CASE STUDY Tesco

Shop
on the
Go
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 UK’s 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 Smart strategy: Koreans ‘virtually shopping’ at a subway station
the products on display with
their smartphones, and place i m a g e c o ur t e s y : l i l d o r e m i . o r g

I
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 country’s lifestyle.
n 2011, when domestic sales
of the UK’s retail giant Tesco
slumped, it fell back on its
second-largest market, Asia,
which accounted for 30 per
cent of its total profit. Tesco’s
pany since the late 1990s. Following
its acquisition of Thailand’s Lotus in
May 1998, the company announced
a £142-million investment in South
Korea in March 1999 by partnering
with Samsung to develop hypermar-
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 Homeplus app into their smart-
phones.
n They then use their smart-
phones to scan the QR codes of the
products they want to purchase. The
posters in the virtual stores are de-
their order is completed. Homeplus
reported that the majority of the or-
ders are placed at 10 am and 4 pm,
when people are commuting to and
from work.
n Customers schedule a time for

By Martin Petit De success in Asia, and specifi-
cally in South Korea – cur-
Meurville, Kimberley Pham rently its largest market out-
and Courtney Trin side the UK – is based on its
ability to adapt to the local consumer.
Tesco’s expansion into Asia has
been an important focus for the com-
kets. 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 localisa-
tion was the launch in 2011 of its
first virtual store, located in a Seoul
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 com-
muters. This is how such stores work:
n Interested customers download
signed to resemble the actual aisles
and shelves of a regular Tesco store,
making the experience very user-
friendly.
n The scanned products are
stored in the customers’ online shop-
ping basket, who pay online once
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

112 Business today February 15 2015 February 15 2015 Business today 113
 CASE STUDY Tesco
than one year, making the Homeplus
Retailers struggling to develop app the most popular shopping app in
competencies to succeed globally South Korea. Online sales increased
130 per cent since the introduction of
O V
ne of the most dramatic changes in retailing over the past the virtual stores and registered app
two decades is its rapid globalisation. As a result, what users increased by 76 per cent. In
used to be a local, unsophisticated, “mom and pop” busi- February 2012, Tesco Homeplus an-
nounced it was extending the virtual
ness is being transformed into a global and technology-intensive
store concept to 20 new locations
growth sector. In support of this thesis, consider premier global across the country. Today, there are
retailing brand names – such as ALDI, Body Shop, H&M, IKEA, 22 Homeplus virtual stores in South
Marks & Spencer, Toys R Us, Walmart, and Zara – who are Korea, and the brand is the country’s
adorning the streets of several countries. They combine their No. 1 online retailer.
finely-tuned value proposition with superior retailing skills, glo-
bal sourcing, and access to capital to create value for both their Understanding the
customers and shareholders. Going international is one of the Consumer
South Korea, a country of around 50
primary growth strategies available to a retailer when its domes- million people, is the fourth-largest
tic market is saturated. economy in Asia and the 12th largest
Despite the popularity of globalisation in retailing, most re- in the world. Compared to other
tailers are still struggling to develop competencies to succeed in Asian countries, South Koreans gen-
global markets. To what extent should the “original” format and erally have higher levels of education,
merchandise be adapted is a major issue. Walmart learnt this the higher average household income,
hard way when its initial entry into China had the wrong mer- and better living standards. Over the
past few decades, the country has
chandise. On the other hand, Mexican customers were disap-
built itself up with its largest resource
pointed when they did not find enough imported US merchan- – people – and has achieved rapid
dise in the Walmart stores. Toys R Us has learnt that there are economic growth through exports of
differences in consumption patterns. The Japanese demand elec- manufactured goods. It is now a ma-
tronic toys, other Asian consumers demand educational toys, jor producer of automobiles, electron-
Europeans favour traditional toys, while American kids prefer ics, steel and high-technology prod-
television- and movie-endorsed toys. ucts such as digital monitors, mobile
The Tesco case in South Korea demonstrates that despite the phones, and semiconductors.
Over the past decade, South
company’s many problems, it has been a leader in developing
Korea has advanced tremendously
multichannel solutions. With consumers preferring the conven- and has been shaped by constant in-
ience and selection of e-commerce, traditional brick-and-mortar novation, technology and westerni-
retailers are challenged to address how to serve this customer sation. In today’s world, shopping
profitably. The home-delivery option is much valued by consum- habits and behaviour of South
ers but cannot be as profitable as the traditional store. Therein Korean consumers are impacted by
lies the dilemma. several key factors.
Extensive use of technology/con-
“Despite Tesco’s nectivity: According to a report by
McKinsey & Co., South Korea is one
many problems, it of the most advanced countries in
has been a leader
terms of broadband penetration, and
has more than 10 million smart-
in developing phone users. In other words, one in
multichannel five South Koreans use a smart-
phone. Additionally, according to
solutions” Nielsen, households in South Korea
nirmalya kumar are making six per cent fewer shop-
Visiting Professor of Marketing, London ping trips. When they do shop for
Business School, and Member, Group products, an increasing number of
Executive Council, Tata Sons South Koreans go online.
114 Business today February 15 2015
Long working hours/busy life-
style: 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 thou-
sands of pounds a year on after-
school tuition on an industrial scale.
There are just under 100,000 hag-
wons or private academies in South
Korea and around three-quarters of
Korean children attend them.
Travel time on public transporta-
tion: South Koreans spend a signifi-
cant amount of time on public trans-
portation, 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 Tesco’s vir-
tual stores in subways made use of
time spent by commuters waiting for
public transportation, allowing buy-
ers to use the little time they have
available for grocery shopping. Not
only did this change the way buyers
shopped, it also increased the poten-
tial market for Tesco. These buyers
may not have otherwise had time to
go grocery shopping between their
personal and professional lives, opt-
ing 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.
Tesco’s Value
Proposition
Globally, Tesco’s customers are price-
driven buyers who look for value
and/or convenience. According to its
corporate website, Tesco’s customers
care about the following areas: (1)
price and value (2) multichannel and
convenience, and (3) trust. Typically,
therefore, the company’s value prop-
osition 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 vari-
ous forms across developed markets. Today, we can be
optimistic about the acceptance of new concepts by Indian con-
sumers 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 implementa-
tion 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 ar-
eas, such as local train stations in Mumbai, are unlikely to be
successful given the high traffic and quick movement, while tier-
I 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 neigh-
bourhood retail chains such as Godrej’s Natures Basket or
Reliance Fresh, who have an existing set up could prove success-
ful. 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 brick-
and-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
Buying on the move: Tesco’s 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, con-
venience 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 exe-
cute its new localised value proposi-
tion: provide the variety of products
that the customer wants in a conven-
ient location and at a low cost.
In South Korea, it can be argued
that Tesco’s customer values mul-
tichannel options (for example, on-
line 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 pur-
chase in the previous three months.
Image-value-experience
Triangle
In addition to the virtual store’s strong
value proposition, Homeplus has also
116 Business today February 15 2015
developed a strong image and experi-
ence that mutually reinforce this value
proposition. The Homeplus virtual
stores attract their customers through
their quick, tech-savvy, and cool im-
age. They sell to their customer by of-
fering the value of extreme conven-
ience that the customer requires. And
they are able to keep their customers
by offering them the satisfying experi-
ence of easy-to-use technology, on-
time delivery and quality products.
Given that the South Korean on-
the-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 Tesco’s virtual
store strategy?
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prices in order to maintain its overall
Homeplus value proposition, which
hinges on providing desired products
at low prices.
Key Learnings
This case study highlights important
learnings that can be applied, gener-
ally, 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 pur-
chasing behaviour, to identify who
the valued customers are and how
they behave.
Adaptation of value proposition:
If the needs, attitudes and lifestyle of
the company’s “value customer” are
different in the new market/geogra-
phy, the company needs to adapt its
value proposition and value network
across the entire supply chain.
Power of technology in tradi-
tional industries: Technology has a
disruptive power in traditional in-
dustries, such as retailing. In this
case, the predominance of smart-
phones in Korea allowed Tesco to
boost its revenues through an in-
novative 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 consid-
ered 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 in-
creasing prices. ~
(This case study is from the Aditya Birla
India Centre of London Business School)