Righting the Tesco Supertanker?

Well a few days have now passed since the Tesco figures and the dust has settled some what. Much of the attention of course has fallen on the withdrawal from the USA and the attempts to be made to sell some of Fresh & Easy to recoup some of the investment. This is not surprising – media loves a failure, especially when it comes with a price tag of £1bn.

It is not clear what we learn from the US adventure. Tesco join a list of many retailers who have failed internationally, including in the USA. Indeed it is arguable whether more internationalization fails than succeeds. But failure on this scale is something of importance.

I saw some of the Fresh & Easy stores a few years ago – not in the heartland of California but out on the extremes in Phoenix. It was an odd and unsettling experience even at that time. One of the stores was probably one of the nicest small supermarkets I had ever been in. Attractive design. well-stocked, great staff, very busy – trading a storm. The other was the exact opposite – dead, uninterested staff and in a strip centre that was out on its feet. In over an hour in the store there was not a single customer.

That difference worried me at the time and made me question whether despite the much trailed research, Tesco had got the concept and the sites right? Operationally it worked in some places, despite being quite a long way ahead of the market (self-scanning as one example), but did not in others. The timing was unlucky, for sure, as that part of the US has struggled since 2007.

So, Phil Clarke has pulled the plug, following the announced withdrawal from Japan.

But for me, that was not the story of the results. Two other things stood out.

First, the property write downs are an interesting shift and statement about the future. Combine this with the ongoing good results from online retailing (and see the John Lewis online figures this week as well) and the announcement of a rethink about some of the pace of development in China and the loss of goodwill in Central Europe and you get a picture of a business thinking hard about its shape for the future. Writing down the value of sites and stores in the UK and pointing to the inability or lack of desire to build on some of this land reflects the structural shift underway in UK retailing and retail property.

So Tesco have taken a hit on this property in its balance sheet. The question we should perhaps be asking however is whether other retailers and especially property holders and banks have fully reflected this shift in their balance sheet? I don’t think Tesco is catching up here, but is signalling what needs to go on, especially in hypermarket and some town and city centre properties. The structural change in retailing has to set off other structural changes in other sectors and places.

Secondly, the shift in emphasis in China and Central Europe, the leaving of the US (and Japan before that) and recent small non-core acquisitions in the UK (Giraffe, coffee chains and entertainment channels) point to attempts to refocus on and rebalance the UK business. Building a better UK Tesco has involved a range of initiatives (e.g. refurbishment, new products, extra staffing) and has been rolled out through the year – the process is not finished yet. The figures reveal however that this has come at the loss of quite a lot of margin – some 0.6%, and it may be that more might have to be invested further, as the process has not yet stabilised the market share.

These are interesting times for Tesco and we have to remember that they still have huge market share and sector leadership in the UK and remain a much admired retailer by many consumers. But the figures last week give a sense of clearing the decks and redirecting the business; only time will tell the extent to which this will work. And it is on the success of these initiatives and their impact on the business that the leadership team will be assessed over the next 12 months. It is always thus for retail leaders, but rather more pointed in this case and at this time.

About Leigh Sparks

I am Professor of Retail Studies at the Institute for Retail Studies, University of Stirling, where I research and teach aspects of retailing and retail supply chains, alongside various colleagues. I am Chair of Scotland's Towns Partnership. I am also a Deputy Principal of the University, with responsibility for Internationalisation and Graduate Studies.
This entry was posted in Banks, International Retailing, Internet shopping, Market Shares, Online Retailing, Property, Tesco and tagged , , , , . Bookmark the permalink.

9 Responses to Righting the Tesco Supertanker?

  1. On the odd locations for the USA USA adventure – I was alerted to that through an email from an American associate who was curious about that at the outset. He was hoping that I was going to discern some clever marketing guile on the part of a perfidious Brit incomer. I had to admit being clueless.
    Tesco is clearly having to think hard about future strategy – one headline in the financial press over the weekend was ‘Pain will mean Gain for Tesco’. We shall see. One strategic challenge for all big corporates is not just changing course, but the struggle to halt the momentum of the sheer scale and imbedded custom & practice fixed on continuing to take it where it’s currently going.

    Anecdote time – they often hold clues and warnings. Last Easter weekend we had a large number of guests coming so we opted for traditional legs of lamb. Turned out Tesco were doing a price promotion for Easter lamb. Outcome was that from the Good Friday early evening through the whole weekend we could not source lamb from Tesco – started with our local supermarket, then hypermarket, then 3 town centre stores – no lamb. In mild panic we emailed Tesco customer services early Saturday evening in hopes of some signposting – no response as they do’t seem to reply weekend. Couple of days later we a, frankly, unhelpful phone call of the sort; ‘sorry about that and we will report it’. I said that left me dissatisfied albeit philosophical. I did point out that, since my email, we had had a wasted return journey on the Saturday late evening as we had been advised of ‘another consignment’. Unfortunately that did not, in the event, include lamb.
    Another couple of days and another call from Tesco. This time emphasising that the local hypermarket had been wrong and they would be ‘told about this’. I emphasised that the was a minor matter amidst the bigger failure (my experience of large corporates is that the centre invariably seeks to move the responsibility for a problem downwards and outwards). I then got some rather partronising advice that ‘lamb is very popular with the British at Easter’ , so that is why the stock ran short. My response was to point out the obvious – if you cannae stock it sufficiently for the traditional bank holiday weekend, don’t then do a price promotion on it.
    This is not the only stock problem we have experienced over the past year with Tesco. Seems that the operational as well as the strategic needs tending to.

  2. … and, it’s not just Tesco? I see that in the current ‘Brand Republic’ edition there is reference to “Embattled” retailer Morrisons:
    http://www.brandrepublic.com/bulletin/brandrepublicnewsbulletin/article/1179427/morrisons-calls-agency-review-pledges-keep-ant-dec/?DCMP=EMC-CONBrandRepublicdailynewsbulletin

    • Leigh Sparks says:

      Edward

      Couple of thoughts:

      1. On Tesco, they have said they have been running their supply chain “too hot” (not a reference to horse) in that their pursuit of “lean-ness” in stock terms has lead to out of stock and under supply. Rectifying this will cost some margin.

      2. Morrisons – seem to have been treading water for a short while, but I wonder if the “embattled” comes from a view that their refusal thus far to entertain and engage in online retailing was Cnut like and ultimately futile, providing a perception of out of touch leadership?

      • Leigh interesting thoughts and in reply:
        1) Seems I got ‘burned’ in the heat of the Tesco lean-ess
        2) Really intriguing on Morrisons. They long succeeding in retaining in a large supermarket chain offering much of that ‘Northern English’ traditional shopping feel (illusion?). Decent wet fish counters, ‘proper’ meat offerings, market ‘barrows’, green and gold abounding etc. To have achieved that and then to have not responded to the advent of online… perhaps together does say something about leadership (following on in a company that was of course marked in the earlier epoch by strong patrician, home grown – and successful – leadership).
        That perhaps led them in turn into Porter’s stuck in the middle trap – just what was their image, brand, position and offer all meant to be?

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