Many of the household names which we know so well have come from very humble beginnings, but few are quite so grassroots as Tesco. From a single market stall selling groceries, Tesco’s has become the UK’s leading supermarket brand, with a market share of more than a quarter. Having diversified into almost every imaginable sector of business, the Tesco brand has become an inescapable part of everyday life in the UK, and though its roots may have come from small beginnings the corporation it has grown into today is anything but tiny.
To put into perspective just how dominating a position Tesco has achieved over the course of its near-century of existence, their nearest competitor ASDA has just over 600 stores nationwide. ASDA is a subsidiary of Wal-Mart, an enormous USA-based shopping chain with tremendous competitive potential and a great deal of financial backing. In comparison to ASDA’s 600 stores, Tesco has nearly 3,500; that means that for every ASDA in the UK, there are almost 6 Tesco stores. This goes some way towards explaining how ubiquitous Tesco is in the country. Their other main competitor, Sainsbury’s has a total of 1,304 stores nationwide (though their market share is marginally lower than ASDA’s), so even this mainstay of British supermarket shopping is outnumbered 3 to 1.
Tesco now offers everything from groceries to petrol to banking, and has expanded their services to provide mortgages to customers as well. This wide spectrum of products is all tied together under the Tesco corporate identity, and is further reinforced with their Clubcard loyalty scheme; customers are consistently rewarded for using Tesco services, and since Tesco provide products for nearly every aspect of modern life there’s a strong incentive for customers to remain Tesco shoppers from day to day.
So where did Tesco come from? In comparison to many other modern corporations, the heritage of Tesco is distinctly working class; the business was born from a single grocery stall selling cheap surplus food. With the end of the First World War, there was a great surplus of food from over-production, and with returning troops and a burgeoning post war population, there were a great many opportunities for a businessman with a keen eye for profit. Jack Cohen, the founder of Tesco, trained as a tailor under his father before the war and volunteered as a balloonist and sail repair hand in 1917. Serving in many different theatres, Cohen was eventually returned for demobilisation after the ship he was aboard was sunk near Alexandria by a mine, and he contracted malaria.
With his £30 demobilisation payment in hand, Jack Cohen purchased ex-Army NAAFI supplies to stock his market stalls with. With his keen head for business and a hardworking attitude, Cohen soon became the owner of several market stalls, expanding across the market until he could go no further. The brand name of Tesco was born when Cohen combined the first three letters of one of his suppliers with the first two letters of his surname; this characteristically utilitarian attitude gave us the brand name which has endured where countless carefully (and expensively) designed brands have fallen into obscurity.
In order to continue growing, Cohen then transferred his business into permanent shops, trying as far as possible to maintain the atmosphere of a market stall by removing the doors and covering the wooden floors with straw. His ability to draw a crowd made him a firm favourite with the owners of new shopping centres, who would seek to involve him in any new opening in order to draw consumers through the doors.
From these humble beginnings Tesco grew quickly, and only ten years after starting out Jack Cohen was the owner of 100 successful stores. This was just the beginning though; although Cohen wrote off the new American self-service stores as poorly run in the mid-1930s, his son in law revisited the idea in the 1950s and convinced him of the opportunities it offered for expansion. Upon becoming one of the first self-serve stores in the UK, Tesco quickly went from strength to strength, with success fed by the business acumen of Cohen’s son in law Hyman Kreitman.
Throughout this period the business was driven by Cohen’s motto of “Pile it high, sell it cheap”, a strategy which worked wonders when pushing against the competition. Internally, there was also an unofficial motto which exhorted employees to work hard for their pay; “You can’t do business sitting on your backside!” Clearly Cohen’s no-nonsense attitude filtered down through the workforce, as the business continued to grow throughout the 1960s and 1970s until Tesco stores totalled over 800.
Through a combination of organic growth and takeovers, Tesco grew their share of the market over the decades until they were streets ahead of the competition, a trend which has continued today. Towards the end of the 20th century, Tesco were even able to diversify into many different service areas, including the launch of their banking services in 1997.
Jack Cohen’s customers back in 1939 would have thought you mad if you’d suggested that one day you’d walk into one of his stores to get a mortgage. However, the sheer size of Tesco and its ubiquitous nature makes it a logical choice for a mortgage; if they put petrol in your car, clothes in your wardrobe and food in your cupboards, why wouldn’t you trust them as a bank, too? This sensible logic led to the formation of Tesco Personal Finance in 1997 as a 50/50 joint venture with the Royal Bank of Scotland. This was prompted by the recent launch of Sainsbury’s Bank, also as a joint venture with RBS, and the late 1990s saw a marked shift in the public perception of supermarkets as viable banking options.
Tesco Personal Finance proved to be a profitable venture, and the co-operation between Tesco and RBS led to a mutually beneficial relationship between the two businesses. In 2008, Tesco announced their plans to purchase the remaining 50% share of Tesco Personal Finance from RBS, bringing the bank completely under Tesco ownership. The following year, Tesco Personal Finance was renamed Tesco Bank, and the organisation has remained profitable and reliable into the modern day.
Since the foundation of Tesco Personal Finance, Tesco has been one of the leading providers of financial services within the consumer credit sector. The wide range of services which are on offer provide customers with substantial choice, and Tesco Bank products are typically of a very competitive standard. What makes Tesco Bank especially attractive from a consumer point of view is their Clubcard loyalty points scheme, which ties all the branches of the Tesco corporation together. By rewarding customers for spending with Tesco, the company incentivises customers to choose Tesco over their competitor’s products. Especially with high-value recurring payments such as those associated with a mortgage, customers stand to benefit substantially from remaining a consistent Tesco customer – rewards can cover anything from driving lessons to restaurant meals to travel vouchers.
Tesco also benefits from a positive public perception, because customers have so much face to face experience in dealing with the company. Unlike high street banks, customers are much more likely to trust Tesco since they’re already used to dealing with them, and have developed a measure of confidence in the business. In addition to this, Tesco has a direct line to their customers in the form of in-store displays and online advertising, allowing them to reach customers directly with offers.
This means that Tesco has an edge over other mortgage lenders, since they’re able to capitalise on their position as a trusted retailer in order to reach new customers. However, Tesco must also compete with other supermarket banks, which have the same advantages when it comes to reaching and maintaining a customer base. To hold their position at the head of the pack, Tesco must continue to offer attractive deals to consumers, and the products on offer to customers must reflect the needs of different types of buyer.
The world of consumer finance is one of the most competitive marketplaces there is, and businesses must continually offer new products which cater to the demands of consumers. Sainsbury’s found this out in 2005 when they were forced to withdraw their mortgage products from sale, citing a lack of uptake across the board. After 12 years, Sainsbury’s are planning a return to the marketplace, and will need to offer competitive products that match those on offer from Tesco.
Tesco mortgage products are marked by the straightforwardness with which they’re offered. A quick glance around many price comparison sites, or many high street competitors, will return an enormous slew of information; there are often dozens of different mortgages on offer, several different schemes and repayment plans, all designed to offer slight variations of cost against value. From a customer point of view this presents a problem; though there are mortgages that suit every conceivable buyer, it’s very hard to work out exactly what the best deal is. In fact, you could easily spend so long working out what the best deal is that you completely lose track of whether the lender’s “best deal” is in fact a good deal.
In comparison, Tesco offer a simple suite of products which lets borrowers immediately decide on the right plan for them. The products on offer are easy to understand, and come in enough varieties to suit almost any buyer; essentially, Tesco mortgages offer fixed and tracker mortgages with variable terms, and with the option to choose between an arrangement fee or a higher interest rate.
These are one of the most popular types of mortgage on the market today, and are one of the best suited for first time buyers. Because first time buyers are often on a tight budget, stability and predictability of future payments is highly valuable, and this is something that fixed rate mortgage deals offer. The ability to “fix” a mortgage rate at a pre-determined level for a length of time means that monthly payments will remain static, and won’t be affected by fluctuations in the marketplace. This means that although homeowners won’t stand to benefit if interest rates decrease, they aren’t exposed to the risk of possible increases either. Typically, first-time buyers aren’t too concerned with maximising the value of their home in the first few years; the stability of knowing they can meet mortgage payments is much more important!
The compromise for this stability is reflected in the interest rates which banks set their fixed rates at. Usually, these will be higher than the current variable rate being offered, reflecting the banks inability to respond to changes within the market. However, Tesco fixed rate mortgage rates compare favourably with their standard variable rates, meaning that first time buyers can rest easy knowing that they’re paying a competitive rate on their mortgage.
The alternative to a fixed rate mortgage is a tracker, which offers a “halfway house” between the standard variable rate and the fixed rate. Essentially, it means that the mortgage’s interest rate will directly “track” the level of the Bank of England base rate, usually a few percentage points above it. This means that when the base rate goes up, your interest rate will go up too, but only by as much as the base rate has increased. This means that borrowers are less likely to see their mortgage bills rise drastically in a short space of time, and that any increase in price will be limited. This differs from a standard variable rate (SVR) in that the rate cannot be altered beyond the changes in the base rate, whereas with an SVR the rate can be increased further for bigger profits (or decreased to attract new customers).
A tracker rate effectively allows customers to take advantage of fluctuations in the national base rate without exposing themselves to too much risk. Tesco tracker mortgages are typically offered at a rate several percentage points above the base rate, and are expressed as “Bank of England base rate plus x%”. This allows Tesco to maintain a steady profit on the mortgage, as they will always receive a percentage payment above the rate they pay to the Bank of England.
Both fixed and tracker mortgages are offered for limited times, rather than as lifetime mortgage types, so they will automatically become standard variable mortgages once the agreed period has expired. These are offered in three different lengths, either 2, 3 or 5 years, and typically attract different fee structures depending on their length. Generally, a longer fixed or tracker term will feature a higher interest rate than a shorter term, reflecting the additional benefits of remaining on the more stable plan for longer.
Generally speaking, deposits which constitute a larger portion of the total property value will allow buyers to access the best interest rates on offer, reflecting the security this provides to the lender. Consequently, a longer fixed period on a larger deposit may still be cheaper than a short fixed period with a small deposit, so finding the balance between upfront costs and long-term payments is crucial for any buyer.
As with any mortgage provider, Tesco incurs costs whenever it arranges a large loan. To offset these, there are fees associated with new mortgages; however, many mortgages have the option to defer payment in exchange for a higher interest rate. This can be a valuable option for first time buyers who need to put all their money into a deposit rather than paying off arrangement fees.
Those who have been through the mortgage application process before know that it can be a lengthy “ordeal by paperwork”. However, Tesco Bank works hard to make the process of switching your mortgage as painless as possible, and has a team of specialist experts ready to handle your mortgage. Currently, most mortgages take between 4-8 weeks to transfer from one lender to another, but this is set to decrease in coming years as the UK Government incentivises lenders to streamline the switching process. Although mortgages may not reach the 7 day switch time of other consumer credit services like utilities contracts or mobile phones, it seems likely that they’ll drop substantially in coming years.
During the course of its 20 year existence, Tesco Bank has proven that it provides valuable services for its many customers. Being ideally placed to take advantage of its central position in the lives of many UK residents has helped Tesco to climb to the top of the lending pyramid, but they haven’t made it there on presence alone; their ability to offer high quality products which reflect consumer needs at the right price has ensured that they remain competitive, and as they move further into the 21st century Tesco Bank looks set to continue as one of the UK’s leading providers of consumer credit.