1st tier uk retail report

7/30/2019 1st Tier UK Retail Report

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An Overview of the UKGrocery Retail Market

2011Profiles of 1st Tier Retailers


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TIER RETAILER PROFILES: 2011

Table of Contents

Terminology

Executive Summary

Chapter One UK Grocery Market Overview 2011 5

Chapter Two Tesco 21

Chapter Three Asda 45

Chapter Four Sainsburys 64

Chapter Five Morrisons 81

Chapter Six The Co-operative Group 95

Chapter Seven Waitrose 108

Chapter Eight Marks & Spencer 127

Chapter Nine Iceland 140


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Terminology

Abbreviation Explanation

BOGOF Buy One Get One FreeBWS Beers, Wines and SpiritsCSR Corporate Social ResponsibilityCTN Convenience, Tobacco, NewsCRTG Co-operative Retail Trading GroupCPI Consumer Price IndexEDLP Every Day Low PricesEDLC Every Day Low CostsEPOS Electronic Point of Sale SystemFSA Food Standards AgencyGDA Guideline Daily Amount

GPD Gross Domestic ProductIGD Institute of Grocery DistributionKVI Key Value IndicatorMSC Marine Stewardship CouncilMPC Monetary Policy CommitteeNDC National Distribution CentreOFT Office of Fair TradingRDC Regional Distribution CentreRFID Radio Frequency Identification TechnologyRPI Retail Price IndexRRP Retail Ready PackagingSRP Shelf Ready PackagingSKU Stock Keeping UnitWRAP Waste & Resource Advice Programme


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EXECUTIVE SUMMARY

The aim of this report is to give Irish manufacturers and suppliers an insight into the dynamicsof the UK grocery market, particularly in respect of developments which have taken placeover the past 12 months (to September 2011).

Many UK households have seen their spending power squeezed over the last year by acombination of rising prices and static or declining earnings. Rising commodity prices havehad an effect in UK stores over the first half of 2011, and an unprecedented eruption of civilunrest in North Africa and the Middle East raised oil prices to record levels. Such is the impactof rising oil prices on the UK shopper that the UK government has introduced a newstabiliser to help moderate the pressure on domestic budgets. This fuel stabiliser meansthat fuel duty will increase in line with the Retail Price Index (RPI) measure of inflation whenoil prices are high. However, in years when crude falls below a set trigger price for asustained period, the government will increase fuel duty by RPI plus 1p per litre.

The current downturn in the UK has resulted in numerous challenges for UK retailers and

consumers alike. Consumers are increasingly value focused in their purchase decisions asthey try to counteract the effects of rising inflation, food and fuel costs on their disposableincome. This has resulted in promotions playing an increasingly important part in retailerstrategies as they fight to retain their market share and maintain loyalty among theirshoppers.

Throughout 2011 UK retailers have been increasing their focus on value with bigger, bolderinitiatives in an attempt to drive footfall. In September 2011 Tesco announced a 500minvestment in price cuts while Sainsburys has revealed a move away from their six year oldTry something new strap-line to the new Live well for less strap-line. This widespread use ofprice guarantees by UK retailers is further evidence of increasing awareness in the sector thatconsumers budgets are under more pressure than ever and highlights the effort that theretailers are making to retain customers and build brand loyalty.

However despite the tough market conditions of note is Asda, which has enjoyed bettermomentum against weak comparatives. Helped by its new smaller supermarket formatfollowing the acquisition of Netto, in September 2011 Asda had a 17.4% share of the UKgrocery market.

There has also been good news for discount retailers. Mike Watkins at Neilsen commented:Aldi and Lidl are experiencing stellar performance. They have consistently outperformed allother food retailers this year, and over the 12 weeks to 3 September 2011 recorded +19%growth in sales. Not only are more shoppers visiting these discounters, but theres a double -digit increase in spend per visit across their FMCG (Fast Moving Consumer Goods) ranges.These trends towards discounters are even stronger than they were during the recession ofthree years ago.

Looking ahead, there are plenty more hurdles to be overcome: possible interest rate rises,currency fluctuations and further food price increases. Further promotions aimed at attractingshoppers in store, as retailers and manufacturers gear up for Christmas trading are expected

Chapter one of this report provides an overview of the UK retail market and outlinessignificant developments which have taken place in the year to date. Key highlights of 2010and 2011 are examined including an overview of the UK grocery market shares, conveniencesector, competition commission, online retailing, private label, local sourcing, food labellingand a focus on the value offering.


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The remainder of the report features a chapter dedicated to each of the first tier retailersoutlined below.

1. Tesco

2. Asda3. Sainsburys4. Morrisons5. The Co-operative Group6. Waitrose7. Marks & Spencer8. Iceland

Each chapter is subdivided as follows:

1. Organisational Overview Current Highlights & ChallengesOrganisational StructureKey Financial Indicators

2. Trading Strategy Grocery Trading StrategyPrivate Label StructurePricing StrategyPromotional Strategy

3. Marketing & Advertising Key Performance MeasuresCustomer ProfileMarketing & Advertising Strategy

4. Operations Store FormatsOnline RetailingSourcing, Supply Chain & Distribution

Corporate Social Responsibility

5. Brief History


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UK GROCERY MARKET OVERVIEW 2011

Key Highlights:

IGD estimates the value of the total UK Grocery Market in 2011 to be 161.96 billion.Tesco holds the highest share of the grocery market at 30.6%. Asda is the secondlargest retailer in the UK holding 17.3% market share. Sainsburys comes in a closethird with 15.9% of the market.1The UK economy is expected to grow by 1.3% in 2011 with a growth forecast of 2.2%

for 2012.2

David Cameron was elected Prime Minister in May 2010, the first Conservative PrimeMinister since 1997. The Conservatives did not receive an outright majority of votes,and so formed a coalition government with the Liberal Democrat party. Its leader,Nick Clegg, was elected as Deputy Prime Minister.

A key determinant for consumer spending will be the direction of interest rates. TheBank of England (independent from governmental control) has set a target ofmaintaining inflation below 2%, and uses interest rates as a lever to achieve this.Interest rates are currently standing at an all-time low of 0.5%, however inflationreached 4.5% in September 2011.

Consumer confidence in 2011 is low owing to the rise in VAT, increased taxes andpublic sector job cuts which have inevitably had some impact on retail sales.Inflation in the UK in 2011 remains elevated, due to continuing oil price inflation and asudden pick-up in food prices. Consumer price inflation was 4.5 per cent inSeptember.Online grocery channel set to be worth 7.2bn by 2014 (+93% on 2009), with retailerscontinuing to bolster their online propositions. Shopper acceptance of online isgrowing: 41% of shoppers are anticipated to buy groceries online by 2014.The British food industry has experienced a jump in food inflation in 2011 in the wakeof soaring animal feed prices, a shortage of silage and poor harvests. Some analystshave predicted food prices could be at least 10% higher by early next year.

UK Population: 62.3 million

UK Grocery Market Value: 161.96 billion (IGD 2011 estimate)

UK Economic Overview:

Measure Unit 2006 2007 2008 2009 2010 2011

ConsumerSpend

GBP (bn) 807.64 849.93 878.91 863.48 905.2 936.81

GDP Growth(Real)

% 2.85 2.56 0.74 -4.39 0.91 2.49

GroceryRetail Market

GBP (bn) 118.44 122.93 128.94 136.99 139.24 144.41

GroceryRetailMkt/Capita

GBP 1954.78 2018.89 2111.35 2238.4 2248.34 2304.29

NominalGDP

GBP (bn) 1328.36 1404.85 1445.58 1392.71 1464.72 1530.73

NominalGDP/Capita

GBP 21923.75 23071.93 23670.87 22756.7 23651.22 24425.24

Total RetailMarket

GBP (bn) 229.59 237.92 245.67 254.49 257.52 263.04

Source: Retail Analysis Datacentre, calculated in 2011

1Kantar WorldPanel, till data October 2011


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Economic Policy & Consumer SpendingGrocery retail in the UK continues to grow, albeit at a slower pace than previously. However itis likely that consumer confidence will remain somewhat uncertain as plans for a deepreduction in government expenditure will affect the income of millions of households.

Under the coalition government, the UK is undergoing the biggest fiscal tightening since the

Second World War. The proposed squeeze will see the government make 81 billion inbudget cuts by 2015.

3The sheer scale of the tightening means that consumers will be hit by

tax rises, welfare cuts, a public sector pay freeze and public sector job cuts.

One of the key determinants of consumer spending is interest rates. The Bank of Englandstarget is to maintain the rate of central inflation below 2% with interest rate policy being themost important lever.

Towards the end of September 2011, consumer confidence rose for the first time in fourmonths according to leading market research company GfK NOP Ltd. Their figures placedhouseholds expectation for the economy up four points to minus 27, with furtherimprovements in other criteria for consumer confidence.

Source: GfK Consumer Confidence tracker - September 2010 to September 2011

VATThe rate of VAT rose from 17.5% to 20% on 4

thJanuary 2011, this will account for an extra

13bn in public funds. Firms seemed to pass on just under half of Januarys rise from 15% to17.5%, taking core inflation to above 3%. The Office for Budget Responsibility has assumedthat two thirds will be passed on. With the new 20% VAT rate still just below the Europeanaverage, the standard rate could yet be raised further.

InflationCPI annual inflationthe Governments target measure was 4.9 per cent in September, upfrom 4.5 per cent in August 2011.4

Figures from the latest BRC-Nielsen Shop Price Index show that overall shop price inflationremained at 2.7% in September.

Meanwhile, food sales were down 1.6% during July 2011, as consumers cut back onspending due to the higher prices. The figures show that inflation in predominantly food storesis running at 5.0%, down from 5.7% in August, compared to 1.3% in predominantly non-foodstores, down from 1.4% in August.

Stephen Robertson, British Retail Consortium Director General, commented: The pressureson prices from world commodities, import inflation and Januarys VAT rise havent gone awaybut they havent worsened either.

3 World Economic Forum 20114 Office of National Statistics September 2011


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InflationAnnual inflation rates - 12 month percentage change: CPI 4.5%, RPI 5.2%.

Source: Office of National Statistics Septmeber 2011

NotesCPI is the consumer prices index. It is the measure adopted by the Government for its UK inflation target. The Bank of England'sMonetary Policy Committee is required to achieve a target of 2 per cent. In the June 2010 Budget, the Chancellor announced theGovernments intention to also use the CPI for the price indexation of benefits and tax credits from April 2011. Prior to 10 December2003, the CPI was published in the UK as the harmonised index of consumer prices (HICP). RPI is the retail prices index - the uses ofthe RPI and its derivatives include indexation of index-linked gilts. Historically the RPI has also been used for indexation of pensionsand state benefits. Inflation is the percentage change in the index compared with the same month one year previously.

UK GROCERY MARKET SHARE

UK Grocery TradeThe Annual Till Roll chart below is drawn from the widely-used Worldpanel study by Kantarwhich measures the market value shares of the leading UK grocery retailers. The KantarWorldpanel Till Roll measure accounts for all expenditure going through the main till in eachretailer, with the exception of Marks & Spencer. Marks & Spencer is not included in thismeasure because of its large clothing departments, which would distort chart figures.

The UK grocery trade is dominated by four large players: Tesco, Asda, Sainsburys andMorrisons. The latest market share data indicates that the top four retailers hold just over 75%of the grocery market as illustrated below.

Retailer Market Share

Till Roll 12week 2 Oct 2011 (KWP P11)


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The latest grocery share figures from Kantar Worldpanel, published for the 12 weeks ending2nd October 2011 show the grocery market growing at 5.1% per year, below the 5.7% groceryprice inflation in this period.

The is evidence of clear polarisation between premium and discounter retailers with Aldi andLidl again posting strong double digit growth of 25.1% and 10.5% respectively. Both retailers

now represent 6.0% of the market. Waitrose was the next big winner with growth of 9.4% andincreasing its share from 4.2% a year ago to 4.4%.

Morrisons was the fastest growing of the big four retailers with growth of 6.0%, increasing itsshare from 11.5% to 11.6%. It was also the only big four retailer to grow ahead of the marketthis 12 week period.

Edward Garner, Director at Kantar Worldpanel, is of the view that there is evidence shoppersare trying to manage their personal inflation by trading down. This can be done by seekingout lower priced outlets and cheaper alternative products. As a result, those retailers with alow price message are the driving force in the market, with Iceland and Lidl enjoying salesgrowth of over 10% year-on-year, and Aldi leading the market with 25.1% growth.

The sharp decline of 69.6% for Netto is a result of the store conversions to the Asda brandalongside store disposals, as required by the OFT.

While there has been an increase in sales and market share for discounters this has notresulted in a shift towards consumers buying more own-label products. In fact, budget own-label is showing only muted growth of 2%, while premium own-label is growing at over 8%,confirming that despite economic pressures, low-price is not the only motivation in thismarket.

Edward Garner explains: This is further demonstrated by the continued two nations theme,as Waitrose shrugs off any gloom with sales growth of 8.3% - over double the market growth.

This is a challenging market for the big four grocers, which have to appeal to a broad range of

consumers, unlike the discount and premium niche players. Only Morrisons has managed toadd share this period (11.5% to 11.6%), with year-on-year growth of 6.0% slightly ahead ofthe market.

Kantar Worldpanel Retailer Share Track (RST)As previously mentioned, Marks & Spencer is not included in the Kantar Worldpanel Till Rollmeasure. However, using Retailer Share Track, which records only food and drink, health andbeauty and household items going through the till, we can benchmark Marks & Spencersmarket share performance like-for-like with other retailers. Retailer Share Track excludestoys, books, clothing and electrical which are all included at a Till Roll level.


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Store Numbers and Store AreasThe chart below shows that the number of stores and total sales area of each retailer variesgreatly across the board. Tesco continues to dominate with the largest number of stores andthe greatest store area. Asdas positioning as a superstore retailer, w ith no presence yet inthe convenience sector, is reflected in the fact that they are number two in the market withonly 526 stores, compared with Sainsburys 948, for example.

Retailer No. of GroceryStores

UK Sales Area (sq m000s)

2011

Retail Share

Tesco 5,380 9,620.492 30.60%

Total Asda 526 1,696.249 17.03%

Sainsburys 948 1,885.258 15.90%

Morrisons 474 2,521 11.60%

The Co-operativeGroup

3,001 1,297.983 7.00%

Waitrose 242 408.179 4.40%

Aldi 528 435.072 3.5%

Marks & Spencer 1,078 1,923.350 3.10%Source: IGD Datacentre accessed October 2011

THE UK CONSUMER

The UK population has increased in 2011 to over 62.3 million people. The current rate ofpopulation growth is +0.6%. The UK population is projected by the Office of National Statistics(ONS) to increase by 4.4 million by 2016; this is equivalent to an annual growth rate of 0.7%.

If past trends continue, the population will grow to 71 million by 2031.5

The ageing nature of the population is another point to note. The government estimates thatby 2014, the number of people aged 65 and over is expected to exceed those aged under 16for the first time. This trend is set to continue with 17% of the population estimated to beunder 16 and 32% over 65 by 2031.

Household size is also expected to continue to shrink over the coming years, from 2.3 in thelast census to 2.2 by 2017. As a result of this, household number growth will be close todouble overall population growth, averaging 1% per year.

The changing population structure has clear implications for the grocery sector in terms ofstore design and layout, while pack sizes, product formats and packaging design will alsoneed to be considered.

The UK society is also expected to be even more multi-ethnic as immigration is forecast tocontinue, although at a more modest rate. This will create further opportunities on a selectivebasis for ethnically tailored ranges in the UK.

5 IGD UK Country presentation 2011


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CONVENIENCE SECTOR OVERVIEW

The last year was another strong period of growth for convenience stores in the UK. Sales inthe channel reached 32.4bn in the year to April 2011, a rise of 4.9% on the previous year.

Although this represents a slowdown on the growth experienced during 2010 (+5.9%), the

sector continues to grow ahead of total grocery (+2.9%)6. IGD forecasts that growth will

continue at a compound annual growth rate (CAGR) of 5.5% to 2016 with value reaching42.3bn by that time.

Stores in the convenience sector are typically less than 3,000 sq ft, have a broad range offood and grocery lines with a limited range of non-food items and are typically inneighbourhood, high street and forecourt locations. By April 2011, the number of conveniencestores in the UK was 48,168 down 0.4% on the same time last year. The decline hasstabilised in the last two years following greater reductions in store numbers from around2005 onwards. A fall in the number of forecourts, down 1.6%, and non-affiliatedindependents, down 3.4%, was behind this decline, although the latter underwent its smallestreduction in numbers for many years (717 fewer stores compared to a drop of 1,090 the year

before).7

In terms of store numbers, convenience multiples grew faster than any other segment lastyear demonstrating a 6.4% increase taking the total store count to 2,835. Sales fromconvenience multiples grew by 8.1% to 5.1bn but they still accounted for less than 16% oftotal sector sales. Efficiency and consistency of operations helped the segment achieve agreater share of sales than its share of stores (16% of sector sales versus 6% of stores).

Stores offering a convenience proposition can be categorised as follows:Convenience multiples: organisation with 10+ company owned stores, non-affiliatedCo-operatives: Co-operative society convenience storesSymbol groups: stores affiliating to a symbol group, branded fascia retail club orfranchiseIndependents: organisations with less than 10 stores, non-affiliated

Forecourt convenience stores: convenience stores based on a petrol filling station,can be multiple or independent/dealer status

Convenience sector value by segment

Source: IGD Convenience Retailing 2011

Symbol group sales increased by 9.2% last year to reach 12.6bn and ensured the segmentremained comfortably the largest by value. Consequently in the convenience sector, theirshare of sales increased to just under 39% of the total convenience market. Store numbersalso increased by 2.9% to 16,288; close to one in three convenience stores now operatesunder a symbol fascia. Symbol groups will remain an attractive option for independentretailers but the rate of switching is likely to slow in the coming years.

6IGD Convenience Retailing Report 20117 IGD Convenience Retailing Report 2011


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Convenience multiples experienced higher levels of growth than any other segment in 2010,while new entrants such as Waitrose and Morrisons are expected to contribute to furtherestate growth in the future, Tesco Express and Sainsburys Local remain the majorcontributors to segment growth at present. Development of this segment will intensifycompetition in the wider convenience sector, but will also drive further improvements in range,promotions and in-store operations across the market.

ONLINE GROCERY RETAILING

Retailers have continued to build their online presence in both grocery and non-food, withnew ranges, increased coverage and re-launched websites all supporting the growth. TheBritish Retail Consortium (BRC) and Google launched a quarterly report in April 2011analysing the rapidly growing online retail sector and shopper behaviour.(http://www.brc.org.uk/). The BRC-Google Online Retail Monitor for Q1 2011 showed thattotal retail search volumes grew by 29% compared with the same quarter a year earlier.Mobile retail search traffic outpaced overall growth rising by 181% over the same period.Mobile searches accounted for 11% of total retail searches in the first quarter of 2011.

The internet accounted for 3.9% of total grocery sales in 2010, increasing from the previous3.3% share.8 The value of grocery shopping conducted over the internet is predicted to nearlydouble to 9.5bn in five years compared to its 2010 level of 4.8bn, according to researchpublished by IGD in March 2011. Online shopping will represent 5.2% of the overall UKgrocery market by 2015, compared to 3.2% at the moment.

9The e-Retail Sales Index showed

that overall internet retail sales jumped by 19% to 31.5bn in the first six months of 2011.10

Improved websites, faster technology, more use of mobile technology and a strengtheningretailer emphasis on the channel will rank among the key drivers. To succeed in the channelsuppliers will need to engage proactively and invest the time now in what is a highlyinnovative and fast changing sector of the market.

Source: Kantar WorldPanel 2011

8 Kantar Worldpanel9 IGD online shopping report 201110 IMRG Capgemini e-Retail Sales Index 2011
http://www.brc.org.uk/http://www.brc.org.uk/


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PROMOTIONS

Promotions have become increasingly important to shoppers during the downturn as theyseek value and attempt to manage inflation. As a result promotions have also become muchmore important for retailers as they try to increase their market share, protect sales volumesand build brand loyalty with consumers.

Retailers regularly communicate their latest promotions in leaflets, on their websites andthrough above the line advertising, particularly in press and on TV. The chart below showsthat nearly half of shoppers claim to be comparing prices more between different stores(48%), and looking out for promotions more before going shopping (47%). A similar numberclaim to be shopping around more to look for the best deals since the start of the year (46%),

up from 27% of shoppers who stated this in 2008.11

Source: IGD ShopperTrack

Shoppers are using a range of in-store and online comparison tools to compare prices andpromotions across different stores as they hunt for value. This is being encouraged by recentactivity by the main supermarkets, including:

Supermarket websites.Retrospective supermarket websites e.g. Asda Price Guarantee.Comparison websites mySupermarket.co.uk plus various non-food sites.Online discount vouchers and Mobile phone applications.

11 IGD ShopperTrack, base: all main shoppers, fieldwork April 11
http://www.igd.com/analysis/download.aspx?uid=5654704&dltid=3&dlci=5997&mr=1


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PRIVATE LABEL TIERING VALUE VS PREMIUM

The economic downturn saw significant changes in consumer purchasing patterns. UKshoppers became significantly more value conscious in 2010/11 as spending came underincreased pressure due to limited availability of credit, rising unemployment and high foodinflation (5.0% September 2011).

Private label quality perceptions have improved considerably over the last number of years.Almost eight in ten (79%) British shoppers believe that the quality of private label productshas improved, with virtually nobody (1%) taking the opposing view. This is significantly morethan the two thirds (66%) who shared this opinion three years ago, rising particularly among65+ year olds. This is a very positive endorsement of the initiatives taken by many leadinggrocery retailers and private label manufacturers to extend and improve the private label

offer.12

While strengthening value credentials was important in the depths of the downturn, recentlyretailers have renewed focus on premium own label lines to reflect the improving economy.With predicted growth of 14% over 2010-2014 and only 4% of people planning to buy lessown-label food once the economy recovers, it is vital that grocers continue to challenge

brands in new areas and with new product launches to maintain the pace of the market.

In 2011 a notable development has been the launch of Tescos first 'venture brands' providingthe retailer with a private label alternative to premium own label products in categories whereconsumers are particularly drawn to brands. Products are characterised by a lack of Tescobranding, high quality ingredients, design and merchandising, and even their own brandwebsites. Product launches to date include Yoo yoghurts and ChokaBlok ice cream.

UK Private Label MarketThe UK private label market is segmented into the following tiers:

Economy/ValueStandardPremium

Premium Plus/ Super premiumHealthOrganicKidsDesigner

These tiers are examined in more detail within the Private Label Structure section of eachretailer profile in this report.

Private LabelOver the last few years, all the major UK retailers have made significant moves to strengthentheir private label credentials:

Tesco arguably the most developed private range of any of the UK retailers. Thenumbers are impressive, with around 8,000 SKUs (Stock Keeping Units) under the'standard' Tesco brand alone. Then there are another 3,000 SKUs across the Valueentry-level and Finest ranges. In 2010 Tesco launched a new healthy eating labellingsystem across its three health focussed ranges. In July 2011 Tesco launched a newItalian food brand called Parioli, marking the fourth launch in its line-up of venture

brands that do not carry any references to the retailer.

Asda bolstered its own value range by cutting the price of every single Smart Priceproduct. Smart Price was a significant growth area for the retailer in 2009, growing 22%year-on-year. Asda re-launched its core private label range as Chosen by you inSeptember 2010, including 500 new and over 1,000 reformulated products.

12 IGD ShopperTrack, March 2011


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Sainsburys have extended the Basics range off the back of 50% year-on-year growth,mainly due to their Feed your Family for a Fiver promotion. During the past year morethan 5,000 private label products are new or improved, as the company continues toinvest in raising the quality of its food. Sainsburys re-launched its Freefrom range in2009, Be Good to Yourself range in January 2010 and Taste the Difference range inSeptember 2010, and launched a new entry level range of wine in May 2010, called

Sainsburys House. In May 2011 Sainsburys launched its Feed your family for 50campaign- which gives families week-long menus and tells them all the ingredients theywill need for seven days.

Morrisons In 2011 Morrisons announced the launch of its new M Kitchen Conveniencerange, has led to 11,000 new or improved products in Morrisons stores. The rangeconsisting of 150 completely new lines including a bistro range and a diverse array ofPan-Asian and tapas-style dishes was launched early in October 2011. In 2010Morrisons extended its range of Value lines from 300 SKUs to 450, resulting in year-on-year growth of 345%. In 2010, Morrisons also introduced a new range of healthy eatingproducts called 'Wholefoods', thus expanding its overall private label offer. Morrisons re-launched its Eat Smart range in 2009/2010, and introduced a new range of healthy foodsunder the Wholefoods banner in July 2010.

M&S In 2011 Marks & Spencer has introduced a 'step change in innovation' with 1,900new lines launched, as well as a significant increase in product communication throughadvertising, promotions and in-store cafes.

Waitrose launched its essential Waitrose range in March 2009. In 2011 the range nowconsists of 1,600 SKUs and was instrumental in maintaining the retailers performanceover the tough economic period. Waitrose launched its Menu From range of ready mealsin February 2010, following the successful introduction of essential Waitrose and thedevelopment of the Duchy Originals from Waitrose brand the previous year. In October2010 Heston Blumenthal launched his Heston from Waitrose food range.Blumenthalcreated a Christmas pudding for Waitrose in 2010 containing a whole candied orangewhich quickly sold out. In July 2011 Waitrose unveiled its festive range which included a

brining kit under the Heston range.

The Co-operative - rebranded its healthy eating range to Healthier Choice between Juneand October 2010, completed its conversion to The Co-operative private label in all ex-Somerfield stores by October 2010, and introduced a new Eat In range of prepared mealsolutions in September 2010.

PremiumIGD has defined the premium sector to include products and brands which appeal toconsumers on aspirational ethical and quality grounds and have included the following in thissegment:

The organic market

Fairtrade productsLocal and regionally sourced productsSpecialist and fine foods

As mentioned, there has been a certain return to premium in recent months as consumerstrade up. Retailers are conscious of the need to innovate as their private label offer can nolonger be defined by competitive prices. The development of premium plus and superpremium own label products by retailers has been a trend over the last few years, asdemonstrated by Heston Blumenthals Heston from Waitrose food range which waslaunched in Waitrose in October 2010.


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OrganicSales of organic products fell 5.9% to 1.73bn in the 52 weeks to January 1st 2011 asshoppers opted for cheaper produce in the economic downturn, according to the Soil

Association.13

Despite fragile consumer confidence in the wider economy, the report showspositive signs of resilience and recovery for the organic sector overall. The biggest successstories were sales of organic beef (up 18%), organic baby food (up 10.3%) and organic

textiles (up 7.8%) over the same 52 week period.

The definitive guide to organic trade in the UK, the Organic Market Report shows thatshoppers spent more than 33m a week on all things organic in 2010, and that 86% ofhouseholds now buy organic products. Dairy products and fresh fruit and vegetables are themost popular categories, accounting for 30.5% and 23.2% of sales respectively. Althoughsales through multiple retailers fell by 7.7%, to 1.25bn in 2010, Waitrose and Marks &Spencer anticipate modest growth for 2011, while Tesco, Sainsburys, Morrisons and the Co -operative predict level sales year on year. Multiple retailers accounted for 72.3% of the

organic market in 2010.14

ETHICAL & SUSTAINABLE ISSUES

Sustainability is still firmly part of the commercial agenda of every retailer in the UK and isalso increasingly rising in the consumer agenda despite the current economic climate. Thegrowing consumer interest in environmentally friendly and ethically sourced products isturning into a sizeable trend that retailers cannot ignore. Understanding shopper awarenessand involvement with ethical issues and how these affect product choice in different marketshas become essential to target specific segments of shoppers and develop successfulproducts and services. Retailers seeking to differentiate on sustainability are increasinglyengaging with their suppliers to share and develop best practice in this area.

Plans to address sustainability issues can highlight short-, medium- and long-term priorities.Addressing the short term issues can result in quick wins in the form of cost savings,particularly appealing in the current economic environment. However it is the morechallenging, long-term changes to business practices that are likely to make a greater impact.

Many shoppers are very committed to becoming waste free. IGD research found that almostseven in ten shoppers want to become a zero waste household, with half of them alreadyclaiming to be recycling, composting or reusing all the food leftovers and packaging that they

can.15

Industry is also demonstrating a strong commitment to waste reduction. Phase 1 of the

Courtauld Commitment, a responsibility deal aimed at improving resource efficiency andreducing the carbon and wider environmental impact of the grocery retail sector, hassuccessfully reduced food waste by 270,000 tonnes per year, far exceeding the 155,000

tonne target.16

Despite this progress, big challenges remain. The total amount of packagingwaste has not reduced, remaining at approximately 2.9 million tonnes per year.

The proportion of shoppers that feel able to positively influence the environment through theirgrocery shopping decisions has increased considerably from 23% in 2009 to 42% in 2010,reversing the decline over the preceding two years. Likewise, more feel able to positivelyinfluence sustainable fishing and global warming concerns than two years ago, rising from17% to 35%, and 11% to 22% respectively. 84% of shoppers are regularly recyclingpackaging, 77% regularly take reusable bags to the supermarket, and 67% are committed toreducing their food waste. A quarter (26%) of shoppers identify local products as having thesingle, most positive impact on the environment, almost three times as many as any otherproduct type. This rises to 58% when including all those who regard local products as having

a significantly positive impact on the environment.17

13Namnews April 201114

http://www.soilassociation.org/Businesses/Marketinformation/tabid/116/Default.aspx15IGDs Shopping Trends for the Future Learning from Trailblazers, Sept 201116 WRAP (Waste and resources action programme), 23 Sep 201017 IGD ShopperTrack Hot Topic Private Label and Brands April 2011


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This is followed by five other product types, namely: products with sustainably sourced paper,those not transported by air, those that help reduce shoppers energy use, sustainablysourced fish, and products that help protect wildlife, the countryside or habitats. Followingincreased prominence over recent years, just over a third (36%) of shoppers regardRainforest Alliance certified products as making a significant contribution towardsenvironmental sustainability. Shoppers appear particularly attracted to environmentally

friendly products that involve a new packaging format with additional functional benefits,include multiple environmental improvements, or demonstrate how they have gone the extramile in tackling environmental concerns.

The subsequent individual retailer sections in this report outline the current ethical tradingstrategies of each retailer and the different approaches being taken towards sustainabilityissues.

REGIONAL/LOCAL SOURCING

As consumers are continuing to take more of an interest in what they are eating and productorigin, retailers are using this as a point of differentiation between themselves and theircompetitors. Most leading retailers now have regional/local sourcing teams on a region-by-region basis.

Following four years of significant growth, the penetration of shoppers specifically buyinglocally sourced foods has plateaued.

Tracking ethical purchasing

Source: IGD ShopperTrack Shopper Trends 2011

Over recent years, the economic downturn appeared to accelerate the trend for locallysourced food and drinks, as shoppers sought to support the economy through their purchasedecisions. The nature of this type of food patriotism appears to have now evolved, asrevealed by the main reasons shoppers give for buying locally sourced products.


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Tracking reasons to buy local food top six

Source: IGD ShopperTrack Shopper Trends 2011

Shoppers are still motivated to support local producers as they were a year ago, however, thedesire to buy locally sourced products in order to support local retailers or keep jobs in thearea has waned somewhat.

The distinction between local producers and retailers may reflect perceptionsregarding the size of the business rather than the stage within the supply chain. Localretail franchise outlets may not always be perceived as local businesses, whereasfarmers and local producers are often perceived as sole traders or small local firms.The public have been braced for dramatic increases in unemployment since therecession began. While unemployment has increased, it has not yet reached levels

originally anticipated, at least within the private sector.

The key initiatives in this area are outlined below by retailer:

Tesco has a long term promise to stock more locallines than any other retailer. Tesco has fivededicated regional buying offices throughout the UK.In 2010 sales of local products increased to 1bn, upfrom 850m the year before.

Sainsbury's stated aim is to increase the number oflocal/regional products available in its stores and hasestablished local and regional sourcing teamsdedicated to finding these products and bringingthem to market. In some cases, these products willbe truly "local", sold in a small cluster of stores closeto the point of origin. However in other cases, theproducts may be "locally renowned" products, butwith a much wider, even nationwide distribution.Sainsbury's has also launched "Supply SomethingNew." The scheme is run in partnership with FoodFrom Britain, and involves top representatives fromthe supermarket taking to the road every two months

in a search for new, innovative, large and small UKsuppliers.


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Asda has a supplier hub network which provides anopportunity for small suppliers to supply the retaileroutside its UK-wide depot infrastructure. Asdasources over 7,000 lines, including world foods, fromover 500 specialist suppliers, with a goal of

developing a catalogue of 15,000 local lines.

Morrisons has over 230 locally sourced fresh andfrozen products in stores in Wales and over 500dedicated Scottish products in their Scottish stores.Morrisons supports a number of local suppliers fromother regions ranging from Saffron Cakes and Bunsin Cornwall, Onion and Chive cheese in Northumbriato Stapleton Farm yoghurts in the South West.

Waitrose has publicised the fact that it seeks tosource goods from Britain wherever possible andactively champions the interests of British suppliers.This has been taken a step further by employingregional buyers, tasked with finding smallersuppliers. Waitrose run meet the buyer road-showsfor producers to present their proposals andsuccessful products receive a listing for a cluster oflocal stores.

The Co-operative Group has a strong commitmentto sourcing goods from British suppliers and Britishfarmers especially. In November 2010, The Co-operative announced that it would move to adedicated UK milk supply scheme from August 2011when its existing contracts expire. Over the comingmonths, the retailer will be finalising plans with milkprocessors which will result in up to 350 British dairyfarmers receiving a premium for supplying around360m litres of milk to more than 4,000 Co-operativestores.

COMPETITION COMMISSION UPDATE

The Competition Commission is an independent public body which conducts in-depthinquiries into mergers, markets and the regulation of the major regulated industries. In May2006 the Office of Fair Trading (OFT) confirmed its earlier draft decision to instruct theCompetition Commission (CC) to carry out an investigation of the UKs Grocery RetailingMarket. This has been the third investigation in this sector within the last 8 years.

The investigation broadly focused on:

The planning system.Land holding policies of the supermarkets.The buying power of the biggest supermarkets.Below cost selling and price competition.


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18

The groceries final report was published on 30th

April 2008. The recommendations made in

the final report include:18

A recommendation for the inclusion of a competition test in planning decisions onlarger grocery stores.

Action to prevent land agreements which can restrict entry by competitors.

The creation of a new strengthened and extended Groceries Supply Code ofPractice.

A recommendation to establish an Independent Ombudsman to oversee and enforcethe Code.

The Commission published a stronger code of practice in August 2009 aimed at betterprotecting suppliers. The new code applies to all grocery retailers with annual turnover inexcess of 1bn and prohibits them from making retrospective changes to terms andconditions of supply. It will also require them to enter into binding arbitration to resolve disputewith suppliers.

While the heads of the UKs major supermarkets supported proposals to improve localcompetition and improve relationships between retailers and suppliers, they hit out at theproposed introduction of an ombudsman to oversee and enforce the Groceries Supply Codeof Practice. In August 2010, the Department for Business published plans to establish aGroceries Code Adjudicator (GCA) rather than the much disputed ombudsman. The GCA willhave the power to receive complaints about the way supermarkets interact with their primarysuppliers from anyone in the supply chain at home or overseas, and deal with themanonymously. This includes farmers who may not directly supply the large supermarkets. Agovernment statement said although non-governmental organisations, trade associations andother organisations cannot lodge complaints directly, they still have a useful role to play in

offering advice and assistance to their stakeholders.19

The Grocery Codes Adjudicator (GCA) in brief

The adjudicator will be introduced in 2012.

The offices will be at the OFT but it will be entirely independent fuelling retaileraccusations it is a quango.It will be funded by the 10 UK grocers with a turnover of more than 1bn. Governmentestimates the regulator will cost 1.2m a year 120,000 per retailer although costswill vary depending on the complaint and investigation numbers.It will be able to receive complaints from all primary suppliers in the UK supply chainor overseas. This includes farmers not directly supplying supermarkets even thoughthese contracts are not covered by GSCOP.

In July 2011 a parliamentary committee made a statement saying that they felt that theproposed supermarket adjudicator should be given the power to fine the supermarket giantsfor unfair treatment of suppliers. The Government is committed to introducing legislation tocreate an adjudicator to investigate alleged breaches of the Groceries Supply Code of

Practice (GSCOP), which came into force last year. But the only sanction in the watchdog'sarmoury will initially be the power to require stores to publish the results of his investigations.Only if this proves an insufficient deterrent will ministers consider granting the adjudicator thepower to impose fines.

The report by the cross-party released by the Business, Innovation and Skills (BIS) committeeof the House of Commons said financial penalties should be available from day one. The BIScommittee also said the bill to empower the adjudicator should also include provision for tradeassociations and other third parties such as farmers to put forward complaints forinvestigation, because individual suppliers may fear losing contracts if identified aswhistleblowers.

18 http://www.competition-commission.org.uk/19 http://www.kamcity.com/namnews/asp/newsarticle.asp?newsid=55162
http://www.competition-commission.org.uk/http://www.competition-commission.org.uk/


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TIER RETAILER PROFILES: October 2011 TESCO

CHAPTER TWO 19

Tesco Head Office (UK & International),New Tesco House,

Delamare Road,Cheshunt,

Waltham Cross,Hertfordshire.

EN8 9SL

Tel: 0044 (0) 1992 632 222www.tesco.com

Domestic Market: United Kingdom Turnover: GBP 61,610.95m

No of Formats: 10 Operating Countries: 14

No. of Stores: 2,715 (UK) Sales area: 9,620,492 sq.m

Tescos Mission StatementCreating value for customers, to earn their lifetime loyalty.

Corporate Strategy

Maintain a strong UK core businessBecome as strong in non-food as in foodExtend operations into retailing servicesDevelop Tescos international operation

To put the community at the heart of what it does

2011 Key Highlights:

Tesco has the largest market share in the UK grocery retail market. In October 2011,their market share stood at 30.6%.20Despite difficult market conditions in its core market, Tesco's progress over the year hasbeen strong, with trading profits up 7.8% to 3.7bn.UK business delivered a solid overall performance but growth fell short of corporateexpectations. In part this can be explained by the rising cost of fuel deterring shoppersfrom visiting out-of-town Extra stores and soft demand for discretionary non-food items.Record results were achieved in rest of Europe, with the strongest growth in sales, profitsand margins for several years.The performance at its US concern Fresh & Easy is improving, with trading picking up

markedly through the year, and Tesco now broadly satisfied with the format. Howeverlosses increased, reflecting costs associated with the acquisition of two suppliers.Total global space increased by 8.4 m sq ft to 103.6m sq ft, a net gain of 8.8%, with morespace added in Asia than in any other region. Store numbers increased by 544 to 5,380,including 22 new Extras in the UK.Strong growth in onlinesales. In UK, 15% growth was reported for grocery and a 30%rise in sales at Tesco Direct.

20Kantar WorldPanel Till Roll data October 2011

ORGANISATIONAL OVERVIEW
http://www.tesco.com/http://www.tesco.com/


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A growing focus on services, with solid growth achieved in Telecoms, lifted by a 24% risein Tesco Mobile subscribers. Growth from both pre-pay and contract customers.Tesco Venture Brands.Tesco has been developing its strategy with the launch of its first'venture brands'; private label products designed to compete with premium brands butwhich do not feature any direct links to Tesco on their packaging.In 2011 Tesco is focusing on delivering intrinsic product quality through benchmarking its

products against the best in market, investing 35m in food quality, improving 500 lines,launching 2000 new lines, launching 20 exclusive Tesco brands, investing in NPD andimproving team expertise.In September 2011 Tesco announced details of a 500m investmen t in the Big PriceDrop which will see it cutting the price of thousands of essential items.

2010/11 Key Challenges:

Maintaining focus on specific markets with increased geographical spread.Low consumer confidence.Lower consumer disposable income.Record levels of promotions.Higher fuel prices.Increasing inflation.

Decreasing brand loyalty.

Organisational Structure

In June 2010, Sir Terry Leahy announced that he was retiring as CEO in March 2011. He wasreplaced by Philip Clarke who was previously responsible for the Groups internationaloperations. Richard Brasher assumed the new role of CEO of UK and Republic of Ireland.Richards key priorities include:

Driving like-for-like sales in a low growth and competitive environment.Ensuring a strong pipeline of new space (Tesco plans to open 2.3m sq ft of space in2010/11 in the UK and Ireland).Continued development of Tescos strong multi-format strategy from Express to Extra as

well as the potential roll out of the Home-plus non-food format.Use of Club-card as a differentiator in the market.

In March 2011, additional changes were made to the board:Tim Mason, CEO of the group's US Fresh and Easy business will become Tesco DeputyChief Executive, based in America with responsibilities including 'branding, our valuesand climate change'Commercial Director Richard Brasher will assume the role of Chief Executive of the UKbusiness, a newly created position, also taking responsibility for the Republic of Ireland.David Potts will take responsibility for the growing Asian division as CEO of Asia.


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Key Financial Indicators

Tesco's full year results for the 52 weeks ended 26th February 2011 revealed a strong overallperformance across the group, with revenue (ex-VAT, ex IFRIC13) increasing by 7.2% to61.7bn. Trading profit increased by 7.8% to 3.7bn with group profit before tax growing 11.3% to3.5bn.The key highlights from the results were:

8.4m sq ft of space was opened over the year, with 72% outside the UK. UK sales growth was ahead of industry averages at 7.19%. Market share gains were made with encouraging like for like trends seen internationally.

For the 26 weeks to 27 August 2011, group turnover rose by 7.8% to 31.8bn (+7.3% excl. fuel)with pre-tax profits up 12.1% to 1.9bn. Underlying trading profit was up 8.2% (+3.7% on areported basis). However, as expected, performance in its home market remained weak with UKturnover up just 5.8% to 21.2bn and like-for-like sales down 0.6% (excl. VAT). This was slightlyless than the decline predicted by analysts, although the chains performance weakened duringthe six month period with the fall in like-for-like sales accelerating to 0.7% in the second quarterhaving fallen 0.4% in first. UK trading profit was up 4.5% to 1.27bn, impacted by the effects of itssale and leaseback programme. Trading margin slipped 7 base points to 6.01%.

Company Strategy

Tesco is the UKs largest grocery retailer, operating in the UK and internationally through a rangeof different store formats. Tesco has long based its development on a simple four part strategy,which has been in place since 1997 and has formed the bedrock of much of the retailer's successover recent years. In 2006, Tesco added a fifth pillar - Community. In April 2011, Group CEOPhilip Clarke outlined six new immediate corporate objectives for Tesco, which build on Tesco'slong standing five pillars of growth.

Keeping the UK strong and growing. To be outstanding internationally not just successful. To become a multi-channel retailer. To deliver on the potential of retailing. Applying group skill and scale. To deliver a higher return on capital employed.

STRATEGY


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Maintain Strong UK Core BusinessTesco has reaffirmed its commitment to driving its UK business, worth over 40bn in 2010/11,and still delivering 66% of sales and 68% of trading profits. Tescos core UK business accountedfor 68% of group sales and 68% of group trading profit in the 2010/11 financial year. Tesco hasadded significantly to its UK store estate over recent years, and new store development remainsa priority. Another priority has been the expansion of the Tesco Extra hypermarket format. Thedevelopment of these larger stores has provided a strong platform for Tesco to grow its non-foodsales, but has also provided scope for Tesco to offer fuller food ranges in more stores. TescoExtra now accounts for c. 42% of total UK selling space.

The retailer has also focused on developing its smaller format stores with the expansion of TescoExpress convenience stores a recent priority. Tesco has up-weighted its focus on Express newstore development, with 180 new Express stores planned for the current year. Total Expressstore count reached 1,310 by February 2011.

In recent times, Tesco has introduced more tailoring to individual store offers, to reflect localdemographics. This has come in tandem with a thrust towards developing more local sourcing,and this remains an important development area. In response to the shift in consumer attitudesas shoppers have tightened their belts, Tesco has made a series of adjustments to its offer to

reflect changing consumer priorities, including a new promotional focus, price reduction initiatives,launching of "discount brands" range and the re-launch of Tesco's Club-card loyalty scheme. Thisis very much in line with the Tesco ethos of following the customer.

A key tool in Tesco's consumer armory is Club-card, Tesco's loyalty card scheme which providesinsight into customer shopping patterns and help shape product and range developmentstrategies. More information on Club-card, and is provided in the Direct Marketing section of thisprofile.

International GrowthTesco now operates more space outside the UK than in its domestic market. At February 2010,64% of Tesco's total sales area was outside the UK. 8.5m of the 11.3m sq ft of new spaceplanned for 2010/11 will be outside the UK, and as a result international stores will account for

66% of total space by February 2011.

Central Europe is the main focus of Tescos international activity and Poland, its largest market inthe region. Having built up a nationwide network of hypermarkets, Tesco is now focusing more onopening up new catchments in the country with smaller formats. Having introduced Club-card in2009, Tesco is now preparing for a dotcom launch in Warsaw in early 2012.A dotcom launch isalso in the offing in the Czech Republic with the service set to debut in Prague in the next fewmonths. As in Poland, Tesco is actively pursuing a multi-format strategy; its presence in theconvenience market was greatly strengthened in January 2011 when it announced the acquisitionof 128 Zabka and Koruna outlets.Perhaps Tescos greatest opportunity for long term growth inEurope lies in Turkey, where it has been steadily increasing its estate of Kipa hypermarkets. Alarge population and economic liberalisation makes Turkey a market with considerable potential.Having invested in modern distribution centres, Tesco has a solid foundation for expansion in thecountry and plans to increase its space by almost a quarter over 2011 and 2012.

Over half of Tescos international revenues are generated in Asia, with the retailers presenceconcentrated in the most dynamic South and East Asian economies. Tescos most significantoperation is in South Korea where it now achieves annual turnover of 5.0bn through acombination of formats. Within the next year Tesco plans a substantial non-food online launch, itsfirst outside the UK, which will build on the proven success of its online groceries service andextend the reach of the comprehensive non-food offer of its hypermarkets.


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One of Tescos highest profile international operations is Fresh & Easy, its US start up which inJuly 2011 was operating 164 stores in the western United States. Having invested substantialresources into launching and building the business, Tesco is eager to realise a return on itsinvestment. In 2010/11 Fresh & Easys like-for-like sales grew robustly as the format grew inpopularity, but losses increased, reflecting the purchase of two fresh food suppliers. Tescobelieves it can breakeven with only 300 stores instead of the 400 previously anticipated. With theformat receiving positive feedback from customers and 50 further stores set to open this year,Tesco is confident of reaching breakeven before the end of 2012/13.

Source: IGD Research*Sales excluding VAT and impact of IFRIC 13 (customer loyalty schemes)

Non-FoodTescos long-term goal is to be as strong in non-food as it is in food. This strategy is being

developed across a number of fronts, but the key vehicle for selling non-food at present isthrough its stores, the Extra hypermarket format in particular, alongside its dedicated Home-plusnon-food stores. Catalogue and online activities represent the other channels through whichTesco sells non-food.

Retailing ServicesTescos strategy of"following the customer" into new areas of expenditure allows the company tosell more products to existing customers as well as gaining new customers. The main serviceswhich fall under this division are:

Tesco.com and Tesco Direct Tesco Bank Tesco Telecoms

Dunnhumby

Tesco's Retailing Services customers are also its most valuable and most loyal21

. Customerswho use two retailing services spend four times as much in stores as those who do not use anyservices. Customers with a Tesco credit card spend c.30% more with Tesco than similarcustomers who do not have a Tesco credit card, and customers with two retailing services are25% less likely to lapse over a 12-month period than similar customers without services.

21 IGD, Tesco Retail Profile. 20.04.2011


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To put the community at the heart of what we doThe adoption of a fifth pillar for Tesco is significant and reinforces the importance that the retaileris placing on developing in this area. This move was announced in 2007 and builds on a numberof well-established practices within Tesco in this area. These include Sir Terrys 10-pointcommunity plan introduced in 2006 and, more recently, the introduction of programmes coveringclimate change, carbon reduction and packaging reduction.

Recent progress has been made in developing "Environmental Stores". A number of these storesin different formats have been developed including the world's first zero carbon supermarket inRamsey, Cambridgeshire. Other recent initiatives include the launch of a SustainableConsumption Institute with The University of Manchester, together with a programme to introducewind turbines on around 30 Tesco sites across the UK.

PropertyIn recent years, there has been a growing willingness among all UK grocery retailers to releasecapital from property. This is linked to the premium that potential investors have been attaching toUK grocery retailers off the back of their property assets. In December 2009 British Land initiatedits fifth joint venture with Tesco when it acquired Segro's stake in two shopping centres, SurreyQuays in London and Clifton Moor in Yorkshire, both of which have Tesco as the anchor tenant.Segro invested in the centres 20 years ago in a joint venture with Tesco. Tesco laid out plans in

its 2010 annual report to plough 1.6bn of capital into the UK economy through new storeopenings. Tesco added 188 new stores to its portfolio in 2010, expanding its estate by 6.3%.Nearly all of Tescos growth came from its convenience estate, which grew by 10% in the past

year. As of May 2011 Tesco had opened a further 50 stores in the UK.22

Trading Strategy

Tesco's focus is on delivering value and simplicity for customers, and this is reflected across howthe retailer does business. The retailer's view is that if customers like what it offers, they are morelikely to come back and shop with Tesco again. This translates into a key ethos of Tesco, namely"No-one tries harder for customers." Linked to this is a separate ambition for staff to "Treat peopleas we like to be treated". Tesco's focus on continual improvement is epitomised in the retailer's"Every little helps" strategy:

Every Little Helps - key elements

The shopping tripFive main elements: clear aisles, being able to get what they want, goodprices, no queues and great staff. Constantly measures progress againstthese goals.

A great place to workFour components: to be treated with respect, to have a manager whohelps them, to have an interesting job and to have an opportunity to geton.

The way we workFocus on delivering consistently every day, trying to get it right firsttime, making jobs easier to do, ensuring individuals appreciate howvital their jobs are and having a continual focus on saving time andmoney.

EDLP PlusTesco uses its scale advantages to pursue a volume-led strategy in which profit from sales isrolled back into the business in order to reduce operating costs, improve the offer to customersand cut prices. Tesco has demonstrated an ability to continuously drive cost out of its business byseeking to carry out everyday retailing activities "better, simpler and cheaper" with its "step-change" programme a key part of this. Tesco has developed the scale and the systems requiredto give it real traction here, and this continues to build.

22 IGD, Tesco raises the bar internationally 10.05.11


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Category TeamsCategory teams, each headed by a Category Director, are responsible for the execution ofcommercial strategy at an operational level. Category directors typically manage four streams ofstrategy within their areas including customer, NPD, technical and buying. Tesco has sought toengage suppliers in more meaningful relationships as the business develops its approach to themanagement of categories. It seeks to work with suppliers that:

Understand the Tesco strategyAre innovative and receptive to change, responding quickly to consumer trendsAre willing to build long-term relationshipsMeet all necessary technical requirements

When dealing with large suppliers, Tesco encourages interaction with suppliers through"business units" - a multifunctional team that combines a variety of resources from bothcompanies. Business units exist on a number of levels, depending on the size and scale of thecategory and the capabilities and approach of the supplier. These include:

Category Business Unit - A good operational understanding exists between the supplierand retailer, facilitating a joint planning process that helps to develop the category.

Strategic Business Unit - Both businesses share knowledge, participate in collaborativebusiness planning and forecasting and enjoy an active trading relationship across severalcategories. This level of interaction requires a significant amount of commitment andresource from both parties.

Commercial TeamThe commercial team follows a strategy that takes a broad, inclusive approach to customerrequirements, embracing the following principles:

1. To be the right price2. To lead on range3. To lead on quality4. To drive innovation

1. To Be the Right PriceTesco has long had strong value credentials, which it supports through a combination of EDLPand promotions. Price Check is a key part of this, with a commitment to be cheaper than Asda orrefund the difference. Over 10,000 price checks are conducted on a weekly basis and buyers areable to react immediately to any competitor pricing activity on both a local and national level.Tescos and their key rivals prices can be viewed at www.tesco.com/todayattesco/pricecheckand at mysupermarket.co.uk. Tesco launched a double the difference price guarantee in 2011 ina bid to prove it was cheaper than Asda after it promised to be 10% cheaper than its rivals. Tescoresponded by promising shoppers that it if they found exactly the same item at a rivalsupermarket it would pay out twice the difference, in the form of vouchers. However in May 2011Tesco cut back its offer to refund double the difference on products bought for less in Asda,blaming savvy shoppers. The supermarket group said that it would now only refund thedifference in price - rather than double the difference as part of its Price Check scheme.

2. To Lead on RangeTesco aims to meet the everyday needs of all customers. The retailer's appeal is broad with wellconstructed private label tiering giving the retailer wide appeal. Current priorities include moreclosely matching store format to the characteristics of the local population, for instance withrelevant ethnic food ranges and greater investment in premium ranges. Tesco offer a range ofprice and quality alternatives in every major food and grocery category through the Value, Tesco,Finestand the new Discounterranges. Tescos research indicates that customers view this broadranging as one of its core strengths.


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During the economic downturn, Tesco made a number of changes to its range and positioning,including the introduction of the discount brand range and the more prominent positioning ofTesco value products within store. However, as the economic environment eases slightly in

2011/2012 Tesco plans on launching +1000 new lines , significantly improve +500 lines andlaunching 20 Tesco exclusive brands. In 2011Tesco launched its first venture brands: privatelabel products designed to compete with premium brands but which do not feature any direct links

to Tesco on their packaging.

3. To Lead on QualityTesco aims to offer better value for money than equivalent competitor private label or brandedproducts by offering lower prices or superior quality. There will be greater focus going forward onenhancing product quality at the premium end of the private label spectrum. For example:

Value ranges - Fit for purpose products equal to, or lower in price, than the cheapestavailable at rivals' stores.Tescobrand - Market-leading quality priced cheaper than the market leader or any pricerival achieving the same quality levels.Finest - Positioned as the best quality products available in supermarkets at comparableprices.

For example, in March 2011, Tesco announced a roll out of a new private label range of yogurtsunder its venture brands initiative. The products have been launched under the Yoo brandname and will cover 21 products with sub-branding of 'fruity thing', 'tasty thing', 'light thing' and'yummy thing'. The packaging of these products highlights their British credentials, with theyoghurts made from 100% British milk and Tesco stating that they will be priced at 20% cheaperthan other popular yoghurt brands.

4. To Drive InnovationInnovation will be a higher priority for Tesco going forward, with greater emphasis on new productdevelopment and the harnessing new technological platforms to increase digital presence.

There are a number of additional trading priorities that suppliers should be aware of:

Fresh produce (with emphasis on quality and appearance of fruit and vegetables).Getting the best out of new products.Delivering great seasonal events.Strengthening "pillar" brands - (The established Value, Healthy Living and Finest ranges,and niche ranges such as Whole-foods and Organics).Serving the local community better (by delivering more local and ethnic foods in-store).

Tesco has signalled that it is particularly keen to work with suppliers that:

Understand the Tesco strategy, and recognise its multi-format and multi-channel focus inhow they manage their business with Tesco.Are innovative and receptive to change, responding quickly to consumer trends throughuse of Dunnhumby insights as well as wider category expertise.Are willing to build long-term relationships (with Joint Business Plans a growing priorityfor Tesco).Meet all necessary technical requirements.


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In-store Ranging and MerchandisingOptimising ranges will be an increased focus for Tesco going forward as it seeks to maximisecategory opportunities and to enhance individual store performances, Tesco is more closelytailoring ranges according to local catchment characteristics:

Tesco is increasingly able to deliver store-specific ranging across its stores. The

planogram for each store is driven by its individual sales, specific space, product cubingand "level run down" criteria (i.e. merchandising products in such a way as to equalisethe rate of shelf-stock run down - therefore making replenishment of any given categorymore efficient, as the entire category will, theoretically need to be replenished at thesame time).Having placed greater emphasis on its value offer to help customers cope withchallenging economic times (with, for instance, the more prominent positioning of theTesco Value range, introduction of Discount brands and stronger promotional agenda),Tesco will focus more on nurturing demand for premium products and driving innovation.Tesco recognises the opportunity for ethnic ranges and has appointed ranging managersto ensure that ranges of local stores better meet the demand of the local consumers.

Pricing & Promotions Strategy

As shoppers have become more cautious in their spending the role of pricing and promotions hasrisen fast across the sector. Tesco has reacted with a stronger focus on price, pricecommunication, and rounded price points evident in-store. Similarly there has been a strongeremphasis on promotions with promoted products increasingly contributing to sales. The shift intype of promotional offer has been towards price reduction rather than multi-buy deals. However,Tesco has also moved into new promotional mechanics where these tie in with prevailingconsumer sentiment, for instance with a variety of meal deals being introduced.

Pricing StrategyTesco is essentially an EDLP+ operator (referred to by Tesco as value -led), supporting anEvery Day Low Price proposition with a programme of promotional activity. Typically, the EDLPapproach is used for staple grocery lines whilst promotions are used for impulse categories,product launches and one-off (or "wow") lines.

Tesco's uses its scale advantages to pursue a volume-led strategy in which profit from sales isrolled back into the business in order to reduce operating costs, improve the offer to customersand cut prices. This in turn generates increased sales and profits allowing a further cycle ofinvestment.

Tesco has demonstrated an ability to continuously drive cost out of its business by seeking toimprove its everyday retailing activities with its "step-change" programme a key part of this. Thesavings generated from this programme have multiplied over time to reach 550m in the UK in2010/11, and are crucial to Tesco's ability to maintain margins while still competing strongly onprice.

Since the onset of the global financial crisis, Tesco has strengthened its value focus with a

sharper price message. Initiatives such as the introduction of 'discount brands', more variedpromotions; greater use of events and the new price match guarantee have helped sharpenTesco's price position.

In September 2011 Tesco announced details of price offensive aimed at revitalising its UKbusiness. The group said it is investing more than 500m in the Big Price Drop which will see itcutting the price of thousands of essential items - from milk to pasta, fresh fruit and vegetables and simplifying promotions, whilst reducing the number of multi-buys, particularly in fresh foods.


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UK Chief Executive Richard Brasher said it was the biggest investment he had made in loweringprices in 25 years at the business. To fund the move Tesco will end the practice, introduced twoyears ago, of offering customers double Club-card points. It will revert, towards the end ofOctober, to one Club-card point for every 1 spent from two points for every 1 spent, a movethat Nomura, joint broker to Tesco, estimated would free up more than 300m.

Promotion StrategyTesco customers prefer simple offers and as a result current promotions are focused on fourkey mechanics:

1. BOGOF2. X for Y3. Price cuts with a consistent message4. Extra free

Source: Tesco Trade Briefing Presentation, May 2011

In line with the broader sector, there has been a stronger emphasis on promotions, and in turnthe proportion of sales that products on promotion contribute has also increased. A notable recentshift has been more focus on price reductions (including round price points) rather than multi-buydeals.

New promotional mechanics have been developed, for instance with a variety of meal dealsbeingintroduced. Indeed, Tesco has pushed ahead strongly here in recent months with wider use ofBuy One Get Two Free deals and better than half price offers designed to attract shopperattention and drive value credentials. Tesco is also keen to use Club-card more strongly as apromotional driver. Double Club-card points is being complemented with offers such as extrapoints on certain products, or wider initiatives such as the periodic Big Club-card VoucherExchange, making Clubcard points worth more when spent on specified categories (e.g. beauty,

clothing or garden products in Spring 2011).

In February 2011 Tesco launched a new 200m price campaign with price reductions on 1,000everyday items (brands and own label products) with a promise to pay double the difference if thesame items could be found cheaper at Asda. Soon after the launch of the offer websites,particularly the MoneySavingExpert.com forums were full of consumers informing fellow shoppersabout which items were cheaper in which store, spreading the news via Facebook and Twitter.Tesco has since refined the offer to close loopholes and this remains an important tool throughwhich Tesco demonstrates its price competitiveness.


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Going forward Tescos promotional activity will be designed to encourage shopper loyalty. Thisactivity will include but is not limited to round pound pricing, meal deals, Club-card relatedpromotions and events such as foyer killer deals.

Private Label Strategy

Tesco has an extremely strong private label strategy stretching from value, through the coreTesco brand to Finest. In September 2008, a fourth tier was added with the introduction ofDiscount Brands, which sits between Value and the core Tesco brand.

The private label structure is being rolled out to non-food categories, with the core Tesco brandand Value brand increasingly in evidence across the non-food product portfolio and even in place

across services, for example in Tesco's broadband, mobile phone tariff and car insurancestructure.

Tesco also operates a range of niche brands targeting specific customer groups or demands. Keylines include Organics, Healthy Living, Kids, Free From and Healthier Choices in food togetherwith the clothing sub-brands F&Fand Cherokee.

Having expanded and promoted its value offering during the downturn, Tesco has now signalledthat it wants to focus more on developing its premium own label and intends to invest in qualitymore going forward.

Tesco ValueThe Tesco Valuerange was launched in 1993, and now consists of more than 1,200 lines .Valuelines are benchmarked against the cheapest branded competitor in terms of quality and thecheapest supermarket or discounter in terms of price. About 75% of customers buy into the Valuerange.

Discount Brands at Tesco

In September 2008, Tesco launched a new own label tier in response to strong performance inthe discount market, with Aldi and Lidl in particular showing impressive double-digit growth. Thelaunch was accompanied by extensive POS in-store; highlighting Tesco as "Britain's BiggestDiscounter", while shelf-edge labelling focused on two key messages: "discounter price, Tescoquality" and "discount brands". On average, the discounter range is sold at 23% below TescoStandard price and around twice the relative price of the Value Range. In the past two yearsTesco has successfully used its discounter brand to stem the tide of buyers moving todiscounters as a result of the recession.


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Tesco Brand

The standard Tesco brand has an extensive range comprising more than 8,000 lines. Productspecifications are positioned to achieve market leading quality at a price lower than the marketleader. The brand is positioned to sit between Tescos Valueand Finestoffers in the multi-tierapproach, and slightly above the discounter range.

Tesco FinestFinest was launched on a nationwide basis in 1998. With cash-strapped consumers dining inmore, its Finest range has been one of Tescos strongest performers with sales up 6.3% in 20 10,

outpacing growth in other areas of its food range. Its Finest and Value are now the two largestfood brands in the UK bigger than Coca-Cola each with sales of 1.1bn per year.

Tesco Healthy LivingTesco Healthy Living is a lifestyle oriented brand, comprising over 400 products that are typicallylow in sodium and fat. The range includes products with added health benefits such as thosewhich offer at least two nutritional benefits such as being a good source of Omega-3, providingwholegrain or one of the recommended five portions of fruit and vegetables.

Additionally a new Light Choicessub-brand was launched at the same time, targeted at shoppersseeking to lose weight, to offer products which meet strict criteria for sugar, saturates, salt andcalories and are either less than 3% fat or half the fat of a comparable product.

Two further healthier ranges in the Tesco portfolio are Free Fromand Wholefoods. Tesco holdsa 40% share of the free-from food market which aims to serve the needs of customers with foodallergies. There are around 150 products in Tescos Free Fromrange.


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The Wholefoodsrange comprises natural snack and cupboard lines, including nuts and pulses.

Tesco KidsThe Kids range has been in operation since 2002 and comprises approximately 40 productsdesigned for children between the age of 5 and 10. The range is positioned to help deliver thenutritional requirements of children, specifically in the areas of fibre, wholegrain and five-a-day.As such, the range covers a variety of products such as fruit, dairy products and breakfastcereals. The range also stretches across non-food to include selected health & beauty products.

OrganicsTesco has traditionally had eight specific areas in store where consumers can purchase organicproducts: produce, dairy, bakery, meat, frozen, ambient, baby and BWS. However, as the organiccategory has become more widespread and achieved greater consumer penetration, organicproducts have become increasingly commonplace across the store. These products areintegrated into product categories, rather than merchandised together as an organics section.The range consists of approximately 1,600 SKUs.

City Kitchen

In July 2009, Tesco began a trial introduction of a new ready meal range into a number ofExpress convenience stores. The range is aimed at providing a healthy alternative for time-pressed shoppers, and positioned more towards the premium end of the market. The new range,called 'City Kitchen' contains six different meals, including Chorizo Paella and King Prawn

Linguine, aimed at the premium end of the market.


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Venture brandsIn 2011 a notable development has been the introduction of so called venture brands providingTesco with a private label alternative to premium own label products in categories whereconsumers are particularly drawn to brands. Product launches to date include Yoo yoghurts,ChokaBlokice cream and Lathamsand Nutricatpet food. Products are characterised by a lack ofTesco branding, high quality ingredients, design and merchandising, and even their own brandwebsites. With multilingual packaging, venture brands have potential to be introduced to all Tescomarkets, developed as global brands in a similar manner to F&Fand Technika.

In addition to the above ranges, Tesco stocks a range of own-label Fairtradeproducts includingfruit. The Fairtrade range now includes over 60 products.

Tesco launched new labelling in August 2010 across hundreds of its private label products whichwill make it easier for its customers to choose healthy products from its product ranges. In thisnew initiative, Tesco is to introduce a simple roundel label to communicate health messages,such as: 'A good source of fibre'; '1 of 5 a day'; 'Low salt'; or 'Contains wholegrain'. The newcircular symbols will be silver or black on Tesco Finest range, green on Tesco Standard and blueon the retailer's Value ranges. This new label will be extended to over 700 of Tesco's private labelproducts.

Customer Profile

In line with their mainstream market position, Tescos shopper spend profile is close to theaverage for the total UK market. There is a slight trend towards upper socio-economic bands, yeta broad appeal across different social classes is clearly still retained. Tesco strives to achieve thiswide appeal through the innovative nature of their ranges whilst also maintaining a strongemphasis on value for money and lifetime loyalty through tools such as their Every Little Helps

marketing and the Tesco Club-cards.

There is more evidence of the breadth of Tescos customer base in the age profile of customerswhich again closely matches the total market. There is however a skew towards youngercustomers which could be because of the appeal of Tescos price position to students and youngfamilies, and the greater readiness of the younger age brackets to shop in larger superstore andhypermarket formats. A slight bias exists among Tesco consumers towards households withchildren.

MARKETING & ADVERTISING OVERVIEW


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Along with the popularity of Tesco amongst young families with children, Tescos household sizeprofile shows a definite skew towards larger households. However, Tesco still scores wellamongst single and two-person households. Popularity with these groups will have been aided bythe roll-out of the Tesco convenience formats.

The average spend per trip of a Tesco customer is the lowest amongst the Top 4 UK retailers.The main reason for this is likely to be the emphasis Tesco has placed in recent years on theexpansion of its convenience formats, which is bringing down the overall average. Customerfrequency of purchase in Tesco stores remains well above the average for the Top 4 UK groceryretailers, again as a result of Tescos success in the convenience sector, which caters towardssmaller yet more frequent transactions. Over two-thirds (69%) of UK households visit a Tescostore within a four week period. The average score on this measure across the Top 4 UK groceryretailers is 44.1%.

Marketing & Advertising Strategy

Tescos marketing strategy supports the company mission of increasing market share by winningthe lifetime loyalty of customers. Tesco markets itself as the consumers champion, an approachexpressed in the long-established slogan Every Little Helps. A wide range of programmes helpsupport this, including initiatives designed to improve the customer shopping experience such asthe one-in-front strategy, where Tesco aims to open new till points where customers find they arein a queue with more than one other customer ahead of them.

This positioning is closely linked with the overall business model which is volume-led and relieson high consumer footfall and increasing sales in order to be successful. The role of marketingtherefore is to communicate Tescos positioning in order to provide a general reassurance ofvalue for money and to draw attention to specific activities. E.g. in April 2010 Tesco became theofficial supermarket of the England football team enabling it to capitalise on marketingopportunities in the run up to, and during, the 2010 FIFA World Cup. In January 2011 Tescoannounced that it was going to sponsor Great Britain Olympic canoeing team for the next twoyears. To support the surge in public interest in the sport in the run up to the 2012 OlympicsTesco have added canoes and kayaks to their sales catalogue - Tesco Direct the range is due tobe expanded in the Summer 2011.

In May 2011 Tesco announced that it is planning on launching its first ad-funded TV series, calledThe Tesco Real Food Cook-Off, on both Channel 5 and the UKTV channel Good Food inSeptember. The eight-episode series, under its Real Food magazine brand, will launch off theback of a Tesco advertising campaign that will include a competition to find eight of the UK's bestcooks. An online and print campaign will encourage people to enter the competition with theirfavourite recipes. The people behind the eight best recipes will be chosen to take part in thecook-off programmes in a contest to find the "People's Cook".

Tesco markets itself as the consumer's champion, an approach expressed in the long-established

slogan "every little helps". This is supported by a range of initiatives, driven by Tesco's customerplan focused across a number of key areas:

1. Helpfulness: Tesco aims to provide in-store services which help consumers with theirshopping, including one in front till opening, bag packing, price scanners and c

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