thenextwave

The Tesco problem

Posted in business, retail, Uncategorized by thenextwavefutures on 25 July, 2014

Tesco,_BatleyOver at The Futures Company blog I have a short post on Tesco’s problems, prompted by the abrupt dismissal of its Chief Executive Philip Clarke in the face of the continuing pressure on the company’s market share and profitability.

For non-British readers,Tesco is (still) Britain’s largest supermarket, but having been utterly dominant in the 1990s,  has been struggling for much of the past decade.

The first thing I said in the post was that the food market had become more complex since the financial crisis, and Tesco hadn’t been able to follow. This normally translates into a story about being “assailed by discounters”, but the discount proposition isn’t just about price. People who advise Tesco to turn its attention to fighting with discounters on price show they don’t really understand how the market has changed.

The Tesco proposition was built on ruthless price competition, on promoting ‘choice’, and also serving both ends of the market. One of the things that consumers learnt from the financial crisis was that choice costs money, and that some of Tesco’s deals were less straightforward – and less straight – than they looked. Clarke tried to address some of these issues, but this takes more time than he was given. And the Aldi and Lidl proposition isn’t just about price; it’s also about simplicity and a bit of bargain-hunting (listen to its customers talking about their wine selection if you doubt this).

The price of emotion

The second point is that, in effect, Tesco spent thirty years taking the emotion out of food with its hard-edged price-driven consumer proposition. One of the consequences of the financial crisis was that people put emotion back into food again, partly because it’s a low-cost way of entertaining, partly because of a shift in values. But every time Tesco has tried to shore up its market position, it’s done it by yet more price promotions. Its mental models get in the way of looking at the market.  When you see nails wherever you turn, its not surprising that you always reach for a hammer.

[After the crisis] food became an important part of social nurturing. Sainsbury’s and Waitrose – and also Marks & Spencer – all understood this, and created new stories, and new deals, to build this up. In short, food regained its emotional aspect, while Tesco was still stuck firmly in transactional mode. … And it still is in transaction mode: every time the company tries to address its decline in the UK, its default position is price-based promotion. Its competitors are playing a different game, but Tesco seems unable to escape from the strategy and tactics that helped it grow during the boom years. The category rules have changed, and Tesco hasn’t.

As Martin Vander Weyer blogged at The Spectator, Tesco had become ‘a business-school case study of a brand that has lost all positive emotional connection to its customers’

Shifting values

And the third point is a wider one, perhaps of more interest to futurists. Tesco was perfectly formed for the decades that it did well in; hard-nosed, brutal in its negotiations, indifferent to the environmental impact it had, protecting its dominance in the out-of-town “weekly shop” market with a vast property portfolio and willingness to bruise with planning officers. Its Clubcard, with its 19 million members, was thought to give it an impregnable market position, such that irs competitors would always be playing catch-up.

But as the market has changed, partly because of a shift in values, all of these sources of one-time competitive strength have become sources of weakness instead.

We’re not so keen on driving to do a weekly shop anymore – increasingly online and top-up pick up the slack, so those edge of town superstores look more and more like white elephants. I heard that one supermarket chain was doing an evaluation on the viability of turning its edge of town stores into online distribution hubs, though I never found out which one.

And this shift is something of a vicious cycle for Tesco because ot its big portfolio of large-format stores, as Gary Carp points out:

The greater their online success, the bigger their structural challenges. The economics of operating large stores collapse rapidly when you rip out the high till-ring transactions, and then comes the second-whammy when residual spends head into small stores, even if they are Tesco’s.

The property portfolio now feels like a weight rather than an advantage, geared as it was to the building of more large supersotres when the rest of the market was heading away from it.

The Clubcard problem

The unethical behaviour towards suppliers, and the plain lack of interest either in the sustainability of its supply chain has dripped into the public domain through the work of people like Andrew Simms (Tescopoly) and others. While only a few people make their lead buying decisions on such things, in a market of relatively undifferentiated providers it becomes a factor in a far greater number of purchase decisions.

And while the Clubcard is great at telling you what your existing customers are buying, it doesn’t tell you what your ex-customers are buying, and only hints at the reasons they’re choosing to buy. Purchase data is a poor guide to shifting values.

One of the themes of the coverage was that Clarke – who started stacking shelves at Tesco 40 years ago – was unlucky in his inheritance, David Moyes to Terry Leahy’s Alex Ferguson, with the defects in the team papered over by some well-judged PR. There’s some truth in this: the things that are wrong with Tesco were already wrong when Clarke took over three years ago. Certainly Leahy’s “golden” reputation looks a bit tarnished now.

Future stories

But the biggest mistake Tesco made was in having only one future story, and betting the business on it. Given its previous dominance – which was bad for pretty much everyone except for their shareholders – we should be relieved about this. Almost all of the factors that are weighing it down now have been visible for a decade, from even before the financial crisis. But Tesco made the mistake of believing that the future would continue to be like the past. It didn’t ask enough questions about the wider environment it was working in. It also, I think, made the mistake of taking profits as a measure of success, along with the plaudits it received from the City and elsewhere, without realising that profits are a lagging indicator.

As Charles Hampden-Turner once observed (in Charting the Corporate Mind), “[P]resent profitability may be the consequence of several hundred decisions taken over the past decades. …  Because profits are historical they are realized up to the very second that you are holed and start to sink.”

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3 Responses

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  1. thenextwavefutures said, on 27 July, 2014 at 11:12 am

    Zoe Williams has a good piece in The Observer on all of this: http://www.theguardian.com/business/2014/jul/27/nervous-supermarkets-miles-of-aisles-they-dont-want-tesco-asda

    A couple of extracts: “”The reality is that the model of retailing for the last 60 years is no longer fit for the changing needs of consumers,” says one senior industry source. “The question is: what are you doing to adapt your space to the new economics?”

    “There is a lot of experimentation going on, much of it led by Tesco. Philip Clarke, who was ousted as chief executive last week, was trying to reinvent its nearly 250 Extra shops, which can be as big as 120,000 sq ft, as shopping destinations. Tesco has been turning over space to food outlets such as Harris + Hoole, which it half owns, and Euphorium Bakeries, as well as to gyms and soft play centres. It has even let surplus car park space to vehicle hire firm Avis.”

    And in the whistling-in-the-dark-to-keep-yourself-cheerful department, a supermarket boss who doesn’t realise the game has changed:

    “But one supermarket chief reckons that big-box grocery could yet return to vogue once Britons’ spending power recovers: “As the economy swings back there could be a shift back in favour of them, because the economic model is best served by them. In big stores, prices are lower and choice is better. This is something the industry has to figure out, but it can’t carry on subsidising unprofitable channels [like online] forever. In that sense what Philip Clarke was doing was not a stupid strategy by any means.””

    And good luck with that strategy…

  2. thenextwavefutures said, on 26 September, 2014 at 6:13 pm

    A good analysis today by Mary Dejevsky of why shoppers prefer Aldi and Lidl (clue: it’s mostly not about price).

    “The problem for Tesco was that, where there was an alternative, its customers chose it, for all that it had a Teutonic tinge. Price was one consideration, but only one. In my experience, Aldi and Lidl offer a less frenetic atmosphere. A more limited selection saves you time. The stores, by and large, have clean shelves and clean lines. Prices are as marked; you do not need A-level maths to check on multiple “deals”. And they have not gone down the route of self-service tills.”

    http://www.theguardian.com/commentisfree/2014/sep/24/tesco-aldi-lidl-britain-supermarkets

  3. thenextwavefutures said, on 31 October, 2014 at 11:32 pm

    And one more, this time from Michael Shrage at the HBR blog, on the failure of Tesco’s customer data. An extract:

    “The core competencies that made Tesco a marketing juggernaut and analytics icon appear almost irrelevant to its unhappy narrative of erosion and decay. More than any other retailer of scale, Tesco had committed to customer research, analytics, and loyalty as its marketing and operational edge. … Tesco was digital before digital was cool. Tesco’s Clubcard loyalty program was launched under Leahy in 1995 and redefined both the company and the industry. As the Telegraph recently observed, “Tesco was transformed into the market leader in the UK—with more than 30pc market share—by being able to respond to the demands of its customers. …

    ”But the harsh numbers suggest that all this data, all this analytics, all the assiduous segmentation, customization and promotion have done little for Tesco’s domestic competitiveness since Leahy’s celebrated departure. As the Telegraph story further observed, “…judging by correspondence from Telegraph readers and disillusioned shoppers, one of the reasons that consumers are turning to [discounters] Aldi and Lidl is that they feel they are simple and free of gimmicks. Shoppers are questioning whether loyalty cards, such as Clubcard, are more helpful to the supermarket than they are to the shopper.”

    http://blogs.hbr.org/2014/10/tescos-downfall-is-a-warning-to-data-driven-retailers/


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