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1. 0 Executive Summary This report examines the marketing strategies of Tesco, the market leader in the retail grocery industry in the UK. Analysis has shown that in this oligopolistic market, Tesco is following different marketing strategies to remain market leader. Tesco has been doing extremely well in focusing on different marketing strategies by constantly sticking to its principles “very little helps”.
Subsequently the report highlights the different marketing strategies adopted by Tesco, specifically market penetration, product development, market development and diversification have been analysed in order to see in which ways Tesco is competing profitably in the retail grocery market. The following section discusses how Tesco operates in the competitive environment of the retail grocery industry. Tesco battles by expanding market demand, increasing market share and defending market share with strategies such as flank, pre-emptive or mobile.
In return the main competitors Asda and Sainsbury’s are attacking the market leader by using offensive strategies such as frontal, flank or bypass, in order to gain market share. Tesco’s understanding of the customers as well as its strong defensive marketing strategies against competitors assure them the leading position in the market. 2. 0 Introduction The retail grocery industry in the UK, which is generally recognized as being oligopolistic, is clearly dominated by Tesco.
The market leader has a market share of 30,6 % in comparison to key players such as Asda (16,6 %), Sainsbury’s (16,3 %) and Morrisons (11,1%) (BBC 2006; Burt and Sparks 2003). Tesco with different stores formats such as Tesco superstore, Tesco extra, Tesco express, Tesco homeplus and Tesco metro operates over 1,800 stores and employs over 260,000 people in the UK. A variety of products such as groceries, non-food articles (home entertainment, clothing, health and beauty etc. , financial services, telecom and online services (Tesco. com) are offered by the market leader. Since the 1990s, Tesco has been expanding in markets particular in Europe and Asia to grow its potential further, but for the purpose of the report the focus will only be on Tesco in the UK (Tesco Plc 2007). 3. 0 Marketing strategies ???Ansoff? s matrix In order to identify why Tesco is market leader and what strategies it pursues to remain at the top of the UK retail grocery market, it is essential to analyse its marketing strategies.
The product and market strategy matrix by Ansoff, which provides a functional relation between products and markets, helps to analyse the different strategies in a straightforward way (Drummond and Ensor 2002). Figure 3. 1 Ansoff matrix by Jobber (2007) The market penetration strategy aims at current products in existing markets. It involves low risk but limited growth potential. Furthermore it can be used to win competitor’s customers mainly achieved through aggressive marketing like competitive pricing, sales promotion or advertising (Drummond and Ensor 2002; Jobber 2007).
Recently Harry Tuffins, a small chain of independent supermarkets, opened a new store in Ludlow with big advertisements for it. Tesco had paid attention to that and started a sales promotion campaign to shoppers within the area by distributing vouchers (? 10 off for any shopping over ? 30) for its local store for the fortnight and the day of the opening. This has consequently resulted in a loss for Harry Tuffins (Bowers 2007). Another method of gaining market penetration is to buy competitors. This is common in the retail grocery industry.
For instance Morrisons bought Safeway lately to gain market share and sales volume. In 2002, Tesco took over the chain T&S (862 convenience stores and corner shops) and therefore could extend its market share and increase sales volumes because convenience and corner shopping account for 20 per cent of UK retail grocery market (Hooley et al. 2004). Another growth strategy is market development which aims to find new markets for current products (Drummond and Ensor 2002). It does not only involve geographic markets, but also new distribution channels and new market segments.
Tesco applied market development by marketing existing grocery products, which are normally sold in out-of town superstores to a new market segment the convenience shoppers (Tesco express, Tesco metro) (Jobber 2007). In addition to that, “Tesco. com” is a good example for new distribution channels as Tesco offers besides the groceries and non-food products in stores, a whole product range online. Tesco is currently the most successful online grocery shopping service in the world; therefore it can be staid that this market development strategy has certainly contributed to the strong position of Tesco (Tesco Plc. 007). The development of new products for existing markets is called product development. This can mean to extend existing product lines. Tesco for instance has extended its “Finest” brand, which is worth between ? 400 m. and ? 500 m. into the home ware market and other non-food products (crockery, cutlery, cotton bed linen etc. ) as well as into health and beauty products (Silk Creme Bath, Smoothing Body Polish …) to give current customers a greater choice (Jobber 2007; Tutor2u 2007). Diversification is concerned with development of new product for new markets, either related to existing activities or unrelated.
Of all the above mentioned strategies the diversification strategy can be considered as the most risky one, especially when it is not based on core competences of the company (Drummond and Ensor 2002; Jobber 2007). Tesco has pursued a diversification strategy because new stores formats such as Tesco express or metro introduce new products (financial services, telecoms, range of selected non-food articles etc. ) to a new market segment the convenience shopper. Also its online business “Tesco. com” is an example for diversification as new products such as clothing are targeting to people who shop online (Jobber 2007; Hooley et al. 004). After having discussed which marketing strategies Tesco is pursuing, it is moreover important to look at the competitive environment in order to identify how Tesco and major competitors are reacting in this market. 4. 0 The battlefield The market leader Tesco dominates the battlefield (Figure 4. 1) in the UK retail grocery industry. Figure 4. 1 Taylor’s Triangle by Taylor (2007) The battlefield for market share has two ground rules: to gain market share and to be able to keep market share.
These can be achieved either through offensive or defensive strategies (Drummond and Ensor 2002). 4. 1. The market leader ??? defensive strategies A leadership position is attractive as it offers benefits in terms of economies of scale and higher return on investments. It also provides the opportunity to influence others. In order to remain market leader Tesco has to engage on three fronts (figure 4. 1. 1) (Wilson and Gillian 2005; Kotler and Keller 2006). Figure 4. 1. 1 Strategies for market leader adapted by Kotler and Keller (2006)
It has been stated that when the market expands, the market leader tends to gain the largest share of this expansion (Drummond and Ensor 2001; Kotler and Keller 2006; Wilson and Gilligan 2005). As the retail grocery market has been growing constantly over the years and is expected to grow further (IGD 2007) Tesco’s market share has increased from 25% in 1999 to 30, 6 % in 2006 compared with Asda with 14 % in 1999 and 16, 6 % in 2006 or Sainsbury with 14% in 1999 and 16, 3 % in 2006 (Key note 2003; BBC 2006). When an organisation tries to expand the total market, it is crucial to target people who are currently non-users.
There are three ways to achieve this: first of all, the market can be penetrated by focusing on people who might use Tesco but are currently not doing it for example due to customer loyalty to another store. ASDA and Safeway claim to have the most loyal customer (Brassington and Pettitt 2005) and therefore target advertising would be important to attract them. Secondly new-markets can be entered to attract those who have never used Tesco. For example the upper-market segment which usually shops at Marks and Spencer or Waitrose is currently attracted by the high premium line offered at Tesco (Key Note 2003).
Lastly the geographical expansion has to be taken into account for people who live elsewhere. Tesco expanded from edge-of town stores to convenience stores and corner shops in the city to reach more customers (Jobber 2007; Kotler and Keller 2006). Another element to expand the market is to create new uses. Tesco has successfully entered new markets and created new uses. By offering online-shopping, non-food articles (home entertainment, clothing, health and beauty…), Personal Finance, Telecom and Petrol, it has become one stop for everything (Jobber 2007; Keller and Kotler 2006).
While trying to expand total market size, the market leader has to constantly defend and protect its market share. The market leader can pursue the following strategies (figure 4. 1. 2) Figure 4. 1. 2 Defensive strategies by Kotler and Keller (2006) A position defence aims to strengthen the present position of the dominant firm and to exclude the competition (Drummond and Ensor 2002), usually in ways of established brand name (Tesco) and reputation (“every little helps”), higher quality, improved delivery and service, enhanced promotions and lower prices. But it can also involve filling the gaps in provision to exclude competitor attacks.
As mentioned earlier on Tesco could fortify its position in the market by taking over T&S stores because the convenience and corner shopping market account for a considerable amount in the UK retail grocery market (Hooley et al. 2004). Pre-emptive defence involves striking at the potential competitor before they can attack. The objective is to pre-empt the actions and reduce the possible threat. This can be through an attack on the competitor or just the intention and willingness to fight with the necessary resources to defend the business (Drummond and Ensor 2002; Hooley et al. 2004).
Wilson and Gilligan (2005:442) stated that Tesco when it has become market leader “has reinforced its position with a series of astute strategic moves that have seen the business develop into a number of other markets including books, CDs, […] all of which have been underpinned by speed and agility”. A reactive strategy is the counter defence strategy, it is important to identify the vulnerability of the aggressor and strike hard. To invade the attackers main territory is also meaningful, so that the competitor has to pull back to defend the territory (Drummond and Ensor 2002; Hooley et al. 004; Kotler and Keller 2006). When Aldi and Netto appeared on the UK market, Tesco as well as Sainsbury established their “Essentials and “Tesco everyday value” range to counter the attacks (Kotler et al. 2002). When the company is willing to constantly update and improve the organisations offerings to the marketplace it is called mobile defence (Hooley et al. 2004). In 1995, Tesco introduced its loyalty scheme “Tesco Clubcard”. Trough this scheme customers can collect points for every pound they spend and in return are rewarded by obtaining vouchers etc.
But for Tesco it is not only about showing loyalty to their customers, but more about obtaining information about them and then adjusting, updating and improving their offers according to customer needs in order to remain successful (Brassington and Pettitt 2005; Jobber 2007). But sometimes it is difficult to defend all the areas and the best plan to defend the whole business is strategic withdrawal (contraction defence). Although Tesco has diversified far from its core skills there is no yet a need for a contraction defence (Drummond and Ensor 2002; Kotler and Keller 2006; Hooley et al. 2004).
Market leaders are able to improve their profitability by increasing their market share, as the company can then experience economies of scale. The optimal market share for a market leader is 50 per cent. But in the case of Tesco there is already a risk when its market share will be increase that competitors as well as the industry consider the market leader as a pure monopolist (tescopoly. org) and will look for appropriate actions (built restrictions, price levels etc. ) to restrict further expansion. Another risk is when the total market share is increased and the market leader cuts its prices so deeply than it does not operate profitable.
Moreover can market share growth lead to decrease of quality which may result in losing customers to competitors (Kotler and Keller 2006). 4. 2 The challengers – offensive strategies In a matured market like the grocery retail segment market share can only be gained at the expense of other competitors, what consequently leads to confrontation between the different key players. In the past, market challengers have gained ground or even overtook market leaders. In 1995 Sainsbury’s lost market leadership to Tesco, which reposition their outlets and focused on a younger segment in the market.
Sainsbury continued their strategy and lost even more market share to Tesco, which repositioned itself based on product and store quality and improvements in information technology (Adock et al. 2001; Hooley et al. 2004). The main challengers in this market can be identified as Asda and Sainsbury which are occupying rank two and three with regard to market share (BBC 2006), they are in the position to attack the leader and other competitors in an aggressive way for further market share (Kotler and Keller 2006). There are different strategies to attack the market leader to win market share.
Figure 4. 2. 1 Offensive strategies by Kotler et al. 1999 citied in Drummond and Ensor (2002) The frontal attack is characterised by an “all-out attack on the opponent’s territory” argued that the attacker has to be sure of sufficient resources and be clear on its advantage over the market leader. The challenger can pursue a pure frontal attack by matching the leader’s product in terms of advertising, price and distribution, or a more limited frontal attack by attracting away particular customers (Hooley et al. 2003:394; Drummond and Ensor 2002).
Asda attracted customers by claiming to be the cheapest supermarket and whereas the actual difference to Tesco was just 0, 7% (thisismoney. co. uk 2006). Another example of the frontal attack has been made by Sainsbury’s. In 1997 the chain announced to cut prices to regain some of its lost market share. The next day Tesco declared that every price cut would be matched. So consequently a frontal attack is usually cost-intensive and self-defeating something that Sainsbury’s and Safeway have experienced when attacking Tesco in the past (Hooley et al. 2004; Wilson and Gilligan 2005; Kotler and Keller 2006).
Wilson and Gilligan (2005) identified a flanking attack as an attack on areas where the market leader is weak either geographically and segmental. Kotler and Keller (2006) stated that flanking is modern marketing because it discovers needs and satisfies them. Furthermore flanking attack seems to be more successful than frontal attacks and is more suitably for challengers with fewer resources than the leader. Asda has attacked Tesco by investing heavily in their clothing offer. The success of Asda in this segment has come on the back of its “George” range launched in 1990 which has been extended to the High Street (Macalister 2004).
Another major attack on Tesco has been made when Wal-mart (Asda) has entered into an agreement with Levis to supply a special brand of jeans “Levis Signature” to supply Levis products at prices suitable for Asda`s principal customer base (Key Note 2003). Sainsbury’s, being the first major supermarket chain which has gone into financial services, recognized early that Tesco is relatively new to financial services therefore may lack experience and expertise therefore it has extending their financial services by for example providing the customer with an own bank (Sainsbury’s bank) to attack Tesco (Key Note 2003).
Encirclement involves attacking the leader from all sides (Jobber 2007). Hooley et al (2004) argued that there are two ways to encircle the defender. An option is to cut the supply of raw material or to offer a better product or service than the market leader. A good example for this is the strong spending in advertisement of Sainsbury, which spends almost twice the amount of Tesco. With Jamie Oliver as its public face Sainsbury’s has increased sales by promoting quality and fresh food (“try something new today”).
The strong promotional campaign by Sainsbury’s can be seen as an attempt to become number two market chain again (Key note 2003; Finch 2006). Another example is “Nectar”, the biggest loyalty scheme in the UK, with core members such Sainsbury’s, Barclaycard, Debenhams and BP. This scheme with over 7000 stores and companies as members, offers free flights, meals, vouchers etc. in return for the points collected by the customers. Therefore it can be seen as a better deal to show loyalty as there a more opportunities to collect points and exchange them (Jobber 2007). Bypass strategy is more a strategy of avoiding attacking. In this case the ttacker moves into areas where the competitors are not present, it is frequently attained through technological leapfrogging, by concentrating on unrelated products or new geographical markets (Hooley et al. 2004; Drummond and Ensor 2002; Wilson and Gilligan 2005). Sainsbury’s signed a deal in 2002 with NTL to allow grocery shopping via interactive digital TV. Customer can place orders by interactive TV and their groceries will be delivered the next day (Key Note 2003). When the attacker is weaker and smaller than the defender the guerrilla attack is used and be marked by tactical attacks on prices, advertising, etc. (Hooley et al. 004, Kotler and Keller 2006). Wilson and Gilligan (2005) stated that Safeway has used this strategy to attack Tesco by running short-term localized campaigns by concentrating on competitor’s local areas where they were weak and vulnerable. 5. 0 Conclusion To sum up, it can be said that Tesco as a market leader has been enormously successful over the last years, having gained a market share twice the amount of Sainsbury’s or Asda. The marketing strategies Tesco is pursuing, either in terms of market penetration, product development, diversification, or new market strategies have been carefully selected and put into practice at the right time.
Furthermore, Tesco is defending its territory remarkably well, by constantly adapting to changing customer needs and by tracking trends in advance. Past attacks from major competitors have not been very successful which is due to its strong defensive position in the market. Tesco is an exceptional example for an organisation, which tries to understand its customers, wants to keep them satisfied and provides them with new or improved products and services. If Tesco wants to remain market leader, it has to keep understanding its customers and constantly adapt to the changing environment. 6. 0 Bibliography Adock, D. Halburg, A. and Ross, C. (2001). Marketing principles & practise. Harlow: Pearson Edition Ltd. BBC (2006). ‘Tesco’s market share still rising’ [online]. Available at: URL:http://news. bbc. co. uk/1/hi/business/4694974. stm [Accessed 15 May 2007]. Bowers, S. (2007). ‘Smaller players struggle to beat aggressive pricing’. [online]. Available at URL:http://www. guardian. co. uk/supermarkets/story/0,,1997249,00. html [Accessed 13 May 2007]. Brassington, F. and Pettitt, S. (2005). Essentials of Marketing. Harlow: Pearson Education Ltd. Burt, S. and Sparks, L. (2003). ‘Power and Competition in the UK Retail Grocery Market’.
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