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CASE STUDY Tesco

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Executive Summary
South Koreans have amongst
the longest working hours
in the world, with young,
upwardly mobile executives
often too busy to go shopping
for grocery at a traditional
store. The UKs giant retailer,
Tesco, sought to turn this
disadvantage to its benefit.
It introduced virtual stores,
which are essentially a display
of products on walls of metro
stations and bus stops.
Commuters, especially the
tech-savvy, ultra-busy lot,
could scan the QR codes of
the products on display with
their smartphones, and place
their orders even as they
waited for their trains or
buses. This case study looks
at how Tesco virtually
created a new market based
on a countrys lifestyle.
By Martin Petit De
Meurville, Kimberley Pham
and Courtney Trin

112 Business today February 15 2015

Go

Smart strategy: Koreans virtually shopping at a subway station

n 2011, when domestic sales


of the UKs retail giant Tesco
slumped, it fell back on its
second-largest market, Asia,
which accounted for 30 per
cent of its total profit. Tescos
success in Asia, and specifically in South Korea currently its largest market outside the UK is based on its
ability to adapt to the local consumer.
Tescos expansion into Asia has
been an important focus for the com-

i m a g e c o ur t e s y : l i l d o r e m i . o r g

pany since the late 1990s. Following


its acquisition of Thailands Lotus in
May 1998, the company announced
a 142-million investment in South
Korea in March 1999 by partnering
with Samsung to develop hypermarkets. Through its tie-up with
Samsung, Tesco made a localisation
effort to adapt its Homeplus stores to
the local consumer.
The latest example of this localisation was the launch in 2011 of its
first virtual store, located in a Seoul

subway station, an idea based on the


observation that the typical Seoul
commuter did not have the time to
shop at her nearest brick-and-mortar
Homeplus store.

The Virtual Store


The virtual stores are set up in public
spaces, most often in subways and
bus stops with high foot traffic and
frequented daily by tech-savvy commuters. This is how such stores work:
n Interested customers download

the Homeplus app into their smartphones.


n They then use their smartphones to scan the QR codes of the
products they want to purchase. The
posters in the virtual stores are designed to resemble the actual aisles
and shelves of a regular Tesco store,
making the experience very userfriendly.
n The scanned products are
stored in the customers online shopping basket, who pay online once

their order is completed. Homeplus


reported that the majority of the orders are placed at 10 am and 4 pm,
when people are commuting to and
from work.
n Customers schedule a time for
home delivery. Same-day delivery is
the norm, so that customers can get
their products by the time they get
back home from work.
The virtual store has been a huge
success with commuters and drove
over 900,000 app downloads in less

February 15 2015 Business today 113

CASE STUDY Tesco


Retailers struggling to develop
competencies to succeed globally

ne of the most dramatic changes in retailing over the past


two decades is its rapid globalisation. As a result, what
used to be a local, unsophisticated, mom and pop business is being transformed into a global and technology-intensive
growth sector. In support of this thesis, consider premier global
retailing brand names such as ALDI, Body Shop, H&M, IKEA,
Marks & Spencer, Toys R Us, Walmart, and Zara who are
adorning the streets of several countries. They combine their
finely-tuned value proposition with superior retailing skills, global sourcing, and access to capital to create value for both their
customers and shareholders. Going international is one of the
primary growth strategies available to a retailer when its domestic market is saturated.
Despite the popularity of globalisation in retailing, most retailers are still struggling to develop competencies to succeed in
global markets. To what extent should the original format and
merchandise be adapted is a major issue. Walmart learnt this the
hard way when its initial entry into China had the wrong merchandise. On the other hand, Mexican customers were disappointed when they did not find enough imported US merchandise in the Walmart stores. Toys R Us has learnt that there are
differences in consumption patterns. The Japanese demand electronic toys, other Asian consumers demand educational toys,
Europeans favour traditional toys, while American kids prefer
television- and movie-endorsed toys.
The Tesco case in South Korea demonstrates that despite the
companys many problems, it has been a leader in developing
multichannel solutions. With consumers preferring the convenience and selection of e-commerce, traditional brick-and-mortar
retailers are challenged to address how to serve this customer
profitably. The home-delivery option is much valued by consumers but cannot be as profitable as the traditional store. Therein
lies the dilemma.

Despite Tescos
many problems, it
has been a leader
in developing
multichannel
solutions
nirmalya kumar

Visiting Professor of Marketing, London


Business School, and Member, Group
Executive Council, Tata Sons

114 Business today February 15 2015

than one year, making the Homeplus


app the most popular shopping app in
South Korea. Online sales increased
130 per cent since the introduction of
the virtual stores and registered app
users increased by 76 per cent. In
February 2012, Tesco Homeplus announced it was extending the virtual
store concept to 20 new locations
across the country. Today, there are
22 Homeplus virtual stores in South
Korea, and the brand is the countrys
No. 1 online retailer.

Understanding the
Consumer
South Korea, a country of around 50
million people, is the fourth-largest
economy in Asia and the 12th largest
in the world. Compared to other
Asian countries, South Koreans generally have higher levels of education,
higher average household income,
and better living standards. Over the
past few decades, the country has
built itself up with its largest resource
people and has achieved rapid
economic growth through exports of
manufactured goods. It is now a major producer of automobiles, electronics, steel and high-technology products such as digital monitors, mobile
phones, and semiconductors.
Over the past decade, South
Korea has advanced tremendously
and has been shaped by constant innovation, technology and westernisation. In todays world, shopping
habits and behaviour of South
Korean consumers are impacted by
several key factors.
Extensive use of technology/connectivity: According to a report by
McKinsey & Co., South Korea is one
of the most advanced countries in
terms of broadband penetration, and
has more than 10 million smartphone users. In other words, one in
five South Koreans use a smartphone. Additionally, according to
Nielsen, households in South Korea
are making six per cent fewer shopping trips. When they do shop for
products, an increasing number of
South Koreans go online.

Long working hours/busy lifestyle: Although the average annual


hours worked per person in South
Korea is declining, the country still
comes out top among OECD countries
with 2,193 hours. This is perhaps
unsurprising, as the work ethic and
lifestyle of South Koreans get shaped
at a young age. According to the BBC,
South Korean parents spend thousands of pounds a year on afterschool tuition on an industrial scale.
There are just under 100,000 hagwons or private academies in South
Korea and around three-quarters of
Korean children attend them.
Travel time on public transportation: South Koreans spend a significant amount of time on public transportation, predominantly between
home and work. What has helped is
that public transportation is reliable
and inexpensive, and is the fastest
and most efficient way to get around.
The introduction of Tescos virtual stores in subways made use of
time spent by commuters waiting for
public transportation, allowing buyers to use the little time they have
available for grocery shopping. Not
only did this change the way buyers
shopped, it also increased the potential market for Tesco. These buyers
may not have otherwise had time to
go grocery shopping between their
personal and professional lives, opting to buy take-out instead.
All of this implies that grocery
customers in South Korea are more
time-poor and less price-sensitive.
They value convenience and
technology to accommodate their
busy lifestyle.

Tescos Value
Proposition
Globally, Tescos customers are pricedriven buyers who look for value
and/or convenience. According to its
corporate website, Tescos customers
care about the following areas: (1)
price and value (2) multichannel and
convenience, and (3) trust. Typically,
therefore, the companys value proposition is to provide customers with

virtual stores could see acceptance


largely for top-up or impulse purchases

irtual retail, such as Tesco Homeplus in South Korea, is


an innovative concept that has witnessed success in various forms across developed markets. Today, we can be
optimistic about the acceptance of new concepts by Indian consumers with the recent success of e-commerce and increasing
penetration of smartphones online shoppers have grown to 35
million from 8 million in 2012, and smartphone users have
climbed four-fold to over 110 mn in the same period.
A virtual store would offer consumers the convenience of
online retail and the experience of brick-and-mortar stores.
However, we can expect significant challenges in implementation in India. The target segment would be very niche young,
urban, middle class, time-strapped, convenience seekers, whose
needs are fulfilled by either neighbourhood mom-and-pop stores,
or e-commerce sites like BigBasket.com and LocalBanya.com.
To reach this niche target consumer with virtual stores would
be different in every Indian city. Mass public transport transit areas, such as local train stations in Mumbai, are unlikely to be
successful given the high traffic and quick movement, while tierI city airports may be ideal given the audience and transit time.
Also, common areas in residential, commercial and shopping
complexes could potentially thrive.
The success of virtual retail would also hinge on a strong
back-end for order fulfilment and a supply chain enabling timely
delivery. An extension by online retailers or organised neighbourhood retail chains such as Godrejs Natures Basket or
Reliance Fresh, who have an existing set up could prove successful. However, such a concept may not be viable on a standalone
basis. A hybrid model could be a marketplace aggregator who
could use the existing kirana stores for delivery.
As the concept is fascinating to consumers, virtual stores
could see acceptance largely for top-up or impulse purchases.

Virtual stores
would offer the
convenience of
online retail and the
experience of brickand-mortar stores
Nandini Chopra,

MD, Corporate Finance Group,


Alvarez & Marsal India

February 15 2015 Business today 115

CASE STUDY Tesco

i m a g e c o ur t e s y : l i l d o r e m i . o r g

prices in order to maintain its overall


Homeplus value proposition, which
hinges on providing desired products
at low prices.

Key Learnings

Buying on the move: Tescos virtual stores in subways made use


of time spent by commuters waiting for public transportation

the products that they want at a low


price. Tesco executes this proposition
through multiple channels, including
hypermarkets, grocery stores, convenience stores and online. When
Tesco first entered South Korea, it
offered this value proposition for the
local customer: to provide the variety
of products that the South Korean
customer wants at a low cost in a
beautiful store environment.
As the economy progressed and
South Koreans invested more time
and money into their careers and
high-tech devices, Tesco adapted its
value proposition to fit its on-the-go
customers. By introducing the virtual
store, Tesco Homeplus is able to execute its new localised value proposition: provide the variety of products
that the customer wants in a convenient location and at a low cost.
In South Korea, it can be argued
that Tescos customer values multichannel options (for example, online and mobile), and convenience
much more than price. According to
a March 2013 research from
MasterCard, around 40 per cent of
online shoppers in South Korea used
their smartphones to make a purchase in the previous three months.

Image-value-experience
Triangle
In addition to the virtual stores strong
value proposition, Homeplus has also

116 Business today February 15 2015

developed a strong image and experience that mutually reinforce this value
proposition. The Homeplus virtual
stores attract their customers through
their quick, tech-savvy, and cool image. They sell to their customer by offering the value of extreme convenience that the customer requires. And
they are able to keep their customers
by offering them the satisfying experience of easy-to-use technology, ontime delivery and quality products.
Given that the South Korean onthe-go customer places much greater
value on convenience than on low
prices, Tesco Homeplus may have
been enticed to increase product
prices through their virtual store
channel. However, we believe that
Homeplus decided not to increase

What can we learn


from Tescos virtual
store strategy?
Post your comments at
businesstoday.in/
casestudy-tesco

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This case study highlights important


learnings that can be applied, generally, to other businesses:
Customer-based marketing: A
real-world application of the new
marketing paradigm, in which the
process starts with the consumer and
his or her needs, as opposed to with
the product.
Customer segmentation: When
you enter a new market/geography,
companies need to understand and
analyse consumer behaviour trends,
including shopping habits and purchasing behaviour, to identify who
the valued customers are and how
they behave.
Adaptation of value proposition:
If the needs, attitudes and lifestyle of
the companys value customer are
different in the new market/geography, the company needs to adapt its
value proposition and value network
across the entire supply chain.
Power of technology in traditional industries: Technology has a
disruptive power in traditional industries, such as retailing. In this
case, the predominance of smartphones in Korea allowed Tesco to
boost its revenues through an innovative approach.
Innovative marketing: The way
marketing can be used innovatively
to target captured audiences (such as
commuters waiting for the next train
in a station).
Brand Extension: One option that
Tesco Homeplus may have considered in order to take advantage of is
to create a new brand for the virtual
stores that would have remained
independent from the Homeplus
brand and, therefore, limited the
risk to the Homeplus brand by increasing prices. ~
(This case study is from the Aditya Birla
India Centre of London Business School)