1) Tesco’s decrease in profits is mainly driven by the revenue side; a decrease in volume, as it loses

market share, and price because of extensive price wars. Industry level changes are one of the levers
to decreasing revenues. While the UK retail market remains attractive with a value of £177.5 bn,
customers’ needs are changing. For instance, consumer behaviour is shifting from shopping in town
centres to out of town stores and for the Internet. In 10 years, the percentage of town centre shopping
has declined from 49% to 43% while town shopping has grown from 28% to 31%. Tesco was not well
positioned to capture this change – 71.8% of its stores are metro and express stores traditionally
located in town centres near busy areas (Exhibit 8). Furthermore, Internet shopping was becoming an
increasingly dominant distribution channel. In 2011, Internet sales accounted for nearly 10% of all
retail sales, an increase of 4% in a year. Previously, consumers made one weekly big shop making the
bulk of their purchases and made small top-up purchases midweek. Now many consumers favoured a
bulk online order for key items supplemented with visits to convenience stores for fresh goods. Again
Tesco was not positioned to meet this change in demand; only 6 (0.22%) of its stores were dotcom i.e.
serving internet sales (Exhibit 8). This number was stagnant for a year meaning it was not an area of
focus for them. Finally the industry was showing strains of overcapacity. Exhibit 7 shows a ratio of 5-
year sales CAGR to store space CAGR in the UK of 1.1% increasing to 1.7% for a 10-year CAGR.
This suggests, that the industry could potentially be oversupplied by the large number of competitors.
This overcapacity links to the position level via competitor threats. Tesco faced stiff competition on
both higher end retail and low end. Tesco had a basket price of £25.37 (Exhibit 9), cheaper than that
of the other general retailers but not significantly. Indeed it is only 0.32% less than that of Sainsbury,
and Waitrose, a high-end retailer, is only 9% more expensive. Thus, Tesco does not offer much
differentiation on price to other general retailers. However, discount retailers do offer a steep discount
to Tesco – 28.9% for Aldi. This means Tesco is losing on a cost advantage to the discounters and does
not offer enough horizontal differentiation to warrant a benefit strategy compared to the general
retailers. Furthermore, the discount retailers offer steep discounts through big stores with various
products. This differs from Tesco which main stores are express. The case highlights there is evidence
consumers were price sensitive to store size and location, substituting more frequently from smaller
stores to larger stores. Thus as retailers such as Aldi grow, consumers are more likely to substitute
Tesco as competitor stores are not only larger with greater product offerings, even clothing, but also
cheaper.

Finally Tesco also faces issues at the business model level. Firstly, as mentioned before it is not suited
to meet the changing customer demands in the industry level. It store model and lack of online retail
means it cannot satisfy the customers who want to buy out of town centres or online. Thus it is losing
this customers, reflected in the decreasing market share. Furthermore, Tesco model sought to draw
customers by holding a broad product mix. This led to cost implications as Tesco had reduced
negotiating power with suppliers and inefficient shelf space used. Furthermore, this means that costs
cannot be discounted to the same level as discounters, Tesco product offerings do not match the high
end market as those of Waitrose or do not offer enough differentiation from direct competitors like
Sainsbury. Additionally, 80% of its revenues come from the UK (Exhibit 3). As shown, in Exhibit 7,
the UK had the most overcapacity; a 0.6% 10 year CAGR ratio of 5-year sales CAGR to store space
CAGR than countries like Spain and Poland. Furthermore, Tesco store model does not align to its
strengths. About 13% of larger Tesco stores enjoyed a local monopoly (i.e. over 60% market share
within a 10-minute drive) and Tesco accounted for 30% of all large stores in the UK with a local
monopoly. Nevertheless from 2013 to 2015 Express stores grew at the highest rate of 3.8%, meaning
the business was focusing on expanding smaller stores. Finally in the business model area we see
Tesco has not developed any online slae facilities. Indeed it is mentioned a CAPEX of £ 120mm was
spend on automating the traditional store distribution, with little to no investment in an online service.
Overall all these factors put Tesco in a considerable disadvantage in meeting the changing customer
needs at the industry level. Thus, as it loses customers and price attrition takes place, revenues
decrease sharply as seen in Exhibit 3, a 20% drop in one year.
2) Tesco should divide its strategy into investing in the online retail space, capitalizing current
product offering, and expanding its sales. Exhibit 4 shows online sales are growing at a 9.15% CAGR,
~8% higher than any other channel. One could argue value stores could be another channel Tesco
could expand in. However, focusing solely on discount, lowering prices to match those of the
discounters would eat any margins and the growth rate of this sector is still much lower than that of
online. Furthermore, as the world becomes more digitalized and the internet more widely used one
would expect for the shift to online sales to strengthen. Tesco cannot wait for Ocado to continue
growing at the other retailers expense. From 2013 to 2014 Ocado grew by sales by 20%. Tesco has a
reputable brand, large product offerings and an extensive distribution channel. Thus it has the ground
to build an online sale business exploiting distribution channels with its current stores to decrease
costs. Furthermore, the online business will have plenty of data allowing Tesco to see customers
needs and trends. It can exploit this to match customer needs both in store and online, something other
retailers at the time did not have.
Starting from scratch could be an option for this investment but Tesco current business model is far
from an online business. It may not have the capability or knowledge to develop this. Thus a
partnership or a direct acquisition of an online player would be ideal. Such inorganic growth will
allow it to gain scale quicker and challenge Ocado. The strong brand name and reputation of Tesco
will act as a revenue synergy for its online sale business. Note that this may cannibalize some of
Tesco current sales and thus Tesco should focus on customer retention. Loyalty schemes in its online
sale channel will aid this. Furthermore, it should look into selling of the smaller less profitable stores.
Many are located in city centres where likely the rent is a high fix cost. Indeed leases were estimated
to cost £1.84 bn annually thus aiding the profitability. Furthermore, it could look into exiting the
Asian market streamlining the business. Exhibit 3 shows this region had a 56% drop in sales.
Divesting it will streamline the business, decrease overall costs and allow to allocate this resources
into the new strategy.
Tesco should also capitalize on its products. Currently Tesco does not offer a significant price or
benefit difference compared to other general retailers. In contrast discounters offer steep discounts
capitalized by operating larger stores, which are what customers have been shifting to. Indeed Aldi
sales grew by 28.6% from 2013 to 2015 (Exhibit 11). Tesco current strategy of differentiation by
offering a large product mix is not what customers want. It should focus on limiting this mix to
discount prices more. Offering less products it can exert more power over its suppliers and manage it
shelf space better. Discount prices will give Tesco a cost benefit over other general retailers such as
Sainsbury whose profits have also been decreasing. It will also put it into closer competition to the
discounters who have increased in market share. For example Asda has gained a 5% share from 2012
to 2015 while Tesco share has decreased (Exhibit 12). Nevertheless, it has to be careful. Tesco has a
brand image of providing good quality products at a cheap price. It cannot alienate this customers so it
has to ensure, that customer service, loyalty schemes and product quality remains high to retain
customers. Finally, Tesco should capitalize on its large stores. As mentioned previously these stores
enjoy a monopolistic share. Focusing on such stores and expanding outside town centres will meet
changing industry needs.
Finally Tesco should look into diversifying its sales. It already has a strong brand and thus can look
into expanding sales in electronics, beauty, furniture and house items. It can leverage the large stores
monopolistic effect, store size and layout to increase the time customers spend here, inciting them to
buy other times. For instance Asda followed this model in 2014, becoming the 2 nd largest UK clothing
retailer. This will have a huge revenue synergy as the brand effect will help drive sales up this
channel. Furthermore, there are various cost synergies. By selling furniture items, it can drive down
distribution costs if it coordinates with the logistic of the online selling business. It can also streamline
the business closing unprofitable small stores and focusing on the large ones which meet more of the
customer needs. Finally loyalty schemes both in the food retail and this other product offerings will
help customer retention. Once this customers are in the Tesco environment it will be hard for
competitors to ‘poach’ them.