– The grocer needs to reconnect with its customers and rethink ranges
– Tesco’s exposure to the hypermarket store format will need to be addressed
– Any business turnaround requires good communication with and support from a multitude of stakeholders
The golden decade when Tesco and the big four grocers achieved growth simply by mopping up market share from the demise of Somerfield, Netto and Safeway is at an end.Tesco has found itself marooned in the middle ground, facing strong competition from both premium and discount grocers and is now faced with the painful process of adjusting to a new, harsher, trading environment.The KPMG/Ipsos Retail Think Tank (RTT) met in October to discuss what Tesco can learn from other businesses which have successfully been turned around.
Change the culture and get back to serving the customer
The RTT believes that Tesco must first identify and acknowledge the full extent of the problems facing its business. The economics of its business model no longer work in the current trading environment: its high margin strategy is unsustainable and will continue to negatively impact its market share.
Acceptance needs to be followed swiftly by finding the root causes of business distress and bringing to light what is not working.
“This is not about completely reinventing the business, but it is about recognising that some things – not least relatively high margins – are just not sustainable in today’s market”
, said Neil Saunders, Managing Director of Conlumino.
“The price of trying to maintain those margins is one of continued market share erosion. This is a difficult thing to engineer but it is something that others, such as Carrefour, have successfully done in order to get growth back on the agenda.”
Customers are also confused as to what Tesco now stands for. Historically it has been the grocer which served everyone, but in today’s environment, where the mass market is becoming increasingly fragmented, that is impossible to pull off. With competition fierce from the luxury and discount grocers alike, Tesco must deliver ranges and promotions designed specifically for its best customers.
It has data and cash to achieve this: Tesco has access to more consumer data through its Clubcard than any other grocer. However, the data are only valuable if they produce sharp and deep insights and the customer is put at the heart of everything the business does. Martin Hayward, Founder of Hayward Strategy and Futures, commented: “The irony is this is a company that has one of the best insight machines in the marketplace, yet has failed to understand the change in customers’ needs. Tesco should be in a tremendously strong position to connect with their customers given their pioneering investment in customer data analysis since the mid 1990s. Somehow the messages that this data must and should have been sending to the board of Tesco have been missed or ignored, in the pursuit of ever greatness and scale. The business needs to learn to listen once again.”
Martin Newman, CEO of Practicology said: “Customer loyalty demands more than a points-based rewards system. Customers want to be treated like individuals. Tesco needs to leverage its data with a programme of rewards and personalised offers aligned with customers’ lifestyles and lifecycles.
“Once the business has understood customers’ requirements, Tesco can re-engineer its people, systems and processes to deliver the new customer proposition and journey.” Mike Watkins, Head of Retailer and Business Insight at Nielsen, added: “With two thirds of households shopping at Tesco each month and with a considerable depth in range, there are opportunities for Tesco to tailor and edit ranges to build resonance with target audiences. Format and private label development are also key opportunities to drive new shoppers into store and to build loyalty.”
Invest, and fast – but not in a price war
In the midst of a sustained price war it will be hard for Tesco to take its foot off the gas and work out its proposition, but the company needs to make strategic investments rather than just cutting prices. For example Sainsbury’s recovery programme under Justin King saw the retailer focus on quality fresh food and own label ranges.
“There is insufficient time or information to run a traditional strategy process so the board must run a range of scenarios and make some big decisions around what the future core of the business is and where money is going to be made whilst the business is still strong,” said David McCorquodale, Head of Retail at KPMG.
“It needs to make these investments to create growth – a business can’t be turned around by just cutting costs or prices. Howard Schultz at Starbucks certainly cut costs brutally in his ‘grip’ phase but he then made some critical decisions, the first was to focus on the company’s core product – coffee – and the second; to recreate the ambience of local coffee houses. Schultz built customer affinity programs and aggressively extended the brand to return its premium position.”
Nick Bubb, Retail Consultant, said: “Regulatory investigations and changing the management team risk being a distraction in the vital run up to Christmas. The world is not standing still as Tesco gets its act together. Competitors will be moving swiftly to demonstrate their strong values, product ranges and pricing.”
Give retailers a seat at the boardroom table
“With analysts already questioning the level of retail experience on the board and these inquests occupying significant management time, there are question marks over whether the company will be able to achieve a significant turnaround quickly without broader management structural changes,” said James Knightley, Senior UK Economist at ING.
The RTT argues that most turnarounds come hand in hand with new appointments at board level to galvanise the leadership into a change programme and Tesco needs to have experienced retailers and marketers at the top table. “Many successful turnarounds have involved the appointment of a Chief Restructuring Officer to drive the transformation and communicate the great change story that everyone understands, while allowing others to continue to do their jobs and the business to carry on functioning,” said Tim Denison of Ipsos. “Don’t be surprised if we see such a role announced at Cheshunt.”
The RTT warns that Tesco needs the support of all shareholders, suppliers and employees to contribute to the stabilisation of the business and the solution. For example, John Walden at Argos has maintained a consistent dialogue with stakeholders underpinned by consistency of delivery.
With vocal investors talking about their disappointment in Tesco’s performance, the grocer’s brand remains in jeopardy, unless it gives out strong, positive messages about the action being taken or a shareholder or supplier publicly backs it.
Look at the structural challenges
Unlike some of its rivals, Tesco’s online grocery operation and convenience store chain are well advanced, so it is well represented in the growth parts of the market. But Tesco’s major problem is that it is over-represented in the weakest part of the market, namely the big out-of-town hypermarkets with their big non-food presence.
At the beginning of this financial year Tesco had over 3,000 UK convenience stores in one form or another (i.e. Tesco Express, Tesco Metro and One Stop) and they accounted for about 18% of Tesco’s total UK selling space (excluding “dark stores” and Dobbies Garden Centres). But the 247 Tesco Extra stores (which average over 70,000 sq ft in size) accounted for as much as 45% of Tesco’s total UK selling space and it is clearly here where work needs to be done to improve non-grocery productivity.
How Tesco deals with the structural challenge of its hypermarkets exposure will be a part of its turnaround strategy.
Successful turnarounds of companies in an aggressively competitive and disrupted market are not easy but there are stories of change that could give Tesco confidence in its future. The recovery of Starbucks, McDonalds’ ‘Plan to Win’ success and Argos’ ongoing transformation spring to mind. Tesco still generates significant amounts of cash and holds a dominant market share. This gives it significant ability to invest. It needs to research who its best customers are, what they want and deliver it.
Nick Bubb concluded: “History teaches you that it’s always darkest before the dawn. Others have gone through this process and turned their business around. One of the greatest ever turnarounds was Asda in the early 1990’s under Archie Norman, who always said that a big company with a lot of top-line sales will have enough levers to pull to make a difference to the bottom line. And changing the culture of the Asda business and unleashing the talent in the store managers was an important part of the turnaround.”
Date Published: 1/21/2015 11:05 AM
Note to Editors:
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Dr. Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – Harper Dennis Hobbs
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – Conlumino
- James Knightley – ING
- Richard Lowe – Barclays Retail & Wholesale Sectors
- David McCorquodale – KPMG
- Martin Newman – Practicology
- Mike Watkins – Nielsen
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Definitions: The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.
1. Demand – Demand for retail goods and services. From a retro-perspective, retail sales, volumes and prices are the primary indicators. When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used
2. Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage. Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts
3. Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people
The Retail Health Index – how is it assessed?
Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.
The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate. The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health. The index ‘base’ of 100 was set on 1 April 2006. Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter. An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.
The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.
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