Tesco - Losing Ground in the UK?

            
 
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Case Details:

Case Code : BSTR421
Case Length : 19 Pages
Period : 2006-2012
Pub Date : 2013
Teaching Note :Not Available
Organization : Tesco Plc.
Industry : Retail
Countries : UK

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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"Tesco has lost some of its broad appeal and, in trying to be everything to everyone, increasingly became nothing to a whole lot of people. That potential brand damage is possibly the most serious issue facing management." 1

-Dr Clive Black, Director and Head of Research, Shore Capital Stockbrokers.

"There has been too much running up and down the escalators. We fully recognize that we need to raise our game in the UK. As we improve the shopping trip for our customers, it will follow that our sales growth and financial performance will improve too." 2

-Philip Clark, CEO, Tesco.

Trouble in Store

Tesco Plc. (Tesco), the largest retailer in the UK and the third largest retailer in the world, announced that for the financial year ending February 25, 2012, profits from its UK operations had fallen by 1% while underlying sales had dropped by 0.9%. The margins fell from 6.14% the previous year to 5.79%. This did not come as a surprise, as Tesco had already issued its first profit warning in 20 years in January 2012. From being the third largest retailer in the UK, Tesco had gone on to become the third largest retailer in the world.

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This was the result of the strategies it adopted like stocking a wide range of private label products, going in for aggressive expansion, using consumer data to provide customized discounts, etc. The UK was the most important market for Tesco, accounting for over two thirds of the company's annual sales.

However, its performance in the UK started to dwindle in the late 2000s. In the wake of the recession that started in 2008, penny-pinched shoppers opted for the better deals provided by hard discounters. Customers who were looking for good quality, shopping experience, customer service, and reasonable prices, moved to competitors complaining that Tesco's stores were jaded and that its customer service levels were abysmally low. Analysts said that this was due to the company's years of underinvestment in its UK operations and the reduction it had effected in the number of staff in order to cut costs. They also pointed out that Tesco had concentrated on funding and expanding in international markets and had failed to maintain its focus on the UK market. Darren Shirley, an analyst at Shore Capital, said "The general consensus is that three or four years ago, they took their eye off the ball in the UK and started to focus on overseas.... Some of the profitability and cash flow was diverted from the UK and service standards slipped; hence their stores have become quite sterile, dull, and clinical."3 Though Tesco remained the top retailer in the country, it started losing market share and the same store sales showed a decline.

The CEO of Tesco, Philip Clarke (Clarke), announced a six-pronged strategy to revive Tesco in April 2012. This included revamping the stores, hiring additional staff for the stores, improving its dot com business, scaling back on opening new stores, improving value and range offerings, and providing the best price. However, Tesco's underlying sales continued to drop even after the announcement and observers were left wondering whether the retailer's days at the top were over.

Background Note - Next Page>>


1] Rick Pendrous, Tesco 'Needs to Make Business More Fun', Food Manufacture, May 2012
2] Nick Enoch, Sean Poulter, "Embattled Tesco Announces 1bn Plan for Major Revamp after UK Profits Plunge,"
3] Nick Enoch, Sean Poulter, "Embattled Tesco Announces 1bn Plan for Major Revamp after UK Profits Plunge," www.dailymail.co.uk, April 18, 2012.


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