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.