A07-01-0011

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 £18.7 billion and net income of £1 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 £11.2 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.

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.

the regulatory hurdles that made it difficult to establish large stores drove its multiple format growth strategy. betting on the growth of its online endeavors to help sustain growth. it might soon be time for a reality check when scalability of its systems comes in question. The company firmly believed in expanding its offerings of goods and services as it strove to become an end-to-end solution provider for all the customer’s needs offering both food and non-food items at its stores 2 A07-01-0011 . off-the-shelf software packages. Cohen instituted a set of core principles that had served the company well. Tesco introduced a variety of innovative practices that have increased efficiency and reduced operating cost over the years. This meant that it would have to take on Amazon. it could adversely affect the company. The path to profitability was not going to be easy.K. Mr. Tesco’s hybrid model could become inefficient. the Czech Republic. Just as soon as the site went online. a market research company. It also had operations in Ireland. While Tesco’s strategy had taken various forms over the years. There were many questions that needed to be addressed. A. and 21 Express stores in the U. how long they would stay open. market. were making deep incursions in the U. As if local competition were not enough. rated Tesco as the lowest-cost supermarket for food in all of Europe. Mason’s thoughts focused on Tesco’s online competitive advantage. Instead. Blanketing the entire country with superstores was therefore a pipe dream. Poland. Tesco: The Company In 1919 Sir Jack Cohen founded Tesco as a small organization that sold groceries to London’s East End markets. In January 2000. Mason realized that critical times lay ahead.K. As of early 2000 the company operated 225 superstores. After 1998 it considerably slowed down building new stores in the U. Amazon. Hungary. Would Amazon turn its attention to the lucrative grocery business once it had a string of warehouses in place in the U. Until then.. all of its activities were primarily focused on selling to the retail trade. and Thailand.2 million in sales in the first quarter of 2000. The company grew over the years and in 1947 was listed on the Stock Exchange as Tesco Stores (Holdings) attracting a share price of 75p (pence). In the U.com in what was widely perceived to be areas of Amazon’s strength. For them. He was only hoping that Mr. Taking a leaf from the successful grocery supermarkets that evolved in the United States in the 1930s. It wasn’t until 1929 that Tesco opened its first store in Burnt Oak.com had recently been rated as Britain’s top retail site generating £31. 48 neighborhood stores. Slovakia. Leahy was right about the two-year advantage. 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 approach? Perhaps the decisions in the technological and fulfillment arenas were not mutually exclusive like they appeared to be. gave it some important experience benefits. Mr. Edgware. As the traffic light turned green.C. Mason knew that plans called for stepping up Tesco’s presence in non-food areas eventually rising to 45%-50% of all online sales. established e-tailers from the U. 42 Metro stores. Mr. however. Although Tesco had shown tremendous technological savvy in launching its Web site on a shoestring budget with a group of Dell servers and standard. With an increasing number of online customers. Mr. town councils and municipalities had a very strong position of power and in many cases held the final say on where stores were built.K. Tesco’s experience with the regulatory labyrinth in the retail sector in the U. it had maintained an unflagging focus on delivering the best value possible to its customers. For example. Scalability in each dimension could soon become critical. While Tesco was using its regular stores as the backbone for its online efforts. it was no longer a hybrid bricks-and-clicks offering but a structure that had separate facilities for online operations. market? As he pulled into the parking lot. Nielsen.K.S. and how big they would be. Tesco used novel formats that were tailored to fit area-specific regulation.K. some customers began complaining about the inordinate delays in accessing Web pages at certain times of the day. 220 supermarkets.It even started its own Internet Service Provider (ISP) arm as a prelude to bringing more customers online.K. competitors such as Sainsbury’s were building dedicated warehouses and picking centers to streamline their operations. If that perception stuck..

The company had integrated its IT skills into multiple areas spanning both front office operations as well as the backroom operations.2 It spent between £130 million and £150 million every year to stay abreast with advances in IT. Analysis of purchase data through data mining techniques helped forecast trends much more effectively. in all areas of electronic retailing. This emphasis had given the company a leg up in terms of the experience curve. to set up a transactional Web site where customers could log in to a central system to purchase groceries online. The Clubcard program reached over 10 million customers by early 2000.S. www. 19-20/12/1997. In many ways.Tesco’s Move into Online Shopping Tesco was the first in the U. the company’s IT infrastructure provided the backbone for customer service and support operations. Despite its storied reputation as a technology “big-spender.K. Managing such a large customer base required significant IT expertise. it could legitimately claim responsibility for that lead. 5. the company used a mixture of homegrown software packages and off-the shelf packages that raised questions about its ability to blend them together into a seamless whole.tesco. Since then. the transaction recorded the price on the bill. 2000 3 A07-01-0011 . Similar to a frequent flier program. the scheme awarded points to enrolled customers for purchases made. customer accounts.000 telephone calls. Tesco’s IT Prowess Information Week ranked Tesco as the best among British supermarkets in terms of its IT operations and third among all of European supermarket chains. the company received 100. It operated a tri-level architecture anchored by mainframes and assisted by middle system servers and PC client front-ends. and 1.500 e-mails from its customers in a typical week!3 At the front-end. plan inventory levels more precisely. IT played a key role in the acquisition of scanner data. it did have a significant lead in one category—online groceries.000 square feet and handled 2 3 Information Week.000 letters. relayed the information to inventory control making changes to inventory levels in real time. keeping up with technological changes had not been easy. A typical warehouse covered an area of 300. and generating orders for supplies as needed.com. it had moved into other non-food lines and added a considerably wider delivery region. While these systems proved to be really innovative. The awards could then be exchanged for products. Contractors operated an additional six such centers on behalf of Tesco. and triggered an ordering process with a distribution request based on current inventory levels sent directly to forklift operators on the floor of Tesco’s warehouses. For example. It operated 13 strategically located warehouses or distribution centers throughout the country. Tesco was a company that was waiting for the Internet to evolve into the digital marketplace that it later became. integration of the data with the inventory control system. Distribution Acumen Tesco’s distribution network was an integral part of its success story. At the customer end. and provided a well-orchestrated system of running store operations. Although Europe by the turn of the century was lagging behind the U. When a customer’s purchases were scanned at the point of sale. For example. Since Tesco had roughly 70% of the online grocery market. many critics suggested that the equipment the company used was quite outdated and did not offer the capacity to scale upwards. It was used to administer a remarkably successful loyalty card scheme. For example. It had always prided itself on an excellent information technology (IT) support network and had leveraged its IT skills to enhance efficiencies in its traditional brick and mortar stores for quite some time. having provided it the opportunity to get its internal house in order while meeting the challenges of conducting business digitally. It was indeed the world’s largest online grocery business.” Tesco appeared to be behind the times perhaps because of past decisions. Its private digital network connected all its stores in real time.

net) and offered free Internet service to all its customers. This cumbersome method was necessitated by the high connect time costs that were prevalent in the U.) and Tesco (U.000 units after two days.). This resulted in a joint business gain of around £50.K.). Tesco used onthe-ground market intelligence to provide comparisons with key competitors such as Sainsbury’s. Intended as a complement to the EDI (Electronic Data Interchange) system already in use. Called the Tesco Information Exchange (TIE). CVS (U. we avoided disappointing some 15. where most online shoppers entered. First.). compared with an original forecast of 10. and also designate a delivery slot.000 of the 20. Each center scheduled roughly 2. The company had developed two Web sites6 that customers could access easily. observed.500 users. and Iceland. a customer could obtain a CD-ROM catalog containing information relating to 3. we were able to respond and increase depot stock at short notice. 2000 www.000 products that Tesco normally carried. Royal Ahold (The Netherlands). All of this could be accomplished via the Internet through the Tesco Direct site (www.tesco. Once the update was received.com) provided relevant information regarding online shopping. TIE was linked to a number of Tesco’s key systems to give suppliers access to relevant and up-to-date information such as Electronic Point of Sale (EPOS) data to track sales and inventory. the customers could log off and prepare an order offline before connecting again to transmit their orders to Tesco. The corporate website (www. It had a comparison-shopping engine that was quite powerful in that it offered real-time comparisons of prices on select items including fresh produce.000 units for the whole week! As a result. Auchan (France). The deliveries occurred in waves depending on the nature of goods delivered.tesco. the Customer Business Development Manager for P&G. 4 A07-01-0011 . TIE promised numerous benefits for participating suppliers as well.000—and more importantly. check prices and availability. For example. 2000 6 The two sites were merged for more efficient control and management. Tesco owned its own ISP network (www.).).”5 Tesco also joined the Worldwide Retail Exchange (WRE). specials and promotions as well as corporate information. The exchange was designed to facilitate trading between suppliers. fresh produce was delivered right before the stores opened while dry goods were delivered at less busy times during the course of the day. consisted of a set of simple. Tesco Direct. The corporate Web site was linked to the dedicated shopping site as well.000 shoppers. The customer could update the CD-ROM catalog after establishing a connection to Tesco’s servers.).S.4 The distribution system was integrated with a supplier extranet that Tesco had built in partnership with GE Information Services.com. K-Mart (U.S.). The second method allowed the customers to browse Tesco’s product selection.S. partners. Casino (France). more efficient inventory planning. Target (U. and more sophisticated analysis of inventory flow data.K. It also included an auction facility and other features designed to dovetail with the ERP (Enterprise Resource Planning) systems of participating retailers aimed at reducing supply chain costs. It had the potential to generate significant savings in planning joint promotions. (U. It encompassed 400 suppliers and over 2.K.tesco. Moving into Digital Commerce Armed with information infrastructure assets and distribution capabilities Tesco launched its online grocery shopping service in 1996.S. Jonathan Kemp. Marks & Spencer (U.some 50 million units a year. Asda.com). a business-to-business exchange promoted by 11 retailers.500 deliveries to its stores daily and was normally responsible for serving a 50-to-80-store population. and distributors.S. Safeway Inc. easily navigable pages that offered 4 5 www. Kingfisher (U. For example.K. “During the trial we spotted that the demand for one of our lines had reached 8. place an order online. Participating companies anticipated that the interaction on the WRE would be more efficient due to standardized item information. It included Albertson’s (U. retailers.tescodirect. this system was first introduced for a small set of large suppliers such as Procter & Gamble (P&G) and Nestle but had since been expanded to cover a wider range of smaller suppliers as well.com.tesco. It offered customers two different ways of using its shop-at-home service.

This system of using local stores to deliver online orders imposed some strain in terms of scheduling. Hence. was equipped with a price scanner and a shelf identifier screen. (See Exhibit II for a schematic showing the ordering and fulfillment process. May 26. Since the transportation infrastructure around densely populated areas was not adequate.) Further. CDs. Tesco argued that it did make money on Internet sales because the average shopper bought much more online than at the store. Despite the breadth of its non-food offerings. books. or kitchen equipment. Customers could shop for music. Since the entire process was controlled electronically. tableware.) The “personal shopper” who was responsible for picking the order had to compete with regular. they tended to buy more fresh food than 7 8 “Tesco outlines ambitions to expand online. (See Exhibit III for fulfillment cost estimates. especially since all the stores in the geographic region required a fleet of vans ready to deliver. kitchen equipment. Tesco maintained that its customers could not get any fresher food even if they went to the store themselves. creating delays. All this added up to higher sales per customer in the form of books. the trolley was sent to the delivery van directly. the company was contemplating the addition of clothes to its offerings. and recipes to the time-conscious shopper. Despite the high operating costs associated with this online model. The incoming order was assigned to a delivery van at the local store and then forwarded to a picking trolley manned by store personnel. While all of this seemed to be well orchestrated. Customers paid a delivery fee of £5 per order (approximately $8) for groceries and £2. a large bulk of the orders had to be fulfilled in the evening hours. 2000. in-store shoppers since the order was to be fulfilled within a store environment and not a warehouse. 5 A07-01-0011 . Tesco aimed to generate 40% to 50% of sales revenues from non-grocery products. These vans had to be equipped with refrigeration units to ensure that chilled and frozen products were delivered fresh. In fact. specifically fresh food. Unlike grocery sales. and housewares.8 Online shoppers seemed to be more willing to mix food and non-food purchases. unlike their in-store counterparts. This trolley. The company had an arrangement with ParcelForce (a trucking company similar to RPS. one often saw store personnel jostling shoppers as they raced to fill orders for delivery within the two-hour window that Tesco promised. it was routed to a computer located in the store that was nearest to the physical location of the customer. since most of the ideal target audience for the service. and hence the person doing the shopping was directed to the aisles where the product was to be picked. The layout of the store was pre-coded into the system. Feb. use instructions. computers. Once the picking was completed. a modified version of a shopping cart.7 The Way it Worked When an order was received at Tesco Direct.” Financial Times. all of which contributed to missed and delayed deliveries. the Financial Times reported that in fiscal year 2000 most of Tesco’s online sales of £125 million were from groceries. Over four years. than other products. it also meant that Tesco drivers were fighting rush-hour traffic. It was estimated that an average online shopper bought products worth £5 while in-store shoppers averaged only £25. the FedEx company in the U. For example. there were very important issues that arose during execution. However. most of Tesco’s online customers seemed to use Tesco Direct more for food items. The delivery fee hardly made up for the dedicated vans and in-store picking personnel.) for order fulfillment. office supplies. non-food products such as kitchen equipment and bed linen were available for sales throughout the country.” Economist. office products. 5. videos.pertinent information such as nutrition.S. once the product was picked. This meant that the store was a lot more crowded with regular shoppers. which were restricted to a specific geographic region due to distribution constraints. time-conscious shoppers. videos. “Tearaway Tesco. it had to be scanned to ensure a match with the order and for capturing pricing information before it went into the trolley. By mid-2000 the company offered much more than fresh produce and groceries. the offerings at this site increased significantly.95 for an order of non-food products such as linens. there was little room for human error. were seldom available at home during the day to receive deliveries. and a host of other products. 2000. In keeping with that target. Given the wider reach that was possible for selling dry goods.

while the other 50% was cannibalization of current customer purchases moving online from offline.5 billion by 2004 in the U. U. all accounts pointed to a leveling of online populations and even an acceleration of European online retailing sales in the near future. This created an even greater sense of urgency among the leading companies to introduce new online models or risk obsolescence fairly soon. and Safeway. Tesco would be well on its way to achieving superior performance. reported that online grocery shopping alone would grow to £2.they would normally do when they visited the store. Despite the disparity between the U. expected that most of the online grocery sales growth would materialize from cannibalization of brick and mortar stores and only a paltry 4% was expected to come from new sales online. it also signaled the steep climb that lay ahead for online retailing. According to a report from the European Information Technology Observatory. It entered into partnerships with companies such as Autonomy to offer customers online assistance with their shopping..000 people to man its stores. Canada’s Financial Post reported that Mr. A07-01-0011 6 . It was certain that the competitive conditions that prevailed would be quite unforgiving of any lapses. although Europe accounted for only 1/8 of all worldwide online sales in 1998. a company owned by Wal-Mart. It is this promise of growth that had retailers lining up to stake their ground.”10 He believed that Tesco had significant experience advantages including technology that would make it an attractive partner across the Atlantic. and German cataloger Otto Versand to offer baby accessories and home furnishings through Tesco Direct. accounting for 19% of all online purchases. another market research company. The Economist Intelligence Unit (EIU) reported that only 30% of the U.9 The sales growth picture was desirable indeed. Its ISP arm had developed into a full-fledged portal of some note and the company began to notice some important synergies between its ISP backbone and e-commerce front-end offerings. the model seemed to be under constant strain. The company reported that 50% of the online sales were incremental (25% new customers plus 25% higher sales from current customers). Tesco had recently announced that it would employ an additional 7. 9 10 ABN Amro Food and Drug Retailers Sector Research. CEO of Tesco.S. a respected Internet consulting firm. If customer reach became the key determinant of success as many of the analysts believed it would. However. with Charcolonline to build a digital mortgage supermarket. Asda. On other fronts.K. Tesco unveiled plans to build Internet cafes in its stores to offer customers free and easy access as a means of spurring the growth of digital preparedness.K. Appealing as it was from a capital expenditure viewpoint.K. it was expected to generate 2/3 of the total by 2002. The Competitive Landscape Jupiter Communications.” Financial Post. Competition in the grocery business came from the major chains. Tesco had recently announced that it was seriously evaluating entry into the North American market. and customers had started to complain. told analysts that the company “is researching the opportunity to take our model internationally. 2000. population was online compared to nearly 50% in the U. it remained to be seen whether the additional manpower would make up for a technological infrastructure that had not been scaled upward to meet demand. the picture was quite bleak but encouraging at the same time.S. namely Sainsbury’s. It was rumored that the company was also eyeing markets in continental Europe and Asia where it already had a brick and mortar presence. Tesco faced a variety of rivals both in its traditional food lines as well as its non-food lines.. While this could be interpreted as a sign of untapped potential. However. Verdict Research. May 10. In terms of digital preparedness. Terry Leahy. and most of Europe. “Britain’s Tesco eyes North America. 2000. What it had saved in terms of equipment and software seemed likely to hurt in areas of customer service because it had negatively impacted access times (time it took a customer to log into the system and place an order). May 23.

It had started a new service called “Sainsbury’s to you. according to Sainsbury’s.” an Internet-enabled shopping site (www. recently became the first grocery chain to offer 2. which can be increased to 600 to 700 per hour with greater automation.000 lines of products managed from two picking centers in Croydon and Watford. there were other important intangibles 11 12 Quoted in “To build or not to build. and fresh foods in densely populated areas. The company believed that Tesco’s model of clicks and mortar would not be successful in the long term as demand exploded. or Sainsbury’s that was using in-store picking and warehouses. 2000.K. frozen. Waitrose. unlike Tesco that was using its stores. by 2003. wine. The company hoped to enroll 30 million customers in the U.750 lines over the Internet with free delivery throughout U. Sainsbury’s Head of Strategic Development. another grocery chain of national repute. Betting on the right model could have enormous consequences. much like Tesco Direct but largely focused on groceries and a few non-food items. It was open to debate whether Sainsbury’s model was more easily scalable than Tesco’s. The delivery area that the company initially supported was quite small in comparison to Tesco and that. 7 A07-01-0011 . the company had been offering a restricted product line limited to flowers. subject to a minimum order of £40. Service levels will always be compromised.K. in-store. May 8. It was building two more warehouses in the London area in mid-2000 to increase the scope of its online retailing offerings. This site was a partnership with Line One. the fourth largest grocery chain in the U. It had also been dabbling in online sales for some time. March 15. for example.12 It remained to be seen which of these models would ultimately emerge as the most promising one for online grocery retailing. U.000 home deliveries a week across Internet. are less tolerant. was betting on a completely different approach.K.’s grocery chains. Iceland also used an in-store picking approach similar to Tesco. While the cost elements might drive some of the format decisions that lay ahead. had been offering a service it called asda@home for 5. known for its attention to detail and quality of produce. and fulfillment of orders has to be perfect. “Pickers in stores pick 100 items per hour. “Diverging routes to the online buyer’s heart. cost £4 million. and chocolates since February 1995. It was quite possible that it had chosen the warehouse route simply because its store network was quite sparse and did not correspond to high growth online market regions. we’ve found. That’s difficult in-store because of the high out-of-stock situations..” Super Market News. 2000.”11 Sainsbury’s plan called for combining in-store picking with dedicated warehouses to significantly improve efficiency and shorten delivery times. a chain of grocery stores in Massachusetts. and phone/fax ordering. It connoted more of an upscale shopping experience than either Tesco or Asda.” Financial Times. having chosen to rely exclusively on warehouses. The company had recently acquired Shaw’s. offered delivery of groceries with a twist. it was using a fax/phone-based customer collection service. Safeway.com). The company reportedly made 100. The lack of legacy infrastructure allowed Asda to come up with a different model. They could place orders during the day and the goods would be delivered to their offices in time for their drive home. It was estimated that the Watford warehouse. According to Jennifer Baker-Hurst. Customers could either fax their orders or call in their orders ahead of time and drive to the nearest store to pick up their purchases. It foresaw a model under which it would use its warehouses for slow-moving items or in sparsely populated areas. combined with in-store picking of chilled.S. was by design. an ISP that was to be packaged to offer free access to all Sainsbury’s customers. It would deliver only to offices but not homes! It ran a fairly successful “Waitrose at Work” scheme for the purpose. Iceland. Instead. At a national level. Sainsbury’s had been building warehouses dedicated to supporting online shopping. “Online customers.sainsburys.Sainsbury’s was the storied granddaddy among U.” She added. It offered neither online ordering nor home delivery. Intent on eliminating the inefficiencies that were endemic to the pick-in-the-store system. In a warehouse it can be 300 items per hour. Asda represented one end of the fulfillment continuum.K. Asda. a fairly small operator but nevertheless one with a national presence. the Wal-Mart company. It started with an experimental contract to provide employees of Hewlett Packard’s Bracknell plant the option of buying their groceries online. Exhibit V provides estimates of potential costs associated with alternative delivery formats.

at a flat fee of $7.emarketer. and the general lack of a fulfillment infrastructure. D. The poor rate of converts was blamed on a variety of factors including the inability of companies to offer a fail-proof delivery system. a growth of over 3. the sprawl into suburbia that required complex math to figure out delivery routes. holdings in the form of the Stop and Shop chain of stores that were widely popular especially in the Northeastern U. It prided itself on its customer service and had been rated among the best online grocers by Gomez. Webvan delivered in the cities of San Francisco. a fairly early entrant to the online grocery business. Atlanta.000%. It teamed up with Federal Express to offer a shipping service that ensured fulfillment of orders within 1-4 days. According to Forrester Research. The service was available in the metro areas of Massachusetts.13 eMarketer (www. Illinois..peapod.streamline. Peapod (www. Netgrocer. music.S. Peapod also used centralized warehouses to deliver produce and food items to well-defined geographic markets.netgrocer. It also had local agreements with smaller chains to function as picking centers. clothing repair. and New Jersey among others. and convenience might prove to be equally important. books.S. shipped a wide range of groceries other than perishables such as milk and fruit throughout the 48 contiguous states from a warehouse in New Jersey.8% of U. Shaheen believed that a network of state-of-the-art warehouses would go a long way toward solving critical fulfillment problems that could plague an online grocer’s reputation. Streamline (www.com) was the oldest online grocery retailer in the U. an independent e-ratings company. It cost approximately 10% of the value of an order for shipping. Mr. who headed Andersen Consulting before joining Webvan. Peapod.S. founded Webvan.gomez.95 per order. it was the largest online drugstore and the largest online pet store in the country. Sacramento. However. consumers had not really taken to online grocery shopping in quite the same way as those in Europe. consumers used the Internet to shop for groceries. July 3. only 2. had been in operation only for a few years but could not weather the challenges of planning warehousing and logistics. Mr. In early 2000 Webvan. Illinois. much of which was earmarked for building warehouses in the 24 markets that it sought to enter.K.S. According to the company. thus opening up the possibility of leveraging Ahold’s U. A07-01-0011 8 . some of the larger players were betting that things would change soon. reach..C. film processing. It had opened its non-perishables service to the 48 contiguous states in the U. brand building.com (www.to consider as well.” New York Times. the entrepreneur who established the Borders book chain. Analysts be13 “Online grocery shopping still faces hurdles. and was in the pre-launch testing mode in Chicago.com).com).S. Customers paid a monthly membership fee of $30 in addition to the value of their orders. The most visible online grocer in the U.9 million by 2002.S. Louis Borders. However. not to mention the enormous amount of capital investment that it required. and prescription drug pickup in addition to fresh produce and groceries. Netgrocer (www. ran the company. an important convenience to working customers. 2000. especially the U. having started operations in 1989 in Skokie. by early 2001 the company ran out of capital and had to declare bankruptcy. Maryland/Washington. The company generated a substantial amount of cash after its initial public offering. Royal Ahold of the Netherlands acquired a significant interest in Peapod. Its offerings spanned a wide spectrum that included food items and non-food items such as office supplies. Streamline either installed a full-size refrigerator in the garage or delivered orders in a temperature-controlled box. George Shaheen. Issues such as differentiability.S. and housewares.com) predicted that the number of households buying groceries online would increase to 6. videos. It also installed a keyless entry system to the garage so that orders could be delivered even if the customers were not home. Across the Pond The U. and Streamline were the key contenders for what was believed to be a market ripe for picking.com) was probably the closest to offering its customers a very attractive package of goods and services targeted at addressing day-to-day needs such as dry cleaning.

The Board would definitely want to see a plan to increase the sales of non-food items. Some analysts believed that the general downturn in the fortunes of Internet companies would sound the death knell for many more online grocery retailers.2 people. Mr. it would have to prepare for a frontal assault on Amazon since the U. Leahy that he would reflect on the proposition over the weekend. was 245.-based online grocers were “pure plays” (not being tethered to a brick and mortar operation). had been gathering a sizable following all across Europe and parts of Asia as well.S. Management Horizons Europe and Nelson Sofres. Despite the promise of convenience and the fertile landscape of a highly connected target audience in the U. computers. music. he’d have to chart a course that would deliver superior performance on several fronts. Would Tesco have to rethink its distribution mechanism if it were to cross the Atlantic? The Future Looms As Mr.K. it was forced to shut its doors in November 2000 because it was unable to raise financing. The obstacles of warehousing and logistics were too overwhelming. Should he choose to accept the offer to head up Tesco. The U.K. Should he revisit the fulfillment process and move to warehouses to increase efficiency? Should he recommend moving into the North American online grocery market and bet on leveraging the experience benefits gained in the U. As soon as he finished his conversation with Mr. Retail consultants.S. 2000. While the average population density per square kilometer in the U. launched from Germany. Tim Mason settled down to take stock of the day’s priorities. online shoppers that showed more than 30% of those surveyed reported that their last purchase was from Amazon. Closer to home. and only 3% from Tesco. Despite the convenience that Streamline promised. markets and that. It had launched localized Web sites in multiple markets. Leahy was on the line with significant news. Mr. Leahy was hopeful that Mr. electronics). establishing a portal of sorts within the realm of B2C commerce. Mason needed some time to collect his thoughts about the offer and told Mr. Perhaps Tesco would be ideally suited to buck the trend if it chose to set up operations in the United States.lieved that this model held significant promise because it offered customers a one-stop clearinghouse approach for all their needs. would it make sense to launch a pan-Euro14 “A British E-Grocer takes on Amazon. 3. Mr.S. too.? Given the current popularity of Tesco in grocery retailing. many of the companies were facing serious financial troubles. in the U.. e-tailer had already evolved into similar product areas with a famous brand name as well. Tesco would possibly enter with a clicks and mortar approach built around store-based fulfillment. only as a substitute for telephone-based ordering processes.S. was littered with failed online grocery companies. 9 A07-01-0011 . Mason to attend that meeting where the members of the Board would be eager to hear of his plans for Tesco. Some analysts believed that population density was a key performance driver in fulfillment.g.bol. June 12. This would suggest that physical distribution economies might be much more difficult to harness in the U.com. Mason had a lot to think about in terms of future strategy. Mr. it was a paltry 27.” Fortune. videos. Mason should be given the opportunity to head up the new division as its Chairman since he had done well in nurturing Tesco Direct.7% from Bertelsmann. the telephone rang incessantly. While many of the U.S.com. a flood of questions rushed into his mind. The Board felt quite strongly that Mr.com). Mason would accept the offer in time for the next meeting of the Board early next week. Bertelsmann Online (www. He had just confirmed plans with the Board that Tesco Direct would be spun off as an autonomous entity consolidating all the e-commerce and Web-based activities of the company. books. It was building a warehouse network in the U. The company had recently targeted 40% to 50% for such sales. Leahy.K.14 These were long odds. BOL had been quite active in the U.K.S. reported findings from a survey of a large sample of U. If Tesco wanted to increase its non-food business (e. He also extended an invitation to Mr.K. This approach was only now being attempted in isolated U.. the Bertelsmann venture.S.

pean offering to encompass regions where Tesco had a bricks and mortar base (e. Mason had seen recent sales figures showing that his online customers shopped at Tesco mostly for fresh food.g. Czech Republic.K. or would it help to first shore up the U. Hungary). 10 A07-01-0011 . Slovakia.. Mr. market by expanding within the country? Of course. Ireland. Poland. After all. the larger question was really whether Tesco should continue its foray into non-food products or at least emphasize it much more.

Rest of Europe Asia Total Operating Profits Operating Margin U.8% 4.74 89649 14.3% 17.9% 3.1% 70p 156427 9160 15600 21.02% 5.5% 659 27720 197 156 169 Market Position Market share in food and drink shops 13.2% 2.5% 20.1% 60p 146326 8478 14222 19.K.4% 639 26654 202 157 177 16958 1374 464 18796 993 51 -1 1043 5. ft 25600 Share Price Performance High Low Year End 113 82 90 A07-01-0011 11 .5% 5.Exhibit I Tesco’s Five-Year Financial and Operating Statistics 1996 1997 1998 1999 2000 Year ended February Financial Statistics in £ million Sales U.1% -1.48 99941 14.8% 1.9% 16.05 104772 15. Rest of Europe Asia Total Group Return ratios Return on shareholder funds Return on capital employed Net assets per share Productivity ratios £ Turnover per employee Profit per employee Wages per employee Weekly sales per sq.1% 17. ft Full time employee equivalents 11560 534 12094 713 11 724 6.31 80650 13118 769 13887 760 14 774 5.3% 18.7% 59p 149799 8755 15079 20. Rest of Europe Asia Total Sales net of value added tax Operating Profit U.K.4% Number of stores 545 Average store size ’000 sq.2% 65p 151138 8771 15271 21.K.8% 2.9% 56p 143335 8841 13948 18.6% 21.8% 618 26600 180 113 172 15835 1167 17158 919 48 -2 965 5.3% 5.2% 568 26300 123 88 116 14791 1481 16452 875 37 912 5.5% 20.8% 5.7% 0.0% 20.43 108409 15.6% 21.1% 6.4% 16.

Exhibit IV Potential Profits Gained on In-Store Sales and Internet Sales Sales revenue per customer Net margin @ 6% Delivery charge Fulfillment costs EBIT Store sales £ 25.60 6.00 Source: Based on estimates by ABN Amro Food and Drug Retailers sector research report.80 1.com Tesco employee picks order in the neighborhood store A special Tesco van delivers order during a customer determined two-hour window Exhibit III Estimated Fulfillment Costs for In-Store Picking £ 2.10 4. @ £8 per hour including benefits 7 deliveries an hour @ £12 per hour Depreciation of picking and delivery equipment Type of fulfillment cost Picking Delivery Van operating costs Other costs Total fulfillment cost Source: Based on estimates by ABN Amro Food and Drug Retailers sector research report.50 1.70 0.00 6.10 5.tescodirect. 2000.00 5. May 23. 12 A07-01-0011 .50 Internet sales £ 85.00 1. 2000.Exhibit II The Order Fulfillment Process at Tesco Exhibit II The Order Fulfillment Process at Tesco ORDER ORDER Tesco neighborhood store Customer generates order based on CDROM catalog or directly online ORDER www.10 Remarks 15 mins.00 1. May 23.

00% 1.33% Administrative costs 1.45% Capital Expenditure $ 201m 201m 150m Cost Element 1.00% 1.80% 5. June 12.75% Other expenses 1.00% 9.00% Delivery cost 10.50% 2.00% 0.55% Net Margin -4.35% 8.50% Total operating costs 27.00% 1.00% 21.00% 5. 2000.14% 1.74% 16.50% 17. A07-01-0011 13 .00% 23.00% 2.50% Advertising 10. Assumes sales of $1 billion in all models 2.26% 6.66% 79m 28m Bricks & Mortar 23.50% 1.75% 1.50% 16. Assumes that the customer will share delivery costs in all models except pure plays Source: Based on projections by Lehman Brothers in Tesco: From local to global and clicks growth.50% 2.40% 1.50% Depreciation 0.34% 6.50% 1.33% 3.35% 14.40% 6.00% 1.70% 5.50% 2.01% 0.40% 7.70% 1.00% Labor cost 3.00% 23.40% 0.50% 5.Exhibit V Projected Costs as a % of Sales Revenues in Alternative Grocery Models Pure play Bricks & Clicks in-store picking In-house delivery Outsourced 23.50% 2.50% 1.50% 0.50% 1.00% 23.00% 5.60% 280m Bricks & Clicks warehouse picking In-house delivery Outsourced Gross Margin 23.33% 3.40% 6.

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