ASSIGNMENT 1

CHAPTER 3

CASE STUDY: O line, online and back:The evolution of UK grocery market

The UK grocery market is predicted to grow by 12.5 percent through 2024, and according to the food
and grocery research organization IGD, it is expected to reach a value of £217.7 billion. The main
grocery stores operating in Great Britain are Tesco, which, as of December 2020, had a market share
of 27 percent; Sainsbury, 15.7 percent; ASDA, 14.1 percent; and Morrisons, 10.3 percent. Together,
they cover over 65 percent of the grocery market and are considered the "Big Four" in the United
Kingdom. Tesco reached its peak in 2007, when it held 31.1 per cent of the UK grocery market share.
Worldwide, the company operates around 7,000 stores across Europe and Asia.

In the United Kingdom, Tesco focused on implementing a strategy that enabled the company to o er
the lowest costs and achieve cost leadership. This drew price-sensitive customers away from its
competitors and increased its market share. Tesco adopted the following strategies to maintain this
cost leadership: (1) high utilization of assets through production of large outputs and spreading fixed
costs over large quantities, (2) minimal direct and indirect costs in the production and distribution
stages, and (3) strict control over the supply chain to ensure low costs. This strategy was viable for
Tesco; as a big company, it could take advantage of economies of scale in the market.

However, due to the popularity of discount super- markets such as Aldi and Lidl, Tesco has recently
been struggling to maintain its cost leadership. Consumer behavior has changed in the United
Kingdom due to economic recession and inflation, leading customers to shift to budget supermarkets
for their grocery purchases. Over the last several years, Tesco's market share has fallen slightly; by
contrast, Aldi and Lidl have continuously been in- creasing their market share over the last few years.
In December 2020, Aldi was the fifth largest grocery chain in the United Kingdom with a market share
of 7.7 percent.

Besides the physical supermarkets, Tesco initially operated two online platforms: Tesco.com for
grocery home deliveries and Tesco Direct for household goods and clothing. However, in May 2018,
Tesco announced Tesco Direct's closure in an unexpected move. Tesco Direct had been launched in
2006, and it had cost the company £25-£30 million. According to Charles Wilson, the then CEO of
Tesco's UK chain, closing one of the websites would help them to focus their investment in one
platform to o er better ser- vice and more products to customers. Although the closure cost 500 jobs,
it was not a huge surprise, considering that Tesco had, by its own admission, faced challenges in
making it profitable. Tesco's attempt to compete with huge online retailers such as Amazon and Argos
had failed because it had been unable to make profits after covering the costs of marketing and order
fulfillment.

Besides this setback, Tesco must also contend with the threat from discount supermarkets. By June
2019, Aldi had opened 830 stores in the United Kingdom since 1990, when its first store was
launched. Aldi reported £11.3 billion in revenue for 2018, an 11 percent increase over the previous
year. Similarly, Lidl reached a total of 760 stores by June 2019 and also plans to continue to grow over
the next five years. Customers were skeptical at the beginning, but once they saw the low-price
products, they switched their buying preferences to these discount supermarkets.
The COVID-19 crisis served as a further boost to the discount sector. According to some estimates,
customers who switched from the Big Four super- markets save over £2.2 billion annually by shopping
at Aldi. Aldi UK's most successful year was 2017, when it generated £10 billion in annual sales for the
first time.

Experts argue that the main reasons these dis- count supermarkets have been successful is ris- ing
inflation and the stagnation in wages, and the atmosphere of uncertainty brought about by the COVID-
19 crisis. The services o ered by Aldi are similar to those that the "Big Four" provide their customers,
but Aldi has the advantage of lower prices and is still considered a discounter, which is especially
attractive for customers during inflation. Surveys show that Aldi also gets very good ratings in
customer satisfaction. During the COVID-19 crisis, Aldi announced the opening of 100 new stores and
further investment in a new online ordering service. Aldi is trying out new formats of home delivery; for
example, "click-and-collect" enables shoppers to order groceries and pick them up at a nearby store.
Furthermore, a partnership with the courier firm Deliveroo allows for rapid grocery delivery service
within half an hour.

Ever since the two discount supermarkets came to the United Kingdom from Germany, they have
forced the big grocery stores to rethink their approach. Thanks to their low-price grocery strategy, Aldi
and Lidl have changed the UK supermarket industry for some time to come. Big supermarkets like
Tesco and Sainsbury already o er online grocery shopping, but they faced di iculties making a profit
from their e-commerce operations. With Aldi and Lidl's entry into this market, these challenges will
only increase.

In the beginning of 2016, Aldi opened its first on- line store for the UK market. The discount retailer
made its opening move by investing £35 million to launch an online website for selling wine, which
was followed by non-food "special buys." According to Kantar Retail analyst Bryan Roberts, this move
is a smart way of reaching customers who don't have access to an Aldi.

Lidl founded the Lidl Digital Logistics, and experts expect this supermarket to enter the grocery
delivery market too. So far, Lidl has sold wine and some non- food items online in parts of Europe, but
not groceries. Lidl's approach to entering the digital market is quite innovative: recently, they launched
a chatbot designed to help customers in their choice of wine based on what they are eating.

The public love for the discounters signifies a major threat for big supermarkets looking to keep their
market share, both on- and o line. To take the fight to Aldi and Lidl, and having seen Aldi and Lidl's
success in gaining market share, Tesco announced plans in 2018 to open a discount chain of 60
stores all over the United Kingdom, thus entering the fast- growing discount market. History has
shown that attempts by big supermarkets to launch discount brands have largely failed. Tesco was no
exception, and it has since scaled back those plans and even closed some of those stores.

With Aldi and Lidl trying to enter the e-commerce industry and Tesco trying to defeat them by entering
the discount market, the war between the big and budget supermarkets has taken some interesting
turns, especially since food shopping has undergone changes too: more people prefer to buy food on
a daily basis and more locally, and a high number of them prefer to buy their food online. A number of
European retailers have responded to this by opening smaller stores in nearby locations, launching
online stores, and testing other new models for shopping.

Tesco has been in the business of selling on the Internet for a long time now; in 1996, it became the
first supermarket to launch online shopping. There are several ways Tesco is using information
technology to its advantage. For instance, in 2011, while Tesco's domestic United Kingdom sales were
dropping, it was a huge success in South Korea, its largest market outside the United Kingdom, as a
result of its ability to adapt to local customer needs. As South Koreans are among the people with the
longest working hours worldwide, Tesco introduced "virtual stores" with its Homeplus brand in the
country. It displayed these virtual stores in subways and bus stations, where people could scan
products’, barcodes using their smartphones and purchase them online. These products were then
delivered to them right after they returned home, thus saving time and e ort for the consumers.

History has shown that the grocery industry needs to adapt to consumer demands and lifestyles
continuously. The United Kingdom and South Korea are a study in contrasts. While people in the
United Kingdom switched from domestic big supermarkets to budget supermarkets, the opposite
happened in South Korea thanks to Homeplus, which turned Tesco into the country's second largest
grocery re tailer. Customers in the United Kingdom are price- sensitive due to economic recession and
inflation, whereas customers in South Korea have embraced the technology made available to them
to suit their time-sensitive lifestyle.

E-commerce is a huge opportunity for discounters, but what will happen to the grocery sector if Aldi
and Lidl decide to o er their full range of products on- line? Perhaps more importantly, can they gain a
big- ger share of the grocery market at the expense of the Big Four in United Kingdom? Some experts
believe that this strategy is untenable. According to retail consultant Graham Soult, the discount
supermarkets' initiative of entering the online shopping market runs the same risks and problems that
other super- markets have faced. He believes that the uniqueness of these supermarkets lies in their
simplicity and low cost, which they might be putting at risk when they start to sell food and groceries
online. Simply put, the complexity of the e-commerce industry might not fit their low-cost business
model.

Sources: Statista, "Market Share of Grocery Stores in Great Britain from January 2017 to December
2020, Statista.com, January 6, 2021; Sarah Butler, "Aldi to Create 4,000 More UK Jobs as Sales Surge
in Covid Crisis," The Guardian, September 28, 2020, "Lidl Renews Estate Growth Target Despite
Disruption Caused by Pandemic," The Grocer, July 14, 2020; Jasper Jolly, "Aldi Sales Reach Record
£1bn at Christmas as It Opens More Stores," The Guardian, January 6, 2020; "Aldi Adds £1.1B in
Revenue as Profits Slip," Insidermedia.com, September 16, 2019, Zoe Wood, "Slow Growth Takes
Shine O Tesco Budget Chain Jack's a Year On," The Guardian, September 15, 2019, Jon Robinson,
"Aldi to Soon Own 1,200 UK Stores as It Opens 21 More in Bid to Cover Every Town in Country," Daily
Express, June 25, 2019; "UK Food Sales to Grow by £24bn by 2024, www.idg.com, June 20, 2019; Zoe
Wood, "Low Prices and No Frills: Can Tesco's Secret Plan Defeat Lidl and Aldi?" The Guardian,
September 15, 2018; Sarah Butler, "New Tesco Discount Chain Could Launch as Early as September,
The Guardian, July 22, 2018; Julia Kollewe and Jessica Lindsay, "Why Is Tesco Direct Closing and Is
There a Closing Down Sale?" Metro, June 8, 2018; Levi Winchester, Zoe Wood, "Tesco Shuts Its Non-
Food Website, Tesco Direct," The Guardian, May 22, 2018; Miles Brignall, "Tesco Planning Discount
Chain to Take on Aldi and Lidl," The Guardian, February 11, 2018; Josie Cox, "German Discount
Supermarket to Major Threat to Rivals such as Tesco and Sainsbury," Independent, January 4, 2018;
Simon Johnstone, "Aldi and Lidl: A Journey from Hard Discounters to Multichannel Retailers, Essential
Retail, March 14, 2017; Matthew Chapman, "Aldi Puts £35m into E-commerce as It Begins Selling
Wine Online," Campaign, January 21, 2016; "Aldi Opens Its First Online Store in the UK," E-commerce
News, January 20, 2016.
CASE STUDY QUESTIONS

3-13 Analyze the cost leadership strategy of Tesco based on Porter's Competitive Forces Model.
Why would it be a smart move to close one of its online shopping sites?

PORTER’S COMPETITIVE FIVE FORCES MODEL ANALYSIS

By utilizing Porter's Competitive Forces Model to analyze Tesco's cost leadership approach, we can
evaluate the closure of one of its online shopping sites as a wise option. Porter's model outlines five
competing factors that influence industry competition: the danger of new entrants, the threat of
alternative goods and services, the rivalry between current rivals, and the bargaining power of
suppliers and buyers. Let's look at how these forces fit with Tesco's cost leadership plan and how the
shutdown of an online retailer helps this approach work:

1. Bargaining Power of Supplier

EVALUATION - MODERATE

When a supplier has extra inventory or the store has a specific shortfall, the internet can assist
encourage suppliers to participate in bids or auctions.

• TESCO was able to promote its own brand of products by making investments in food technology
and ethical product labeling. This lessens negotiating power and holds suppliers accountable.

IT controls the supply chain and only requires suppliers to deliver a small number of intermediary
warehouses, which lowers their costs. Specialized distribution businesses operate the warehouses;
TESCO is not restricted to just one.

Tesco's cost leadership approach include securing low-priced supplies by negotiating advantageous
terms with suppliers. Tesco can optimize its cost structure by leveraging its bargaining power with
suppliers to secure better prices by combining its online operations.

2. Rivalry among existing competitors

EVALUATION - HIGH

• In the supermarket and food retail industry, there is fierce rivalry.

. Tesco's formidable competitors in the UK include several. Such competitors heavily spend on
advertisements and other marketing initiatives. Even though Tesco leads the market, there is fierce
competition from its closest rivals. Tesco's profit margins are being impacted by the price wars being
fought by Aldi and Lidl.Tesco has been able to discover appropriate ways to address the problem of
fierce competition. For example, in order to compete with Lidl and Aldi, the supermarket chain Jack's
was introduced in 2018. Unfortunately, its success has been subpar due to low sales, employment
losses, and the opening of fewer outlets than anticipated. Wood, 2019.

In the retail sector, Tesco is up against fierce competition, particularly from bargain stores like Aldi
and Lidl. Tesco intends to keep a competitive edge by implementing a cost leadership strategy and
lowering prices. Tesco may more e ectively compete on pricing by streamlining its operations and
cutting expenses by shutting down its online shopping website.

3. Bargaining Power of Buyer

• There are plenty of replacement items accessible, particularly with the three major companies,
which makes it simple for customers to move between the various supermarkets;

• Customers have a reasonable amount of power. Apart from the ease of access to internet-based
retail purchasing, people are highly attracted to cheap costs amid the present economic downturn
since they can readily compare the pricing of items.

Customers who purchase online have more negotiating power since it's simple for them to compare
costs and shop at di erent stores. Tesco can improve customer satisfaction and even draw in new
customers by providing a unified, e ective online shopping platform that appeals to consumers who
value a ordability and convenience.

4. Threat of Substitute products or services

EVALUATION - LOW

• The ability of substitutes to allow customers to switch items may result in a decline in demand.

• This is especially dangerous given the shift in culture toward online shopping and more
distraction.

• Tesco was among the first supermarkets to see a need in the market and provide not just online
shopping but also the ability to purchase an entire dinner with just one mouse click. As a result, Tesco
has addressed the possibility of replacement.

Customers that purchase online have access to a variety of options, such as physical stores and other
online merchants. Tesco's cost leadership strategy is to provide competitive pricing in order to lessen
the risk of competing goods and services. Tesco can streamline its cost structure and maybe provide
even more competitive rates to counter alternatives by streamlining its online operations.

5. Threat of New Entrants

EVALUATION - LOW

• The chance of new competitors entering the UK grocery sector is quite low, especially in light of
financial needs.

Despite the fierce competition in the supermarket business, discounters ALDI and LIDL were able to
get into the market. They have been able to invest a substantial sum of money in the UK since they are
one of the major companies in Germany.

Due to its very low entry barriers, the retail sector—which includes online grocery—is open to new
competitors.

Tesco's cost leadership strategy makes use of economies of scale and operational e iciency to assist
establish a barrier to entry for any rivals. Tesco is able to concentrate its e orts and fortify its position
against new competitors by shutting one of its e-commerce sites.

3-14 Do you think Aldi and Lidl's strategy of venturing into e-commerce is a good idea?

Aldi and Lidl, two budget supermarkets from Germany, may not be related, but they both adopt a
common business model based on simplicity, execution, and an integrated supply chain. This shared
approach has allowed them to provide a low-cost advantage in the grocery industry. In order to expand
their reach and explore new opportunities, both companies have launched online websites that
exclusively sell wine and non-food items, serving as a way to "test the waters" of e-commerce. Aldi
entered the UK market in 1990, followed by Lidl in 1994.

During the COVID-19 pandemic, online sales surged, helping traditional retailers compete with Aldi and
Lidl. The Telegraph UK reported on May 27, 2020, that the rise of online shopping halted the growth of
Aldi and Lidl.

In the UK, online sales in the four weeks leading up to October 4, 2020, increased by 76% compared to
the previous year, with one in five households now ordering groceries online (Kantar, 2020).

Post covid 19 predictions:

Looking ahead, it is predicted by MarketWatch that e-commerce penetration rates, currently at 15%,
will grow to 25% by 2025. Considering these developments, it is indeed a favorable decision for Aldi and
Lidl to venture into e-commerce, allowing them to adapt to changing consumer behavior and capture a
larger share of the market.

According to these facts and figures, Yes, it is a good idea for Aldi and Lidl to venture into e-commerce.

3-15 Comment on Tesco's strategy of opening a discount chain. Do you think it could recover
Tesco's former market position? Explain your answer.

• Risk of overcomplicating its product;

• Quite tough;

• Registered the chain "Jack's" as a retail trademark;

• Competitive price alone won't be enough to compete;

•How does Tesco ensure that Jack's delivers something unique?

• O ers its own-label products;

• Takes into account:

• Establishes an online platform;

• Permits Tesco's current customers to use their Clubcard reward card when making purchases at
Jack's

3-16 How much potential do you see for virtual stores (like the ones Tesco introduced in South
Korea) in the United Kingdom?

• Given the rapid advancement of technology, virtual stores have a great deal of potential. • As
technology adapts, it will raise its degree of acceptance and influence consumer behavior.

• Online retailers facilitate:

• Customers will shop while on the go. • More will be produced and o ered in response to customer-
based marketing and segmentation.

• A rise in assertions of value

Di iculties for Virtual Stores in the United Kingdom:

• A di iculty for Gen X and Baby Boomers who lack internet literacy.

• Would like a brick and mortar approach;

• Impact of COVID-19;

• Not the best moment due to the epidemic and shutdown;

• like online buying and e-commerce

 E-commerce and online purchasing have a significant impact and are e ective ways to strengthen
the economy.
 Modernize its e-commerce and company websites to o er customers a pleasurable purchasing
experience.
 Investigate new markets and open more outlets in Asian and African nations.
 To prevent losses and failure, conduct thorough market research and analysis prior to entering a
new market.
 Continue to develop new strategies to enhance its marketing and advertising e orts in order to
outperform its rivals and hold onto its current clientele. (For instance, strategy: Customer
Acquisition and Customer Retention) Get input from customers on the introduction of new
advertisements and promotions. It can avert any possible backlash from the general population.