How is Tesco using technology to differentiate their Business and Operating Model?
Tesco has continually been investing in technology to develop an omnichannel customer experience and to maintain a competitive edge in an increasingly digitized UK grocery landscape. Three technological advancements that have created opportunities, as well as some challenges, for Tesco have been:
- Moving from ‘bricks and mortar’ to ‘bricks and clicks’ with the emergence of Tesco Direct, an online grocery platform with ‘click-and-collect’ functionality
In the early 2000s, the UK was prime for online grocery shopping and home delivery due to high technology adoption rates and areas of high population density. In 2000, Tesco was quick to respond to this opportunity, adapting their business model by establishing an online grocery channel, ‘Tesco Direct’ (Exhibit 1) . By 2006, online sales were rapidly growing (CAGR of 23%) and in order to meet fulfilment demands, Tesco augmented their operating model by investing in ‘grocery dotcom centres’ , warehouses solely for online order fulfilment purposes equipped with innovative ‘goods to person’ picking technology (Exhibit 2) . In 2011, to offer further convenience to customers and to improve business model profitability through lowering home delivery costs, Tesco led the competitive pack by offering an omnichannel ‘click and collect’ function, whereby customers placed orders online and collected bagged groceries at a collection point of their choice. Despite revenue upside, the shift to a ‘bricks and clicks’ omnichannel offering came with challenges for Tesco’s operating model: heavy investment in development of an online platform, investment in ‘grocery dotcom centres’ (approximately £1.5-3.5M per warehouse) , investment in a home delivery labour force and supply chain ordering difficulties due to inaccurate forecasting of online grocery orders given a lack of historical data.
Exhibit 1: Tesco Direct online website 
Exhibit 2: State of the art goods-to-person picking technology 
- Implementation of a digitalized in-store experience
To improve the efficiency of Tesco’s operating model, Tesco invested in digital in-store initiatives. ‘Scan as you shop’ handheld devices (Exhibit 3) and self-check-out stations (Exhibit 4) were placed adjacent to the usual employee manned check-out stations to provide customers with the technology to perform the check-out function without involvement from Tesco employees . From a business and operating model perspective, this results in efficiency cost savings as fewer employees are required to perform manual check-out . However, self-checkout has not come without challenges – the lack of employee supervision has led to significant levels of fraud for Tesco (approximately ~£8M per year) . Tesco is combating this thievery through digital receipt technology and specialized cameras at self-checkout stations to alert staff real-time to ‘irregular’ customer scanning activity .
Exhibit 3: Scan as you shop handheld device 
Exhibit 4: Self Service Checkout 
In addition, in-store video cameras, such as the ‘broccoli cam’ (Exhibit 5), detect when fruit and vegetable trays in the fresh foods aisles are depleted, sending instant messages to the shop-floor employees for immediate replenishment . Electronic shelf-edge labels (Exhibit 6) circumvent the need for Tesco employees to change 5-10 million paper labels monthly, freeing up valuable employee time to focus on serving customers [7, 11]. Moreover, electronic shelf-edge labels allow for instantaneous price-changes throughout a given day, allowing Tesco to implement promotional prices at a moment’s notice. Finally, employees are equipped with portable smart badges which, upon scanning an item, provide employees with information on stock levels and further product details, allowing shop floor employees to answer customer queries live .
Exhibit 6: Electronic shelf edge labels 
- Development of Tesco Clubcard – a sophisticated data-driven customer loyalty scheme
The Tesco Clubcard loyalty scheme tags a unique customer ID to every purchase, resulting in the amalgamation of millions of customer purchasing data points . Tesco leverages big data analytics and algorithms to adapt the supply chain and product offering to purchasing trends, predict future customer purchasing habits and generate personalized online and offline discounts . This has created opportunities for Tesco’s business and operating model as approximately 16.5 million customers subscribe to Clubcard in the UK, driving greater customer lifetime value and loyalty through repeat purchases due to personalized discounts and allowing greater accuracy into forecasting customer demand by region and product category .
What additional steps Tesco should consider implementing?
Moving forward, Tesco needs to leverage smartphone technology to digitally innovate the in-store customer experience by equipping customers with knowledge and personalization in-store. For example, the existing Tesco App could be expanded provide a functionality to help customers locate specific items within superstores and to replace the ‘scan as you shop’ handheld devices for a seamless digital experience using digital wallets. This could create an operating model opportunity by further decreasing in-store headcount and costs. Finally, Tesco could overcome the difficulties users face scanning barcodes in self-checkout machines by utilizing innovative Toshiba technology which no longer requires barcodes .
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