Tesco: Seeing the light, where's the tunnel?

It wasn’t meant to be like this. 

When Philip Clarke took over as Tesco boss, no one anticipated the pace of structural shift in shopper behaviours that is destabilising retail. Tesco were the most convenient and ambitious UK retailer;  they were and still are number one. So why does it feel so dire? The harsh reality is almost every reason underpinning Tesco's last twenty years of success has been turned upside down and inside out. It is hard to see any light at the end of Tesco's tunnel.

Being there

As enticing as it may be to believe Tesco decoded some retail holy grail and locked the secret away, deep in Cheshunt, the reality is much simpler and far less romantic: they have more stores than their competitors.  

According to the IGD Tesco operates over  3,300 stores in the UK with over 3.8million square meters of retail space. By contrast, Sainsbury have slightly more than 1,000 and ASDA over 500. Nor are the stores equally spread. Asda's northern and Scottish predominance presents serious growth potential in London and other regions where Tesco dominate. Tesco are the only truly national UK retailer.  Tesco just happen to "be there" more often than anyone else. But lack of choice should never be mistaken for love.

When Tesco launched Clubcard, it was no Harry Potter wizardry either: they just offered shoppers some extra, delayed gratification, value, accessible only through Clubcard. Their customers said "hell, I am here anyway, why not?"  Clubcard rolled out along with store expansion. Lots of people signed up, because lots of people shopped in lots of Tesco stores, in lots of places. It was just convenient. 

Convenience reframed

And convenience is the point. Most studies conclude the main reason shoppers patronise the stores closest to either their home or place of work, relative to whatever shopping trip / mission they need to fulfil. But, convenience is a moving feast. It used to be a hassle to shop on the high street: It was a high price, time consuming experience. Tesco drove out of town, superstores with spacious and free car parks. Everything under one roof.  Convenience delivered. 

And then came the internet and the symbiotic resurgence of small, proximity stores.  Do your big shop on line, and top up the incidentals at a locally convenient, small store, as you need to.   

That Tesco are growing their online sales is no help either. 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. For Superstores, it all means less staff hours to stack shelves, staff tills, cleans floors and provide shopper services. It harms the  shopping experience and drives more customers away. A truly vicious cycle. 

Tesco shareholders call for lower prices, better services and higher dividends: they yearn nostalgically for yesterday, rather than face the uncomfortable truths about today and tomorrow. 

As the UK grocery world reheats itself, Tesco can innovate all they like, cut prices as deep as they want, but they are, inconveniently, saddled with a collection of dinosaur assets: of Tesco's total shopping space, 76% is taken up by Extras and Superstores. Ouch.

Clarke knows this all too well - that's why he called time on Tesco's Superstore development. And while this trend will increase over time, it's not everyone's trend yet. Asda still see Superstore development as a valuable part of their model- they still have plenty of places where shoppers today can't access an Asda store.

Online - a glorified shopping cart

Tesco's success in online today, is a mirror of their physical success yesterday: they  had the shoppers and they got online first. But online is no more valuable a service to Tesco's shoppers than a trolley. It improves convenience. It serves to shift the location of purchase for existing shoppers. It is only an effective recruitment tool for emergent retailer and those with limited physical presence. In other words, Tesco's competitors. 

Tesco are vulnerable to a online pure-play like Amazon Fresh - who without legacy assets to support will, as an insurgent play, rip the ring out of prices. Scarily, Tesco are unwittingly and unintentionally preparing their shoppers for an Amazon future.

Being there...again

Clarke deserves no blame for any of this. If Sir Terry were still in the hot seat his reputation would be looking less shiny. Leahy drove UK superstore expansion, international expansion etc: yesterday's success is today's structural nightmare and whoever sits it the top job, these challenges and pace of change remain. Clarke's problem is he just happens to be there, now.

Seeing the light, finding the tunnel

So where from here? There are three possibilities facing Tesco.

1.      Tesco exits retail in the medium to long term and becomes a retail /leisure space operator – elements of this are already appearing and before you completely dismiss this idea, remember long before Costa Coffee, Whitbread had a 250 year history as a brewer.

2.      Tesco rethinks its land bank and become the UKs biggest provider of affordable housing - this idea is gaining some supporters.

3.      Tesco is acquired by a Chinese or Middle Eastern powerhouse keen to get its hands on Tesco's retail systems and talent. 

It is possible all three could happen. The final catalyst for change is not clear. 

At last week's AGM Clarke quite rightly said, "Reducing prices doesn't result in an immediate increase in sales....if it was purely an online and convenience business, Tesco would be shooting the lights out"...But it isn't and they're not ....

During one of the rounds of Middle East peace process discussions, Yitzhak Rabin was asked if he could see light at the end of the tunnel. Rabin responded laconically  “I can see the light, it’s the tunnel I can’t find”.  Philip Clarke may understand this sentiment better than most. 

Shopper Loyalty Part 3: The end of Clubcard?

Will Tesco axe Clubcard? I know, it is an absurd suggestion. Having spent twenty years building a veritable industry of activity around it, how could Tesco possibly abandon its golden child? Unthinkable.

Yesterday, Morrisons 
announced £1billion of price cuts over the next three years focused on basic products. Their message: the gap between mainstream retail and discounters is too great and must be closed to stem the loss customers: downplay like for like sales, focus on volumes.  Shoppers want value today, delivered with simplicity and are prepared to leave Morrisons to find it elsewhere.

Assuming these price cuts are for real, Tesco will have to respond, but how? Where can they find savings to fund continued price investments? A clue to the answer may lie in Canada, where earlier this week Safeway abandoned its loyalty card. 

According to Jim Tierney on Loyalty360:

"As of April 4, Safeway Canada eliminated the store’s actual loyalty card and extended the program savings to anyone, regardless of whether they were members of the program..Spokesperson John Graham said "Discounted items—an average of 4,500 per week—will now be available to all customers......We introduced card-free savings at Safeway, the intent is to offer everyone the lowest prices every day with no more card. The ability to carry one less card is seen as a greater convenience for our customers. A large percentage of our shoppers had used the club card. It’s been a fundamental part of the way we offer savings.” Graham said the initial early feedback has been very positive among customers. “The research and feedback we had over the years showed that some customers had a preference for not requiring a card”

Unthinkable? But then we live in strange times and thinking the unthinkable is not as dumb as it sounds. Don't be surprised if you hear: "One less card, one thousand lower prices. Every little helps: that's Tesco" 

Shopper Loyalty Part 2: Membership Matters

I am the world's worst golfer. After years of trying to play, the basic problem still haunts me: I stand too close to the ball after I have hit it. My golf bag sits forlornly in the corner, simpering, like a long-lost lover: "you never take me out any more!" she murmurs.

It's true. Despite being surrounded by plethora of Surrey's finest municipal and private golf courses, I haven't been a regular visitor to a golf club since I gave up my membership at Dunham Forest, almost fifteen years ago. 

Having stretched to find the money to buy the shares and fees, I was determined to drive every last penny of value from the investment. Membership made the difference.And it wasn't just the golf, the club had an active social side. I bought in. And on a shots per round basis, on the course and in the bar, I did pretty well. 

It's why Costco customers are so loyal. As David Mamos wrote in "Money Morning" last year: "Costco's "members only" set-up charges annual fees ranging from $55.00 to $110.00. Its loyal membership acts as a built-in cushion that allows Costco to deliver roast chickens for under $5.00 and offer super deals that are occasionally sold at a loss"

Costco plan their store locations around affluent consumers - they aren't everywhere - and once you've paid up, every visit helps you off set the initial outlay. You know you paid in, you want pay-back. And you can feel the value every time you shop. Financial investment precedes emotional connection. Getting members is one thing, keeping them something else. The discipline of paid for annual memberships means Costco must keep delivering, keep impressing or else people stop renewing. 

Tesco Clubcard by contrast is ubiquitous, democratic and free. 

Submit your details and your previously pointless existence is transformed. Simple and easy. Yet on another level it is deeply irritating: you must give up personal data. You were in the store shopping already, why not give you the value right there and then? It's odd: trading information for a sense of exclusivity is fine, but doing so to access value, available to all, feels somewhat different and not necessarily conducive to building a lasting emotional connection. 

Which is why Amazon Prime, combining the specialness of Costco with the ubiquity of Tesco, can change everything. Early Prime adopters talk like evangelists: "Have you got Prime?"  Like a naughty, thrilling secret: this question marks out the cognoscenti from the rabble. 

The more products and services wrapped in, the more access to value recovery exist and the smarter you feel about your choices. And, you don't have to stand in line behind other cardholders feeling very ordinary. Shopped in privacy, Prime membership can always feel special no matter who else has it. 

When it comes to loyalty it seems paid-up membership is the prerequisite for a meaningful relationship, but just the beginning. After this, the club has to deliver. Anything less is simply playing around.

Shopper Loyalty Part 1: It's not like we're married....

42% of UK marriages end in divorce. If the
ultimate "loyalty card" - diamonds, gold and marriage certificate - can't return outcomes much beyond a 50/50 bet, what chance have retail marketers on securing undying commitment through bits of plastic and smart analytics?

It gets worse. Open your wallet. Go on, try it. Take out all your cards. Here are mine, in no particular order:

RBS Visa Bank Card; Virgin Atlantic Visa Credit Card; American Express Platinum Credit Card; American Express Platinum Charge Card; Lloyds American Express Avios Card; Nedbank Visa Card;  Marriott Hotel Rewards Card; Priority Pass; Virgin Atlantic Gold Card; Tesco Clubcard; Costa Coffee Club; Cafe Nero Thingy; Nectar Card; SPG Card & British Actors Equity Card.

Each one of these is a de facto "loyalty card". My American Express charge card is my preferred travel booking partner because it provides free insurance. Preferred but not exclusive. The Costa and Nero's coffee cards say I like Americano's and don't care too much for Starbucks. The array of hotel and airline related cards remind me I travel too much, stay in too many hotels and never really worked out how any of these schemes work. And anyway, if I need a cheap rate, there is always laterooms.com.

The Tesco and Sainsburys cards remind me I shop at both though increasingly at the Waitrose and Aldi because I just can't stand the faff of a superstore any more.

These cards represent my portfolio of historic choices to date. They say little about loyalty; are no certain guide to my future decisions and have nothing to say about relationships. The only card  I have any emotional connection to is my Equity card (because I earned it) and I haven't used this beyond a talking point in thirty years.

In any case, I don't want a relationship with shops or service providers. I just expect them to do what they promise, and do it really well. If Amex cease offering free travel insurance, I will cease using Amex. If they offer insurance but their claims processes are a nightmare, forget it. If Tesco stop offering Clubcard points, the Clubcard becomes irrelevant. More to the point, if Tesco, Sainsbury, Waitrose etc can't provide the products I want, when I want them, how I want them, at acceptable prices...who needs them? It's not like they are the only shops in town.

Brands build loyalty to the devices they use to build loyalty.  If you predicate your attraction on gimmickry, god help you when your bells and whistles prove unaffordable or someone else offers more.

And please don't take me for granted and offer more value to new customers.  I don't think I am unique in being really irritated when banks offer preferential mortgages to new customers. Hang on, I have been banking with you for years, what about me?

Over-marketing is as irksome as complacency. Just because I bought an expensive gift once in your store doesn't mean I am now interested in anything else you do. If you bombard me with offers, chances are I'll simply ignore you. After all, if you are trying this hard perhaps I should rethink our "relationship".
It's like Groucho Marx said "I don't want to be a member of a club that wants me as a member"

Loyalty cards, schmoyalty cards! They provide customers with delayed value gratification. I don't drink more coffee with Costa because I carry their card. But hey, if they are going to give me one free drink in ten, just for carrying the plastic, why wouldn't I?

In my search for value, I shop around. Get over it. Be happy you are in my decision set. Keep your promises; keep impressing me; don't try too hard and don't give me reasons to rule you out. Just because I carry your card doesn't mean we are married. Hell, even if we were, you'd still have a 42% risk of losing me.

Tesco: Time to reset the clock

Yesterday's latest Kantar Worldpanel data brought little comfort for any of the UKs Big four retailers. The 0.4% drop in Sainsburys' share versus last quarter highlights Justin King's personal astuteness in calling time on his own leadership at just the right moment. His touch is almost as measured as was Sir Terry Leahy's departure from Tesco.

But spare a thought for everyone still at Tesco. Retail is tough when your weekly numbers are perpetually red. Missed targets drive stress and undermine confidence in equal measure. This is especially hard when you are still market leaders. You should be winning, you should feel like winners. You don't and everyone senses your pain. It is suffocating.

 

So what can they do? Tesco need a radical response and reset the clock on everyone's expectations. 

First, Tesco should explain to the markets what a great job they did historically in driving national UK coverage. Noting Asda's announcement this week of their intensifying moves South; Tesco can proudly note they are the only one of the top four UK retailers with a truly national footprint. They got there first, it has provided a competitive advantage for a period of time, but not forever.

Second, it follows Tesco should reset long-term expectations of their natural market share being somewhere between 20%-25% of the UK market. This will cause pain to the share price in the short to medium term - but it is a statement of inevitability. Tesco cannot open new physical stores as fast as others because they already have their footprint. And they can't acquire anything meaningful given their market share position. Furthermore, for all the success of on-line, the evidence so far is that it’s only a mechanism to slow Tesco's rate of share loss.

It is worth recognising for every new store opened by a competitor, as a rule of thumb, 30 pence of every pound through their tills comes directly from Tesco. So with Aldi, Lidl, Asda and Waitrose still expanding; who knows what course Mike Coupe will set for Sainsbury; and Amazon / Ocado expanding their remits: holding as much ground for as long as possible is Tesco's challenge.

Third, Clubcard needs a structural rethink.  Critics note it has evolved from being a strategic builder of store loyalty into a driver of supplier promotional investment. If the phoney price war ever starts, suppliers will be caught between the investing directly in price or through Clubcard mechanics: both may not be affordable. 

A simple switch in emphasis could prove powerful. Instead of offering schemes to let you redeem Clubcard vouchers outside of Tesco, they should work with third parties to give Clubcard vouchers to reward non-Tesco purchasing. Eat in Cafe Rouge - earn extra Clubcard points and bring the spend back in store. Likewise with Petrol: Tesco’s pump prices are already competitive- stop giving money off fuel in-store, give store vouchers on petrol sales instead.

These points are not panaceas. They bring pain.  Yet they will allow Tesco to celebrate "still above 25%" on each set of results, enable them to approach right-sizing based on a reframed future and refocus Clubcard on driving traffic in-store. Most importantly, they reset the clock on market expectations and buy Tesco some much needed breathing space. 

Tesco: Big Data, Little Evidence

If you didn’t catch the news yet, Tesco is now the world's 3^rd biggest continent. Having bought US big data firm Sociomantic it now has access to a database of one billion shoppers making Tesco's citizenry almost as populous as China or India. 

Acquired through Dunnhumby, Sociomantic (according to Marketing Week April 3^rd 2014) “runs a programmatic digital advertising service, buying and selling online ads via an automated process” and the aim is to improve Tesco’s “online marketing to offer a better experience for consumers and advertisers”.

But does big data necessarily lead to big loyalty?

Tesco Clubcard was a 1993 brainchild of then just plain Terry Leahy and since then has grown into the UKs biggest loyalty program. Yet for all  Clubcard and Dunnhumby's efforts, like for like sales in the UK, including petrol and VAT, over the 2010-13 period grew; 2.6% (2010) 1.0% (2011) 0.0% (2012) and -0.3% (2013) respectively and the 2011 and 2012 figures include the impact of VAT rising to 20%. One can make the case “think what the numbers would be without clubcard!” – it is hardly the most compelling argument you’ll ever hear.

From little data to little dates, one date actually: April 16^th and the publication of Tesco’s 2013/14 preliminaries. With Lawrie McIllwee’s imminent departure, the market is anticipating another set of challenging results.

Could this be a case of big data vanity? It’s the little numbers that keep you sane.