Introduction:

In 2008, the UK-based international food and general merchandising retailer Tesco reached a
market share of about 30 percent in the United Kingdom, roughly the same as its rivals
Sainsbury's and ASDA combined. In recent years, Tesco has greatly diversified, extending its
business lines from food into non-food, clothing, financial services, and telecommunications. It
ranks sixth in the international retail market behind Wal-Mart (United States), Carrefour
(France), Home Depot (United States), Metro (Germany), and Royal Ahold (Netherlands). Tesco
was not always the dominant player it is today. In 1990, it was a mid-sized food chain far beind
its rival, Sainsbury's. Starting in the 1990s, it pursued a broad set of growth initiatives, steadily
increasing its market share and gaining importance. In 1995, Tesco surpassed Sainsbury's to
become the U.K. market leader. Today, Tesco is the clear market leader. How did that happen?
Why was Tesco so successful in growing sales and prof-its, while Sainsbury's could not keep
pace? Where did the competitive actions of these firms differ? Let us start with a close look at
their origins.

Sainsbury's, Tesco, and the U.K. Retail Market in 1990:

Sainsbury's was established in 1869 by John James and Mary Ann Sainsbury, making it the
oldest food retailing chain in Britain. In 1922, | Sainsbury became a private company, with |
Sainsbury plc acting as parent company of Sainsbury's Supermarkets Ltd, commonly known as
Sainsburys, a chain of supermarkets in the United Kingdom. In 1973, the company was floated
as JSainsbury ple in what was at the time the largest flotation retains about 14 percent of its
shares. The group is also engaged in property and banking, owning real estate worth about £8.6
billion. For much of the twentieth century, Sainsbury's was the market leader in the U.K,
supermarket sector, but in 1995 it lost its place to Tesco; in 2003, it was pushed to third place by
ASDA. Tesco was founded by Jack Cohen in London's East End. From a modest background,
Cohen began selling groceries in Well Street market, Hackney, in 1919. In the aftermath of
World War I, food supplies were low, so he bought damaged goods from other stores and
re-sold them at reasonable prices. The Tesco brand first appeared in 1924. The name originated
after Cohen bought a shipment of tea from TE Stockwell. He made new labels using the first
three letters of the supplier's name and the first two letters of his surname. The first Tesco store
opened in 1929 in Burnt Oak, Edgware, Middleser Tesco was floated on the London Stock
Exchange in 1947 as Tesco Stores (Holdings) Ltd. During the 19505 and 1960s, Tesco grew
slowly, until it owned more than 800 stores. The company purchased 70 Williamsons stones
(1957), 200 Harrow Stores outlets (1959), 212 Irwins stores (1960), 97 Charles Phillips stores
(1964), and the Victor Value chain (1968) (sold to Bejam in 1986). In 1973, Jack Cohen
resigned and was replaced as chairman by his son-in-law, Leslie Porter. Porter and managing
director Ian MacLaurin abandoned the "pile it high and sell it cheap" philosophy of Cohen, which
had left the company stagnating with a bad image. In 1977, Tesco launched "Operation
Checkout," which included price reductions and centralized purchasing for all its stores. As a
result, its market share rose by 4 percent within two months.
At the beginning of the 1990s, the U.K. retail market slowly became more competitive. Three
players dominated the food market: ASDA? (which became Wal-Mart's largest overseas
subsidiary in 1999), Sainsbury's, and Tesco. ASDA positioned itself as the price leader and held
this position for some time, closely followed by Tesco. Sainsbury's targeted he upper price
segment, positioning itself between mass market and high end. In the mid-1990s, competition
intensified as a price war among these players emerged, resulting in squeezed margins and
cost cutting. It is not surprising that this also had an adverse impact on the service level these
corporations provided. In general, prices of standard brands and private labels at both
Sainsbury's and Tesco came closer, while the two firms differed slightly in their discounting
policies. Tesco emphasized its low-price private label ("Value") and continued to cut prices,
while Sainsbury's emphasized price reductions on the standard private labels. The price cuts
were prompted by the increased price pressure from the market entry of discounters. For
example, Aldi entered the market in 1990, followed by Lidl in 1994. In 2005, these two hard
discounters had acquired a market share of 2.2 percent and 1.9 percent, respectively.

Store Formats:

In 1975, Sainsbury's launched the "Sainsbury's SavaCentre" hypermarket format as a joint

venture with British Home Stores. This was the first attempt in the United Kingdom to launch
supermarkets with a large non-food range. SavaCentre became a wholly owned Sainsbury's
subsidiary in 1989. As the hypermarket format became mainstream, with rivals such as ASDA
and Tesco launching ever-larger stores, Sainsbury's decided that a separate brand was no
longer needed. Over the following years, these stores were converted to the regular Sainsbury's
superstore format and, subsequently, Sainsbury's retreated from hypermarkets and changed its
store formats. Now, Sainsbury's operates three formats: regular Sainsbury's stores, Sainsbury's
local stores (con-venience stores), and Sainsbury's central stores (smaller supermarkets in
urban locations). For an overview of Sainsbury's U.K. store portfolio at the end of fiscal year
2005-06, see Exhibit 1. While Sainsbury's retreated from hypermarkets, Tesco expanded Tesco
Extra and strengthened its hypermarket formats.' Its overarching store strategy is reflected in its
core marketing slogan adopted when Terry Leahy became CEO in 1997. "The Tesco Way"
implies a shift from a focus on the corporation to a focus on people, both employees and
customers. Tesco stores are divided into five formats, differentiated by size and range of
products, and are customized to specific segments: Tesco Extra, Tesco Superstores, Tesco
Metro, Tesco Express, and One Stop (see Exhibit 2). The approximately 500 One Stop stores
are the smallest units. They stay open in the late evening and feature a differentiated pricing
and offer system. Tesco Extra, launched in 1997, is the largest format, consisting mainly of
out-of-town hypermarkets that stock Tesco's entire product range and offer free parking. Their
number has increased about 20 percent annually, mainly by conversions of other formats. Tesco
Superstores are the standard large grocery supermarkets, with a much smaller range of
non-food goods than Extra. They are referred to as "superstores" for convenience, but not as
part of the name. It is the standard Tesco format. Most are located in suburbs of cities or on the
edges of large-and medium-sized towns. Tesco Metro stores are sized between normal Tesco
stores and Tisco Express stores. They are mostly located in city centers and on the high streets
of small towns. The first Tesco Metro was opened in Covent Garden, London, in 1992. Tesco
Express stores are neighborhood convenience stores, stocking mainly food, with an emphasis
on high-margin products alongside everyday essentials. They are found in busy city center
districts, in small shopping precincts in residential areas, and in petrol station forecourts. As
CEO Terry Leahy remarked in the company's 2000 annual report: This obsession with our
customers, their needs, and how these must be changing, means that you should not expect us
to go on opening large edge-of-town superstores long after the need for new ones has passed.
Expect . .. continual evolution: expect us to provide a mix of formats in different locations . .. to
meet special needs of customers in each location. Much of Tesco's sales increases occurred
through increases in total square footage with the opening of new stores, including new formats
such as Metro and Express. From 1994 to 1996, selling areas increased by 22 percent for
Tesco and 10 percent for Sainsbury's. At the same time, Tesco managed to increase sales per
square foot by 14 percent, while Sainsbury's gained only 3 percent. In addition, acquisitions and
alliances complemented the organic growth strategy. Tesco, for example, purchased Adminstore
in 2004, owner of 45 Cullens, Europa, and Harts convenience stores in and around London. In
late 2005, it purchased the 21 remaining Safeway/BP stores after Morrison's dissolved the
Safeway/BP partnership. In 1997, Tesco formed an alliance with Esso Petroleum Company Ltd
(now part of ExxonMobil Corp.). The agreement included several petrol filling stations on lease
from Esso, where Tesco would operate the store under the Express format. In turn, Esso would
operate the forecourts and sell their fuel via the Tesco store. Ten years later, over 600
Tesco/Esso stores can be found across the United Kingdom. Sainsbury's also expanded by
acquisition. As part of the acquisition of Safeway Group by Morrison's, Morrison's was to
dispose of 53 of the combined group's stores. In May 2004, Sainsbury's announced that it would
acquire 14 of these stores, 13 Safeway stores, and one Morrison's outlet, all located primarily in
the Midlands and the north of England. The first of these new stores opened in August 2004. In
2004, Sainsbury's also expanded its share of the convenience store market through other
acquisitions. Bell's Stores, a 54-store chain based in northeast England, was acquired in
February 2004. Jackson's Stores, a chain of 114 stores based in Yorkshire and the North
Midlands, was purchased in August 2004. JB Beaumont, a chain oftsix stores in the East
Midlands, was acquired in November 2004. SL Shaw Ltd, which owned six stores, was acquired
in April 2005 for €6 million. On September 29, 2004, Sainsbury's established Sainsbury's
Convenience Stores Ltd to manage its Sainsbury's local stores and the Bell's and lackson's
chains. The latter two are to be rebranded as Sainsbury's local stores by 2009.

Service Offerings and Distribution Systems:

"An inclusive offer" is how Tesco describes its aspi-ration to appeal to upper-, medium-, and
low-income customers in the same stores. According to Citigroup retail analyst David McCarthy,
"They've pulled off a trick that I'm not aware of any other retailer achiev-ing. That is, to appeal to
all segments of the market." One plank of this program has been Tesco's use of its private label
products, including the upmarket "Finest® and low price "Value." Other examples include
organic, kids, British specialty food, and "free from" brands. As Edward Garner, the
communications director of the TNS Superpanel, remarks: • "Tesco's winning formula
is largely due to its ability to be all things to all people. According to TNS, over 60 percent of
British house-holds shop in Tesco every four weeks. That's 20 percent more than its nearest
rival. The store appeals to wide-reaching demographics across the country and has built up a
heritage of reliability and trustworthiness, which keeps shoppers returning to its stores. These
factors have enabled Tesco to gain close to a third of the British grocery market." Sainsbury's
has also invested in private labels. A large Sainsbury's store typically stocks around 50,000
lines, of which about half are private labels. These lines include, for example, "Basics" (an
economy range similar to "Tesco's "Values"), "Taste the Difference* (a premium range similar to
Tesco's "Finest"), "Different by Design" (a smaller range of premium non-food lines), "Kids,"
*Be Good to Yourself" (products with reduced calorific and/or fat content), "Free from,"
"Sainsbury Organic," «fair Trade," and "Super Naturals* (a range of readymade meals with
healthy ingredients). While service offerings today are quite similar, the rivals' distribution
strategies differ significantly. In common with most other large retailers, Tesco decided to draw
goods from suppliers into regional distribution centers for preparation and delivery to stores.
Tesco is extending this logistic practice to cover collection from suppliers (factory gate pricing)
and input to suppliers in a drive to reduce costs and improve reliability. In contrast, Sainsbury's
has heavily invested in fully automated depots. On January 14, 2000, Sir Peter Davis was
appointed Sainsbury's CEO. This decision was well received by investors and analysts, as in his
first two years he raised profits above targets. By 2004, however, the group had suffered a
decline in performance relative to its competitors and fell to third in the U.K. food market. Davis
oversaw an almost €3 billion upgrade of stores, distribution, and IT equipment. Part of this
investment included the construction of four fully automated depots, which, at €100 million each,
cost four times more than standard depots.

Loyalty Programs:

Retailers try to gain the loyalty of their customers in various ways. Tesco was the first to launch
a Clubcard system. It was introduced in 1995 and has become the most popular card in the
United Kingdom, with around 13 million active Clubcard holders. Customers collect one
Clubcard point for every f1 (€1 in Ireland) they spend in a Tesco store, Tesco Petrol, or at
Tesco.com. Customers also collect points by paying with a Tesco credit card or by using Tesco
Mobile, Tesco Homephone, Tesco Broadband, selected Tesco Personal Finance products, or by
using its Clubcard partners, Powergen or Avis. Each point is worth 1p in-store when redeemed
or 4p when used with Clubcard deals (offers for holidays, day trips, etc.). Every three months,
holders receive a Clubcard statement offering discount coupons that can be spent in-store,
online (if opted into eVouchers), or on various Clubcard deals. The program has numerous
partners (e.g., hundreds of British pubs), but the Clubcard belongs to Tesco alone. Tesco
implemented the Clubcard rewards program to gather customer information, which is then used
to cater to specific potential customer needs and wants. When shoppers sign up for the card,
they automatically submit their ages, genders, and incomes. Tesco segments their shoppers on
the basis of these factors. As soon as the shopper uses the card online or in-store, product
information is automatically uploaded into the Tesco database. Product information is used to
cross-sell additional products and services, such as food Delivery. Tesco is the most
customer-focused business that I have ever worked for. They are absolutely obsessed with the
customer. -JOHN HOERNER, NON-FoOlDIREcTOR, TEscO Sainsbury's was "wrong-footed" in
its original reaction to the Tesco Clubcard, showing "no immediate response apart from disdain."
It lost market share in subsequent years. In 2004, the London Times quoted a former executive
and others who viewed this event as the start of the company's downturn due to management
failures by David Sainsbury and his successors, Dino Adriano and Peter Davis. David
Sainsbury, who in 1992 replaced his cousin, the long-time CEO John Sainsbury, first dismissed
Tesco's Clubcard. After long internal debates, Sainsbury introduced the Sainsbury's reward card
in 1996. A multiparty card program, "Nectar," was launched in the autumn of 2002. Nectar gives
the customer a versatile and powerful point-gathering system to be used and redeemed at a
variety of stores. In Nectar, Sainsbury's has strong partners such as Barclaycard, British
Petroleum, and the department store chain Debenhams. The Nectar card was re-launched in
summer 2007 to celebrate its fifth anniversary. The scheme was changed from a reward- to a
treats-based program. In its early days, the Nectar scheme was criticized as being among the
worst card schemes offered. At the time, it was said that some consumers who spent €5,000 on
Barclaycard received as little as €12.50 in points to redeem, while Sainsbury's customers had to
spend as much as €1,000 just to get two tickets to the cinema. Today, points on spending
in-store are earned at a rate of two points per f1 spent (except 1 point per liter of fuel); 500
points can subsequently be exchanged for a voucher worth £2.50 to spend in Sainsbury's. The
card scheme is run by a third-party company, Loyalty Management UK (LMUK), which collects
information on behalf of the partner sponsors.

Online Sales Channels:

Toward the end of the 1990s, both firms targeted online distribution channels that promised
large growth potential. Non-store retailing growth rates were expected to be higher than
store-based rates, as online usage gained popularity among British consumers. (see Exhibit 3).
Following these predictions, the United Kingdom has evolved into a leader of Internet retailing in
Europe, and growth is continuing. Tescos has operated on the Internet since 1994 and was the
first retailer in the world to offer a robust home-shopping service in 1996. Tesco.com was
formally launched in 2000. It also has online operations in the Republic of Ireland and in South
Korea. Food sales are available within delivery range of selected stores, goods being
hand-picked within each store, in contrast to the warehouse model followed by most competitors
(e.g., Ocado°), which allows rapid expansion with limited investment. In 2003, Tesco.com's
then-CEO, John Browett, received the Wharton Infosys Business Transformation Award for the
innovative processes he used to support this online food service. Today, Tesco operates the
world's largest food home-shopping ser-vice, as well as provides consumer goods,
telecommu-nications, and financial services online. As of November 2006, Tesco was the only
food retailer to make online shopping profitable. Sainsbury's has been involved in e-business
and home-shopping development since 2000, when it launched Sainsbury's to You in April of
that year. Although some employees transferred from the traditional side of the business,
Sainsbury's also hired new staff with Web and marketing skills. Specific training was provided
on e-business, as well as cross-functional training. Sainsbury's to You did not completely spin
off but occupied a separate building, thereby combining entrepreneurial flexibility with the
strength and security of a strong brand. Sainsbury's Online currently oper. ates from 144 stores
and uses two dedicated picking centers that are not open to the public. In addition to food, also
available are flowers, wine, gifts, and electronics. In October 2007, Sainsbury's was receiving
around 80,000 online orders per week. This represents quite strong growth, but is far less than
Tesco, which processes weekly orders of 250,000. Sainsbury's did not release any e-commerce
sales figures, but said it was still on track to expand its Web service to 200 stores by March
2010. Tesco.com captured two-thirds of all online food orders in the first seven months of 2007,
generating sales of approximately €2.5 million per day. Sainsburystoyou .com took third place
with 14 percent, behind ASDA with 16 percent. Customers of Sainsbury's, however, spent the
most per order, averaging almost £90, compared to €80 for both Tesco and ASDA. ASDA and
Sainsbury's online shoppers also bought more items per arder, with both averaging 69 units per
order compared to 58 for Tesco. Sainsbury's online customers incurred the lowest average
delivery charge during the period, at just over £3. Tesco online customers paid over f4 per
delivery, and ASDA online customers paid nearly €5.50.

Diversification into Non-Food:

A number of retailers have created such sense of nearness with customers in terms of
perception, safety and security that you can refer to them as brands. -KAREL VUURSTEEN,
CHAIRMAN & CEO, HEINEKEN Originally specializing in food, Tesco began to diversify into
areas such as discount clothes, consumer electronics, consumer financial services, DVD sales
and rentals, compact discs and music downloads, Internet service, consumer telecoms,
consumer health insurance, consumer dental plans, and budget software. In these new product
segments, Tesco heavily built on its skills in private labels. For example, it introduced brands
such as "Cherokee" and "F+F" in clothing, "Technika" and "Digilogic" in consumer electronics,
and other labels ranging from DVD players to televisions and computers. Tesco used its food
brands "Finest" and "Value" to expand into non-food items. In its Extra stores, Finest health and
beauty, home, and clothing lines resulted. In 1997, Tesco Personal Finance was launched as a
fifty-fifty banking joint venture with the Royal Bank of Scotland. Products ffered included credit
cards, loans, mortgages, savings accounts, and several types of insurance, including car, home,
life, pet, and travel. They are promoted by leaflets in Tesco stores and through its web site. All of
its offers are simple, providing customers few but clear options and choices. Profits were 6130
million for the 52 weeks prior to February 24, 2007, of which Tesco's share was 666 million. This
move toward the financial sector has diversified the Tesco brand and provides opportunities for
growth outside the retalling sector. For example, Tesco offers Clubcard points or free petrol
when consumers purchase 'Tesco car insurance. The company is currently conducting trials at a
finance center in the Glasgow Silverburn Extra store, providing free financial advice and quotes
for insurance and loans; this service is staffed by trained Royal Bank of Scotland employees.
The center also has a Euro cash machine providing commission-free Euros and a Bureau de
Change run by Travelex. If successful, this service will be rolled out to more key and flagship
stores. Tesco also entered the telecommunications sec-tor. Though it launched its Internet
service provider in 1998, the company was not seriously active in telecommunications until
2003. Rather than purchasing or building its own telecom network, Tesco paired its marketing
strength with the expertise of existing telecom operators. In autumn 2003, Tesco Mobile was
launched as a joint venture with 02, and Tesco Home Phone was created in partnership with
Cable & Wireless. In August 2004, Tesco Broadband, an ADSL-based service delivered via BT
phone lines, was launched in partnership with NTL. In January 2006, Tesco Internet Phone, a
Voice over Internet Protocol service, was launched in conjunction with Freshtel of Australia.
Simple and clear offering logic is also evident in the strategic move into telecommunications.
Tesco Mobile offers only four different pay-as-you-go tariffs: Value, Standard, Extra, and Staff
(for employees). Tesco announced in December 2004 that it had signed up 500,000 customers
to its mobile service in the 12 months since launch. By December 2005, one million customers
were using its mobile service, and by April 2006, Tesco claimed over one and, one-half million
telecom accounts in total, including mobile, fixed line, and broadband. On December 19, 2006,
Tesco Ireland announced that it would enter into a joint venture with 02 Ireland to offer mobile
telecommunications services, also under the Tesco Mobile brand. Recently, Tesco entered the
housing market with a self-advertising Web site, Tesco Property Market. Other strategic
initiatives into non-food items include, for example, following a successful trial in 2006, "Apple"
20nes in 12 outlets, where the iPod range is sold along. side Mac computers and other Apple
products. Sainsbury's was much more reluctant to move into hon-food retailing. Inspired by the
success of its main rivals (ASDA had also moved strongly into the non-food. area) and the
sheer size of the U.K. non-food retail market (in 2003, it was estimated at over €100 million), it
launched 2,500 home and cookware products in September 2003. Copying 'Tesco, Sainsbury's
also used its own food brands and transferred them to non-food items. For example, it extended
its clothing range with an organic line. In addition to food and non-food items, Sainsbury's
expanded into retail banking and property development. In 1997, Sainsbury's bank was
established as a joint venture between J Sainsbury pl and the Bank of Scotland (now HBOS).
Sainsbury's bank offers services similar to Tesco's, including travel (insurance and money),
savings, and lending; it also offers a Sainsbury's credit card. By 2010, Sainsbury's expects to
achieve sales of €3.5 billion, with 33 percent of its total sales coming from non-food businesses.

International Diversification:

These results show that our new growth businesses -in international, in non-food and in
services--have contributed as much profit as the entire business was making in 1997. _CEO
TERRY LEAHY, 2005 Tesco's international expansion began in the late 1970s with the purchase
of a small company in the Republic of Ireland. The small-scale nature of this first foray was seen
as a weakness, and the company was eventually sold in the mid-1980s. In 1994, Tesco
acquired the Scottish supermarket chain William Low. Tesco successfully fought off Sainsbury's
for control of the Dundee- based firm, which then operated 57 stores. This paved the way for
Tesco to expand its presence in Scotland, where it was weaker than in England. Inverness was
recently branded "Tescotown" because well over 50p in every fl spent on food is believed to be
spent in its three Tesco stores. In March 1997, Tesco announced the purchase of the retail arm
of Associated British Foods, which consisted of the Quinnsworth, Stewarts, and Crazy Prices
chains in the Republic of Ireland and Northern Ireland, as well as associated busi-nesses, for
£640 million. This acquisition gave Tesco both a major presence in the Republic of Ireland and a
larger presence in Northern Ireland than Sainsbury's, which had begun its move into the
province in 1995. In the 1990s, Tesco strongly expanded overseas by increasing investments in
emerging markets such as Hungary, the Czech Republic, Thailand, and South Korea. Tesco
was buying into successful companies, a strategy that resulted in strong positions in these
mar-kets. In 1997, the new CEO, Terry, Leahy, enforced Tesco's international growth strategies
beyond Great Britain. However, outside the United Kingdom the supermarket firm's position was
far from dominant and remained in the shadow of larger, more high-profile international
operators such as Wal-Mart and Carrefour. Tesco then analyzed countries for expansion, putting
high emphasis on two dimensions: the market potential for growth and the competitive situation
in the market. Only if a market was characterized by relatively high growth potential and
relatively low rivalry was it considered a real target market and approached in an orderly
fashion. In 2002, Tesco purchased 13 HIT hypermarkets in Poland. In June 2003, Tesco
purchased the C Two-Network in Japan. It also acquired a majority stake in the Turkish
supermarket chain Kipa. Another acquisition was the Lotus chain in Thailand. In mid-2006,
Tesco purchased an 80 percent stake in Casino's Leader Price supermarkets in Poland, which
were subsequently reconfigured as small Tesco stores. Many British retailers attempting to build
international businesses have failed. Tesco has responded to the need to be sensitive to local
expectations in foreign countries by entering into joint ventures with local partners, such as
Samsung Group in South Korea (Samsung-Tesco Homeplus), and Charon Pokphand in
Thailand (Tesco Lotus), and by appointing a high proportion of local personnel to management
positions. In late 2004, the amount of floor space Tesco oper. ated outside the United Kingdom
surpassed its home market space for the first time, although the United Kingdom still accounted
for more than 75 percent of group revenue due to lower sales per unit area outside the territory
(for an overview of Tesco's international store portfolio, see Exhibit 4). Tesco regularly continues
to make small acquisitions to expand its international businesses. For example, in the 2005-06
fiscal year, acquisitions were made in South Korea, Poland, and Japan.
In September 2005, Tesco announced that it was selling its operations. in Taiwan to Carrefour
and purchasing Carrefour stores in the Czech Republic and Slovakia. Both companies stated
that they were concentrating their efforts in countries where they had strong market positions.
Tesco entered China by acquiring a 50 percent stake in the Hymall chain from Ting Hsin of
Taiwan in September 2004. In December 2006, it raised its stake to 90 percent in a €180 million
deal, which was just after Tesco lost out to Wal-mart to partner with the Indian Group, Bharti, to
develop a national retail chain in India. In February 2006, Tesco announced its intention to move
into the United States, opening a chain of convenience stores on the West Coast (Arizona and
California), Fresh & Easy Neighborhood Market. The first store was opened in November 2007,
with 100 more openings scheduled in the first year. By planning to open a new store in the
United States every two-and-one-half days, Tesco intends to mimic the successful expansion of
U.S. pharmacy chains such as Walgreens. Tesco's strategy and unorthodox tactics have not
been without controversy. In 2005 and 2006, the company covertly sent an advance team
consisting of executives in disguise to conduct intelligence on potential competitors. Like a
James Bond movie, the company's agents sought to keep their plans secret by posing as
Hollywood film producers making a movie about supermarkets, according to Business Week.
The bold operation collected intelligence on the U.S. market and on competitors such as
Wal-Mart, Kroger, Safeway, Albertson's, Whole Foods, and Trader Joe's. The covert operation
was so unusual and unsettling that some potential rivals hired security teams to infiltrate Tesco
and obtain information about executives involved in the operation. In the end, Tesco did obtain
the necessary information to proceed with its store openings. A Tesco senior manager said, "For
me, it is remarkable that in five years Tesco has moved from being a U.K.-based supermarket
chain to become an international mixed retail and services business. This rapid transformation
is based on clarity at the top and a tremendous creativity and energy in making it happen
quickly. "Sainsbury's international strategy can be described as that of a fast follower, albeit with
varying results and to a lesser extent. It expanded its operations It expanded its operations into
Scotland, opening a store in Darnley in January 1992. In June 1995, Sainsbury's announced its
intention to move into the Northern Ireland market, which had until that point been dommated by
local companies. Between December 1996 and December 1998, the company opened seven
stores. Two others at Sprucefield, Lisburn, and Holywood Exchange, Belfast, would not open
until 2003 due to protracted legal challenges. Sainsbury's move into Northern Ireland was
undertaken in a very different way than that of Tesco. While Sainsbury's outlets were all new
developments, Tesco (apart from one Tesco Metro) instead purchased existing chains from
Associated British Foods (see Tesco Ireland). In 1999, Sainsbury's acquired an 80.1 percent
share of the Egyptian Distribution Group SAE, a retailer in Egypt with 100 stores and 2,000
employees.

Management Teams:

At the end of March 2004, Davis was promoted to chairman and was replaced as CEO of
Sainsbury's by Justin King. Justin King joined Sainsbury's from Marks and Spencer plc, where
he was a director with responsibility for its food division and Kings Super Markets, Inc, a
subsidiary in the United States. King was also previously a managing director at ASDA, with
responsibility for hypermarkets. In June 2004, Davis was forced to resign as chairman in the
face of an impending shareholder revolt over his salary and bonuses. Investors were angered
by a bonus share award of over €2 million, despite poor company performance. In July 2004,
Philip Hampton was appointed chairman. Hampton had previously worked for British Steel,
British Gas, BT, and Lloyds TSB. king perceived Sainsbury's to be not suficiently focused on its
customers or its main competitors. King ordered a direct mail campaign to one million
Sainsbury's customers, asking what they wanted from the company and where the company
could improve. Results re-affirmed the commentary of retail analysts; that is, the group was not
ensuring that shelves were fully stocked, partly due to the failure of the IT systems introduced
by Peter Davis. In October 2004, King unveiled the results of the business review and his plans
to revive the company's fortunes. This was generally well received by both the stock market and
the media. Immediate plans included terminating 750 headquarters staff and recruiting around
3,000 shop floor staff to improve the quality of service and the firm's problem of stock
availability. Another significant announcement was the decision to halve the dividend in order to
increase funds available to offer price cuts and to improve quality. The company's fortunes have
improved since the launch of this recovery program. In 2004, King hired Lawrence Christensen,
previously an expert in logistics at Safeway, as supply chain director. Immediate supply chain
improvements included the reactivation of two distribution centers. In 2006, Christensen
commented on the four automated depots introduced by Davis, saying, "INJot a single day went
by without one, if not all of them, breaking down ... the systems were flawed. They have to stop
for four hours every day for mail tenance. But because they were constantly breaking down you
would be playing catch up. It was a vicious circle." Christensen felt that a fundamental mistake
was to build four such depots at once, rather than building one and testing it thoroughly before
building the others. In 2007, Sainsbury's announced an additional €12 million investment in its
depots to keep pace with sales growth and to remove the failed automated systems from its
depots.
The Competetive Landscape Today:

The situation today is clear. Tesco has outpaced its closest rival in its local and international
markets. Edward Garner, communications director of the TNS Superpanel, said, "TNS
supermarket share information shows that the retailer's market share has grown consistently
and strongly over the last decade and shows no sign of abating." These events led to shifts in
the competitive landscape. The U.K. retail industry has become highly concentrated. The top
four store-based retailers--Tesco, Sainsbury's ASDA, and Morrison's Supermarkets--dominate
the market; all are original food retailers. This illustrates the status of food retailers in the market
(see Exhibit 5). All are British, except ASDA, which was acquired in 1999 by the U.S. retail giant
Wal-Mart. Discounters adapted to this less-favorable environment by slightly improving their
meager U.K. presence by expanding their number of outlets and moving upscale. This was
helped by the trend of consumers to increasingly combine bargain shopping with purchases of
luxury products or services. This "schizophrenic" shopping behavior blurs previously separate
boundaries. The traditional structure of upper, middle, and mass market has been more or less
abolished. Since the launch of King's recovery program, Sainsbury's has reported nine
consecutive quarters of sales growth, most recently in March 2007, even outpacing Tesco,
making the company's performance the best since its glory days of the 1980s and early 1990s.
Sales increases were credited to solving problems with the company's distribution system. More
recent sales improvements have been attributed to significant price cuts and the company's
focus on fresh and healthy food. On October 4, 2007, Sainsbury's announced plans to relocate
their Store Support Centre from Holborn to Kings Cross in 2011. This office, part of a new
building complex, will allow both cost savings and energy efficiency. Despite this positive news,
according to the latest Taylor Nelson Sores rankings published in March 2007, Sainsbury's
market share in food retailing remains third in the United Kingdom at 16.37 percent compared to
Tesco's 31.35 percent, ASDA's 16.83 percent, and Morrison's 11.08 percent (see Exhibit 6).
Tesco remains the clear market leader. In the past, Tesco showed itself to be the quickest at
seizing expansion opportunities. Furthermore, it has succeeded in building an image of
providing good value at low prices. The recovery in the Sainsbury market share builds on the
positive picture already established. This strong performance has been achieved in the face of
relentless pressure from Tesco, which continues its recent run of double-digit turnover growth..
Whilst Tesco remains dowsinant, there are signs that it is experiencing increased competition. It
is still growing but the year-on-year share increase is below the average we were seeing last
year. Looking towards the future, Tesco will continue to face challenging competition from its
nearest competitor Asda as well as the likes of Sainsbury's, which is showing positive growth
trends and Morrisons once the Safeway store conversions are complete. Tesco will need to
prove its ability to meet increasingly challenging consumer demands and stay a step ahead of
the competition...

New Challenges Ahead:

After a relatively long period of economic growth during the review period, conditions may well
stagnate in the coming years, thus dampening the forecast performance of store-based
retailing. Consumer debt levels have reached record highs and, with the United Kingdom's
negative saving rate, there is less room for continued growth in consumption. As a result,
discounters (both food and non-food) are well placed to gain importance. Euromonitor predicts
food retailers to outperform non-food retailers with a value compound annual growth rate of 1
percent. Recent trends, such as health and wellness and ethical concerns, have opened
opportunities, even in the saturated food category; however, most food retailers' growth is
expected to stem from non-food Items. Consolidation is expected to continue (see the Safeway
takeover), with independent shops closing, being taken over, or joining larger chains. This is
evident in the decline of the number of total outlets, particularly independent ones. Sainsbury's
might be the target of additional takeover bids, since family investment in the company is only
18 percent. A first private equity bid was considered by CVC Capital Partners, Kohlberg Kravis
Roberts (which later left the consortium in order to focus on its bid for Alliance Boots), and
Blackstone Group; in February 2007, this also included Goldman Sachs and Texas Pacific
Group. The initial offer submitted in April 2007 of 562p a share was rejected after discussions
between Sainsbury's top management and the two largest family shareholders. A subsequent
offer of 582p a share was also rejected. As a consequence, the CVC-led consortium abandoned
its quest, stating "I]t became dear the consortium would be unable to make a proposal that
would result in a successful offer." In April 2007, Delta Two, a Qatari investment company,
bought a 14 percent stake in Sainsbury's (causing its share price to rise 7.17 percent); this stake
was increased to 25 percent in June 2007. On July 18, 2007, BBChNews reported that Delta
Two had tabled a conditional bid proposal. On November 5, 2007, it was announced that Delta
Two had abandoned its take over bid due to the "deterioration of credit markets and concerns
about funding the company's pension scheme. Following the withdrawal of the interest of Qatari
investment, shares in Sainsbury's dropped about 20 percent (115p) to 440p on the day of this
announcement.