Over 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’
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.
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.”