Shirley Morgan Business Assignment February 1999

How Can Tesco Regain Lost Market Share?

3420 words

February 1999

The objective of this essay is to examine the current marketing strategy and
marketing activities of one of the ‘big 4’ supermarkets in the United Kingdom with
particular reference to the adverse effect produced by low cost competitors entering
the market. For this purpose, Tesco has been selected. Tesco represents one of
Britain’s largest and most profitable supermarket, which overtook ASDA in 1995 and
continued to increase its market share through the years (Corporate Watch, 2004;
Ruddick, 2015). In addition, Tesco was the first supermarket to (1) introduce ‘value’
lines and cost-effective price range of its own-label products and (2) present the first
company loyalty card on the market (Corporate Watch, 2004). Therefore, it becomes
plausible to suggest that the company is an excellent choice for a marketing strategy
analysis in the current declining grocery retail environment of British brands. The
structure of this essay is as follows: (1) a brief overview of Tesco’s generic marketing
strategy, (2) an in-depth evaluation of the supermarket’s existent marketing actions
and tactics with the aid of the its marketing mix, (3) the impact of low cost
competitors, (4) recommendations and suggestions for improvement, and (5) a
summary of the main findings.

The supermarket’s broad market strategy can be categorised as market penetration

and cost leadership. Firstly, market penetration has been defined by Ansoff (1957) to
explain one of four business growth strategies. The strategy refers to involves
attracting new customers, often achieved by gaining competitors’ customer base(s),
in order to increase sales. Furthermore, Farris et al. (2010) identify two important
metrics of market penetration – penetration rate and penetration share. On the one
hand, the penetration rate refers to the proportion of the relevant study population
that has purchased the examined product category. On the other hand, the
comparison between the brand’s customer shares with the market’s overall customer
population relates to penetration share. In relation to this, a key aspect in Tesco’s
market strategy is attracting competitors’ customers (e.g. ASDA, Sainsbury,
Morrison’s), which is evidenced by its increased market penetration rate and share
from 7.2% in 1971 to its peak in 2007 when Tesco accounted for 31.1% of the total
UK grocery market share (Economics Help, 2014). In addition, according to data
from March the current market share of Tesco is 28.7%, which positions the
company as a market share leader in the British groceries industry, however, this
figure has decreased from the previous financial years (Kantar, 2015). Secondly,
before the introduction of discount supermarkets, the company focused on cost
leadership, which represents one of the three generic strategies devised by Porter
(1980). Cost leadership relates to increasing one’s market share through attracting
price sensitive customers and implementing an effective price strategy that enables
the company to offer the lowest cost product offerings. Tesco successfully managed
to maintain cost leadership through three actions before supermarkets like Aldi and
Lidl entered the British grocery retail market.

These actions were as follow: (1) high utilisation of assets, meaning that large
outputs are produced and the fixed costs are spread over high quantities allowing

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the company to manufacture single units at lower costs; (2) minimal direct and
indirect costs in the production and distribution stages; and (3) strict control over the
supply chain to ensure low costs (Gamble et al., 2010). Thus, the cost leadership
strategy was an appropriate approach for Tesco, because it represents a large
company that is able to take advantage of the economies of scale in the market.
Nevertheless, presently the company is unsuccessful in maintaining its cost
leadership due to the strong presence of ‘budget’ supermarkets.

The following part of the essay will specifically focus on the Marketing mix of Tesco –
product, place, price, promotion, which provides a better understanding of the
company’s present marketing strategy.

Firstly, Tesco offers its target segments a wide range of high-quality products at
affordable prices. The balance between affordability and quality as well as Tesco’s
Clubcard helped the company attain a relatively high level of competitive advantage
(Winterman, 2013). Some of its various product categories consist of food, consumer
electronics, financial services and clothing. This is in consistency with the findings
from a study on customer perceived value, where four separate dimensions emerged
explaining customer attitudes and behaviours – emotional, social, quality and value
for money (Sweeney and Soutar, 2001). Similarly, Fernández and Iniesta-Bonillo
(2007) found that customers evaluate relevant benefits and costs involved in a
purchase based on economic and cognitive reasoning.

Secondly, the ‘place’ element of the marketing mix refers to the distribution of
products in locations where customers purchase products and services. In relation to
this, Tesco emphasises product and service distribution in two main ‘locations’ –
online and offline. On the one hand, the online sales channel is directly linked to
Tesco’s website – Tesco Direct, which suits the specific needs of the online
shoppers presenting them with various delivery options (Tesco Direct, 2015). On the
other hand, the offline channel of distribution involves four different store formats –
Tesco Express, Tesco Metro, Tesco Compact and Tesco Superstore (Tesco Official
website, 2015).

Furthermore, Tesco’s initial pricing strategy can be characterised as price

leadership, which represented an oligopolistic business behaviour, where there are a
few companies that dominate the market and determine the price range (Kotler and
Armstrong, 2010). The reason behind this price strategy adoption was the intense
competition and other economic and behavioural factors in the British households
i.e. cost-conscious buyers (Business Café, 2009). Nonetheless, the company is no
longer a price leader, but its pricing approach is still based on the marketing
message ‘Every Little Helps’. In addition, Tesco is able to implement this strategy
and remain to influence the retail market to a certain extent, because it evaluates
and utilises the lowest cost materials for supply to achieve higher efficiency rates in
the production processes.

Fourthly, Tesco’s promotion comprises of a wide range of media advertisements,

regular announcements of promotions and discounts, point-of-sale marketing tactics,
and sponsorships. These marketing activities are aligned with the company’s generic
strategy of cost leadership and support Tesco’s price advantage through profit
maximisation in the long run as well as enhance the value of the brand.

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Hence, Tesco’s marketing communications are integrated to enable the company to

better coordinate its mission, vision, objectives and interactivity with customers. With
the aid of information technology advances (Zabkar et al., 2015). Integrated
Marketing Communications were also found to generate a synergy effect through the
integration of marketing activities, which also tremendously influences customers
through different channels of communications reinforcing the same message (Ewing
et al. 2015) Tesco has successfully managed to build loyalty in its customer
segments through its most effective customer loyalty mechanism – the Tesco
Clubcard (Tesco Clubcard, 2015). In relation to this, Hallowell (1996) found a direct
correlation between customer satisfaction, loyalty and company profitability.
Likewise, Lee-Kelley et al. (2003) suggest that customer retention tools not only aim
to increase the company’s profitability, but also establish long term relationships
between sellers and buyers, which are fundamental to customer loyalty and also
result in decreased levels of price sensitivity.

Tesco’s marketing strategy, which comprises of cost leadership and market

penetration, has been increasingly impacted by the presence of the foreign grocery
store chains Aldi and Lidl as well as food commodity prices and the outcome of this
has been continuous price cuts by Tesco to meet the customer demand for low cost
product offerings (Butler and Wood, 2014). Furthermore, the authors suggest that
further intensification of the market dynamics is caused by the growth of high street
convenience stores and the rise of discounters (e.g. Poundland and B&M), which is
directly correlated to the altered consumer behaviour habits during the recession. In
addition, business analysis of the current grocery retail market conditions suggest
that Aldi and Lidl’s combined market share will increase to 12%-15% by 2020
(Allison, 2015). Nevertheless, according to a press release by KPMG (2014), it will
be difficult for discount brands to fully challenge and erode the market of the big four,
because grocery retail chains like Tesco command the store network market
penetration and their market shares have existed for nearly 10 years.

In relation to Tesco’s marketing mix and the intense price competition and dynamics
in the market, two main recommendations can be made for Tesco to regain its lost
market ground – increased customer retention and an optimisation of its supply
chain management to successfully recover its price leadership status. Due to the
current intense competitiveness in the retail and food industry and the emergence of
competitively low-cost foreign supermarket chains, Tesco should firstly focus on
increased levels of customer retention through the incorporation of effective
customer relationship management systems. Numerous studies have demonstrated
the importance of customer satisfaction in relationship marketing and customer
retention. Specifically, Hennig-Thurau and Klee (1998) conceptualise relationship
quality which refers to the extent of appropriateness of a relationship to fulfil the
needs and requirements of a customer with regards to the relationship. One way to
do this is further integrate the Tesco Clubcard to present loyal customers with
various financial product offerings besides current accounts, mortgages and home
insurance (Tesco Clubcard Perks, 2015). This will form relationships based on two
factors – quality and value-for-money, which will translate into loyalty and protect the
company from switching customers. In order to adequately target and foster loyalty
in the right customer base(s),

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Tesco should understand which customer satisfaction elements have the greatest
impact, and the amount of investments required to improve particular customer
satisfaction elements (Rust and Zahorik, 1993).

The second recommendation for marketing strategy enhancement is directly related

to Tesco’s supply chain management, which will enable the company to regain its
lost market share through becoming a cost leader. Fearne (2009) suggests that in
the current business context, companies must pursue a value chain as opposed to a
supply chain, which represents a chain of activities performed, in order to deliver
valuable products and services to customers. There are two elements that are
emphasised in value chains: (1) focus on demand pull, which places customers first
and everything else subordinate to their needs and (2) concentration on the
formation of collaborative relationships with suppliers. According to the author, these
two actions enable corporations and large organisations to achieve competitive edge
and sustain it over time. For Tesco this would mean careful selection of suppliers
and establishment of collaboration opportunities with these suppliers and
stakeholders to increase the value added to the processes and/or production. For
example, in Wales the company can form relationships with local farms to purchase
the highest quality meat and, once supplier loyalty takes place, discount prices can
be demanded from the meat producers in exchange for continuous bulk buying. This
will allow Tesco to present its customers with quality local meat at low prices, which
will positively influence its lost cost leadership presence in the market.

To conclude, the present work established that Tesco’s generic marketing strategy is
dual – regular market penetration to attract competition’s customers and cost
leadership to retain price sensitive and cost-conscious customers. In terms of its
extended marketing mix, notable actions are: (1) offering a wide range of product
categories, from which groceries remain the most popular category, tremendously
contributing to the Tesco’s market leadership position, (2) alignment of marketing
messages, communication and relative pricing, (3) various marketing and advertising
activities, but the integral one remaining the loyalty card, and (4) simplicity and
convenience with regards to shopping alternatives and store design. Following the
discussion of Tesco’s extended marketing mix, two areas for improvement were
recommended – an increased emphasis on customer retention and loyalty through
novel customer relationship management mechanisms and the development of a
supply chain that adds value to the manufacturing processes through collaborative
relationships. It is important that Tesco understands its customers’ needs and
suppliers’ requirements, because the competition in the grocery retail industry has
never been more severe due to business environments being dictated by the
customers and the suppliers. In other words, market orientation is no longer
dominated by supply push exchanges and transactions, but by devising marketing
strategies and promotions based on customer research and feedback.

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