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