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: Dial F for Franchise

Persistence is admirable. Sometimes. So news of Tesco’s return to the USA could be encouraging. Whilst limiting their risks by adopting a franchise model, Tesco seemingly eschew the learnings from Fresh & Easy, taken on-board by Sir Terry Leahy and B&M, and will open F&F as a new US chain, starting in Boston, rather than buying an incumbent. 

Curiously, Tesco appear to have locked themselves into a rather strange naming process: First came Fresh and Easy (F&E), now comes F&F. Give it eighteen months there is a reasonable possibility we will see the emergence of F&G.....??

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. 

Chairman of the Board

Move over Frank; there's a new Chairman of the Board.
Sir Terry Leahy is polishing the latest bauble in his portfolio. This time it is Blackcircles.com who plan to throw a spanner in the works for Kwik-Fit et al.

Sir Terry's role, apart from owning a quarter of the company, is to advise on a potential float. Of particular interest is the trial with Tesco Extra to let shoppers have their tyres fixed while they shop. This is standard practice in the USA and helps address tyre shoppers main dislikes of hanging around greasy workshop waiting rooms.

Surprising it has taken the big 4 retailers so long to get to this. They built big stores, with huge car parks. Once they started selling petrol and car insurance, it was only a matter of time until other car related services were added.

The Chairman is busy. Tyred but not exhausted: it's just Blackcircles around his eyes. If you bump into him in the Square Mile, don't be surprised if he's humming "My Kind of Town",

B&M: Fresher and Easier

Looking to clean up in value again....

What do you do after leading one of the world's biggest retailers? Well in Sir Terry Leahy's case, the answer is find yourself another retail venture and change the world again.

Whilst the market awaits B&Ms rumoured £2bn IPO, with Sir Terry as Chairman, the acquisition of German discount chain 
JA Woll Handels (who operate 50 stores under the Jawoll and Hafu fascias) took everyone by surprise. 
Going toe to toe with Aldi in the worlds largest discount market is audacious. What chutzpah!

Why buy? Interestingly some of their advisors believe entering a market through acquisition has more legs than starting from a green-field. You may be forgiven a rye smile. That was a very expensive lesson Sir Terry learned in the USA: Tesco's pain may be B&Ms gain. Certainly  B&Ms approach seems fresher and easier. 

PS You may have picked up on this, but if not...B&M Bargains has 375 stores in the UK and yet say less than 35% of the population live within 10 minutes of a store. That sounds like a declaration of intent. It doesn't need a maths degree to see an ambition to treble their store portfolio and a £2bn war chest post IPO will provide the liquidity to push on. 

Liverpool 1 Everton 2

Allegedly, Tesco boss Phil Clarke had a nightmare and woke suddenly on Saturday morning to the vision of Cilla Black shouting "Surprise, Surprise!"


The real surprise was worse. Philip Green's announcement of BHS muscling in to the food market, with a branded, discount food offering, brought more pressure to the UK retail cauldron, as if any were needed.

On reflection, the move is not so surprising. Grocers have spent a great deal of time breaking into the home-wares market, it is only reasonable to expect some push back and John Lewis Partnership have proved the case for department stores branching into food.

At least Phil Clarke got some respite watching his resurgent Liverpool. Mind you, Everton are doing ok without David Moyes and receive wily business advice from two illustrious supporters of their own: Sir Terry Leahy and Sir Philip Green.

With Leahy due to front the IPO of discount chain B&M, and Green dropping his BHS bombshell, it seems the Evertonian duo are intent on devouring Clarke's scouse by the spoonful..

It's all kicking off. Turns out this isn't business after all; it's not even personal: it's football. And as the late, Bill Shankly famously remarked, "it's more important than life and death".

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.