“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.
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.
