Markets served and business model
Tesco’s growth, driven by this strategy, has been predominantly organic and we have used our skills and knowledge in understanding customers, property development, supply chain management, new product development, store formatting and adapting to local customer needs – to create strong business models in our chosen markets. Where we do not have all the required skills ourselves to be successful, we regularly partner with existing businesses – and these relationships have formed the basis of some of our most successful operations – for example with Samsung in South Korea.
The UK grocery retail market remains our largest source of revenue, representing some 50% of last year’s £59.4 billion of sales. International retail sales – from our 12 markets in Europe, Asia and the United States, comprise a further 30% of Group revenues and non-food (in a variety of categories from health and beauty to electronics) accounts for most of the remainder. Our services businesses have comparatively small revenue streams, but they are increasingly material to our earnings base. We have given them a renewed focus this year – deploying more capital and management resources. A first key step in making these already successful businesses much larger and more significant to the Group was the acquisition of Royal Bank of Scotland’s share of Tesco Personal Finance – and we expect these businesses, including our online shopping channels, Telecoms and dunnhumby (our consumer research business) to deliver £1 billion a year of profit for the Group within the next few years.
At the core of Tesco’s business model is a focus on trying to improve what we do for customers. We aim to make their shopping experience as easy as possible, lower prices where we can to help them spend less, give them more choice about how they shop – in small stores, large stores or online – and seek to bring simplicity and value to sometimes complicated markets. We aim to be a good neighbour in the communities we serve, be responsible, fair and honest in our dealings and give customers the information and products they need to make greener choices. We are also an inclusive business – everyone is welcome at Tesco.
Underpinning this approach is a relentless attitude to being the lowest cost provider of goods and services in our chosen sectors – and this combination of qualities is the reason we have been successful in some of the world’s most competitive markets. We have recognised skills and proprietary systems in key areas which help us deliver a low cost model – particularly in customer relationship management, just-in-time supply chain and distribution, property development and store formatting.
In some of our newer markets – such as telecoms or financial services, our willingness to partner with established businesses has given us access to their existing investment in systems and infrastructure and enabled Tesco to develop competitive, profitable business models quickly and, at the same time, limit our own investment and risk in the early years. In the case of financial services, having successfully partnered with Royal Bank of Scotland for a decade we now have the experience to take sole ownership in order to pursue our aim of becoming a full-service retail bank and give Tesco Personal Finance the focus that this will require.
My main challenge is to maintain the balance between staying on strategy while living within our means. For a growth company like Tesco it is vital of course that we meet the challenges posed by the economic downturn – and the priorities there are the same as for any finance director in the current environment – in helping the business to find the resources to invest for customers, by keeping a good grip on costs and cash.
At the same time though, I need to do what I can to help sustain Tesco’s investment in future growth. By investing in the right opportunities, protecting ourselves from unpredictable capital markets and trading in a sustainable way we should exit this recession as an even stronger company. That’s how Tesco emerged as a winner from the last recession. Exciting opportunities are there to be grasped – for example, land and property are already significantly cheaper, our online businesses are not capital intensive and, given the loss of confidence in the banking sector, our very conservative, straightforward approach in Tesco Personal Finance may be exactly what customers are looking for.
Laurie Mcllwee Group Finance Director
Board of Directors
We operate a balanced scorecard approach to managing the business that is known within the Group as our Steering Wheel.
We operate a balanced scorecard approach to managing the business that is known within the Group as our Steering Wheel.
This unites the Group’s resources and in particular focuses the efforts of our staff around our customers, people, operations, finance and the community. Its purpose is to ensure Tesco puts appropriate balance into the trade-offs that need to be made all the time between the main levers of management – such as delivery of customer metrics, operations measures and financial measures.
It enables the business to be operated and monitored on a balanced basis with due regard to the needs of all stakeholders. For the owners of the business, it is simply based around the philosophy that if we look after customers well and operate efficiently and effectively, shareholders’ interests will always be best served by the inevitable outputs of those – growth in sales, profits and returns.
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