In the UK Tesco is cutting back its investment in opening stores and instead concentrating on expanding its multichannel capabilities. For Tesco, this means more than strengthening its online presence. Rather, the UK’s largest retailer is determined to leverage the interaction between digital and physical retailing to build its relationship with UK consumers. But can this deeper relationship translate to a sales lift at Tesco’s struggling large-format stores? Katy Askew reports.

Tesco is the UK’s largest online retailer with 1.6m registered online customers. The company launched its online channel,, in 1996 and now generates online food sales of GBP2.5bn (US$4.2bn) annually in the country.

In contrast to the online operations of a number of Tesco’s rivals, also turns a profit, the group revealed at its investor day yesterday (25 February). For the first time ever, Tesco management confirmed it’s online operations generate EBIT of GBP127m, giving a profit margin just north of 5%.

The key to’s profitability is its efficient packing and delivery model, Tesco multichannel director Robin Terrell told analysts. “Tesco has developed a highly efficient picking model… we pick from 300 locations… with excellent delivery drop densities.” sales are benefiting from the incremental growth of online retailing as consumers increasingly place orders for their weekly shop over the internet.

According to IGD, a research firm, UK online grocery sales totalled GBP6.5bn in 2013. Online grocery sales are expected to more than double in value, rising 124%, to nearly GBP15bn by 2018, IGD forecasts.

Terrell said that there are a “wide range of expectations” for growth in the online grocery channel. “We are not fixated with a specific number – the direction of travel is really clear… We are going to add as much of that market as possible… As we start to offer additional items and products the economics of delivery are very compelling to us. We also become more compelling for customers.”

In order to develop a “more compelling” offer, Tesco plans to expand the product lines available through its grocery website to include non-food items.

Tesco is working to make online retailing more convenient by increasing the number of Click & Collect points it operates and rolling out one hour delivery slots nationwide. The group is also adding innovative new features to its online proposition – such as pick-up lockers located in the London Underground.

According to Terrell, the “number one barrier” to shopping online is delivery charges. Tesco therefore plans to remove charges from its Click & Collect business while also lowering delivery charges to ensure it is the “leader” in delivery fees. For its Delivery Saver subscription model, the company will offer to refund the difference to customers who don’t make a saving using it, in the hope of encouraging people to sign up – effectively locking themselves in to repeat purchase.

While the UK supermarket firm believes that these initiatives will help accelerate its online growth, for Tesco building its multichannel capabilities in the medium term is about a lot more than increasing online grocery revenues.

The company believes that, to be a multichannel leader, it must leverage the relationship between online and physical retailing to create a “seamless” customer experience that reflects emerging shopper trends. Tesco believes that if it can join the dots between online, in-store and digital it will reap “significant” commercial rewards.

According to Terrell, the “easy linear purchase journey” is a thing of the past. As a consequence, Tesco is taking a holistic approach to its multichannel offering and looking at how customers feed through its online, digital and in-store points of contact. “Channel profitability is only one part of the story. My focus is on customer profitability,” the multichannel director stressed.

“Over half of purchases are influenced by digital channels and 43% of customers have used a mobile to look up prices or customer reviews while shopping,” he explained.

An important tool in Tesco’s digital armoury is its Club Card loyalty programme. With 17m Club Card members in the UK, Tesco can use the purchasing information stored on each customer to tailor marketing and promotions.

“On loyalty, we are going to make much more of the Club Card with two particular elements – personalisation and greater rewards for customers today,” chief executive Philip Clarke commented.

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 hopes to tap into social media trends and has even gone as far as launching Orchard, its own social network. According to UK MD Chris Bush, Orchard allows Tesco’s “most engaged” customers and colleagues to connect. It already has 50,000 members and is “on track” to hit 100,000 by the end of the year, he suggested.

For these efforts to prove commercially successful, Tesco also needs to get the basics of retail right. This, Bush insisted, remains at the forefront for Tesco management.

“To lead in the new era we have to create the most compelling offer for our customers,” Bush insisted. First of all, this means hitting the mark on price, quality, range and service.

Tesco has made strides in this direction since it launched its turnaround plan two years ago, Bush said.

The company has relaunched its private label lines, the “mojo” has returned to the buying teams, and Tesco is investing more money getting people onto the shop floor. The group has also evolved its pricing strategy to focus on every day low prices over promotions, and Tesco said yesterday that it will back this up with an incremental investment of GBP200m.

In order to tackle the sales decline at its big box outlets, where sales slipped by 3.1% last year, the group is intent on making them destination stores “worth the trip”.

To deliver on all these fronts will obviously require a significant investment from Tesco. However, management insisted that it remains committed to its margin model and actually reduced its projected capital expenditure for the coming three years to “no more” than GBP2.5bn.

Tesco will achieve this through a combination of efficiency savings and by scaling back its store opening programme at home and overseas.

But Tesco’s drive to deliver a “seamless multichannel offer” is a long term play.

According to Cantor analyst Mike Dennis, the company appears to be struggling to turnaround the bricks part of the bricks and clicks model. 

“In our view Tesco’s investor seminar imparted little new information on how the c.83% of UK sales that are currently under performing the grocery market, are going to recover,” Dennis observed.

While Tesco said it would accelerate its store refresh programme, with a target of having refreshed its entire UK store base by 2017, Dennis remained sceptical that the group’s efforts will pay off.

Sales at Tesco’s larger stores are continuing their decent “despite 33% of the store estate already being refreshed and many key own label ranges (Everyday value/Finest/Health Living) re-launched in 2013”, he emphasised.

“Tesco’s UK strategy, in our view, remains unconvincing given the level of sales decline in large UK store sales volumes and the fact that operating costs are rising.”

Without doubt, it will take time for Tesco’s ambition to deepen its engagement with customers to feed through to a sales uplift. And, even then, it is unclear what impact this could have on Tesco’s troublesome large footprint stores.