TESCO'S VIRTUAL STORE: FROM SOUTH KOREA TO THE UNITED KINGDOM
W14148
TESCO'S VIRTUAL STORE: FROM SOUTH KOREA TO THE UNITED KINGDOM 1
Alina Nastasoiu wrote this case under the supervision of Professor Mark Vandenbosch solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation
Version: 2014-05-14
By September 2011, the buzz around the successful launch of Tesco’s virtual store in South Korea had reached Tesco’s London office, especially Bill Lumbergh, a newly hired executive in the marketing department. As he settled in at the new job, Lumbergh’s first assignment was to get familiarized with the way the virtual store operated in South Korea and assess whether a similar business model would be successful in the United Kingdom. He had one week to gather the necessary data and come up with a recommendation that he would present to the corporate marketing team. TESCO PLC
Founded in 1919 in London’s East End as a group of market stalls, Tesco got its name only in 1924 after the owner, Jack Cohen, started selling his first own-brand product – tea, which he bought from T.E. Stockwell. 2 The name reflects the initials of the tea supplier and the first two letters in Cohen’s name. The expansion continued and, in 1929, Tesco opened its first store in Burnt Oak, Edgeware, United Kingdom. In 1956, it opened its first self-service supermarket in Maldon. 3 The term “superstore” was first used when Tesco opened its 40,000 sq. ft. store in Crawley, West Sussex in 1968. 4 In the 1990s, Tesco became a significant player in U.K. retailing, growing its share continuously from 2 per cent in 1993 to 5.3 per cent in 1994 and 7 per cent in 1995, when it overtook Sainsbury as a market leader. 5 By October 2010, the company had 2,545 stores in various formats across the country. Exhibit 1 provides a breakdown of the number of stores by format type and a description of the formats. 6
1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Tesco plc or any of its employees. 2 www.tescoplc.com/index.asp?pageid=11#ref_about-tesco/our-history, accessed April 11, 2014 3 MarketLine – Company Profile TESCO PLC. 4 www.tescoplc.com/index.asp?pageid=11#ref_about-tesco/our-history, accessed April 11, 2014 5 www.marketingweek.co.uk/tescos-sales-overtake-sainsburys-for-first-time/2041878.article, accessed April 11, 2014 6 http://gain.fas.usda.gov/Recent%20GAIN%20Publications/UK%20Supermarket%20Chain%20Profiles_London_United %20Kingdom_2-2-2011.pdf, accessed April 11, 2014
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Between 2001 and 2011, Tesco doubled the sales and profit in the United Kingdom, consolidating its leadership with £44.6 billion (US$71.9 billion) in sales and £2.5 billion (US$4 billion) in trading profit. The 5.5 per cent increase in sales from 2010 represented a solid performance in the context of high oil prices, inflation and a VAT increase. 7 Tesco went international in 1995, the first external market being Hungary. By 2010, it had entered five other countries in Europe (Republic of Ireland, Poland, Czech Republic, Slovakia and Turkey), six countries in Asia (India, South Korea, Thailand, China, Malaysia and Japan), as well as the United States. 8 By early 2011, Tesco had grown to be the world’s third largest retailer after Wal-Mart and Carrefour. 9 Besides geographic expansion, over time Tesco also expanded its range of products from groceries to clothes, appliances and personal finance. In 2004, it entered the broadband market. 10 Exhibit 2 presents key results from the company’s income statement, balance sheet and a geographic breakdown of the business. TESCO AND ONLINE RETAILING IN THE UNITED KINGDOM
In 1982, Tesco embraced technology in its operations by introducing computer checkouts at the stores. Only two years later, in 1984, the company completed the world’s first ever online shopping transaction: the customer was Jane Snowball from Gateshead, United Kingdom and the effect lived up to her name. To place her order, Snowball used a modified TV set with remote control connected to a regular phone line. 11 In 2000, Tesco launched its online grocery retailing through Tesco.com. Over a decade, this part of the business has grown strong, with sales of £2.1 billion (US$3.4 billion) and 20,000 employees, being the third most visited retail website in the United Kingdom. 12 Although most of the online orders are handled by the regular stores, by 2010, the company already had three “dark stores” 13 around London; i.e., stores meant to fulfill exclusively the weekly average of 470,000 orders received online in the United Kingdom through Tesco.com. By the end of 2009, the site already had 3.4 million users and the company expected this number to grow. Also, by the end of 2009, the firm already had 2,000 vans to deliver the orders received through Tesco.com. According to the company’s site, 14 the grocery delivery service covers most of U.K. residential areas, with different delivery time options at different rates. Exhibit 3 shows the main online retailers in the U.K. market, together with the breakdown of their share by socio-demographic group, as calculated by Rafiq et al. 2006, using survey data. The sample is limited to respondents who used the Internet for grocery shopping at least once and the response rate is 26 per cent. One of Tesco’s main competitors in online grocery retailing, Ocado had been launched in 2000 as an exclusive online grocery retailer and it worked in partnership with the Waitrose supermarket. In 2009, it 7
www.tescoplc.com/media/417/tesco_annual_report_2011.pdf, accessed April 11, 2014 www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf, accessed April 11, 2014 9 www.reuters.com/article/2011/02/17/tesco-igd-idUSLDE71F1LR20110217, accessed April 11 2014 10 www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html, accessed April 11, 2014 11 www.zdnet.com/uk/first-online-home-shopping-1984-7000014128/ - accessed April 11th 2014 12 www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf - accessed April 11th 2014 13 www.telegraph.co.uk/finance/newsbysector/epic/tsco/6743329/Tesco-to-open-customer-free-dark-stores.html, accessed April 11, 2014 14 www.tesco.com/groceries/help/default.aspx?name=myDelivery&rel=help, accessed April 11, 2014 8
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launched an iPhone app called “Ocado on the Go.” Once the users downloaded the catalogue of 18,000 products, they could add items on their shopping list even when offline. 15 By 2011, the app had become available across 20 different platforms and Ocado reported that it was a success, accounting for 12 per cent of its business and increasing the company’s sales by 600 per cent, up to £66 million (US$106.3 million), with 100,000 registered users and 4,000 daily orders. 16 THE SOUTH KOREAN VIRTUAL STORES
In 1999, Tesco entered the South Korean market under the Home Plus brand, becoming the second largest South Korean retailer. In fact, according to Tom Brown, site research director at Homeplus, it is Tesco’s most profitable overseas business. 17 This success is partly attributed to the creative idea of installing virtual stores in Seoul’s metro stations. Implemented in 2011, these virtual stores represented life-sized Home Plus shelf pictures that included a QR code for each product displayed on the shelf. Consumers could use their smartphones to scan the codes and add the desired products to their carts. This allowed time-constrained South Koreans to do their shopping while waiting for the trains. Should the train arrive before the consumer had the chance to finish shopping, the process could be continued using the browsing capabilities of the app. Exhibit 4 offers a graphic depiction of the virtual store business model. The Home Plus virtual store initiative resulted in a 76 per cent increase in the number of registered members and an online sales increase of 130 per cent over three months, making Home Plus the largest online retailer in groceries and helping it reduce the gap to its main competitor, E-Mart. 18
VIRTUAL STORES IN THE UNITED KINGDOM
The main question that Lumbergh had to answer was whether Tesco U.K. should implement the South Korean model and open virtual stores for the U.K. market. If so, he wondered how the model could be improved upon and successfully adapted to the U.K. environment. In trying to answer the first question, Lumbergh gathered some data on the similarities and differences between London and Seoul (see Exhibit 5), as well as data on the smartphone user penetration in the United Kingdom and in South Korea (see Exhibit 6). In answering the second question, Lumbergh had to consider the role of the virtual store: should it be used as an advertising and promotion tool for the entire chain or as a tool for increasing Tesco’s share in (online) grocery retailing? Should it try to persuade the current loyal customers to switch from traditional shopping to using the virtual store or should it try to attract people who were being served by the competition (either online or in the traditional stores)? The recent Mintel report on online grocery retailing in the United Kingdom promised to offer some valuable insights, so Lumbergh read it carefully and highlighted a few pieces of information that he thought would help the company make an informed decision regarding the virtual store’s role. Exhibit 7 presents a few key points that Lumbergh extracted from the Mintel report.
15
http://econsultancy.com/ca/blog/4195-ocado-launches-iphone-shopping-app, accessed April 11, 2014 www.freshminds.net/2011/06/ocado-on-the-go-mobile-app-increases-sales-by-600/, accessed April 11, 2014 17 www.koreabusinesscentral.com/forum/topics/korea-business-central-exclusive-interview-tom-brown-homeplus-tes, accessed November 12, 2013 18 www.telegraph.co.uk/technology/mobile-phones/8601147/Tesco-builds-virtual-shops-for-Korean-commuters.html, accessed April 11, 2014 16
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An important issue to consider was where the virtual store(s) should be located. The London underground, one of the largest systems in the world, was an obvious first choice. With over 1.2 billion annual passengers, 19 it certainly generated sufficient traffic. However, an offsetting concern was that the system was the world’s oldest and some stations certainly showed their age. Complicating things with the underground was the accessibility to Wi-Fi signals. In April 2011, it was confirmed that plans to have a mobile network on the London underground in time for the 2012 Olympic Games were temporarily shelved due to technical complexities. 20 However, the good news was that the mobile operators (O2, Vodafone, EE and Three) together with the network equipment supplier, Huawei, continued to work on this plan of full mobile coverage in the underground as a long-term goal. The other good news was that the current efforts were being directed towards installing Wi-Fi at 120 stations in time for the 2012 Olympics. The Wi-Fi access on the platforms would be free during the Games but, after that period, only Virgin and broadband subscribers would be able to access it as part of their plans. 21 Lumbergh wondered whether he should consider other locations, like train stations or airports, for virtual stores. Train stations were well used across the United Kingdom with 1.3 billion journeys in the year ending March 2011. 22 The National Travel Survey conducted in 2010 showed that 84 per cent of the rail trips were on weekdays; out of these, 51 per cent were for commuting, 8 per cent were for business and 20 per cent were for leisure. During weekends, 61 per cent of the rail trips were for leisure, 18 per cent were for shopping and 12 per cent were for commuting or business. 23 In 2009/10, 59 per cent of all the rail journeys in the United Kingdom started or finished in London, 24 and 8 out of the 10 stations with the highest traffic were located in London as well. Most of these major stations had a large passenger hall that could serve as the location for the virtual store. However, Lumbergh wondered whether it would be better to set up the virtual shopping billboards on the platforms, in the retail areas or on the concourses. He also spent time considering the idea of Tesco introducing the virtual store concept to airports. London was served by five airports that constituted around 60 per cent of the traffic in the United Kingdom (134 million passengers out of a total of 220 million). 25 If Tesco decided to implement virtual stores in airports, Lumbergh had to make a recommendation as to where in the airport the virtual store should be located. He even wondered whether the virtual stores should be located in other European airports that had numerous flights to and from London. Finally, before he pulled together his recommendations, Lumbergh had to consider the assortment of products that would be offered in the virtual store. Should they focus on basics such as milk, bread and eggs, or should they skew their offerings more towards convenience foods that require minimal preparation? Alternatively, they could try to maximize the access to the thousands of products that Tesco carries from groceries to furniture, toys and cosmetics. Instinctively, he knew that his choices here depended on the role Tesco envisioned for the stores and the locations that were selected. With this in mind, he began to prepare his report to the marketing team.
19
www.tfl.gov.uk/corporate/modesoftransport/londonunderground/1608.aspx, accessed April 11, 2014 www.theguardian.com/politics/2011/apr/01/mobile-network-london-underground-shelved, accessed April 11, 2014 21 www.ft.com/intl/cms/s/0/a4687b82-6df4-11e1-b98d-00144feab49a.html#axzz2nmiT4400, accessed December 18, 2013 22 www.rail-reg.gov.uk/server/show/nav.1529 (Table 3-1), accessed April 11, 2014 23 www.gov.uk/government/uploads/system/uploads/attachment_data/file/73093/rail-trends-factsheet-2010-11.pdf, accessed April 11, 2014 24 www.gov.uk/government/uploads/system/uploads/attachment_data/file/73093/rail-trends-factsheet-2010-11.pdf, accessed April 11, 2014 25 www.caa.co.uk/docs/80/airport_data/2012Annual/Table_09_Terminal_and_Transit_Pax_2012.pdf, accessed April 11, 2014 20
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EXHIBIT 1: TESCO STORES BY TYPE
Type of Store
Extra
Superstore
Metro
Express
Home Plus Total Tesco One-Stop Total U.K.
Description*
widest range of food and non-food lines, from electrical equipment to bedding and cookware, clothing, health and beauty and seasonal items such as garden furniture large range of products; non-food ranges such as DVDs and books; can also offer other services such as cafes, home shopping and petrol filling stations bring the convenience of Tesco to town and city centre locations; cater for thousands of busy customers each week and offer a tailored range of mainly food products, including ready-meals and sandwiches offer customers great value, quality and fresh food close to where they live and work; sell a range of products including fresh produce, wines and spirits, and they have an in-store bakery dedicated to non-food, including clothing smaller than the express stores
Number** (as of Oct 2010) 191
% Selling Area (Tesco)*** 42
460
42
185
8
1183
6
13 1,941 513 2,454
2
Sources: *http://stores.tesco-careers.com/, accessed April 11, 2014; **http://gain.fas.usda.gov/Recent%20GAIN%20Publications/uk%20Supermarket%20Chain%20Profiles_London_United%20 Kingdom_2-2-2011.pdf, accessed April 11, 2014; ***www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf, accessed April 11, 2014;
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EXHIBIT 2: KEY FINANCIAL RESULTS
A) Income statement, key results (year ending Feb 26, 2011) 2011
2010
98,184
91,705
Gross profit
8,154
7,424
Operating profit
6,141
5,571
Profit before tax
5,696
5,118
Profit for the year
4,304
3,764
Revenue (sales excluding VAT)
All numbers are US$ millions (1£ = 1.6114 US$ on February 26, 2011)
B) Balance sheet, key figures (year ending Feb 26, 2011) 2011
2010
Non-current assets
56,942
55,203
Current assets
19,126
18,958
Current liabilities
(28,572)
(25,807)
Non-current liabilities
(20,710)
(24,698)
26,786
23,657
Total equity
All numbers are US$ millions (1£ = 1.6114 US$ on February 26, 2011)
C) Geographic breakdown, key figures U.K.
U.S.
Rest of Europe
Asia
Tesco Bank
Total
Revenue*(million)
65,690
798
14,812
16,562
1,481
99,343
Trading profit (loss) (million)
4,037
(292)
869
833
425
5,872
Number of stores
2,715
164
1,082
1,419
1,274
6,654
293,676
4,134
89,559
104,071
491,440
36.7
1.7
30.2
35
104
35.40%
1.60%
29.20%
33.80%
100%
Employees selling space sq ft (millions) selling space % of group *at actual exchange rates
Source: Annual Report and Financial Statements 2011, www.tescoplc.com/media/417/tesco_annual_report_2011_final.pdf, accessed April 11, 2014
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EXHIBIT 3: ONLINE RETAILERS’ PENETRATION BY MOSAIC GROUP (RAFIQ ET AL. (2006))
Mosaic Group
Description*
A (Symbols of Success)
senior management positions; successful enterprises; busy and complex family lives; mostly white British; concentrated in London and SE England; mostly young couples; prospect of future career advancement; place a high value on material possessions found in areas of rapidly expanding employment; intermediate level, white-collar occupations, close to retirement; value independence and self-reliance; much of their personal equity is locked up in their property; manual jobs; strong support networks; typically in former coalfield or steel regions; culture of economy and thrift; young, well-educated and open to new ideas; cosmopolitan, culturally diverse; liberal; in further education or moving into full-time employment; typically in inner London; menial, low-paid jobs; rely on the council for their accommodation and on state benefits to fund bare essentials; mostly in west central Scotland and inner London; passive lives; low-rise estates far from the centre of the cities; rely on buses for mobility and on television for entertainment; management on a weekly basis; practical and enterprising rather than welleducated; small and medium-sized towns in the more prosperous regions; value selfreliance, persistence and responsibility at work; most rely entirely on state benefits for their income; concentrated in Scotland and NE England; retired and in reasonably good health; financially independent; downsizing is likely to have left them with a significant amount of capital; traditional views; like to purchase face-to-face from people they trust; live deep in the countryside in small communities; mixed income levels; attached to the local community; low disposable incomes but high value, illiquid assets;
B (Happy Families)
C (Suburban Comfort)
D (Ties of Community) E (Urban Intelligence)
F Welfare Borderline)
G (Municipal Dependency)
H (Blue Collar Enterprise)
I (Twilight Subsistence) J (Grey Perspectives)
K (Rural Isolation)
Total
Tesco N %
Total
55
49
112
28
83
62
134
40
26
90
59
153
12
21
16
86
68
127
9
12
22
30
29
40
73
10
6
20
6
20
16
50
31
0
0
10
27
2
5
25
68
37
3
4
8
11
9
13
50
72
70
1
6
4
24
2
12
10
58
17
3
5
5
7
11
16
48
72
67
4
9
0
0
4
9
38
82
46
83
10
91
10
163
19
530
61
867
Ocado N %
Asda N %
Sainsbury N %
27
24
8
7
22
20
16
12
11
8
24
8
5
15
10
5
4
15
13
18
3
Source: * www.experian.co.uk/assets/business-strategies/brochures/Mosaic_UK_2003_brochure%5B1%5D.pdf, accessed April 11, 2014
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EXHIBIT 4: THE VIRTUAL STORE – GRAPHIC DESCRIPTION OF THE BUSINESS MODEL
The virtual store is located in a high-traffic place
Consumers pick the desired products by scanning each code with their smart phones. Payment is done also through the smartphone at the moment of ordering.
All the product have a QR code clearly displayed
All the ordered products are delivered at the customer’s address.
Source: Case writers.
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EXHIBIT 5: COMPARISON BETWEEN LONDON AND SEOUL Indicator Cost of monthly public transport ticket Average salary
London $178 $3,760 565 16 8.174 5,206 1.4 % 43 36.4 106.6 5.79 #38 50.84 % Yes
GDP (US$ billion) International corporate headquarters Inhabitants (million) Population density (people/km²) Population Growth Number of universities Average age Rainy days Global Cities Index* Mercer Quality of Living Survey** Facebook users Shared bike system
Seoul $42 $3,850 233 11 9.794 16,000 0.08 % 37 39 108.8 3.41 #80 19.4 % No
Source: http://versus.com/en/seoul-vs-london, accessed November 12, 2013
EXHIBIT 6: SMARTPHONE USER PENETRATION
United Kingdom South Korea
2010 20%
2011 30%
2012 F 36.8%
2013 F 45.5%
2014 F 50%
2015 F 66%
18%
45%
60%
73%
81%
83%
Source: Emarketer, www.emarketer.com/Article/Three-of-Four-U.K.-Mobile-Users-Own-Smartphones-by-2016/1009614, accessed November 12, 2013
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EXHIBIT 7: MINTEL REPORT – ONLINE GROCERY RETAILING, U.K.; SEPTEMBER 2011 A. Online grocery sales as a proportion of the overall grocery sector, 2007-2011
B. Consumer use of the online channel for grocery shopping, July 2011
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EXHIBIT 7: CONTINUED C. Proportion of total monthly grocery budget spent online, July 2011
D. Consumer use of the online channel for grocery shopping, by age, gender and presence of own children in household, July 2011
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EXHIBIT 7: CONTINUED E. “Thinking about shopping for groceries online, do you agree or disagree with the following statements?”
F. If I have to top up on my shopping at the supermarket, I might as well buy everything there.
Source: M. Rafiq and H. Fulford, “Loyalty transfer from offline to online stores in the U.K. grocery industry,” International Journal of Retail & Distribution Management, 2006, 33(6), pp. 444-460.
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TESCO'S VIRTUAL STORE: FROM SOUTH KOREA TO THE UNITED KINGDOM 1
Alina Nastasoiu wrote this case under the supervision of Professor Mark Vandenbosch solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation
Version: 2014-05-14
By September 2011, the buzz around the successful launch of Tesco’s virtual store in South Korea had reached Tesco’s London office, especially Bill Lumbergh, a newly hired executive in the marketing department. As he settled in at the new job, Lumbergh’s first assignment was to get familiarized with the way the virtual store operated in South Korea and assess whether a similar business model would be successful in the United Kingdom. He had one week to gather the necessary data and come up with a recommendation that he would present to the corporate marketing team. TESCO PLC
Founded in 1919 in London’s East End as a group of market stalls, Tesco got its name only in 1924 after the owner, Jack Cohen, started selling his first own-brand product – tea, which he bought from T.E. Stockwell. 2 The name reflects the initials of the tea supplier and the first two letters in Cohen’s name. The expansion continued and, in 1929, Tesco opened its first store in Burnt Oak, Edgeware, United Kingdom. In 1956, it opened its first self-service supermarket in Maldon. 3 The term “superstore” was first used when Tesco opened its 40,000 sq. ft. store in Crawley, West Sussex in 1968. 4 In the 1990s, Tesco became a significant player in U.K. retailing, growing its share continuously from 2 per cent in 1993 to 5.3 per cent in 1994 and 7 per cent in 1995, when it overtook Sainsbury as a market leader. 5 By October 2010, the company had 2,545 stores in various formats across the country. Exhibit 1 provides a breakdown of the number of stores by format type and a description of the formats. 6
1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Tesco plc or any of its employees. 2 www.tescoplc.com/index.asp?pageid=11#ref_about-tesco/our-history, accessed April 11, 2014 3 MarketLine – Company Profile TESCO PLC. 4 www.tescoplc.com/index.asp?pageid=11#ref_about-tesco/our-history, accessed April 11, 2014 5 www.marketingweek.co.uk/tescos-sales-overtake-sainsburys-for-first-time/2041878.article, accessed April 11, 2014 6 http://gain.fas.usda.gov/Recent%20GAIN%20Publications/UK%20Supermarket%20Chain%20Profiles_London_United %20Kingdom_2-2-2011.pdf, accessed April 11, 2014
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Between 2001 and 2011, Tesco doubled the sales and profit in the United Kingdom, consolidating its leadership with £44.6 billion (US$71.9 billion) in sales and £2.5 billion (US$4 billion) in trading profit. The 5.5 per cent increase in sales from 2010 represented a solid performance in the context of high oil prices, inflation and a VAT increase. 7 Tesco went international in 1995, the first external market being Hungary. By 2010, it had entered five other countries in Europe (Republic of Ireland, Poland, Czech Republic, Slovakia and Turkey), six countries in Asia (India, South Korea, Thailand, China, Malaysia and Japan), as well as the United States. 8 By early 2011, Tesco had grown to be the world’s third largest retailer after Wal-Mart and Carrefour. 9 Besides geographic expansion, over time Tesco also expanded its range of products from groceries to clothes, appliances and personal finance. In 2004, it entered the broadband market. 10 Exhibit 2 presents key results from the company’s income statement, balance sheet and a geographic breakdown of the business. TESCO AND ONLINE RETAILING IN THE UNITED KINGDOM
In 1982, Tesco embraced technology in its operations by introducing computer checkouts at the stores. Only two years later, in 1984, the company completed the world’s first ever online shopping transaction: the customer was Jane Snowball from Gateshead, United Kingdom and the effect lived up to her name. To place her order, Snowball used a modified TV set with remote control connected to a regular phone line. 11 In 2000, Tesco launched its online grocery retailing through Tesco.com. Over a decade, this part of the business has grown strong, with sales of £2.1 billion (US$3.4 billion) and 20,000 employees, being the third most visited retail website in the United Kingdom. 12 Although most of the online orders are handled by the regular stores, by 2010, the company already had three “dark stores” 13 around London; i.e., stores meant to fulfill exclusively the weekly average of 470,000 orders received online in the United Kingdom through Tesco.com. By the end of 2009, the site already had 3.4 million users and the company expected this number to grow. Also, by the end of 2009, the firm already had 2,000 vans to deliver the orders received through Tesco.com. According to the company’s site, 14 the grocery delivery service covers most of U.K. residential areas, with different delivery time options at different rates. Exhibit 3 shows the main online retailers in the U.K. market, together with the breakdown of their share by socio-demographic group, as calculated by Rafiq et al. 2006, using survey data. The sample is limited to respondents who used the Internet for grocery shopping at least once and the response rate is 26 per cent. One of Tesco’s main competitors in online grocery retailing, Ocado had been launched in 2000 as an exclusive online grocery retailer and it worked in partnership with the Waitrose supermarket. In 2009, it 7
www.tescoplc.com/media/417/tesco_annual_report_2011.pdf, accessed April 11, 2014 www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf, accessed April 11, 2014 9 www.reuters.com/article/2011/02/17/tesco-igd-idUSLDE71F1LR20110217, accessed April 11 2014 10 www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html, accessed April 11, 2014 11 www.zdnet.com/uk/first-online-home-shopping-1984-7000014128/ - accessed April 11th 2014 12 www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf - accessed April 11th 2014 13 www.telegraph.co.uk/finance/newsbysector/epic/tsco/6743329/Tesco-to-open-customer-free-dark-stores.html, accessed April 11, 2014 14 www.tesco.com/groceries/help/default.aspx?name=myDelivery&rel=help, accessed April 11, 2014 8
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launched an iPhone app called “Ocado on the Go.” Once the users downloaded the catalogue of 18,000 products, they could add items on their shopping list even when offline. 15 By 2011, the app had become available across 20 different platforms and Ocado reported that it was a success, accounting for 12 per cent of its business and increasing the company’s sales by 600 per cent, up to £66 million (US$106.3 million), with 100,000 registered users and 4,000 daily orders. 16 THE SOUTH KOREAN VIRTUAL STORES
In 1999, Tesco entered the South Korean market under the Home Plus brand, becoming the second largest South Korean retailer. In fact, according to Tom Brown, site research director at Homeplus, it is Tesco’s most profitable overseas business. 17 This success is partly attributed to the creative idea of installing virtual stores in Seoul’s metro stations. Implemented in 2011, these virtual stores represented life-sized Home Plus shelf pictures that included a QR code for each product displayed on the shelf. Consumers could use their smartphones to scan the codes and add the desired products to their carts. This allowed time-constrained South Koreans to do their shopping while waiting for the trains. Should the train arrive before the consumer had the chance to finish shopping, the process could be continued using the browsing capabilities of the app. Exhibit 4 offers a graphic depiction of the virtual store business model. The Home Plus virtual store initiative resulted in a 76 per cent increase in the number of registered members and an online sales increase of 130 per cent over three months, making Home Plus the largest online retailer in groceries and helping it reduce the gap to its main competitor, E-Mart. 18
VIRTUAL STORES IN THE UNITED KINGDOM
The main question that Lumbergh had to answer was whether Tesco U.K. should implement the South Korean model and open virtual stores for the U.K. market. If so, he wondered how the model could be improved upon and successfully adapted to the U.K. environment. In trying to answer the first question, Lumbergh gathered some data on the similarities and differences between London and Seoul (see Exhibit 5), as well as data on the smartphone user penetration in the United Kingdom and in South Korea (see Exhibit 6). In answering the second question, Lumbergh had to consider the role of the virtual store: should it be used as an advertising and promotion tool for the entire chain or as a tool for increasing Tesco’s share in (online) grocery retailing? Should it try to persuade the current loyal customers to switch from traditional shopping to using the virtual store or should it try to attract people who were being served by the competition (either online or in the traditional stores)? The recent Mintel report on online grocery retailing in the United Kingdom promised to offer some valuable insights, so Lumbergh read it carefully and highlighted a few pieces of information that he thought would help the company make an informed decision regarding the virtual store’s role. Exhibit 7 presents a few key points that Lumbergh extracted from the Mintel report.
15
http://econsultancy.com/ca/blog/4195-ocado-launches-iphone-shopping-app, accessed April 11, 2014 www.freshminds.net/2011/06/ocado-on-the-go-mobile-app-increases-sales-by-600/, accessed April 11, 2014 17 www.koreabusinesscentral.com/forum/topics/korea-business-central-exclusive-interview-tom-brown-homeplus-tes, accessed November 12, 2013 18 www.telegraph.co.uk/technology/mobile-phones/8601147/Tesco-builds-virtual-shops-for-Korean-commuters.html, accessed April 11, 2014 16
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An important issue to consider was where the virtual store(s) should be located. The London underground, one of the largest systems in the world, was an obvious first choice. With over 1.2 billion annual passengers, 19 it certainly generated sufficient traffic. However, an offsetting concern was that the system was the world’s oldest and some stations certainly showed their age. Complicating things with the underground was the accessibility to Wi-Fi signals. In April 2011, it was confirmed that plans to have a mobile network on the London underground in time for the 2012 Olympic Games were temporarily shelved due to technical complexities. 20 However, the good news was that the mobile operators (O2, Vodafone, EE and Three) together with the network equipment supplier, Huawei, continued to work on this plan of full mobile coverage in the underground as a long-term goal. The other good news was that the current efforts were being directed towards installing Wi-Fi at 120 stations in time for the 2012 Olympics. The Wi-Fi access on the platforms would be free during the Games but, after that period, only Virgin and broadband subscribers would be able to access it as part of their plans. 21 Lumbergh wondered whether he should consider other locations, like train stations or airports, for virtual stores. Train stations were well used across the United Kingdom with 1.3 billion journeys in the year ending March 2011. 22 The National Travel Survey conducted in 2010 showed that 84 per cent of the rail trips were on weekdays; out of these, 51 per cent were for commuting, 8 per cent were for business and 20 per cent were for leisure. During weekends, 61 per cent of the rail trips were for leisure, 18 per cent were for shopping and 12 per cent were for commuting or business. 23 In 2009/10, 59 per cent of all the rail journeys in the United Kingdom started or finished in London, 24 and 8 out of the 10 stations with the highest traffic were located in London as well. Most of these major stations had a large passenger hall that could serve as the location for the virtual store. However, Lumbergh wondered whether it would be better to set up the virtual shopping billboards on the platforms, in the retail areas or on the concourses. He also spent time considering the idea of Tesco introducing the virtual store concept to airports. London was served by five airports that constituted around 60 per cent of the traffic in the United Kingdom (134 million passengers out of a total of 220 million). 25 If Tesco decided to implement virtual stores in airports, Lumbergh had to make a recommendation as to where in the airport the virtual store should be located. He even wondered whether the virtual stores should be located in other European airports that had numerous flights to and from London. Finally, before he pulled together his recommendations, Lumbergh had to consider the assortment of products that would be offered in the virtual store. Should they focus on basics such as milk, bread and eggs, or should they skew their offerings more towards convenience foods that require minimal preparation? Alternatively, they could try to maximize the access to the thousands of products that Tesco carries from groceries to furniture, toys and cosmetics. Instinctively, he knew that his choices here depended on the role Tesco envisioned for the stores and the locations that were selected. With this in mind, he began to prepare his report to the marketing team.
19
www.tfl.gov.uk/corporate/modesoftransport/londonunderground/1608.aspx, accessed April 11, 2014 www.theguardian.com/politics/2011/apr/01/mobile-network-london-underground-shelved, accessed April 11, 2014 21 www.ft.com/intl/cms/s/0/a4687b82-6df4-11e1-b98d-00144feab49a.html#axzz2nmiT4400, accessed December 18, 2013 22 www.rail-reg.gov.uk/server/show/nav.1529 (Table 3-1), accessed April 11, 2014 23 www.gov.uk/government/uploads/system/uploads/attachment_data/file/73093/rail-trends-factsheet-2010-11.pdf, accessed April 11, 2014 24 www.gov.uk/government/uploads/system/uploads/attachment_data/file/73093/rail-trends-factsheet-2010-11.pdf, accessed April 11, 2014 25 www.caa.co.uk/docs/80/airport_data/2012Annual/Table_09_Terminal_and_Transit_Pax_2012.pdf, accessed April 11, 2014 20
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EXHIBIT 1: TESCO STORES BY TYPE
Type of Store
Extra
Superstore
Metro
Express
Home Plus Total Tesco One-Stop Total U.K.
Description*
widest range of food and non-food lines, from electrical equipment to bedding and cookware, clothing, health and beauty and seasonal items such as garden furniture large range of products; non-food ranges such as DVDs and books; can also offer other services such as cafes, home shopping and petrol filling stations bring the convenience of Tesco to town and city centre locations; cater for thousands of busy customers each week and offer a tailored range of mainly food products, including ready-meals and sandwiches offer customers great value, quality and fresh food close to where they live and work; sell a range of products including fresh produce, wines and spirits, and they have an in-store bakery dedicated to non-food, including clothing smaller than the express stores
Number** (as of Oct 2010) 191
% Selling Area (Tesco)*** 42
460
42
185
8
1183
6
13 1,941 513 2,454
2
Sources: *http://stores.tesco-careers.com/, accessed April 11, 2014; **http://gain.fas.usda.gov/Recent%20GAIN%20Publications/uk%20Supermarket%20Chain%20Profiles_London_United%20 Kingdom_2-2-2011.pdf, accessed April 11, 2014; ***www.tescoplc.com/files/pdf/reports/annual_report_2010.pdf, accessed April 11, 2014;
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EXHIBIT 2: KEY FINANCIAL RESULTS
A) Income statement, key results (year ending Feb 26, 2011) 2011
2010
98,184
91,705
Gross profit
8,154
7,424
Operating profit
6,141
5,571
Profit before tax
5,696
5,118
Profit for the year
4,304
3,764
Revenue (sales excluding VAT)
All numbers are US$ millions (1£ = 1.6114 US$ on February 26, 2011)
B) Balance sheet, key figures (year ending Feb 26, 2011) 2011
2010
Non-current assets
56,942
55,203
Current assets
19,126
18,958
Current liabilities
(28,572)
(25,807)
Non-current liabilities
(20,710)
(24,698)
26,786
23,657
Total equity
All numbers are US$ millions (1£ = 1.6114 US$ on February 26, 2011)
C) Geographic breakdown, key figures U.K.
U.S.
Rest of Europe
Asia
Tesco Bank
Total
Revenue*(million)
65,690
798
14,812
16,562
1,481
99,343
Trading profit (loss) (million)
4,037
(292)
869
833
425
5,872
Number of stores
2,715
164
1,082
1,419
1,274
6,654
293,676
4,134
89,559
104,071
491,440
36.7
1.7
30.2
35
104
35.40%
1.60%
29.20%
33.80%
100%
Employees selling space sq ft (millions) selling space % of group *at actual exchange rates
Source: Annual Report and Financial Statements 2011, www.tescoplc.com/media/417/tesco_annual_report_2011_final.pdf, accessed April 11, 2014
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EXHIBIT 3: ONLINE RETAILERS’ PENETRATION BY MOSAIC GROUP (RAFIQ ET AL. (2006))
Mosaic Group
Description*
A (Symbols of Success)
senior management positions; successful enterprises; busy and complex family lives; mostly white British; concentrated in London and SE England; mostly young couples; prospect of future career advancement; place a high value on material possessions found in areas of rapidly expanding employment; intermediate level, white-collar occupations, close to retirement; value independence and self-reliance; much of their personal equity is locked up in their property; manual jobs; strong support networks; typically in former coalfield or steel regions; culture of economy and thrift; young, well-educated and open to new ideas; cosmopolitan, culturally diverse; liberal; in further education or moving into full-time employment; typically in inner London; menial, low-paid jobs; rely on the council for their accommodation and on state benefits to fund bare essentials; mostly in west central Scotland and inner London; passive lives; low-rise estates far from the centre of the cities; rely on buses for mobility and on television for entertainment; management on a weekly basis; practical and enterprising rather than welleducated; small and medium-sized towns in the more prosperous regions; value selfreliance, persistence and responsibility at work; most rely entirely on state benefits for their income; concentrated in Scotland and NE England; retired and in reasonably good health; financially independent; downsizing is likely to have left them with a significant amount of capital; traditional views; like to purchase face-to-face from people they trust; live deep in the countryside in small communities; mixed income levels; attached to the local community; low disposable incomes but high value, illiquid assets;
B (Happy Families)
C (Suburban Comfort)
D (Ties of Community) E (Urban Intelligence)
F Welfare Borderline)
G (Municipal Dependency)
H (Blue Collar Enterprise)
I (Twilight Subsistence) J (Grey Perspectives)
K (Rural Isolation)
Total
Tesco N %
Total
55
49
112
28
83
62
134
40
26
90
59
153
12
21
16
86
68
127
9
12
22
30
29
40
73
10
6
20
6
20
16
50
31
0
0
10
27
2
5
25
68
37
3
4
8
11
9
13
50
72
70
1
6
4
24
2
12
10
58
17
3
5
5
7
11
16
48
72
67
4
9
0
0
4
9
38
82
46
83
10
91
10
163
19
530
61
867
Ocado N %
Asda N %
Sainsbury N %
27
24
8
7
22
20
16
12
11
8
24
8
5
15
10
5
4
15
13
18
3
Source: * www.experian.co.uk/assets/business-strategies/brochures/Mosaic_UK_2003_brochure%5B1%5D.pdf, accessed April 11, 2014
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EXHIBIT 4: THE VIRTUAL STORE – GRAPHIC DESCRIPTION OF THE BUSINESS MODEL
The virtual store is located in a high-traffic place
Consumers pick the desired products by scanning each code with their smart phones. Payment is done also through the smartphone at the moment of ordering.
All the product have a QR code clearly displayed
All the ordered products are delivered at the customer’s address.
Source: Case writers.
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EXHIBIT 5: COMPARISON BETWEEN LONDON AND SEOUL Indicator Cost of monthly public transport ticket Average salary
London $178 $3,760 565 16 8.174 5,206 1.4 % 43 36.4 106.6 5.79 #38 50.84 % Yes
GDP (US$ billion) International corporate headquarters Inhabitants (million) Population density (people/km²) Population Growth Number of universities Average age Rainy days Global Cities Index* Mercer Quality of Living Survey** Facebook users Shared bike system
Seoul $42 $3,850 233 11 9.794 16,000 0.08 % 37 39 108.8 3.41 #80 19.4 % No
Source: http://versus.com/en/seoul-vs-london, accessed November 12, 2013
EXHIBIT 6: SMARTPHONE USER PENETRATION
United Kingdom South Korea
2010 20%
2011 30%
2012 F 36.8%
2013 F 45.5%
2014 F 50%
2015 F 66%
18%
45%
60%
73%
81%
83%
Source: Emarketer, www.emarketer.com/Article/Three-of-Four-U.K.-Mobile-Users-Own-Smartphones-by-2016/1009614, accessed November 12, 2013
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EXHIBIT 7: MINTEL REPORT – ONLINE GROCERY RETAILING, U.K.; SEPTEMBER 2011 A. Online grocery sales as a proportion of the overall grocery sector, 2007-2011
B. Consumer use of the online channel for grocery shopping, July 2011
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EXHIBIT 7: CONTINUED C. Proportion of total monthly grocery budget spent online, July 2011
D. Consumer use of the online channel for grocery shopping, by age, gender and presence of own children in household, July 2011
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EXHIBIT 7: CONTINUED E. “Thinking about shopping for groceries online, do you agree or disagree with the following statements?”
F. If I have to top up on my shopping at the supermarket, I might as well buy everything there.
Source: M. Rafiq and H. Fulford, “Loyalty transfer from offline to online stores in the U.K. grocery industry,” International Journal of Retail & Distribution Management, 2006, 33(6), pp. 444-460.
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