As mentioned before, Tesco’s strategy is based on customer loyalty. Another way of developing personal relationships between the chain and its customers is the creation of online communities. On its website Tesco.com has numerous clubs including eDiets, the Nutri Centre, Healthy living club and others.

Tesco.com
With coverage of 98%, Tesco are now the most successful online grocer in the world. Recently Tesco introduced shopping list to help customers navigate on the website. First time visitors were offered a suggested shopping list based on their shopping patterns accumulated by clubcard.

Non-food products

In order to stay competitive Tesco have turned to adding many non-food lines. These are currently the main drivers in growth of the UK supermarket chains3. Associated with higher profit margins they can support the decreasing profit margins of food products. It is estimated that the current share of Tesco’s non-food products is only 2.5%.4 As such there is a potential for rapid growth and increased market share in this sector. This is also supported by the fact that only 20% of the population have access to Tesco Extra.

Profitability of the Express format

Following the difficulties in obtaining permission to build out of town superstores, Tesco saw an opportunity in convenience shopping. Its Express format is the equivalent of a corner shop, typically positioned in busy areas of towns. It requires less capital investment and provides higher profit margins and faster returns. Customers are willing to pay higher prices for this convenience. It can be argued that with society becoming fast paced and many people being forced to eat on the go, small stores offering ready-made meals are very profitable.

International expansion

Tesco’s international expansion is based on three principles: finding joint venture partners or a chain suitable for acquisition, being able to locate new sites for further growth and having limited competition in the new market.
In 2002, Tesco had experienced difficulties with expansion in Poland. Expected GDP growth of 5-6% turned out to be too optimistic. The actual growth was only 0.6% which had a significant impact on sales. This was coupled with the acquisition of fifteen HIT stores, two of which were still under construction. Although this move gave Tesco a significantly higher market presence, it was also considered very expensive. In 2000, an attempt was made to penetrate the market in Taiwan. Many questioned the agenda behind such move, as conditions in Taiwan did not adhere to any of the aforementioned three principles. Two years on Tesco still had not found a joint venture partner and was facing competition from the French giant Carrefour. This together with the difficulty of obtaining planning permission led to losses. To this day, there are speculations about Tesco’s withdrawal from Taiwan.

These two slip-ups could be part of the reason why return on capital employed dropped by 11% between 2002 and 2003. In addition, the gearing ratio was almost 92% in 2003, which is a sign of an increased contribution of funds by lenders. This could be perceived as a dangerous move if a firm is not sure about how profitable the investment is. However, it proved to be the right move for Tesco, as return on capital employed increased in subsequent years and gearing ratio was down to 65% by 2005.