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Retailing Services Seminar 2009
Retailing Services Seminar, 19-20 November 2009
Tesco.com: Growth and returnsLaura Wade-Gery, CEO Tesco.com
Retailing Services Seminar, 19-20 November 2009
Tesco.com today• Sales 2008/9 of £1.9bn
• Profit 2008/9 of £109m
• Top 5 most visited retail website
• 3.4 million weekly visitors
• 6 million catalogues twice a year
• 475,000 orders a week
• Serving some of our most loyal customers
• 2,000 home delivery vans
• C 20,000 staff
The UK’s largest online retailer
….and a sizeable retailer per se
Source: Public statements; Companies House; Analysts’ estimates
1.90
1.30
4.30
2.00
0.11 0.100.30
0.070.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Sales Profit
Tesco.com(inc. Direct)
WH Smith Argos HMV Group
£bn
Grocery and Direct are our two biggest businesses today
= £5m in 08/09 Sales
Tesco.com portfolio
Scale
Position vs. Competitors
High
Low
Attractiveness of MarketLow High
(Size, Growth, Profitability)
(Our Share, Our Growth, Our Profitability)
Grocery£1.5bn
Directc.£300m
Books
DVD rental
TescoDiets
Wine£60m
Photo
Nutricentre
Opticians
Entertainment
Tesco.com has a history of profitable growth
0
500
1,000
1,500
2,000
2,500
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
-20
0
20
40
60
80
100
120
Sales Profit
Sales £m Net profit £mPost-tax ROCE >25% 08/09
Post-tax ROCE >25% 08/09
Customer take-up of online retail continues to grow
Percentage of adult population shopping online
Source: Verdict
17%21%
32%36%
45%
53%
59%62%
0%
10%
20%
30%
40%
50%
60%
70%
2003 2004 2005 2006 2007 2008 2009 2010
But with online today at only 7% of total UK retail sales there is still huge growth potential
UK Online sales and share of total retail% share of total retail
sales
Annual sales (£bn)
0
1
2
3
4
5
6
7
8
9
10
2004 2005 2006 2007 2008 2009 2010 2011 2012
0
5
10
15
20
25
30
35
Sales % of total retail
Source: Verdict
Online customers are our best customers with most of their shopping incremental• Over two thirds of online sales are incremental
• In grocery:
– c.30% of customers are new to Tesco
– The rest spend more overall with Tesco because we capture a higher percentage of their total spend
• In non food, we are extending our reach:
– The 51% of customers who are not within 15 minutes drive of an Extra today
– A much wider range than even our biggest Extra
1. Understanding what matters to customers• Customers mainly choose to shop with us because of familiarity with our stores,
Clubcard and our prices and offers
• When it comes to whether or not to stay with us, order fulfilment, quality and freshness and timeliness become key
Reasons for choosing Tesco.com Reasons for staying with Tesco.comMost important
WebsiteShop with
Tesco in store
Clubcard
Clubcard
Prices & offers
Range
Website
Range
Prices & offers
On-time delivery
Quality & freshness
Most important
Getting what I ordered
2. Prioritising how to build this into the online shopping experience
• Priority was to ensure that the service actually worked
• Focus on picking and the supply chain allowed us to satisfy customers and be profitable
ResearchLearn/
ExperienceSelect Pay Acquire Return
Catalogue
Web
Store
Desk
Home
Work
3. Creating a multi-channel shopping experience
4. Using existing physical assets• 306 stores nationwide give us 99%
coverage
• Maximum 25 minute drive time for stores
– 55 minutes for dotcom only stores
• Over 250 Direct desks give us around 60% coverage
Both
Direct
Dot com
Website – Heat map – where does the traffic go?
High Low
5. Deploying Clubcard understanding
Unique combination of web traffic data AND Clubcard
Grocery
The online grocery market offers plenty of growth
UK online grocery market size estimate
Penetration of online grocery in the overall market is around 3% but 6.7% of Tesco grocery sales are online
Source: TNS, Tesco analysis
2.3
2.8
3.4
3.9
4.5
5.0
5.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2008 2009 2010 2011 2012 2013 2014
CAGR = 15.6%
Our competitors have been playing coverage catch up with beneficial effect on their headline sales growth
Geographic coverage of UK online grocery retailers
Source: TNS, Tesco analysis
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09
TescoAsdaSainsbury’s
Ocado
Waitrose
Our store based operating model has made us uniquely profitable• Distribution/transport costs are the biggest element in home delivery economics:
keep them low through short travel distances
• We leverage our existing assets efficiently by using stores most when they are quietest
The business carries all its incremental costs
0%
2%
4%
6%
8%
10%
12%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Dot Com
Store
Dot ComSales as %of Hour
Dotcom Contribution To Sales across the DayDotcom as % of Hourly SalesSales %
Hour
But we have now reached capacity in some parts of the country• Dotcom only stores are our response
• Dedicated stores which only service dotcom customers
• Now have two – Croydon and Aylesford:
– Opening in Greenford next year
• Expect to open roughly one a year for at least the next few years:
– Perhaps 15% of turnover through this format by 2014
• Starting at scale allows us to be profitable quickly in this new format:
– Migrate existing customers from surrounding stores
• Additional benefit to the stores because less busy giving more growth potential
We see dotcom only stores as a part of our overall offer
Constant process and IT innovation are key to reducing our operating costs
• Simple principles drive our operating model and process design
• Jobs must be interesting and simple to do
• Technology must reinforce the process
• We work with the flow of human nature
Operating costs as a % of sales
20%
25%
30%
35%
01/0
2 0
2/03
03/0
4 0
4/05
05/0
6 0
6/07
07/0
8 0
8/09
A focus on ‘every little helps’ allows us to improve the customer experience each year
• Every little helps in practice:
– Excellent delivery 2
– Shorter than we’d like
– Cheaper alternatives
– Refund the difference
We plan to continue to lead the expansion of the online grocery market through continuous innovation• Systematically tackling the barriers to shopping online and capitalising on the
strengths of internet shopping
• e.g. making shopping online more convenient than in-store
– Predictive ordering
– Collect in-store or convenient location
– Shop as you go capability from phones and devices in kitchen
• e.g. opening up to less conventional big basket shops
– Equally worthwhile for smaller baskets
• e.g. inspiring confidence in product selection
– Customer reviews and discussions
– Tech assisted special needs shops, e.g. diabetic
Tomorrow’s plan• Visit our dotcom only store at Aylesford
• To see first hand:
– This new format
– Our continuous improvement approach
– How we tackle big operational improvements
– Our integrated use of technology
• To meet some of our management team
Direct
The non food market remains a huge opportunity for Tesco1
0
20
40
60
80
100
120
140
160
180
200
2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
New Non Food1 expenditure
129138 142 148 149 152 157 159 160 163 168 173CAGR 3.0%
CAGR 2.2%177
(£bn)
0.7 0.8 1.0 1.6 2.4 2.6 2.72.1Tesco market share (%)
We have a 3% share of the Non Food market (vs. 21% share of the Food market)
Source: Verdict UK Non Food in Grocers 2009 (December 2008), Non Food LTP, Non Food Finance, UK Central Finance1. New Non Food excludes Health & Beauty and Household; H&B assumed to be 9.3% of Non Food expenditure from 2009-2013; 2013 market size estimated using 2008-2012 CAGR 2. Excludes Dobbies, PFS and Services
Total New Non-Food1
Tesco New Non-Food1, 2
Direct is a key part of capturing additional market share
Source: BRC
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
P7 P8 P9 P10 P11 P12 P1 P2 P3 P4 P5 P6
In the non-food market as a whole, online/direct sales are growing faster than stores
% Non Food market growth YoY Sales
Growth
BRC Non Food (non-store)
BRC Non Food (store)
2008/09 2009/10
Our growth has been strong
0
50
100
150
200
250
300
2006/7 2007/8 2008/9
Sales £m
In some categories we are already a material part of their sales – and a much higher proportion of the growth
Direct as a proportion of category sales
> 50%
• Indoor Furniture
• Outdoor Furniture
• Gardening
• White Goods
> 10%
• Computing
• Nursery
• DIY
• Audio Visual
• Sport
<10%
Our multi-channel approach is key to success
Catalogue shops are a new part of Direct and our overall non food business• Catalogue range held in stock in
warehouse within the store
• Brings extensive non food range to small stores
• Allows reconfiguration of existing space to create enhanced non food shopping trip
• Trial currently in 6 Homeplus and one Superstore
• Will extend to more Superstores and Extras next year
We launched our new online clothing business very recently
• Clothing market is the third biggest online category
• The word “clothing” has been the most searched for term on the Tesco website
• 2,600 lines available in total
• 1,000 lines exclusive to online including some brands
And have relaunched our Entertainments sites• Tesco is the 2nd biggest stores
entertainment retailer
• Online growing rapidly, in both physical and digital formats
• Buying physical and digital content together is what customers want to do
• Strong relationship with studios and licence holders has brought exclusive content
• Competitive prices, great range, search and service, all with double clubcard points!
We’ve got a clear agenda going forward to grow and improve the business• Bigger range
• Increased website merchandising capability:
– Including greater personalisation using Clubcard and web data
• Greater customer interactivity
• More closely integrated operations
– Particularly fulfilment and transport
International
International markets offer significant new growth• Small grocery home shopping businesses today in Korea and Republic of Ireland
• Developing a full operating model for international roll out from next year
• Czech Republic grocery home shopping next year
• Future countries to be selected on:
– Internet penetration and propensity to shop online
– Population coverage from our existing stores
• Non-food offers additional potential:
– Both using the UK website
– And in-country
In summary. Our online business is:• Large
• Rapidly growing
• Competitively advantaged as a multi-channel offer
• Profitable
• Low capital intensity
• High returning
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