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Last Updated: Tuesday, 16 January 2007, 08:52 GMT
The continued rise of Tesco non-food
By Andy Dangerfield
Business reporter, BBC News

A Tesco Extra store
Tesco has opened 130 extra stores in the last ten years

Tesco has come a long way since its founder Jack Cohen opened a stall selling surplus groceries, making 4 sales and 1 profit on his first day.

But, recently the firm has grown from selling beans and biscuits to becoming a major player in almost every area of the retail market.

Clothing, furnishings, mobile phones, DVDs, holidays, financial services, legal advice - the list of products Tesco now offers seems endless.

In fact, the company seems set to leapfrog current non-food market leader, Home Retail Group, owner of Argos, with its 2006 results, according to retail analyst Verdict Research.

'Buying structure'

Tesco has been selling non-food for more than 25 years, but only realised its potential a decade ago.

"We only approached non-food with conviction 10 years ago," says Tesco finance director Andrew Higginson.

"We created a separate buying structure, bringing in High Street specialists who really knew fashion," says Mr Higginson.

More recently, ex-Burton chief John Horner, came in to run clothing and Terry Price from Walmart joined to head up the rest of non-food.

TESCO BY NUMBERS
260,000 UK employees; 360,000 worldwide
Staff roller blade in the UK's largest Tesco in Newcastle
Tesco sells its own brand software in over 700 stores
One in ten people in the UK buy Tesco make-up

"It's got to this stage by engaging with the customers," says Richard Hyman, managing director of Verdict Research.

"Most UK retailers are supply driven which has been OK for years, but now the customer is king."

Analysts agree that good value product has been key to driving Tesco's non-food growth.

"Tesco's huge size allows it to be more efficient in its buying process," says analyst Keith Bowman of Hargreaves Lansdown Stockbrokers.

Floor space

Of course, much of Tesco's non-food growth has been helped by the fact that, to many, supermarkets are convenient.

"People come to the store regularly to buy food and see the non-food," says Mr Higginson.

But much of Tesco's non-food growth has been driven by adding substantial floor space, increasing its portfolio of hypermarket Extra stores.

Tesco's first Extra store opened in 1997 and it now has at least 130.

In fact, Tesco grabbed half of all new shopping space in Britain last year according to recent Verdict figures.

A customer browses Tesco's clothing
One in seven Tesco customers buy clothing each week.

Tesco's new dominance in non-food threatens High Street retailers across the board.

In clothing, Tesco has targeted discounters like Matalan and mid-range retailers like Next.

In entertainment, they are eating into sales at HMV.

"We'll typically take 25% market share on big lines, be it the latest Harry Potter DVD or Robbie Williams CD," says Mr Higginson.

In electricals, retailers like Currys Digital are feeling the pressure, says Credit Suisse analyst Tony Shiret.

"When product goes below a certain price, people are insensitive to whether they require service."

And not content with battling High Street retailers, Tesco recently took on Microsoft, launching a range of own-brand PC software.

Online and catalogue

But Andrew Higginson does not think Tesco is killing off specialist retailers.

"Much of our growth is complementary to the market," he says.

So can Tesco extend its lead in non-food?

Tesco's strategy is to be "as strong in non-food as in food," and non-food currently gets half of new store footage, according to Mr Higginson.

Meanwhile, Tesco Direct could be key to the supermarket's future growth.

TVs on display in Tesco store
Tesco sell LCD TVs costing from 200 to 2000

Launched last Autumn, the home shopping service offers items including bikes, beds and freezers.

Operating in direct competition with Argos, customers can order online or from a catalogue.

Mr Higginson says Tesco Direct is "an important growth channel".

It offers 8,000 items compared with 20,000 lines offered by John Lewis Direct, so there is growth potential.

But analysts think Tesco will take a cautious approach online.

"Tesco has invested a huge amount in stores and aren't going to cannibalise sales," says Mr Hyman.

In October 2005, Tesco trialled its first Homeplus store near Manchester, dedicated to selling non-food.

But hypermarkets seem to be Tesco's preferred store format for the foreseeable future.

Risking reputation

Could Tesco damage its reputation by moving into specialist non-food areas?

"In new technology where the customer needs more reassurance, there is a lot they could learn," says Mr Shiret.

However, Mr Higginson says a full-service model would be tricky for Tesco to follow.

"We explain as much as possible on shelf," he says.

Another risk is that Tesco could make stores so big they will put customers off.

"If you go to Tesco for your biscuits, you might not want to walk around a massive hypermarket," says Mr Bowman.

'Severe penalty'

But analysts agree Tesco's cautious approach should pay off.

"If they're not moving forward, they'll focus their firepower elsewhere," says Mr Bowman.

Mr Higginson accepts that new product areas pose risks.

"But the penalty for selling fresh food badly is severe and we've managed to do that well," he says.

Tesco have, of course, made many mistakes along the way.

Seven years ago, they had a special offer on scooters.

"I think we may still have a couple in the warehouse," Mr Higginson says.




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