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. 

Tesco: That David Moyes feeling...

Manchester United's ten month disastrous flirtation with David Moyes is over. To many, he had been "dead man walking" for months. Despite long-terms critics like myself incessantly calling for his head even before he was appointed, the prevailing mood among the faithful had been to tough it out. 


Moyes was Sir Alex Ferguson's pick and who could argue with that? I never understood the call to give him more time.  After all, why would you give a failing arsonist this luxury? Out of all competitions and no European football for the first time in two decades, time finally ran out for Moyes.

There are some striking parallels between Manchester United and Tesco - organisationally and managerially. Organisationally both have been at the top of their game for the past twenty years. 

Both had  leaders, peerless in their domestic arena who anointed their successors and both business models have been changing profoundly with the influx of massively funded competitors arriving seemingly from nowhere.

For United, the arrival of Abramovitch at Chelsea brought the first high profile billionaire in to the public glare but it is Sheikh Mansoor's arrival at Manchester City and his impending purchase of a new NYC MLS franchise that changed the game. At the same time the Qatari's bought Paris Saint Germain in France and spent $145m on new players last season. United, in transition, have been caught flat-footed.

In mass retail, Tesco are being outplayed by international competitors. Aldi and Lidl from continental Europe, Walmart in USA and UK. But it's the new, next generation giants Amazon and Alibaba that threaten to overwhelm mass retail globally. Tesco have plenty of ideas; possibly too many, without the bandwidth to deliver. Last week's announcement of the decision to open seven F&F Franchise stores in Boston was dwarfed by Uniqlo's declared intention for global fashion domination.

When Philip Clarke recently noted "bigger is no longer better", he was hinting at a problem Manchester United are also facing. Patchi prove how small focused retail businesses can deliver outstanding concepts - way better than anything a mass provider can execute. This is fine for niche, but neither Tesco or United are niche propositions. It's not “big isn't better”; it's more "the new big is bigger" - and for both soccer and mass retail, to play in the “new big world”, you need to have a deep reservoir of international cash to compete.

Asda (Walmart), Boots (Alliance-Walgreens), Aldi (Albrecht family), Lidl (Schwarz family), Sainsburys (25.99% owned by PSG's Qatari Sovereign Wealth Fund) and Superdrug (AS Watsons) appear to have the ownership structure to provide access to external capital. 

Tesco, big in local terms, may need a stronger, internationalised financial backer to secure their long term competitive future. Of concern, Berkshire Hathaway, one of Tesco’s two main institutional shareholders have been reducing their exposure. Similarly, United need to find investment minded billionaire owners to underpin their future.

In the ultimate paradox, United who have fallen furthest will turn around fastest.  United will hire a globally recognised football giant, who in turn will be given $150m and eighteen months to rebuild. Tesco, by contrast, retain their UK's #1 position, but their grip on share is slipping with challenges across their business model. None of this disappears whoever is in charge

Despite a torrid season and all the popular commentary calling for Moyes' exit, once the narrative became front and back page news, his position was untenable. 

Tesco has similar problems. Last weekend's heavyweight papers were filled with negative critique. Journalists are talking with fund managers: they speak of leadership replacements. The narrative is who and when, not if.  Interestingly, former Tesco executive Tim Mason, fancied by some as Clarke's replacement, broke his fifteen month twitter silence last week, referencing two damning articles on Clarke's reign. The jockeying is well and truly under way.

It was never going to be easy filling their respective predecessors' shoes. Both Moyes and Clarke inherited organisations that had over-traded their pasts whilst competitors were investing for new tomorrows. If Philip Clarke reads today's papers he might be forgiven for feeling he has been visited by the ghost of Christmas future. It's that David Moyes feeling...

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. 

Retail Revolution: "Shoppers of the world unite, you have nothing to lose but your (retail) chains".

The UK retail industry is in turmoil. With problems at Morrisons and the Coop threatening their survival; Phil Clarke's speech at retail week seeking to make a virtue of freneticism. Change is in the air; a retail revolution even

The revolution is structural, multi-dimensional and polarised. It's not just mobile internet access transforming the way we "search and purch". There is a revolutionary dynamic stretching across Amazon, Groupon, Aldi right through to Poundland and Boohoo.com. Not forgetting B&M coming to market soon with Sir Terry Leahy on board. Discounting is front and centre

Talking of revolutions, last week marked the 127th anniversary of Karl Marx' death. Some of his ideas illuminate the challenges facing established retailers facing the discount onslaught. No really, they do.


Marx saw economics as the prime mover of change.  As economic power disperses, the dominant forces (thesis) are challenged by new participants (antithesis) and the outcome of the clash would be a new, higher order economic status quo (synthesis), with communism the end of history.  Historical Materialism 101, got it?

Successful discounters are anti-establishment value re-setters and all about economics. They combine high quality with unmatched value chains. Whether it was M&S putting shirts and shorts on Britain's backs and bums (by building direct relationships with suppliers and cutting out wholesalers); Jack Cohen's "pile it high, sell it cheap" mantra in 1960s Tesco or Walmart's EDLP philosophy: these were all discounting models. Their success put a good many competitors out of business, creating a new retail establishment.

Discounters also thrive on the structural disadvantage others impose on themselves. In mass retail focus and simplicity are the partners of unmatched value chains.

When advantage is lost, death is inevitable. Kwiksave UK built a business selling a limited number of major branded SKUs, from small basic outlets at cut prices sustained on one advantage: centralised distribution. While Tesco, Sainsbury and Asda were still had suppliers making minimum drops to individual outlets,  Kwiksave were securing full-truck efficiencies, within a lower cost model and passing the savings on.  Once everyone else could match them, all Kwiksave had left were small untidy stores, a limited range of brands and no price advantage. Game over.

Retail value resetting has severe ramifications. The centralised distribution revolution, the first big data enabled shift, saw suppliers remove sales force organisations and focus on national accounts, outsourcing merchandising services to field force agencies. Expect the impact this time to be no less profound, with services like category management being outsourced to specialist providers.

Karl's theories were always more appealing than his solutions. It's probably why ordinary people connected with Marks & Spencer ahead of Marx & Engels. He was wrong about communism and never foresaw consumerism. If he had, he might have reworked his manifesto, urging: "Shoppers of the world unite, you have nothing to lose but your (retail) chains".  He shouldn't be discounted.

Morrisons fights back - but is it a safe way?

The gloves are off. Morrisons have declared war on Aldi and Lidl sees the race to the bottom takes another sharp fall with £500m of property sales to fund price cuts. It is hard to see how Morrisons wins this battle in the long term. Using property cash to shore up market share is a short-term strategy with any victory, pyrrhic. What happens when the money is spent? Aldi will still be there, still opening new stores. And Morrisons?

History does not always repeat itself, but there are looming shades of Safeway’s last fight. Seeking to stem a loss of customers to Tesco, Safeway invested in hard-hitting promotions. It wasn’t sustainable – and in 2005, Morrisons picked up a Southern store base, thank you very much!. 

Fast-forward 9 years. The Sunday Times (March 9th 2014) reported Sir Ken Morrison as being “apopleptic” with the current performance of the business; one can only imagine how he would feel if the retail name he spent his life building faced the real prospect of disappearing from the high street. 

If there is any fall out, a troubled Morrisons, with a diminished property portfolio, might let Sainsbury move in, move north and get mightily close to matching Tesco’s leadership position. Morrisons misery may catalyse Coupe’s coup. Ding Ding..Round 1.

Tesco and the Art of War

“Victorious warriors win first and then go to war; defeated warriors go to war first and then seek to win.” So wrote Sun-Tzu in The Art of War. What then is to be made of Phil Clarke’s latest attempts to course-correct the UK’s retail behemoth?

Tesco’s world tour into Asia, the US, Europe, etc is in full-scale retreat with the Turkish operations’ restructure, the latest acceptance  of failure. The non-crisis crisis in Tesco Polska will inevitably lead to divestment. If anyone was in doubt: the world tour is over. Tesco went big; they are now coming home.

But while they were travelling, home changed. New competitors, formats and shopping habits have destabilised the core model. Hypermarkets are struggling. Tesco can’t revamp the retail estate quickly enough, and capital expenditure cuts along with foresaking their  5.2% margin promise mean strategy is being sacrificed to tactics, most  notably  £200 million of price cuts.

This is wallpaper.  Asda had already announced £200 million of price cuts themselves and has since added another £100 million to the fire. What no one else seems to have realised, and based on pure market share extrapolation, is  every £1 of price cuts Asda initiates costs Tesco nearly £2. So Tesco’s announcement just doesn’t cut it.

And let’s be frank, if the answer to your problems is to pick a fight with the world’s biggest price-focused retailer, you are dead before you start. Walmart’s pockets are deeper globally and shallower locally: they can stay the fight for longer, and it will cost them less.

Not forgetting, Tesco is hamstrung with Clubcard. The shining star of the 1990s Clubcard may fast become Tesco’s Tazo. (remember Tazos?). Affordable in times of growth, Clubcard risks becoming an expensive gimmick  obstructing visible value delivery. Worse still, with Tesco now accepting other retailers’ vouchers, expect Asda, Sainsburys  and Aldi to start dropping vouchers around Tesco stores in areas where they aren't trading. Ouch. 

Back to the end of the margin promise and no new commitment as to where the clock will get reset. The city vultures were already circling over the UK’s big three listed retailers to leverage out their property assets. This will now intensify: the repercussions may be profound.

The first move could well be “Coupe’s coup”. Sainsburys may use the cash pile generated to buy Morrisons and put themselves neck and neck with Tesco for the number one spot. This is the last big domestic grocery deal left and Coupe has to do something bold to make his mark. But liberated from their strong property asset based underpinnings, Sainsburys and Tesco will be left with big, cost hungry, unfocused (sorry, omnichannel) businesses under ever-increasing margin pressure facing up to a world of giants: Walmart, who won yesterday, Aldi who are winning today and Amazon, who stand to win tomorrow.

In response to all of this, Tesco jobs will go; the cuts have already begun. Expensive talent is being removed and the business is increasingly in the hands of younger, lower-cost managers lacking the experience to win the fight they face. Compare this to the vast array of Princeton, Harvard, and Oxbridge MBAs now stalking the corridors of Amazon UK along with the senior, proven buying talent fresh from Tesco and Asda.

What else can Tesco do? Well...whilst there is no Chinese medicine to fix these structural shifts in retailing, there is a compelling need to adopt new ways of working and breakout of historic operating cost structures. The race is on to take leverage big-data enabled technologies and take an axe to retail back office cost structures.

This will support a delayering of centre organizations, driving back-end costs down dramatically and allow bricks and mortar retailers to reconfigure and reinvest in store service and this is the critical point of difference to online competitors.  Sun Tzu also noted, “There is no instance of a country having benefited from prolonged warfare,” and Tesco faces prolonged war on every front with increasingly formidable rivals. Interesting times.

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