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 Ј18.7 billion and net income of Ј1 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 Ј11.2 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.

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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 servers

and standard, off-the-shelf software packages, it might soon be time for a reality check when scalability

of its systems comes in question. Just as soon as the site went online, some customers began complaining

about the inordinate delays in accessing Web pages at certain times of the day. If that perception

stuck, it could adversely affect the company. While Tesco was using its regular stores as the backbone for

its online efforts, competitors such as Sainsbury's were building dedicated warehouses and picking centers

to streamline their operations. For them, it was no longer a hybrid bricks-and-clicks offering but a

structure that had separate facilities for online operations. With an increasing number of online customers,

Tesco's hybrid model could become inefficient. Should the company switch horses now and jump

into the creation of dedicated facilities or forge new ground by continuing to fine-tune its current