CASE STUDIES

Tesco non-food development case

study
Non-foods hold the key for Tesco future growth strategy
Reference Code: CSCM0125
Publication Date: July 2007

DATAMONITOR VIEW
CATALYST
Tesco has put non-food products at the centre of its future growth plans, and its recent preliminary annual results show that
non-food sales now account for 25% of its sales mix excluding petrol. With the launch of Tesco Direct, an online portal selling
a comprehensive line of non-food products, Tesco is stepping up its challenge to high street clothing, hardware and electronic
companies and looks like it will realize its goal of being the number one destination in non-food as well as in food.

SUMMARY

Tesco is now the largest electrical player among grocers, whilst its market share in the clothing market has
increased from 1.1% in 1999, to 2.3% in 2005. The company has been successful in introducing a multi tiered
clothing line, from value clothes to premium offerings, and the introduction of an organic clothing line taps into
growing consumer demand for ethical products

Internet sales have experienced strong growth over the past couple of years, with the Office of National Statistics
indicating that the value of internet sales to UK households rose fourfold to 21.4 billion between 2002 and 2005.
As a result, Asda, Sainsburys, John Lewis, Next and many other retailers are now offering non-food products online

The launch of Tesco Direct will enable Tesco to offer a much larger range of products than is possible within its
stores, as well as removing the problem of having to expand its sales space. The website and catalogue will also
enable the company to capitalize on the continuing and dominant trend amongst consumers for convenience, with
efficient delivery systems in place the company can capture market share from its non-food rivals.

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ANALYSIS
Expansion in Tescos non-food offerings, provides the company with significant
opportunities for growth in high margin electricals, clothes, and health & beauty
Tescos preliminary results for 2006/2007 demonstrate how non-food offerings are becoming integral to the
companys growth plans
For the fiscal year ended February 2007, Tesco UK announced non-food sales of 7.6 billion, an increase of 11.6% on the
previous year, growth which was significantly faster than its core food sales. Non-food sales, excluding petrol, now
account for 25% of Tescos sales and are growing as a proportion of total sales yearly, and Tescos Value and Finest subbrands are increasingly being stretched into-non-food competencies, including homewares, electricals and garden
furniture. The company, which dominates the UK grocery market, sees massive potential in the non-foods sector, due to
its low market share in many of the categories, due to the growing popularity of its non-food offer to customers, and due to
its scope to expand its retail outlets or sell more through direct channels.

Electricals have shown significant growth for Tesco and the company is now the largest electrical player
among grocers
One of the main drivers of Tescos impressive non-food sales has been electrical goods, which increased in sales by 35%
between 2006 and 2007. The company has been making inroads into the electrical market in recent years, and the roll-out
of its larger format Extra stores has been a key driver in providing customers with both premium and budget priced
electrical products. These larger stores have enabled the company to expand its non-food offerings significantly, and the
company now has over 100 stores in this format. According to Verdict Research, Tesco is the largest electrical player
among grocers, with a 2.1% share in 2005, more than double that of its competitor Asda.

Tescos investment in its clothing range is paying off with market share increasing, and clothing as a
percentage of total sales increasing
After witnessing the success of George at Asda, Tesco brought in clothing professionals from outside the business to
develop its own clothing proposition, and since the millennium, has invested heavily into its clothing line. According to
Verdict Research, Tescos market share in clothing has increased from 1.1% in 1999, to 2.3% in 2005. The company has
been particularly successful in developing a value clothing line, and it is already number four in the value clothing market,
with an 11% market share, behind only George, Primark and New Look. For the fiscal year ended February 2007, the
company achieved 16% sales growth through its clothing, and according to Verdict Research, clothing now accounts for
3% of Tescos sales.

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Figure 1:

Tescos organic clothing range, designed by Katharine Hamnett

Tesco has been successful in

tapping into consumers demands
for ethical products. They recently
commissioned clothing designer,
Katharine Hamnett, to design
organic cotton clothing that is
guaranteed not to harm the
planet. The clothing is available at
discount prices, making organic
products available to everyone.

Source: Datamonitor analysis

DATAMONITOR

Tescos clothing range faces stiff competition from rival supermarkets, Asda and Saisnburys
Whilst Tescos has experienced significant growth in its clothing sales, Verdict estimates that Asda were the largest UK
supermarket chain in the clothing and footware market in 2005, with a 3.5% share as compared to Tescos 2.0%. Asda
has gone from strength to strength since it hired the founder of Next, George Davies, to create the George label, and the
company says, rather modestly, that it has created a fashion democracy where no-one is excluded by price; Asda has
recently announced that it is to extend its George brand with its must have fast fashion range in an effort to consolidate
its position.
Sainsburys launched a new clothing range, Tu, in stores in 2004, and in 2007, announced that it was going to add a
range of Fairtrade clothing to its Tu line, placing it directly in competition with Tescos organic clothing lines in the ethical
clothing market. The ability of supermarkets to retail the latest fashions from the catwalks at affordable prices has meant
that many are taking market share away from high street clothing retailers.
The clothing and footwear market is becoming increasingly competitive, with the value clothing market growing
significantly and the growth of Primark is illustrative of this. Between September 2005 to March 2007, Primark increased
its selling space by over 70% and opened 52 stores, including six abroad. This increase in selling space drove group
turnover from 1,006 million (US$2.0bn) in 2005, to 1,309 million (US$2.6bn) in 2006, an increase of 30.1%. Tesco will
be hoping to match this level of growth through an online site, rather than through increased selling space, and with
Primark being a direct competitor for value clothes the battle is set to be fierce.

Tescos health and beauty sales are second only to Boots

Health and Beauty is one of Tescos core non-food segments, and now accounts for 7% of its overall sales. Moreover,
Tesco is the leading UK supermarket and second only to Boots in the health and beauty market, and has continuously
increased its market share over the past five years, reaching 17.7% in 2005, nearly double that of its nearest rival grocer.
For the fiscal year ended February 2007, health and beauty sales increased by 9% on the previous year.

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Tesco is facing increasing criticism about its apparent dominance of the UK grocery market, from both
consumers and the Competition Commission authorities
The announcement of Tescos preliminary results sparked criticism from some groups about the companys control over
the UK grocery market. The fact that Tesco now receives 1 in every 3 spent in UK supermarkets is seen as detrimental
to both competition and to consumer choice. Small businesses and environmentalists are concerned about the creation of
Tesco towns, in which Tesco controls local consumer shopping habits. According to Vicki Hird, a Friends of the Earth
campaigner, the company is driving High Street stores out of existence, and added that, The time has come to put the
brakes on the Tesco juggernaut and curb its power.
At present, Tesco is being investigated as part of the Competition Commissions investigation into the UK grocery sector
after the Office of Fair Trading found evidence to suggest some supermarket chains were using large land banks to stop
rival retailers opening new outlets. Whilst the issues that the Competition Commission are investigating are related to
grocery retailing, any potential restrictions or penalties imposed on Tesco are likely to impede its non-food growth due its
continued development of large format Extra stores, where its non-food sales are sold.

The development of Tesco Direct has the potential to reach customers who do not do their
grocery shopping at Tesco stores
The last few years have witnessed a considerable number of retailers creating online portals, and embracing the internet
as a means of attracting business. Verdict Researchs 2007 report, UK Retail Futures 2011: Food and Grocery, shows
how to develop non-food offers online (Figure 2). Verdicts analysis pointed to the tactics, employed by Tesco and others
with their online offerings. By creating online offers, the company can showcase a comprehensive range, develop reach
beyond its existing customer base and can increase footfall in its stores by offering cross channel promotions.

Figure 2:

The tactics developed by Tesco and its competitors in developing non-food offers
online, 2006-2011

Source: Datamonitor analysis

Tesco non-food development case study

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DATAMONITOR

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Tesco non-food development case study

The trend for online sales has experienced strong growth over the past few years with the Office of National Statistics
indicating that the value of internet sales to UK households rose fourfold to 21.4 billion between 2002 and 2005 (Figure 3).
This is forecast to continue, as the UK population embraces the internet, particularly faster broadband services, and the
convenience of ordering goods online.

Figure 3:

The value of Internet sales to households in the UK rose fourfold between 2002
and 2005

I n t e r n e t S a le s t o h o u s e h o ld s , U K

Source: Datamonitor analysis

DATAMONITOR

Tesco Direct offers a wider range of non-food products for customers to choose from than its individual retail
stores
In August 2006, Tesco announced that it was launching Tesco Direct, a service offering 8,000 non-food products which
can be ordered online via the tesco.com website, by phone and in selected stores at specially designated Tesco Direct
desks. The service was designed for time-pressured consumers seeking a convenient way to purchase items of furniture,
through to kitchenware, electricals, cameras, bikes and more. The initial launch was 8,000 products offered online and
1,500 by catalogue. In February 2007, the company announced that it had launched a more comprehensive offer, with
11,000 items on its website, 7,000 of which are in its catalogue.
Although the company continues to expand its retail space through larger Extra stores, the advantages of Tesco Direct
are clear. It allows the company smaller start up costs than purchasing land and then developing a store, it allows them to
offer a larger range of products than it can inside its stores, and it provides them with the opportunity to attract consumers
who wouldnt normally shop in Tesco stores.

Tesco Direct has a competitive advantages over its non-foods competitors

There has been an increasing trend towards online non-food sales, with customers choosing to purchase in this manner
due to the convenience associated with having products delivered straight to the door. A number of companies in the
furniture market have made moves to enter online sales with Ikea poised to join the likes of John Lewis, Next and many

Tesco non-food development case study

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Tesco non-food development case study

other high street stores, offering products online; however, the opportunity for customers to one stop shop for their nonfood needs across a broad range of categories gives Tesco a competitive edge over these rivals.
The launch of Tesco Direct is going to be in direct competition with Argos, a UK online and offine retailer that sells a
diverse range of non-food items. Whilst Argos is an established brand in its own market, Tesco has a significant
competitive advantage over Argos due to its much larger scale and bigger buying power; current Tesco shoppers are
likely to purchase goods from Tesco Direct rather than visiting retailers such as Argos, and thus Tescos brand name will
steal share away from high street retailers. Tesco also has an advantage in that shoppers going online for food purchases
will learn of its wider non-food offering and may be tempted to buy. Other stores likely to be worried by Tesco Direct
include: MFI, Homebase, B&Q, Homestyle and Woolworths. Tesco will still, however, have some way to go to catch
Argos comprehensive catalogue; at present it is more than twice the size of Tescos (having over 17,000 lines).

Figure 4:

Tesco Direct offers convenience through online ordering and home deliveries

Source: Tesco website

DATAMONITOR

Tesco Direct will face strong competition from rival Asda

Asda recently announced that it was going to create an online clothing concept to rival Tesco; it has also recently
supplemented its established online range of music & video with dedicated electricals and furniture sites. In an interview
with the Sunday Telegraph in November 2006, Asdas chief executive, Andy Bond admitted that the chain had been far too
late embracing the online revolution. We were slow to understand how big a market and how big a customer demand there
was for dotcom. As such, Asdas new online business will reach its entire UK customer base by October 2007. The online
service will also offer food, health and beauty items, bedding, lighting, and domestic appliances, and the retailer will spend
a minimum of 10m on new delivery trucks. Whilst Asdas online presence is not as pervasive as Tesco, the retailer is
owned by WalMart, which has a massive online presence in the US, where it has 100% national coverage, and this
experience and knowledge will prove invaluable when it takes on Tesco.

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APPENDIX
Case study series
This report forms part of Datamonitor's case studies series, which explores business practices across a variety of
disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and
insurance, pharmaceuticals and software.
Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations,
highlighting the ways in which the company has become one of the best in its field or how it deals with different problems
encountered within that sector.

Methodology
A variety of research was carried out for this case study. This included researching the retail market on Datamonitors retail
database, alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources

High Street juggernaut rolls onward; The Herald (April 2007)

Social Trends, Expenditure Highlights; Office of National Statistics (April 2007)

Asda launches online push to close Tescos lead; the Telegraph (November 2006)

Internet hits on the high street; Cabinet Maker (September 2006)

Tesco is non-food king; The Grocer (May 2006)

Further reading
New Developments in Global Consumer Trends (Datamonitor, DMCM2468, April 2007)
How Britain Shops 2007 (Datamonitor, DMVT0410, 24 April 2007)
UK Retail Futures 2011 (Datamonitor, DMVT0375, 26 March 2007)
Tesco Company Profile (Datamonitor, CSVT0001, 14 November 2006)

Ask the analyst

The Consumer Knowledge Center Writing team

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