ExEcutivE SummarySouth 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 UKs 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 the products on display with their smartphones, and place 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 countrys lifestyle.

By Martin Petit De Meurville, KiMBerley PhaM and Courtney trin

112 Business today February 15 2015 February 15 2015 Business today 113

In 2011, when domestic sales of the UKs retail giant tesco slumped, it fell back on its second-largest market, asia, which accounted for 30 per cent of its total profit. tescos success in asia, and specifi-cally in south Korea cur-rently its largest market out-side the UK is based on its

ability to adapt to the local consumer. tescos expansion into asia has

been an important focus for the com-

pany since the late 1990s. Following its acquisition of thailands Lotus in May 1998, the company announced a 142-million investment in south Korea in March 1999 by partnering with samsung to develop hypermar-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

CASE STUDY Tesco

Smart strategy: Koreans virtually shopping at a subway station

Shop on ThE

Gosubway 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 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

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-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

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 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

i m a g e c o U R t e s y : l i l d o R e m i . o R g

114 Business today February 15 2015

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

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 tescos 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. Tescos Value PropositionGlobally, tescos customers are price-driven buyers who look for value and/or convenience. according to its corporate website, tescos customers care about the following areas: (1) price and value (2) multichannel and convenience, and (3) trust. typically, therefore, the companys value prop-osition is to provide customers with

rETAilErS STrUGGlinG To DEvElop CompETEnCiES To SUCCEED GlobAllY

one of the most dramatic changes in retailing over the past two decades is its rapid globalisation. as a result, what used to be a local, unsophisticated, mom and pop busi-ness is being transformed into a global and technology-intensive growth sector. in support of this thesis, consider premier global retailing brand names such as aLdi, Body shop, H&M, iKea, Marks & spencer, toys R us, Walmart, and Zara who are adorning the streets of several countries. they combine their finely-tuned value proposition with superior retailing skills, glo-bal sourcing, and access to capital to create value for both their customers and shareholders. Going international is one of the primary growth strategies available to a retailer when its domes-tic market is saturated.

despite the popularity of globalisation in retailing, most re-tailers are still struggling to develop competencies to succeed in global markets. to what extent should the original format and merchandise be adapted is a major issue. Walmart learnt this the hard way when its initial entry into China had the wrong mer-chandise. on the other hand, Mexican customers were disap-pointed when they did not find enough imported us merchan-dise in the Walmart stores. toys R us has learnt that there are differences in consumption patterns. the Japanese demand elec-tronic toys, other asian consumers demand educational toys, europeans favour traditional toys, while american kids prefer television- and movie-endorsed toys.

the tesco case in south Korea demonstrates that despite the companys many problems, it has been a leader in developing multichannel solutions. With consumers preferring the conven-ience and selection of e-commerce, traditional brick-and-mortar retailers are challenged to address how to serve this customer profitably. the home-delivery option is much valued by consum-ers but cannot be as profitable as the traditional store. therein lies the dilemma.

despite tescos many problems, it has been a leader in developing multichannel solutionsNirmalya kumarVisiting Professor of Marketing, London Business School, and Member, Group Executive Council, Tata Sons

than one year, making the Homeplus app the most popular shopping app in south Korea. online sales increased 130 per cent since the introduction of the virtual stores and registered app users increased by 76 per cent. in February 2012, tesco Homeplus an-nounced it was extending the virtual store concept to 20 new locations across the country. today, there are 22 Homeplus virtual stores in south Korea, and the brand is the countrys no. 1 online retailer.

Understanding the Consumersouth Korea, a country of around 50 million people, is the fourth-largest economy in asia and the 12th largest in the world. Compared to other asian countries, south Koreans gen-erally have higher levels of education, higher average household income, and better living standards. over the past few decades, the country has built itself up with its largest resource people and has achieved rapid economic growth through exports of manufactured goods. it is now a ma-jor producer of automobiles, electron-ics, steel and high-technology prod-ucts such as digital monitors, mobile phones, and semiconductors.

over the past decade, south Korea has advanced tremendously and has been shaped by constant in-novation, technology and westerni-sation. in todays world, shopping habits and behaviour of south Korean consumers are impacted by several key factors.

Extensive use of technology/con-nectivity: according to a report by McKinsey & Co., south Korea is one of the most advanced countries in terms of broadband penetration, and has more than 10 million smart-phone users. in other words, one in five south Koreans use a smart-phone. additionally, according to nielsen, households in south Korea are making six per cent fewer shop-ping trips. When they do shop for products, an increasing number of south Koreans go online.

February 15 2015 Business today 115

CASE STUDY Tesco

Virtual 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 Godrejs 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.

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 tescos 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 Trianglein addition to the virtual stores strong value proposition, Homeplus has also

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

prices in order to maintain its overall Homeplus value proposition, which hinges on providing desired products at low prices. Key Learningsthis 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 companys 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)

CASE STUDY Tesco

116 Business today February 15 2015

businesstoday.in/casestudy

What can we learn from Tescos virtual store strategy? Post your comments at businesstoday.in/ casestudy-tesco

The best response will win a Harvard Business Press Pocket Mentor. Previous case studies are at

Buying on the move: Tescos virtual stores in subways made use of time spent by commuters waiting for public transportation

im

ag

e c

oU

Rt

es

y:

li

ld

oR

em

i.o

Rg