Tesco plc - Company Profile, Information, Business Description, History, Background Information on Tesco plc

Tesco House, Delamare Road
Cheshunt, Hertfordshire EN8 9SL
United Kingdom

Company Perspectives:

Our core purpose is "to create value for customers to earn their lifetime loyalty." We deliver this through our values--"No one tries harder for customers" and "Treat people how we like to be treated."

History of Tesco plc

Tesco plc is one of the largest retailers in the world, operating more than 2,300 supermarkets and convenience stores and employing 326,000 people. Tesco's core business is in Britain, where the company ranks as the largest private sector employer in the United Kingdom and the largest food retailer, operating nearly 1,900 stores. In continental Europe, Tesco operates in the Czech Republic, Hungary, Poland, the Republic of Ireland, Slovakia, and Turkey. In Asia, the company operates in Japan, Malaysia, South Korea, Taiwan, and Thailand. Through Tesco.com, the company ranks as the largest online supermarket in the world. The company also offers financial services through Tesco Financial Services, which controls 4.6 million customer accounts roughly divided between credit cards and car insurance policies. Through the more than 100-unit Tesco Express chain, the company ranks as the largest seller of gasoline in the United Kingdom.

Early History

In John Edward (Jack) Cohen's day, a retailer's product line was comprised of whatever could be housed in a tiny stall. In 1919, Cohen invested his £30 stipend from his World War I service in the Royal Flying Corps in stock for his small grocery stall in the East End of London and began his career as a market trader. He soon became a successful trader in other London markets outside of the East End and also branched out into wholesaling for other market traders. In 1932, Cohen officially founded Tesco Stores Limited. The name was originally that of a private-label brand of tea Cohen sold, created from the initials of T.E. Stockwell, a merchant from whom he bought tea, and the first two letters of his last name.

Over the next eight years, the company grew rapidly, as Cohen opened more than 100 small stores, mainly in the London area. In 1935, Cohen was invited to the United States by several major American suppliers and became an eager student of the American food retailing system. His vision of taking the American self-service supermarket concept back to the United Kingdom was temporarily thwarted by World War II. Nevertheless, Cohen's dream became a reality in 1947 when Tesco opened its first self-service store, in St. Albans, Hertfordshire, the same year that shares in Tesco Stores (Holdings) Limited were first offered for sale to the public. Although the St. Albans store closed in 1948 after failing to capture the interest of British shoppers, it reopened one year later to a much warmer reception.

Over the next two decades, Tesco expanded quickly across the United Kingdom. This growth was accomplished almost exclusively by the acquisition of smaller grocery chains, including the 19-store Burnards chain in 1955, the 70-store Williamsons Ltd. in 1957, the 200-branch Harrow Stores Ltd. in 1959, the 97-unit Charles Phillips & Company Ltd. in 1964, and the 47-store Adsega chain in 1965. In 1956, the company opened its first supermarket, in Maldon, Essex, to carry fresh foods in addition to its traditional dry goods.

In 1960, Tesco established a special department in its larger stores called Home 'n' Wear to carry higher-margin, nonfood merchandise, including apparel and household items. Seven years later, the company completed construction on a 90,000-square-foot warehouse in Westbury, Wiltshire. The following year, Tesco opened its first 40,000-square-foot superstore at Crawley, Sussex. The term "superstore" referred not only to the store's size but also to its vast selection of inexpensive food and nonfood items.

By 1976, Tesco operated nearly 900 supermarkets and superstores on the "pile it high, sell it cheap" formula that Cohen had imported from America. The firm's management found that the effectiveness of this strategy had deteriorated over time, however, leaving the company with uncomfortably slim margins and a serious image problem among consumers. While Tesco had been preoccupied with opening as many stores as possible and loading them with merchandise, the company had missed important signs that its market was changing and had come to value merchandise quality over quantity.

Turnaround in the Late 1970s

The task of turning the company around fell on the shoulders of Ian MacLaurin, who had risen through the Tesco ranks to become managing director in 1973. In the first phase of his rescue plan Tesco discontinued the use of Green Shield trading stamps (which had been introduced in 1963), an action that major stores in the United States had also taken. This was followed in 1977 by a controversial tactic dubbed Operation Checkout, in which Tesco cut prices across the board in an attempt to increase sales and market share during a period when consumers were spending less money on food purchases. Although the company accomplished these original objectives--market share rose from seven to 12 percent in the span of a year--Operation Checkout did little to improve Tesco's sagging image among consumers. Most of Tesco's stores were cramped, difficult to operate, and even harder to staff. Customer service was poor and merchandise selection in many outlets was limited. Tesco also touched off a price war with J. Sainsbury plc, one of its major rivals, which ended up driving a number of smaller retailers and independent grocers out of business or into the arms of larger companies when they found themselves unable to compete with the prices offered by the two warring retailers.

Next, in order to reposition itself, Tesco embarked upon a massive modernization program intended in part to take the chain upmarket. It closed 500 unprofitable stores and extensively upgraded and enlarged others, including the installation of enhanced lighting and the widening of aisles. Tesco pursued the superstore concept much more aggressively than it had in the past in order to compete more successfully with other major retailers and be more responsive to consumers who preferred to shop where parking was convenient and the selection of goods was broad. The company made a significant investment not only in improving the physical appearance of its stores but also in providing the higher-quality merchandise consumers wanted. Superstores were also seen as a way to generate a higher volume of business at increased margins while reducing overhead.

In the beginning, the superstores averaged 25,000 square feet but eventually grew as large as 65,000 square feet. Each superstore functioned as a self-service department store coupled with a supermarket. The company placed a heavy emphasis on having a varied selection of fresh, high-quality foods available, as well as a wide range of general merchandise such as household items and clothing designed to appeal to more sophisticated tastes.

To the high-quality, service-oriented image of these stores, Tesco introduced its own private-label product lines, developed through an extensive research-and-development program. Tesco also restructured and computerized its distribution system, opening its own centralized warehouses for storing inventory which could then be supplied to its stores as needed, instead of having to rely on manufacturers' delivery schedules.

In 1979, in an attempt to increase its overall sales volume through larger stores, Tesco acquired 17 outlets affiliated with Cartiers Superfoods. This acquisition and another involving Ireland's Three Guys store chain, together with lower sales in nonfood merchandise than the company had expected, drained Tesco's profits the following year.

Battling for Market Share in the 1980s

By late 1981, food sales also appeared to be settling into another slump, placing additional pressure on Tesco's bottom line. In an effort to rekindle activity, MacLaurin initiated Checkout '82, cutting prices between three and 26 percent on approximately 1,500 food items. Like the strategy employed in 1977--but operating in an environment of smaller net profit margins--Checkout '82 touched off renewed price wars between Tesco and J. Sainsbury, in which each chain devoted all of its energies to outdoing the other to win customer loyalty.

In the midst of this ongoing battle, Tesco also established its Victor Value chain of discount stores. Growing over the next four years to a total of 45 outlets, the stores were sold to the Bejam Group plc in 1986, the same year in which the Three Guys chain, renamed Tesco Stores Ireland Ltd., was sold to H. Williams and Company, Ltd., a Dublin-based supermarket chain. This divestiture resulted primarily from the company's inability to operate effectively in Ireland from its home base in England.

In 1983, the company changed its name to Tesco plc. The following year, it joined forces with Marks & Spencer, the upscale British variety store, to develop shopping centers in areas outside the country's major cities. Their first venture, which became a model for subsequent centers, was established at Brookfield Centre, near Cheshunt, and placed a 65,000-square-foot Tesco superstore next to a 69,000-square-foot Marks & Spencer department store. Supported by 42 computerized checkout counters and 900 employees, the Tesco store offered a variety of food and nonfood departments, in addition to services ranging from a bank to a gas station to baby-care facilities to a consumer advisory kitchen staffed by home economists. The Marks & Spencer store featured mostly nonfood merchandise, though it devoted a small amount of space to the popular specialty food items it marketed under its own St. Michael label.

In 1985, Ian MacLaurin became chairman of Tesco, the same year that Tesco opened its 100th superstore in the United Kingdom. The construction of this outlet, located in Brent Park, Neasden, was a source of controversy between the company and the local governing council from the date Tesco first acquired the 43-acre site in 1978. The council made a number of objections to the proposed development, maintaining that the store did not fit the planning needs of the area and did not make adequate allowances for future warehousing requirements. The council's greatest concern was the threat the Tesco store would pose to existing shopping centers and local merchants. Once Tesco's store finally opened for business it became London's largest food store.

Also in 1985, Tesco launched a major capital spending program for aggressive store and warehouse expansion and for more efficient technology in existing stores, both at the checkout counters and behind the scenes. Tesco's investment in the development of a sophisticated distribution system, together with other facility improvements, enabled the company to incorporate its 1987 acquisition of the 40-store Hillards plc chain easily. This expansion also gave Tesco increased visibility in Yorkshire. In 1988 and 1989, the company spent £500 million to build 29 new stores. In the late 1980s, Tesco also introduced a composite six-warehouse distribution system to serve its stores, resulting in increased efficiency and improved service.

Expansion Outside the United Kingdom in the 1990s

By the beginning of the 1990s, Tesco had 371 stores in England, Scotland, and Wales--150 of which were superstores--and the company had become one of the United Kingdom's top three food retailers. The early 1990s saw the culmination of Tesco's fight for market share fueled in part by a two-year £1 billion development program launched in 1990 which added about 60 new stores and more than 2.3 billion square feet of store space. By 1991, Tesco had become the largest independent gasoline retailer in Great Britain. Four years later, the company reached the number one spot among food retailers in terms of market share. This achievement was due in part to the 1992 introduction of the Tesco Metro format, which debuted at Covent Garden, London. The Metro stores were smaller outlets--10,000 square feet or so--designed for urban areas and offering a few thousand product lines tailored specifically for the local market. Whereas Tesco had typically concentrated its stores in suburbia, the Tesco Metro stores were slated for city neighborhoods and were intended to compete directly with Marks & Spencer's successful urban food-only stores. By 1997, Tesco had opened 40 Tesco Metro units.

Perhaps more important for Tesco in the long term, however, was the company's aggressive 1990s push outside of Great Britain. In 1993 Tesco paid £175 million ($282 million) to purchase Catteau S.A., a 92-store grocery chain in northern France. This first foray onto continental Europe proved ill-founded, however, as Catteau struggled to compete against discounters and larger chains such as Promodes and Carrefour. Lacking the critical mass needed to compete successfully, Tesco decided to exit from France four years after it had entered the country, selling Catteau to Promodes in December 1997 for £250 million ($416.9 million).

Other Tesco expansion moves in the 1990s were more successful. In August 1994, the company acquired William Low, gaining 57 stores in Scotland and northern England for £247 million. Also in 1994, Tesco moved into the burgeoning central European market for the first time through the £15 million purchase of a 51 percent stake in Global, a supermarket chain with 43 stores in northwest Hungary. The following year, Tesco acquired the 31-store Savia chain in Poland for £8 million. In 1996, the company spent £79 million for 13 Kmart stores in the Czech Republic and Slovakia, which it soon converted to the Tesco name. Initially, Tesco's central European operations suffered operating losses in large part because of hefty development costs, but the company announced in early 1998 that it aimed to be a major food retailer in the region, that it would spend £350 million through the year 2000 to expand its base, and that it expected to be making a profit there by the turn of the century. In 1997, Tesco acquired the Irish food retailing businesses of Associated British Food plc for £630 million ($1 billion), thereby gaining leading market share positions in both the Republic of Ireland (through 75 stores) and Northern Ireland (through 34 stores).

Meanwhile, back in Britain, Tesco was experimenting with additional new formats and introducing innovative new services. The year 1994 saw the opening of the first two Tesco Express gasoline stations, both located in London. The Express format was a combination filling station and convenience store; by late 1997, 15 of them had opened. In 1997, Tesco opened the first Tesco Extra unit in Pitsea, Essex. This store covered 102,000 square feet, with one-quarter of the sales area consisting of expanded nonfood departments. It soon became the company's number one store in terms of sales.

In February 1995, Tesco became the first British retailer with a loyalty card when it introduced the Tesco Clubcard. In 1997, the company created a new unit called Tesco Personal Finance in order to provide its customers with a wide array of financial services, including a Tesco Visa Card, a Tesco savings account, in-store bank branches, Tesco Travel Money and Insurance, and Clubcard Plus, a combination loyalty card and savings account.

The year 1997 also marked the end of an era for Tesco as MacLaurin retired, with John Gardiner taking over as chairman; Gardiner had been appointed deputy chairman of Tesco in 1993 and also served as chairman of Larid Group plc. That same year, Terry Leahy was appointed chief executive. Leahy, who joined Tesco in 1979, had played a key role in Tesco's rise to the top of U.K. food retailing as the company's first marketing director. With a new management team in place, Tesco aimed to build upon its multiformat empire in the United Kingdom, to continue to develop innovative products and services (particularly financial services), to turn its central European operations into profitable ones, and to seek other overseas expansion opportunities, such as in the emerging markets of Asia.

Tesco in the 21st Century

Leahy emerged as the prominent figure guiding Tesco at the turn of the century. In 1997, the year Leahy was named chief executive officer, Tesco developed a four-pronged growth strategy, one that was ambitious in its design. In the coming years, the company directed its expansion efforts on its core U.K. business, retailing services, international operations, and nonfood business. The nonfood component of the company's growth strategy presented the most daunting challenge to Leahy because the company was essentially starting from scratch. Further, as Leahy's plans evolved, Tesco aimed to make its nonfood business as strong as its food business, which, considering the massive might of its food business, called for an enormous amount of growth. Leahy, during his first years in charge, did not disappoint, as Tesco recorded remarkable success on all four of its expansion fronts.

In 2000, Tesco launched its e-commerce business, Tesco .com, one of several new business developments that propelled the company's financial growth during the early years of the 21st century. The company's grocery home-shopping service quickly developed into the largest of its kind in the world. While its retailing services segment gathered steam, Tesco turned to developing its nonfood business. The company began stocking electronic products, toys, sports equipment, cookware, and home furnishings in its stores. In September 2002, the company added the Cherokee clothing brand to its U.K. stores, giving a substantial boost to the company's non-food business. On the international front, Tesco entered Thailand in 1998, South Korea in 1999, Taiwan in 2000, Malaysia in 2002, and China in 2004. The company's existing operations abroad were bolstered by several acquisitions, including the 2002 purchase of HIT, a 13-store chain located in Poland, the 2003 purchase of Kipa, a four-store chain in Turkey, and the 2003 acquisition of the C Two-Network, a chain of 78 food stores in Japan.

While great strides were being achieved in retailing services, international operations, and nonfood business, Leahy did not forget the heart of the company--its U.K. business. The company's market share in Britain increased steadily and impressively during Leahy's first decade in control. Tesco outperformed all its rivals, increasing its share of the market from 15.4 percent in 1998 to 28 percent in 2004. Highlights of the company's progress in its core business area included its rise to rank as the leading organics retailer in the U.K. in 2001 and the impressive strength of its brands, Value, Finest, and Tesco. Perhaps the most notable achievement in the company's core business area was its January 2003 acquisition of the convenience store chain T&S Stores plc, which owned 870 stores. Leahy planned to convert 450 of the units into Tesco Express stores by 2007.

As Tesco plotted further expansion in its four target areas, the company held considerably sway both in Britain and abroad. Leahy's achievements were applauded by many industry observers, who were hard pressed to find any weakness throughout the company's sprawling operations. Tesco stood as a genuine retail giant, one whose stature only promised to grow more intimidating to competitors as the decade progressed. In 2004, when one out every eight pounds spent in Britain went into Tesco's coffers, the company's expansion program represented more than half of all the new supermarket space planned for the United Kingdom.

Principal Subsidiaries: Tesco Capital Ltd.; Tesco Insurance Ltd.; Tesco Property Holdings Ltd.; Tesco Stores Hong Kong Ltd.; Tesco Stores Limited; Global TH (Hungary); Savia S.A. (Poland); Tesco.com; Tesco Personal Finance; GroceryWorks Holdings, Inc (35%).

Principal Competitors: ASDA Group Limited; Dunnes Stores; J Sainsbury plc.


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