint venture with the Royal Bank of
  Scotland
• 5 mln customer accounts in 2005
• 16 products, including credit cards, loans,
  saving accounts, loans and mortgages
• In-store staff support and cash machines
• The most simple and mass market products. Easy
  and quick access to products online, in store or
  by phone

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TESCO Personal Finance
Source Company data
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Co-opetition
Customers
Comple-mentors
Competitors
Suppliers
Brandenburger and Nalebuff, 1996
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Co-operate or Compete?
DgtCgtAgtB
Compete Co-operate
Compete A, A C, B
Co-operate B, C D, D
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Complementors reasons for co-operation

• Tesco
• Access to expertise and technology
• Risk management
• Royal Bank of Scotland
• Access to an established consumer base
• New geographies
• Opportunity for future growth of other products

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Conclusion
Culture
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Thank You
Questions Answers
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Back-up Slides
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Touch Strategy

• Logged-on
• Offer of email and phone support, and 5 discount
  on first purchase
• Cautionary
• 5 days pp email with link to online satisfaction
  survey
• Developing
• 2 week pp Direct mail with tips on using the
  service.
• Established
• Generic monthly e-newsletter, encouraging cross
  selling
• Dedicated
• 2 months pp 5 off for next shop
• Logged-Off
• Customer does not buy for an extended period
  reactivation email, survey, and 5 incentive
• Follow up incentive after first shop after a break

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TESCO Personal Finance
Source Company data
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Increased size of pie
Source Bank of England.

• Outstanding household debt-income ratio 1.4 in
  2004 vs. 1.05 in 1994
• 8 average annual growth rate of personal
  deposits for the past 5 years

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TESCO as a competitor
Non-Food
Personal Loans Personal Loans Personal Loans
  TESCO Sainsbury Natwest
Age limit 23 18 18
Amount, 3000-25000 1000 - 25000 1000 - 25000
Minimum income 10 000 - -
APR, 6.3 6.1 7.4
Time period 1 - 10 years 1 - 8 years 1- 7 years