Tesco.

com uses the Internet to support its diversification strategy

Context
Tesco, well known as Britains leading food retail group with a presence also in Europe and Asia has also been a pioneer online. By September 2005 online sales in the first half of the year were 401 million, a 31% yearon-year increase, and profit increased by 37% to 21 million. Tesco.com now receives 170,000 orders each week. Soon it should reach an annual turnover of 1 billion online and is generally recognised as the worlds largest online grocer.

Promotion of service
As with other online retailers, Tesco.com relies on instore advertising and marketing to the supermarkets Clubcard loyalty schemes customer base to persuade customers to shop online. New Media Age (2005) quotes Nigel Dodd, marketing director at Tesco.com, as saying: These are invaluable sources as we have such a strong customer base. However, for non-food goods the supermarket does advertise online using keyword targeted ads. For existing customers, e-mail marketing and direct mail marketing to provide special offers and promotions to customers is important. According to Humby and Hunt (2003), e-retailer Tesco.com uses what he describes as a commitment based segmentation or loyalty ladder which is based on recency of purchase, frequency of purchase and value which is used to identify six lifecycle categories which are then further divided to target communications: Logged-on Cautionary Developing Established Dedicated Logged-off (the aim here is to win back). Tesco then uses automated event-triggered messaging which can be created to encourage continued purchase. For example, Tesco.com has a touch strategy which includes a sequence of follow-up communications triggered after different events in the customer lifecycle. In the example given below, communications after event 1 are intended to achieve the objective of converting a web site visitor to action; communications after event 2 are intended to move the customer from a first-time purchaser to a regular purchaser and for event 3 to reactivate lapsed purchasers.

Product ranges
The Tesco.com site acts as a portal to most of Tescos products, including various non-food ranges (for example, books, DVDs and electrical items under the Extra banner), Tesco Personal Finance and the telecoms businesses, as well as services offered in partnership with specialist companies, such as dieting clubs, flights and holidays, music downloads, gas, electricity and DVD rentals. It does not currently sell clothing online but in May 2005 it introduced a clothing web site (www.clothingattesco.com), initially to showcase Tescos clothing brands and link customers to their nearest store with this range.

Competitors
Tesco currently leads the UKs other leading grocery retailers in terms of market share. This pattern is repeated online. The compilation below is from Hitwise (2005) and the figures in brackets show market share for traditional offline retail formats from the Taylor Nelson Softres Super Panel (see http://superpanel.tns-global.com): 1 Tesco Superstore, 27.28% (29% of retail trade) 2 ASDA, 13.36% 3 ASDA @t Home, 10.13% (17.1%) 4 Sainsburys, 8.42% 5 Tesco Wine Warehouse, 8.19% 6 Sainsburys to You, 5.86% (15.9%) 7 Waitrose.com, 3.42% (3.6%) 8 Ocado, 3.32% (owned by Waitrose, 3.6%) 9 Lidl, 2.49% (1.8%) 10 ALDI UK, 2.10% (2.3%) Some companies are repeated since their main site and the online shopping site are reported on separately. Asda.com now seems to be performing in a consistent manner online to its offline presence. However, Sainsburys online performance seems to be significantly lower compared to its offline performance. Some providers such as Ocado which originally just operated within the London area have a strong local performance. Notably, some of Tesco.coms competitors are absent from the Hitwise listing since their strategy has been to focus on retail formats. These are Morrisons (12.5% retail share), Somerfield (5.5%) and Co-op (5.0%).

Trigger event 1: Customer first registers on site (but does not buy)
Auto-response (AR) 1: Two days after registration email sent offering phone assistance and 5 discount off first purchase to encourage trial.

Trigger event 2: Customer first purchases online

AR1: Immediate order confirmation. AR2: Five days after purchase e-mail sent with link to online customer satisfaction survey asking about quality of service from driver and picker (e.g. item quality and substitutions). AR3: Two weeks after first purchase direct mail offering tips on how to use service and 5 discount on next purchases intended to encourage re-use of online services. AR4: Generic monthly e-newsletter with online exclusive offers encouraging cross-selling. AR5: Bi-weekly alert with personalised offers for customer. AR6: After two months 5 discount for next shop. AR7: Quarterly mailing of coupons encouraging repeat sales and cross-sales.

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Trigger event 3: Customer does not purchase for an extended period

AR1: Dormancy detected reactivation e-mail with survey of how the customer is finding the service (to identify any problems) and a 5 incentive. AR2: A further discount incentive is used in order to encourage continued usage to shop after the first shop after a break.

Tescos online product strategy

NMA (2005) ran a profile of Laura Wade-Gery, CEO of Tesco.com since January 2004, which provides an interesting insight into how the business has run. In her first year, total sales were increased 24% to 719 million. Laura is 40 years old, a keen athlete and has followed a varied career developing from a MA in History at Magdalen College, Oxford, an MBA from Insead; manager and partner in Kleinwort Benson; manager and senior consultant, Gemini Consulting; targeted marketing director (Tesco Clubcard), and group strategy director, Tesco Stores. The growth overseen by Wade-Gery has been achieved through a combination of initiatives. Product range development is one key area. In early 2005, Tesco.com fulfilled 150,000 grocery orders a week but now also offers more intangible offerings, such as ediets and music downloads. Laura has also focused on improving the customer experience online the time it takes for a new customer to complete their first order has been decreased from over an hour to 35 minutes through usability work culminating in a major site revision. To support the business as it diversifies into new areas, Wade-Gerys strategy was to make home delivery part of the DNA of Tesco according to NMA (2005). She continues: What we offer is delivery to your home of a Tesco service its an obvious extension of the home-delivered groceries concept. By May 2005, Tesco.com had 30,000 customers signed up for DVD rental, through partner Video Island (which runs the rival Screenselect service). Over the next year, her target is to treble this total, while also extending home-delivery services to the likes of bulk wine and white goods. Wade-Gery looks to achieve synergy between the range of services offered. For example, its partnership with eDiets can be promoted through the Tesco Clubcard loyalty scheme, with mailings to 10m customers a year. In July 2004, Tesco.com Limited paid 2 million for the exclusive licence to eDiets.com in the UK and Ireland under the URLs www.eDietsUK.com and www.eDiets.ie. Through promoting these services through these URLs, Tesco can use the dieting business to grow use of the Tesco.com service and in-store sales. To help keep focus on home retail-delivery, WadeGery sold womens portal iVillage (www.ivillage.co.uk) back to its US owners for an undisclosed sum in March 2004. She explained to NMA: Its a very different sort of product to the other services that were embarking on. In my mind, we stand for providing services and products that you buy, which is slightly different to the world of providing information.

The implication is that there was insufficient revenue from ad sales on iVillage and insufficient opportunities to promote Tesco.com sales. However, iVillage was a useful learning experience in that there are some parallels with iVillage, such as message boards and community advisers. Wade-Gery is also director of Tesco Mobile, the joint pay-as-you-go venture with O2 which is mainly serviced online, although promoted instore and via direct mail. Tesco also offers broadband and dial-up ISP services, but believe the market for Internet telephony (provided through Skype and Vonage, for example) is not sufficiently developed. Tesco.com has concentrated on more traditional services which have the demand, for example, Tesco Telecom fixed-line services attracted over a million customers in their first year. However, this is not to say that Tesco.com will not invest in relatively new services. In November 2004, Tesco introduced a music download service and just six months later, WadeGery estimates they have around 10% market share one of the benefits of launching relatively early. Again, there is synergy, this time with hardware sales. NMA (2005) reported that as MP3 players were unwrapped, sales went up even on Christmas Day! She says: The exciting thing about digital is where you can take it in the future. As the technology grows, well be able to turn Tesco.com into a digital download store of all sorts, rather than just music. Clearly, film [through video on demand] would be next. But it has to be based firmly on analysis of customer demand. She says: The number one thing for us is whether the product is something that customers are saying they want, has it reached a point where mass-market customers are interested? There also has to be scope for simplification. NMA (2005) notes that Tesco is built on a core premise of convenience and value and Wade-Gery believes what its already done with mobile tariffs, broadband packages and music downloads are good examples of the retailers knack for streamlining propositions. She says: Weve actually managed to get people joining broadband who have never even had a dial-up service.
Sources: Humby and Hunt (2003), NMA (2005), Hitwise (2005), Wikipedia (2005)

Question
Based on the case study and your own research on competitors, summarise the strategic approaches which have helped Tesco.com achieve success online.

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