Tesco playing with the big boys

Tesco is now one of the top ten food retailers in the world, ranked number eight according to sales last year, and has grown faster than any of its major rivals in the last year, according to the latest research from market research company, M+M Planet Retail.

According to the report, Tesco's sales of £28.6 billion (€40bn)last year helped lift it from eleventh position into the top ten for the first time, overtaking US-based retailers Safeway, Kmart and Albertsons on the way. Its sales growth of 12 per cent and a 135 per cent increase in store numbers far outstripped any of its competitors.

Accurately targeted acquisitions, coupled with innovation and adaptability, have helped the UK's leading grocery retailer to grow in what is becoming an increasingly difficult international environment. Its position amongst the world leaders will be further enhanced with the demise of Ahold, presenting another potential opportunity for this cautiously aggressive British retailer to ascend the ranks, M+M Plant Retail​ claims.

Hypermarkets provide strong impetus for growth​

In terms of retail activity, Tesco is active in ten countries (it also has a stake in American Safeway's e-commerce subsidiary, GroceryWorks.com in the US) with a variety of formats ranging from virtual stores, to convenience stores, supermarkets, superstores and hypermarkets.

Tesco has adopted a flexible approach to development in overseas markets, often utilising the knowledge of local companies to primarily enter the country via joint ventures and acquisitions. In line with its corporate strategy, overseas operations are accounting for an increasingly large share of sales - 18 per cent last year up from 15 per cent in 2001. This increase is mainly due to strong growth from hypermarkets in Hungary, Poland, South Korea and the UK.

In Hungary, strong growth (32 per cent) partly reflects the opening of five new hypermarkets last year but also - and more importantly - maturing sales from the previous year. Towards the end of 2001, Tesco opened two of its largest stores worldwide in Budapest, at over 15,000 square metres each.

In Poland, Tesco increased sales by 47 per cent to £176 million, reflecting the opening of seven new stores and the acquisition of 13 hypermarkets from the Dohle-owned Hit operation. However, having only consolidated sales from Hit for four months (from September 2002), Tesco can look forward to much stronger sales growth this year, with over £300 million coming from the existing Hit stores alone in addition to the opening of five new hypermarkets.

In South Korea, Tesco has stormed ahead with a 66 per cent increase in sales to £1.2 billion, once again outstripping its key rivals. Last year saw the opening of seven new hypermarkets, bringing its store estate at the end of the year to 21 outlets. This gave Tesco a market share of 3.4 per cent, ahead of Carrefour with 2.3 per cent. With stores opened last year averaging 10,000 square metres, Tesco can expect to see another year of buoyant growth, M+M Plant Retail predicts.

In the UK, Tesco's success has been largely underpinned by its rapidly expanding hypermarket network and a relatively small, but rapidly growing, chain of convenience stores, Tesco Express. Although its acquisition of the 1,200 strong T&S group last year significantly boosted UK store numbers, the full benefits of the acquisition are yet to be felt with just over seven weeks of trading included in the fiscal year.

What is important about Tesco's growth in the UK is that through its hypermarkets it is expanding its share of the growing non-food market, with 21 new stores opening in 2002. Last year, half of UK new floorspace space comprised non-food, enabling it to grow its market share to 5 per cent of this sector. In particular, it is pushing into chart music, healthcare and clothing.

Big and small formats driving sales​

Looking across the group, hypermarkets and convenience stores are Tesco's key sources of growth. Not only do hypermarkets provide an ideal vehicle for entering immature markets, with their ability to double up as a distribution depot in the early years of trading, but they also enable Tesco to capture a vast catchment area with a strong range of food and non-food goods which can be accommodated within an attractive and flexible format.

The non-food component of its operation is particularly important in both developing and more mature markets. Tesco's strong push into hypermarkets is enabling it to rapidly capture sales. Not only is it one of the fastest growing international hypermarket operators (with its number of hypermarkets increasing by 50 per cent last year) but its stores are also some of the largest in the world, averaging around 9,000 square metres. Nevertheless, compared with the global leaders it still has some catching up to do - its average sales area is just half that of market leader Carrefour, for example.

In terms of convenience stores, Tesco is able to use these small and highly profitable outlets to effectively mop up expenditure in niche catchment areas. In the UK, it foresees the potential for 1,000 Express convenience stores and it is also trialling the format overseas in Thailand.

Still plenty of room for growth​

Tesco is facing a wealth of opportunities both at home and overseas. In the UK, the first of the converted T&S stores are set to open as it continues to plough ahead with its incursion into the convenience store market. This year, Tesco is scheduled to open 59 stores in the UK, including six hypermarkets - not counting any that it might acquire as part of the Safeway takeover, should its bid be successful, of course.

Overseas, Tesco is looking to open 40 new stores (in existing markets), and we await the outcome of its decision as to whether or not it will enter Turkey, China and Japan.

With regards to Turkey, Tesco has signed a conditional contract to buy certain classes of equity share capital in Kipa, although it is subject to a number of material conditions. If these conditions are met, the deal is expected to be finalised in the current financial year. Regarding China, Tesco has stated that it believes that it is an attractive market in the long term, although with few companies making money there at the moment, it believes that it needs a local business partner to make the operation successful.

In its overseas markets, Tesco has successfully adapted itself to the local environment with innovative store formats and product ranges. What it brings to each market are strong management skills in areas such as the ranging, customisation, private label and logistics. In Asia, it has built some of the region's most sophisticated distribution centres, enabling it to cut the cost of transportation of fresh, chilled and ambient products. The sale of Ahold's 49 superstores in Thailand could also represent a good opportunity for Tesco to pick up some new stores.

In terms of e-commerce, Tesco continues to lead the world market. Where appropriate it is developing its store-based picking system in overseas markets and is looking for opportunities to export the concept in conjunction with local partners, as evidenced by the Safeway deal in the US.

Non-food is its other key capability, with its hypermarket development strategy enabling it to tap into this valuable market both at home and abroad.

Having shown its strength across the retail sector, one other area that has not been explored by the company is foodservice. This sector is experiencing particularly high growth rates across the world, reflecting the trends towards out-of-home eating. With Carrefour and Metro both involved in this sector, this could be a growth area for the future, the M+M Planet Retail report concludes.