As well as having a vast offline presence, Tesco is the UK's largest online retailer with 1.6 million registered customers. The company launched its online channel, tesco.com, in 1996 and now generates online food sales of £2.5 billion annually.
As the firm cuts back on opening physical stores and focuses on expanding its multichannel capabilities, the emphasis is shifting towards the nexus point between digital and offline.
It’s a necessary shift in focus. Tesco recently unveiled its Christmas 2013 figures to analysts which showed that underlying an overall 2.3% drop in UK like-for-like sales was a 3.1% fall in sales at large format stores. In contrast, online activity was on the increase:
- Online grocery up 10% year on year.
- Online general merchandise by 25%.
- Online clothing sales by 70%.
- Digital entertainment - Tesco’s Blinkbox service - turning in a massive 245% growth rate.
It’s an unsettling time in some respects for Tesco as the market shifts from what the firm sees as a first curve of on premise shopping to a second curve of digital.
Tesco chief executive Philip Clarke admits that it’s difficult to chart a way through the transition:
“I’ve not known a situation like this in my 40 years because of this first curve, second curve phenomenon. The last time we had a recession that was as deep as this for consumers, I didn’t know what the internet was. At Christmas it was 8% of food sales for us and 20% of non-food sales.
“This direction of travel - how big is it going to be? Well we don’t know. And we don’t know what that will mean to bricks and mortar retailing. All we know is that if we don’t have a bricks and clicks offer, we will have a very serious problem. So I just don’t know.”
What he - and everyone else at senior management level within Tesco - does know is that there’s big money at stake. Tesco’s existing online online grocery business made a trading profit of £127 million last year on sales of £2.5 billion.
But it’s multi-channel that offers the biggest prize: those who shop in-store and buy groceries online spend 2.04 times as much as those who only shop in the store while those who add general merchandise online shopping to those two, spend 2.98 times as much.
Tesco group multichannel director Robin Terrell explains:
“What Christmas told us is that our multi-channel focus is the right one, but if anything, we needed to go faster. Besides confirming the strong growth in online, Christmas confirmed some of the more sweeping changes taking place in customer behavior. Most important of all is the continued rise in customer expectations. Customers want to shop however, whenever and wherever they want. We have to respond to that change in behavior and offer them a seamless and faultless experience.
“There is no second curve without the first curve. We have some huge strengths to build on. Our unrivalled store network, unique customer relationship and insight we have with Clubcard, our portfolio brands and services and crucially our team. All of these things made Tesco a leader in the first curve, the bricks and mortar world.
“The second curve is about how we make Tesco as much a leader in today’s multi-channel world. That means building on all the historic strengths in a way that’s relevant for the multi-channel environment.”
So multi-channel planning is where some serious investment is going to take place. To that end, Tesco now has more than 1,750 dedicated desks for online general merchandise, and 232 locations for online grocery click and collect.
On that last point, the grocery chain has been adding some more unusual locations for click and collect, such as pick-up lockers located in the London Underground.
It’s useful at this point to consider what multi-channel actually means to Tesco. Terrell says it’s not an easy question to answer:
“People throw around terms like multi-channel, digital, online and god help us, omni-channel, but these terms are poorly understood and used incorrectly, interchangeably. Multi-channel cuts across the digital and the physical, but it’s not just about selling products. It’s also about how we interact and engage with our customers.
“So it’s transactional and non-transactional through every media channel. So being truly multichannel is not just about having a website, it’s about putting the customer at the heart of our business and giving them one, seamless, joined up relationship with Tesco.
“When we get this right,it just becomes the new way of working. It’s integral to the whole business because, for us at Tesco, being the multi-channel leader is a shared goal. We’ll know we’ve succeeded when we don’t need a multi-channel director anymore.”
The direction of travel is backed up some key stats, says Terrell who notes that over half of Tesco purchases are influenced by digital channels and 43% of customers have used a mobile phone to compare prices or look up customer reviews while shopping in a store.
But customer “purchase journeys” are getting more complicated:
“We no longer have that easy linear purchase journey. Customers bounce between channels and devices in whichever way they choose and they expect a seamless experience. Because their expectations have increased, they are very unforgiving.
“That’s why it’s so incredibly important that when we join the channels up, we join them up with zero defects. That means the end-to-end customer experience is faultless with all defects eliminated.
“The growth of multi-channel is being driven by customer behavior. As retailers we clearly have to respond to that to continue to serve our customers, but there’s also a huge commercial prize for those that get it right for customers.”
Terrell rejects the oft-cited concern by some retailers that digital and online will merely cannibalise existing revenues:
“That’s fundamentally missing the point. It’s about identifying your most valuable customers and satisfying them however, whenever and wherever they want to shop with us. As customers increase the number of channels, from the Clubcard data we have, we this then increase accordingly. This is our opportunity.”
Indeed Clubcard is at the heart of the Tesco digital thinking, a loyalty program that is the jewel in the crown for the firm’s customer engagement strategy. Having 17 million Clubcard members data at your disposal, does make the goal of personalisation and that oh-so-elusive single view of the customer all the more tangible.
Tesco plans to make Club Card a "common currency" across all its brands and services - from banking to its Giraffe coffee shops. The group is also launching digital Club Card later this year to tap into growing customer use of mobile devices such as smart phones.
The company has also launched Orchard, its own social network which allows Tesco's "most engaged" customers and colleagues to connect. This already has 50,000 members and is "on track" to hit 100,000 by the end of the year.
Also coming up is a digital wallet offering which is being trialled at the moment. The wallet will be hosted on Tesco’s smartphone app and will work with all major credit and debit cards.This will allow shoppers to pay for goods on any of their cards by scanning mobile phones - but crucially without the spending limits seen on other contactless payments.Finally there’s Hudl, the Tesco own brand, cut price tablet computer which has sold nearly 500,000 units to date. Terrell explains:
“We wanted to create an accessible product for customers who otherwise would not have bought the tablet. We wanted to democratize this technology with no compromise on quality. But the first version wasn’t good enough. We had to ensure our customers had a great experience and so we pulled it.
“We are very proud of this product. It’s benchmarked against the Google Nexus and the Amazon Kindle with the clear design objective of being accessible to all, easy and inviting and intuitive to use and at a great price.
“Its success goes far beyond the sales unit numbers. The built-in Tesco apps proved hugely important, meaning customers could easily navigate a range of products and services available through the Tesco team. As a result we have seen daily revenue from Blinkbox Movies increase nine-fold and a five-fold increase in streams of Blinkbox Music.
“But importantly it’s also helped our core business with Hudl customers immediately spending meaningful additional amounts with Tesco, both in store and online.”
The direction of travel is set - and it’s a sensibly defined and articulated one.
Tesco’s offline fortunes may have waned somewhat in recent times, but the firm is well-positioned to take advantage of the shift to the ‘second curve’.
And in a hugely competitive grocery market, every little helps as the saying goes.