Tesco Value Chain Analysis

Value chain analysis is an analytical framework that assists in identifying business activities that can create value and competitive advantage to the business. The figure below illustrates the essence of value chain analysis.

Tesco value chain analysis

Tesco value chain analysis

Primary Activities

Inbound logistics

Tesco inbound logistics operations are complex and involve the supply of hundreds of product categories to 7817 Tesco stores around the world[1]. Economies of scale due to the large scope of its operations is a major source of value creation for Tesco. The company makes regular investments to increase the capacity of logistics so that the economies of scales can be exploited to a greater extent. For example, in 2013 as a part of a government-backed trial program testing the efficacy of longer trailers, Tesco received 25 new 51-foot Gray & Adams refrigerated units. New trailers can carry 51 cages (UK shipping units), six more than a standard 45-foot trailer. This change resulted in 13 per cent increase in logistics productivity[2].

The company has a history of poor supplier treatment under the previous leadership that involved the cases of payment delays to improve Tesco’s operational profit margins[3] and unnecessary and unjustified fines being imposed to suppliers[4] with negative implications on various aspects of supply chain practices. However, the new management led by new CEO Dave Lewis announced its commitment to form strategic relationships with suppliers.

Operations

Tesco operations can be divided into three large segments:

1. Retail. This segment represents the core business of Tesco PLC. With more than 80 million shopping trips made thousands of Tesco shops in 11 countries around the world[5], the scope of Tesco’s retail operations is extensive. The company operates stores in the following format:

  1. Metro. Metro stores sell wide range of food and a smaller selection of general items such as cook ware and greetings cards.
  2. Express. The smallest size of stores, Tesco Express aims to bring fresh food as close as possible to home and work. Express store formats are designed for top-up purchases and small shopping visits
  3. Extra. The largest type of store, Tesco Extra offers the greatest choice of products, including electrical equipment, clothing, homeware, health and beauty services, and financial services such as travel money.
  4. Superstore. Stores of this format offer a good range of food and other products. Each Superstore also has a bakery and fresh food counters

2. Manufacturing. The grocery retail chain sells own brand products under Everyday Value basic range products. Recently, the company launched 76 lines with fictitious farm namesacross seven brands as an attempt to revamp its budget range of own-brand value products.[6] This latest move allows the supermarket chain to compete against German discounters Aldi and Lidl with “farm” brands, while maintaining Everyday Value low price.

3. Banking. Tesco Bank is a wholly owned bank by Tesco PLC and it has more than 3000 employees serving about 7 million customers.[7] Initially launched as a joint venture with the Royal Bank of Scotland, the bank became a wholly owned Tesco PLC subsidiary since 2008. In 2014 Tesco Bank generated trading profits of GBP 194 million with a net interest margin of 4.4 per cent, double that of Lloyds Banking Group.[8]

 

Outbound logistics

Flexibility and cost-effectiveness of deliveries are the main sources of value for Tesco outbound logistics. The supermarket chain offers several home delivery options for purchases made online from Tesco Direct. These include delivery for GBP 1 subject to availability of slots, Delivery Saver plan that offers unlimited free grocery delivery for one month and Free Next Day Click + Collect plan.[9] The options above require the minimum spending of GBP 40 and a GBP 4 surcharge will be applied to all online grocery orders under GBP 40. The company also offers home delivery of products purchased from offline physical Tesco stores in selected locations.

Marketing and sales

‘Every Little Helps’ is the main marketing communication message of the supermarket chain and accordingly, Tesco’s marketing strategy attempts to associate the brand with competitive prices, wide selection of products and the best quality/price balance. Currently, Tesco marketing strategy also pursues the aim of restoring stakeholder trust towards the brand to address the severe damage to the brand image caused by commercial income scandal and the instances of poor supplier treatment under the previous leadership. The company uses online and offline sale channels and the UK represents more than two-thirds of Tesco Plc. sales.[10]

Service

Customer loyalty based on the frequency of shopping and an average weekly spend has declined by 2.5 per cent during the course of 2015.[11] While there is no doubt that Tesco’s commercial income scandal played a great role in causing such a decline, it can be argued that flaws associated with the provision of customer services may have also played a certain role.

Due to the choice of cost leadership business strategy, it is difficult for Tesco to provide the customer services of the highest standards. In other words, Tesco business strategy focuses on cost reduction, while exceptional customer services come of additional costs. Therefore, it is difficult for Tesco, as well as, any other business to offer the lowest prices and the most exceptional customer services at the same time…

Tesco PLC Report contains a detailed discussion of Tesco Value Chain Analysis. The report also illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Porter’s Five Forces and McKinsey 7S Model on Tesco. Moreover, the report contains analysis of Tesco marketing strategy, leadership and organizational structure and discusses the issues of corporate social responsibility.

Tesco PLC Report

[1] Annual Report and Financial Statements (2015) Tesco Plc.

[2] O’Reilly, J. (2013) “Tesco Tests Longer Reefer Trailers” Inbound Logistics, Available at: http://www.inboundlogistics.com/cms/article/global-logistics-january-2013/

[3] Simpson, E. (2016) “Tesco knowingly delayed payments to suppliers” BBC, Available at: http://www.bbc.com/news/business-35408064

[4] Ahmed, K. (2015) “Tesco: Where it went wrong” BBC, Available at: http://www.bbc.com/news/business-30886632

[5] Annual Report and Financial Statements (2015) Tesco Plc.

[6] Smithers, R. (2016) “Tesco revamps own-label range in fight against discounters” The Guardian, Available at: https://www.theguardian.com/business/2016/mar/21/tesco-revamps-own-label-range-fight-discounters-aldi-lidl

[7] Tesco Bank (2016) Tesco PLC, Available at: https://www.tescoplc.com/about-us/our-businesses/tesco-bank/about-the-business/

[8] Head, R. (2014) “Does Tesco Bank Make Tesco PLC A Buy?” The Motley Fool, Available at: http://www.fool.co.uk/investing/2014/06/10/does-tesco-bank-make-tesco-plc-a-buy/

[9] Delivery Options (2016) Tesco, Available at: http://www.tesco.com/groceries/zones/default.aspx?name=delivery-options

[10] Annual Report and Financial Statements (2015) Tesco Plc.

[11] Annual Report and Financial Statements (2015) Tesco Plc.