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Strategic Analysis Tesco

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(a) Undertake a strategic analysis of an organization of your choice and review its current and recent past strategy.

Tesco was founded in 1924 by John Edward Cohen in the East End of London. The name 'Tesco', was first used on tea, and was derived from the initials of Cohen's tea supplier, T E Stockwell, combined with the first two letters of Cohen. Tesco Stores Limited was incorporated in 1932. In 1935, Jack Cohen visited the USA and was impressed by the supermarkets' self-service system which enabled more people to be served faster, with lower labour costs. In 1947, the Tesco branch in St Albans, a small shop by 21st century standards (200 square metres) was the first Tesco to be converted to self service, although it didn't immediately catch the public's imagination.

In the early 1960's, Cohen lobbied Parliament to have the Retail Price Maintenance (RPM) act abolished, efforts supported by Edward Heath. The RPM allowed manufacturers and suppliers to set the price of goods thus preventing large retailers, who could buy in bulk and had greater buying power, from benefiting from economies of scale and undercutting the prices of smaller shops. To get 'around' this, Tesco offered another incentive to get customers through the doors. These were collected by customers when they spent money in the store, and were then traded for goods in a catalogue. An effective discount.

In 1964, Parliament passed the Resale Prices Act, curtailing RPM, which by 1979 remained in force only on books and pharmaceutical goods.

Until the 1970's, Tesco operated on the 'pile it high, sell it cheap' formula Cohen had imported from the USA. However, the market was changing, leaving the company with slim margins and a serious image problem. Under the leadership of Ian MacLaurin, who succeeded Jack Cohen in 1973, Tesco decided to try something dramatic and different: to become an 'aspirational mass retailer'. It discontinued the use of Green Shield trading stamps and launched 'Operation Checkout' which cut prices across the board and started a price war with major rivals Sainsbury's. Next, Tesco decided to modernise it, closing 500 unprofitable stores, and extensively upgrading and enlarging others. At this time, Tesco prioritised the development of large out-of-town stores where parking was convenient, the selection of goods broad, and where a higher volume of business could be generated at increased margins while reducing overheads.

In 1974, in a deal with Esso, Tesco began to open petrol stations on the grounds of its superstores. The idea was successful and by 1991 Tesco was the country's largest independent petrol retailer: it now accounts for 12.5% of all petrol sold in the UK. Other innovations throughout the 1980s included introducing own-label product lines; computerising and centralising distribution systems and developing shopping centres outside of the major cities. In 1983, Tesco Stores PLC renamed itself simply Tesco PLC.

In 1993, when Tesco introduced 'Value' lines, a cut-price range of own-label goods, competitors scoffed and the share price sank. But Tesco had gauged the popular mood: after years of recession, shoppers were looking for bargains, and sales soared. A year later, Tesco started 'One in Front' opening a new till whenever a checkout line exceeded two trolleys. It cost millions in extra staff, but customers loved it.

In 1995 Tesco became the first supermarket to introduce a company loyalty card, an idea developed by the then Deputy Managing Director, Terry Leahy. At first the other supermarkets were sceptical, but the concept caught the public imagination leaving the others racing to catch up.

Market share and importance

In 1995 Tesco overtook Sainsbury's as the UK's largest supermarket. In 2001 Tesco occupied 15.6% of the UK grocery retail market and was the market leader by 6%. Tesco's enormous share is still growing: by September 2004, it had increased to a massive 28%, around 12% more than its nearest market rival, Asda.

In the UK, Asda's only real shot at catching up with Tesco would have come from a merger with Safeway, which was disallowed by the competition authorities 2003. However, Asda's parent company, Wal-Mart, the world's largest company, with global sales of $256bn in 2003, is still eight times bigger than Tesco.

At present the only threat to Tesco's ever-increasing market share would come if the Competition authorities stepped in to enforce monopoly legislation which defines a 'classic monopoly' as 25% of market share in a given sector. Since they have already carried out an investigation into the power of supermarkets in the lifetime of the Blair government, it seems unlikely that the Competition authorities will step in to stop Tesco's obvious and increasing anti-competitive position. On the contrary, they are just letting Tesco grow and grow. In September 2004, after Morrisons bought Safeway, Tesco was permitted to buy 10 of the 52 Safeway stores that Morrisons were obliged to sell by the competition authorities as part of their acquisition.

Tesco is equally impressive when considering its share of the total retail market. Tesco's total retail marketshare is 12.3% and it means that almost one pound in every eight spent in the UK is spent in Tesco.

.Tesco profits have increased every year but one since 1987. In April 2004, Tesco announced profits of Ј1.6bn for the financial year ending on 28 February; Ј4.4m profit a day, 17.6% higher than the previous year. As a comparison, in 2003 Tesco made as much profit as M&S, Sainsbury, Next and WH Smith combined. Analysts are now forecasting Tesco pre-tax profits for 2005 will be above the Ј2bn mark, five times that of Sainsbury.

Tesco is Europe's second largest supermarket after the French firm Carrefour, and according to Mintel market research in 2004, Tesco is closing the gap. It is the fourth largest supermarket in the world. Tesco operates 2,318 stores in 12 countries around the world and employs 326,000 people, 237,000 of them in Britain where it is the largest private employer. According to Terry Leahy, Tesco is market leader in 6 out of the 12 countries that it operates in, with its largest store, not in Bristol or Birmingham, but in Budapest.

It operates 1,878 stores in the UK, 261 stores in Europe and 179 stores across Asia,10 and plans to open 184 stores worldwide over the next year.

In the UK, there are 83 Tesco Extra stores; 447 Tesco superstores; 161 Tesco Metro stores; 277 Tesco Express stores and 910 recently-acquired T&S stores still to be converted (see 'Moving



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