Case study: Tesco online development
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Tesco is a leading global retail operation and is Britain’s leading food retail group. Tesco has a substantial European and international network of retailer opera- tions and has recently begun selling non-food goods – e.g. clothing – in over 20 countries. In recent years Tesco’s online operation has enjoyed significant growth in online sales; its non-food operation, Tesco Direct, saw sales rise by 30 per cent. International sales are a fundamental part of Tesco’s growth strategy and in Korea, for example, sales grew by 15 per cent. Tesco states that its vision for online retailing takes account of customer needs (Tesco 2014 annual report): Well, our multichannel approach is already helping customers shop wherever, however and whenever they need to. In the future, the shopping experience will become even more seamless, convenient and ef- fortless. Tesco Labs are already working on turning that vision into a reality for millions of our customers. (McNamara, 2014)
Currently, Tesco Plc is one of the world’s top three retailers, competing with WalMart and Carrefour for the leading position. Tesco’s 2014 report described how international markets beyond the UK were grouped into three ‘cohorts’ depending on their current performance and potential:
- South Korea, Malaysia and Thailand – markets with significant future potential;
- Ireland, Czech Republic, Hungary, Poland and Slova- kia – markets where we are focussed on holding our position and improving returns;
- China, India and Turkey – markets where we know we must refocus on a more profitable approach to growth.
Founded in 1919 by Jack Cohen, the company grew rapidly and has a history of delivering innovations to the UK retail sector, so it is no surprise that once it became feasible to offer online shopping Tesco was quick to determine how it might trade online. By the early 1990s, Tesco was one of the few UK retailers that had invested in a specialist e-commerce department to spearhead its online developments. In 1994 Tesco started offering online shopping to its customers but strategically the organisation had big plans for online shopping. Tesco’s former chief executive, Terry Leahy, was quoted in the Sunday Times as saying: ‘We will be the world’s biggest online grocery retailer and we intend to become the UK’s No. 1 e-commerce business’. This goal was quickly achieved; by December 2000, Tesco offered a wide range of products to 90 per cent of the UK population. The online shopping service, Tesco. com, was established soon afterwards and operated as an independent subsidiary to Tesco. Tesco then started to diversify its online product range, offering many non-food products ranges, and the result was a significant increase in sales. To support logistical operations, Tesco developed a sophisticated semi-automated in-store picking service, supported by local refrigerated delivery vans using existing facilities rather than building high-tech dedicated warehouses and, according to Ellis-Chadwick et al. (2007), this created a strategic advantage that enabled faster geographical expansion of the online shopping services and a distinct advantage of extended national coverage of Tesco’s online shopping service provision. By 2003, 96 per cent of the UK population could shop online with Tesco.com, giving the company 65 per cent of the UK online grocery shopping market and further diversification of product ranges, e.g. financial services and telecoms. It started to expand and offered its online services internationally, for example, in South Korea through Homeplus.co.kr. Previously, Tesco has constantly focused on technology innovation in order to streamline services, provide new features and extend the range of points at which customers can access (Ellis-Chadwick et al.,2007). Diversification and expansion of the online product portfolio and customer services continues with the addition of a series of innovations such as: DVDs to your door (a rental service), energy utilities (thousands of customers save money on their gas and electricity bills), getting healthy online by using the e-diets service (which helps customers tailor their eating plans to what’s right for them, taking into account lifestyles, food preferences and health recommendations) and Internet telephony. However, in 2015 Tesco’s new chief executive, Dave Lewis, has begun to restructure Tesco’ in response to poor performance, previous diversification (e.g. broad- band services, Blinkbox) and aggressive market entrants (e.g. discounters Aldi and Lidl).’ (Wood 2015). The online grocery market and competitors While Tesco remains the second largest online retailer after Amazon in Europe, there are legacy issues, which Dave Lewis has to deal with if the company is to
continue to hold its own online (Warner, 2014)(Warner, 2014). Tesco currently leads the UK’s other top grocery retailers in terms of offline and online market share but, according to Wood (2011), Clarke (former CEO of Tesco): has promised to nurture its domestic business, which despite ringing up almost one pound in every seven spent on the UK high street has lagged behind rivals such as Sainsbury’s and Morrisons in sales growth. Despite its recent underperformance, Tesco remains the dominant force in UK retail, with a market share of more than 30 per cent. It is estimated that 13 per cent of all the MasterCard and Visa credit card trans- actions in the UK are made on a Tesco credit card. Tesco has been at the forefront of the development of online shopping and while it has been making a significant contribution to the growth in online retail, it has also enabled more retailers and consumers to feel that they can shop and trade online. Tesco is likely to face challenges from different sources of competition as the online shopping market grows and matures. Staying ahead: how does Tesco promote its online offer? As with other online retailers, Tesco.online operations rely to a certain extent on instore advertising and marketing to the supermarket’s Clubcard loyalty scheme’s customer base. The linkages between Clubcard mailings (off- and online) act as a trigger for shoppers to engage with both channels. Email marketing is an important part of Tesco’s promotions and, according to Doherty and Ellis-Chadwick (2010), using email marketing is a complex activity, which is largely focussed on ‘grabbing customer attention’ but it can be used to achieve a number of communication and sales objectives. Humby and Hunt (2003) describe how Tesco.com uses ‘commitment-based segmentation’ or ‘loyalty ladder’ based on recency of purchase, frequency of purchase and value to drive Tesco’s communication campaigns. They identified six life- cycle categories which are then further divided to target communications:
- ‘Logged-off’ (the aim here is to win back). Tesco then uses automated event-triggered messaging which can be created to encourage continued purchase – e.g. Tesco.com has a touch strategy which includes a sequence of follow-up communications triggered after different events in the customer lifecycle.
In the example given below, communications after event 1 are intended to achieve the objective of converting a website visitor to action; communications after event 2 are intended to move the customer from a first-time purchaser to a regular purchaser, and for event 3 to reactivate lapsed purchasers.
Trigger event 1: Customer first registers on site (but does not buy)
Auto-response (AR) 1: Two days after registration email sent offering assistance and discounts to encourage the first purchase.
Trigger event 2: Customer first purchases online
AR1: Immediate order confirmation.
AR2: Five days after purchase email sent with link to online customer satisfaction survey asking about quality of service from driver and picker (e.g. item quality and substitutions).
AR3: Two weeks after first purchase – direct mail offering tips on how to use service and £5 discount on next purchases, intended to encourage re-use of online services.
AR4: Generic monthly e-newsletter with online exclusive offers encouraging cross-selling.
AR5: Bi-weekly alert with personalised offers for customer.
AR6: After two months – financial discount to encourage the next shop.
AR7: Quarterly mailing of coupons encouraging re- peat sales and cross-sales.
Trigger event 3: Customer does not purchase for an extended period
AR1: Dormancy detected – reactivation email with survey of how the customer is finding the service (to identify any problems) and a £5 incentive.
AR2: A further discount incentive is used in order to encourage continued usage to shop after the first shop after a break.
By using this stages approach to keeping track of its customers online Tesco has established a robust strategy for attracting attention and retaining customers using email marketing. According to Doherty and Ellis- Chadwick (2010), this form of digital communication is increasingly important as a mechanism for developing and maintaining mutually beneficial relationships with customers. Furthermore, advertising research discov- ered a large proportion of the message recipient’s attention is determined by the structural, executional elements of a message rather than its content – e.g. length, size, layout (Rossiter and Bellman, 2005) – which has implications for developing effective email marketing messages. One of the marketing challenges for international campaigns is that Tesco, although a household name in the UK, is entering new markets with its online grocery delivery service without a good level of aware- ness. It is looking to raise awareness among a younger generation who are using TV less than traditionally. Part of the solution is to use the ‘viral marketing’ available through social media to share humorous videos. This example (www.youtube.com/watch?v=BX5EXJwlSpQ) shows how these videos ‘went viral’ in Poland. It’s a great example of a campaign to show how entertaining and tongue-in-cheek content can appeal to different cultures. It started off as a low-budget trial in Poland, and the videos reached over 740,000 views in a couple of months, peaking to 1.5 million views, at a cost of a few thousand euros for each video. Speaking at the 2014 Smart Insights Digital Impact conference, Niall Walsh, Head of Group Digital and Ecommerce, admitted that it ‘exceeded even their own expectations, and have replicated this across other markets. We needed to wean our market away from price and promotion driven videos, and certainly achieved this through more enter- taining videos’.
Based on the case study and your own research, discuss where you think Tesco should focus to en- sure it can continue to achieve success online and protect market share.