Despite squeezed consumer spending and the growing discounter threat, market leader Tesco has consistently held on to its dominant market share. Amid initial signs of food inflation starting to ease, our Retail Week analysts examine five ways we expect the grocery giant to intensify its focus and maintain its competitive advantage
Over the past couple of years, Tesco has held around 27% of the grocery market, according to Kantar.
Navigating the challenges has not been easy and has involved operational efficiency and some scaling back of operations.
But thanks to its laser-focused strategy, Tesco is winning.
Our Retail Week analysts look at five ways the grocery giant is staying ahead of the pack.
1. Clear short- and long-term priorities
Tesco has put in huge effort to help customers navigate the cost-of-living crisis, but it balances this with one eye on longer-term ambitions.
Key to this balancing act are its four strategic priorities for the business. The retailer is ruthless in sticking to these priorities and operates a strong capital discipline.
The company is also buying back shares and property to strengthen its financial position.
In March, chief executive Ken Murphy told analysts that Tesco will “only open space where we see a return”.
Its fourth priority, ‘Save to invest’, is leveraged to improve convenience and compete on price, but also to pursue longer-term health and sustainability initiatives.
Tesco’s Better Baskets initiative achieved a 60% increase in healthy products sold last year, with a target of 65% over time. Plastic reduction and addressing obesity are two of its further targets.
Working towards net-zero carbon by 2035, Tesco is also among the first retailers to demonstrate commitment by linking 25% of executive bonuses to ESG and sustainability targets.
2. Prioritising customers over suppliers
Tesco is renowned for its ecosystem, locking in loyalty through its Clubcard and low-price initiatives.
Its Aldi Price Match has now been extended to around 700 products, featuring in 99% of large baskets and 85% of top-up shops.
Meanwhile, its Low Everyday Prices label features on more than 1,000 items and Clubcard Prices are now available on over 8,000 lines.
This powerful combination reassures customers of Tesco’s “magnetic value” and saves them the hassle of shopping elsewhere.
With all mobile apps integrated into a single solution, the shopping experience is frictionless and convenient.
Personalisation at scale is a growing focus, targeting Clubcard members with rewards ‘bursts’ every two weeks. Tesco now serves personalised offers to 4 million customers.
With Tesco’s intense focus on winning customers, supplier relationships have become more strained. Murphy recently admitted to The Grocer the “inevitable tension” experienced as suppliers try to get through cost price increase requests and Tesco seeks to keep prices down.
The retailer has already met with suppliers this month to discuss the priority of lowering prices as inflation eases.
And it invited backlash over ongoing plans to introduce a ‘voluntary’ online fulfilment fee, reflecting the higher costs of operating online.
Supplier dynamics could be a watch-out for the company over time, although its customer focus currently strongly supports its hold on market share.
3. Lean and efficient business operations
Tesco operates a cost-efficient model, striving to simplify its offer and avoid passing on costs.
Savings of £1bn are targeted over the two years to February 2024, with £550m achieved in 2022. This creates headroom to fund investments.
Some cost savings impact customers, such as last year’s closure of 467 service counters and a 10% reduction in its home range. But most are less visible in areas such as goods and services not for resale, property, operations and central overheads.
Driving cost efficiency into online grocery is a critical focus for Tesco as it dominates with around 35% market share.
Online orders peaked at 1.6 million per week during the pandemic but are now stabilising at 1.1m orders, around 13% of total sales.
Investment in price and colleague pay led to lower profit margins last year.
Ongoing productivity improvements include the addition of urban fulfilment centres and the expansion of click and collect.
Tesco is also upping efforts to monetise the channel. The minimum online delivery order value was increased to £50 from £40 in May and the reward value of Clubcard points with third-party partners was reduced in June.
For its Whoosh rapid delivery, Tesco is making “light investment” and leveraging its existing network of stores. It remains to be seen how much demand can be generated from this channel over time.
Further efficiency gains are likely to be focused on areas such as supply chain automation, which are already “performing well” following their introduction to Tesco’s fresh distribution centre in Peterborough and its ambient facility in Reading.
Over the next three to five years, Murphy told analysts that investment will improve throughput, efficiency and availability.
4. Maximising switching gains and cross-brand opportunities
At its first-quarter results presentation in June, Tesco revealed that it had enjoyed a “ninth consecutive period of switching gains from premium retailers”.
As cost-of-living pressures ease, Tesco will be keen to hold on to these high-value customers and find ways to inspire ongoing loyalty.
A Finest dine-in meal deal was introduced in February, while in March a new £5 Premium Meal Deal was added for Clubcard members. Other new products added in Q1 included a 30-day matured steak and new Finest bakery products.
This area of opportunity for Tesco is one where it will need to work hard, particularly as M&S also elevates its food credentials. The focus is likely to be on elevation and occasion, winning at key seasonal times with the right product offering.
Despite reducing its home ranges last year, Tesco will also broaden premium non-food to gain a higher share of spend from high-value customers as demonstrated by its Paperchase acquisition at the beginning of the year.
Tesco will also seek opportunities to improve leverage between Tesco and its Booker brands, whether through efficiency gains or cross-selling.
5. Monetising retail media and other revenue streams
Retail media is a big industry focus as retailers advance data-sharing with suppliers and strive to take a bigger share of marketing spend.
This revenue has historically been used to offset some of the cost of doing business online, but its potential is huge.
Tesco has first-mover advantage and the leading edge through its Dunnhumby subsidiary. It already works with more than 500 consumer packaged goods manufacturers to monetise data and insight from its 400-strong analyst team and, over the past two years, has beefed up the Tesco Media & Insight Platform with a self-service model, allowing brands and agencies to gain more interactive insight and track and measure campaigns.
Taking these capabilities in store is the latest focus, with more than 150 stores equipped with connected displays to feature in-store campaigns and exclusive product launches.
Tesco is also establishing partnerships outside the grocery sphere, adding new personalisation projects with companies such as Sky, ITV, Meta and Pinterest.
Over the next few years, Murphy outlined that Tesco is in a “prime position” to take advantage of retail media and, once mature, this will generate an additional profit pool for shareholders.
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