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MIS Uarterly Xecutive: L M R: T e T
MIS Uarterly Xecutive: L M R: T e T
com
Q
E
Albrecht Enders
IMDInternational
Institute for
Management
Development
(Switzerland)
Tawfik Jelassi
cole Nationale des
Ponts et Chaussees
(France)
Executive Summary
Online retailing has become a pervasive phenomenon that has profoundly affected the
structure of many different industries. Yet the challenges for retailers in some industries
have been more difficult due to the nature of the products sold and the existing fulfillment
channels. We present an analysis of Tesco.com to show how the U.K.s leading grocery
supermarket chain successfully addressed its industry-specific challenges to become the
biggest and most successful online grocery retailer in the world. Based on this analysis,
we provide five lessons that we believe are useful for other multichannel retailing
businesses:
Learn by doing and evolve your e-business operations strategy over time.
Leverage data from the online channel for both online and offline businesses.
MISQE is
Sponsored by
While Internet-based retailing has become an important channel for most product
categories, it has so far made only relatively modest inroads into grocery retailing.
There are numerous reasons for this lack of success.3 First, to many customers,
shopping for groceries is an emotional activity where they want to sample products,
particularly when choosing fresh vegetables, fruit, and meats.4 Thus even those
customers who are used (or readily willing) to buy music or books online might shy
away from buying their groceries through the Internet. Second, distribution costs are
high because of bulky volumes and the perishable nature of many products. Thus
delivery either needs to take place during tight predefined timeslots when customers
can personally receive the delivery or they need to be placed in pre-installed cooling
containers at the customers home to avoid spoiling. Both options are complicated
1 Carol Brown is the accepting Senior Editor for this article.
2 An earlier version of this article won the first-place award in the 2008 Best Paper Award competition of the
Society for Information Management.
3 See (1) Mller-Lankenau, C., Wehmeyer, K., and Klein, S. Multi-Channel Strategies: Capturing and
Exploring Diversity in the European Retail Grocery Industry, International Journal of Electronic Commerce
(10:2), Winter 2005-06, pp. 85-122; (2) Himelstein, L., and Khermouch, G. Webvan left the basics on the shelf,
Business Week, July 23, 2001, p. 43.
4 Palmer, J. et al. Online Grocery Shopping Around the World: Examples of Key Business Models,
Communications of the AIS (4:3), 2000, pp. 1-44.
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Which m arket
segments do we
want to target with
our online ser vice?
Quality/
Ser vice
How do we want
to implement our
online service?
'Old
game'
How do we want to
position our online
service in the market?
Cost/
pr ice
'New
game'
CONCEPTUAL FRAMEWORK
To provide a framework for discussing the Tesco.com
case study, we use a conceptual strategic framework
that outlines three main dimensions of strategic
decision making7 (see Figure 1).
The first question in the framework refers to
how a company aims to achieve a competitive
advantage, similar to Porters model of cost versus
differentiation.8 As this case study illustrates,
Tesco previously had changed from a low-cost to a
differentiated positioning, and for its online business,
it also chose to compete based on quality and service
benefits to its customers.
The second question relates to which market
segments the online service should target: the whole
market or a market niche, similar to Porters focus
strategy? Here, Tesco.com initially addressed only
5 Hackney, R., Grant, K., and Birtwistle, G. The UK grocery
business: towards a sustainable business model for virtual markets,
International Journal of Retail & Distribution Management (34:4/5),
2006, pp. 354-368.
6 Details of the research approach are in the Appendix.
7 Hungenberg, H. Strategisches Management in Unternehmen,
Gabler, 2006, p. 251.
8 Porter, M. Competitive Strategy, Free Press, 1998.
2009 University of Minnesota
TESCO HISTORY
The first Tesco self-service supermarket was opened
in 1956 in a converted cinema. During the 1950s and
1960s, Tesco grew primarily through acquisitions and,
by the 1960s, had become a chain of 600 stores. The
Tesco hypermarket store that opened in Leicester in
1961 with 16,500 square feet of selling space entered
the Guinness Book of Records as the largest store at
that time in Europe.
In the 1970s and 1980s, as customers began looking
for quality and choice, Tescos pile it high and sell
it cheap strategy was less successful and results
plummeted dramatically. The primary reason for
the dismal performance was that customers had a
negative image of Tesco and the products it sold. With
its exclusive focus on low prices, stores were poorly
maintained and the selection of items offered was
perceived as inadequate and of mediocre quality.
Ian MacLaurin (Lord MacLaurin since 1996), started
to turn the company around when he became CEO
of Tesco in 1985. By the time he retired in early
1997, he had poured large amounts of money into
the construction of new supermarket stores to attract
upper market segments. Simultaneously, he introduced
new systems and technology in sales and distribution
to position Tesco across a range of store formats and
market segments.
Terry Leahy, Tescos current CEO, has worked for
the company for more than 20 years. Much of Tescos
recent success is credited to his leadership. To respond
to increased competition and declining prices in
the food segment, Tesco significantly expanded its
range of products. Its largest stores now devote 40%
2009 University of Minnesota
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and special offers (e.g., buy one, get one free) are
also made available to online customers. If the offer
is already valid when the order is placed, it will also
be displayed on the website. Payment can be made by
credit or debit card, including Tescos own Clubcard
Plus. The customers account is debited when the
packing of the goods he or she ordered is completed.
For the first couple of years, Tesco charged a flat fee
of 5 for home delivery, regardless of order volume
and delivery time. Now, delivery fees differ according
to the day of the week and the two-hour delivery slot
(between 9.00 a.m. and 11.00 p.m.) that the customer
chooses. Early weekday deliveries are cheapest while
evening and weekend deliveries are more expensive.
Since the product delivery time is the only opportunity
for a Tesco employee to interact with customers,
Tesco.com tries to ensure that customers have a
positive experience from their brief encounter with
the delivery driver. In addition to talking about the
groceries, Tesco delivery drivers also are confronted
with unusual customer requests, such as Can I
borrow your van to help me move?, I need some
help to change a tire, I need some marital advice,
or Would you drop the kids off at school? However,
drivers are instructed to politely decline most of the
requests.
Furthermore, to satisfy the wishes of up-market
customers who disliked seeing Tescos white delivery
vans parked in their driveways, Tesco.com even
leased a small fleet of Range Rover cars for delivering
goods to posh neighborhoods. Tesco.com used these
cars for grocery delivery from early 2000, but due to
environmental concerns, this practice has now been
stopped, and the companys fleet now consists only of
electric-powered vans.
Items are delivered in plastic bags, with substitute
items marked so that customers can inspect them on
delivery and accept or reject them. In an attempt to
reduce pollution and waste, Tesco is reducing its use
of plastic bags for home deliveries. A recent study
revealed that for an order of 32 items, Tesco.com used
11 bags, while other online retailers used even more.12
The company recently announced a no-bagoption, where groceries are delivered in stackable,
reusable plastic trays that are taken away by the
driver. Consumers who shun bags are rewarded with
additional Clubcard loyalty points. Currently, around
40% of Tesco.com customers have opted for the nobag delivery option.
In-store Picking
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LESSONS LEARNED
In this article, we have provided an overview of how
Tesco.com evolved over time from a pure in-store
fulfillment approach to a dedicated warehouse-based
system. Based on the experiences of Tesco.com,
we now provide several lessons for other retailing
organizations in general, not just those in the grocery
industry.
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Tawfik Jelassi
Tawfik Jelassi (jelassi@enpcmbaparis.com) is Dean
and Professor, e-Business and IT at cole Nationale
des Ponts et Chaussees (School of International
Management) in Paris, France. Previously, he was an
associate professor and coordinator of the technology
management area at INSEAD (Fontainebleau). He
has written (or co-written) five books and over 80
research articles published in leading journals and
conference proceedings. Jelassi holds a Ph.D. from
the Stern School of Business at New York University
and graduate degrees from the Universite de ParisDauphine. He has taught in MBA and executive
education programs in over a dozen countries and
has advised several international corporations and
government organizations.