The comeback kid: How the Tesco Innovation Strategy Saved it

by | Jul 30, 2012

Supermarket wars make headlines all over the world. Australia’s two biggest supermarket chains grace the headlines on what seems like a daily basis, with one trying to undermine the other with the introduction of cut-price basic items, such as milk and bread, or the introduction of loyalty schemes and frequent shopper cards.

The following is a tale of UK supermarket chain Tesco and the process it took to turn its fortunes around, and then stay one step ahead of its competitor. The story of the Tesco Innovation Strategy.

Tesco was experiencing some tough times in the early 90s. Sales were dropping, profit growth was stagnating, its share price was down and cheaper grocery retailers from continental Europe were entering the UK market. How did Tesco turn things around?

"The real change agent was the Tesco Clubcard that they introduced in 1995," says Simon Knox, a professor from Cranfield University’s School of Management in the UK.

Speaking to the Australian School of Business, Knox points out that Tesco had improved in-store facilities, developed a Tesco-branded range of products and conducted thorough market research, but the introduction of the Clubcard was “the jewel in the crown”.

Chairman of Sainsbury’s – Tesco’s main competitor – David Sainsbury publicly declared Tesco’s Clubcard a waste of time and money, saying administration costs would swallow up any benefits to Tesco. He also said Sainsbury’s would not be following suit.

Sainsbury spoke too soon. Only six months later, Sainsbury’s would introduce its own card.

The Clubcard offered shoppers only a 1 per cent discount and a frequent shopper points reward system. However, the real benefit to Tesco would be the accumulation of its customers’ data.

Knox says that Tesco is very good at trialling new systems and processes. It trialled the Clubcard only in a small number of its outlets and the success saw it being rolled out nationwide.

The Clubcard allowed Tesco to monitor shoppers’ buying habits and increase loyalty by building a two-communication stream between consumer and retailer.

Dunnhumby, a data management specialist, was brought in to oversee data collection and analysis.

By March 1995, more than five million people held a Clubcard and the supermarket’s profits grew by 7 per cent. Tesco has beaten Sainsbury’s for the first time in becoming the leading retailer of packaged goods, a title it has enjoyed every year since.

Tesco also introduced segmented customer programs, such as Wine Club, Baby Club and Healthy Living Club and spoke to these groups via tailored websites and special offers and discounts. It also introduced a chain of smaller ‘Metro’ stores and online shopping, while diversifying into the mobile phone and home internet services. This broad array of programs and new ideas formed the Tesco Innovation Strategy.

"Sainsbury’s was king, and the organisation acted like it," recalls ASB deputy dean Chris Styles. "But being the leader can mean that you get comfortable. It can often mean that you stop experimenting, you believe all of your old assumptions are still correct and you stop innovating. Tesco didn't copycat the leader, as so many organisations tend to do. Instead it played a different game. It challenged the assumptions in the industry – that profit was only about own-brand labels and profit per square metre, and instead they decided that customer data was the way to find growth. Those other things were important, but customer data would prove to be the key to market domination." In short, customer data and experimentation would form the basis of the Tesco Innovation Strategy.

Innovation requires challenging pre-conceived notions. Styles suggests businesses look outside their industry for inspiration and test, fail, learn and test again.

This tale has a happy ending for Tesco. The turnaround has paid off. In the past six years, sales have more than doubled to £62.5bn, with gross profits of more than £3.39bn. Tesco is now the third largest supermarket group in the world, all thanks to its successful use of the tesco innovation strategy.

Jeffrey Tobias

About Jeffrey Tobias

Dr Tobias is an accomplished innovation consultant and entrepreneurship strategist, drawing expertise from the academic, entrepreneurial and corporate worlds. Jeffrey’s commercial and business experience is particularly focussed on lean startup, design thinking and leadership. Prior to The Strategy Group, Jeffrey was Cisco’s Global Lead for Innovation in the Internet Business Solutions Group helping Fortune Global 500 companies improve customer experience and grow revenue by transforming how they do business.
Jeffrey is a professor of innovation and entrepreneurship teaching MBA students at the Australian Graduate School of Business at the University of New South Wales. An active angel investor, Jeffrey is on the board of various well-known startups.

View All Posts

Managing Director, The Strategy Group

Dr Tobias is an accomplished innovation consultant and entrepreneurship strategist, drawing expertise from the academic, entrepreneurial and corporate worlds. Jeffrey’s commercial and business experience is particularly focussed on lean startup, design thinking and leadership. Prior to The Strategy Group, Jeffrey was Cisco’s Global Lead for Innovation in the Internet Business Solutions Group helping Fortune Global 500 companies improve customer experience and grow revenue by transforming how they do business.
Jeffrey is a professor of innovation and entrepreneurship teaching MBA students at the Australian Graduate School of Business at the University of New South Wales. An active angel investor, Jeffrey is on the board of various well known startups. Jeffrey’s corporate background includes leading global innovation strategy at Cisco, working with large corporates such as Adobe, Westpac, Telstra, Woolworths, and Perpetual.

Need help to get your business to the next level?

More related articles on innovation

Share This