The major British grocery retailer Tesco is in a crossroad. Strategies that have brought the retail chain success, good reputation, and a leading position do not work as well as in past years. Tesco has been frequently commended for its Clubcard loyalty programme, established in 1996, that implemented an exemplary customer data-driven approach in the realm of relationship marketing; it has put the chain way in advance of all its UK competitors. During the previous decade Tesco also initiated its advanced concept of segmented network of different types of stores for different types of shopping that is continuously growing. Notably, the UK-based company has expanded into more countries and to more types of business, becoming a giant global retail group. But now Tesco finds itself in difficulty. The mission is to find where matters have gone wrong and how to put Tesco back in order.

The recent accounting blunder in which the group over-stated its profits, troubling enough, is truly only a symptom of deeper problems in the management of Tesco, going at least three years back. The profit error in excess of £263m corresponds mainly (£118m) to the first half of the current financial year (2014/15), but it extends to the previous two years, too (following an investigation by Deloitte concluded in October).

• This error was caused, in the words of departing chairman Broadbent, by “accelerated recognition of commercial income and delayed accrual of costs in the UK food business“(1), referring to incorrect timing of reporting payments made to suppliers (done late) and concessions Tesco received from them due, for example, to promotions given in its stores (done too early). The accounting misstatement may have occurred innocently because of lack of professionalism and a guiding hand in running the company’s finances (Tesco, reportedly, did not have a CFO for a while). In the worse case, it was done to conceal the decline in its business and poor financial performance. Either way, it is evident of underlying faults in the way the company was run in recent years.

The years 1997-2010 have been a significant period of intensive activity and growth at Tesco, led by two successive CEOs, Leahy followed by Clarke. It was a period full of ambition to extend internationally and engage in additional product and service categories, beyond Tesco’s core competence in food and general household retailing. But then Tesco was caught unprepared to cope with the financial crisis of 2007-2008 and the recession that followed, especially since 2010. Tesco under Clarke was late to respond, and continued its expansion “business as usual” despite the evident decline in consumer spending. Time has now come to re-align and to take a more focused approach on those business areas and retailing activities in which the company is more capable to satisfy both its customers and shareholders. The new CEO Dave Lewis, as of August 2014, re-stated that Tesco sees itself as a customer-centric company that intends to continue providing best value to consumers through its pricing, services, and stores. It remains to be seen how the new management keeps true to this commitment.

Tesco’s Stores in the UK

The British retailer distinguishes between different patterns of consumer shopping under different circumstances or for varied purposes; about ten years ago it split its mother-chain into four main types of chain stores. At the core are traditional supermarkets, known as Superstores at Tesco (482 stores as of Oct. ’14). It has added Extra mega-size stores with a much larger range of products and at lower prices for shoppers who want to stock-up their households for longer periods on fewer concentrated shopping trips (248 stores). On the other hand, Tesco developed a Metro type of store (reduced supermarket) to be located in centres of large cities and accommodate the unique needs and time constraints of working shoppers (194 stores). In addition they established a sub-chain of Express stores in a format like convenience stores for really rush trips and smaller baskets for products in immediate shortage — this is in fact the largest sub-chain currently (1,709 stores).

Mainly the three new groups of stores have grown since 2005; all four types account for more than 2,600 stores in the UK (there are some additional 800 stores of other retail-formats). The Express chain stores faced particular resentment from independent merchants because these stores have been established at their expense, by buying them out or by drawing local customers from them in their neighbourhoods (some have resolved the issue by becoming franchisees). However, it apparently was a more correct move to make than creating the Extra stores. To the surmise of Tesco, consumers are less attracted to the mega-store format because they are now less interested in making large purchases on any single shopping trip. Instead, consumers are more inclined to fill-in their stocks for the coming days (e.g., as budget or available cash allows). The advantage of buying at lower prices at Extra stores, as in the chain as a whole, also diminished in face of a challenge from more efficient discount chains like Aldi and Lidl from Germany.

Tesco has several concerns to confront and resolve. Its position is furthermore unfortunate because it is sandwiched between discounters as mentioned above and high-quality, high-status chains such as Sainsbury’s, Morrisons, and Marks & Spencer. Tesco invested in its own-brands and in prepared as well as fresh meals, and yet it is still not considered in the same class with the high-quality chains. Those chains have a much clearer proposition with regard to product and service quality than Tesco. In addition, analysts argue that Tesco’s stores have become complicated to shop — they are too large, hard to navigate, difficult to find products needed from a selection too broad, and particularly too difficult to find value. (2)

From 1994 until the end of 2005 the market share (MS) of Tesco climbed consistently from 17% to 30%, surpassing in 1995 Sainsbury’s, the leader until that time, and leaving all food and grocery chains far behind. Since 2006 and until the beginning of 2014 Tesco’s MS was essentially stable (30%-32%), then it started to slip below 30%, according to data of Kantar Worldpanel reported by the BBC. Sainsbury’s has kept floating between 15% and 20%. Three challengers are notable — although they are still well below Tesco, they can and do cause trouble for the leader: (a) Morrisons (11% after a steep leap forward from 6% to 10% in 2005); (b) Asda (Wal-Mart’s branch into the UK , 17%, climbed mainly until 2005); Aldi & Lidl (MS grew more slowly from 2% to 4% until end of 2010 and then accelerated in almost four years to 8%). Kamal Ahmed, Business Editor of the BBC, suggests that the position of Tesco has been eroded due to structural changes in retail attributed primarily to online shopping, overall weakening position of the four big chains, and customers who want “smaller daily top-up shopping”. (3)

It seems early to predict if the recent slip in MS is a sign for an ongoing decline, and it depends very much on how Tesco will react. As already indicated by CEO Lewis, Tesco is going to reduce its range of products. It may have to consider the scale of its Express sub-chain, that might got too large. It will have to carefully assess if it can and should compete again hard over price with upcoming discounters or develop and enhance other competitive advantages like shopping-related services and in-store design. Tesco is already in the midst of a project to re-model and improve the layout and design of its stores (“Transforming Our UK Stores”). While part of this work is dedicated to improving their Extra stores, Tesco’s management may want to consider alternative approaches to these stores. For instance, re-arranging the store as a cluster of several autonomous shops under the same roof (e.g., food & grocery; personal care; home improvement & gardening; repairs) which shoppers can visit independently and pay at separate cashiers.

Extended Lines of Business

Tesco has added a variety of services “in a supporting role”, that is, they do not intuitively belong in a food and household merchandise retail business but they may be regarded as facilitating acquisition and fulfilling complementary needs of customers who come to shop at the chain-stores. But even under this flexible definition, Tesco may have reached too far. Consider just the next few examples:

• Tesco Bank provides, in addition to current accounts, also savings, loans, and credit card services (even car insurance and travel services are available);
• Tesco Mobile offers mobile telecom service packages and smartphones, and has even introduced its own-brand tablet device “hudl” (generation 2 just launched), acting as a technology company;
• Tesco operates a network of gas stations for shoppers to fuel their cars;
• Extending from beauty and cosmetic products for personal care, Tesco is also in the healthcare and pharmacy business, supplying medications, medical devices and NHS-approved services;
• Internet services (broadband, e-mail & storage) are also available from Tesco.

The top management of Tesco may have to show greater scrutiny not only with regard to the range of product types it displays in its stores (and online) but also those supplementary services and products, finding a correct balance between benefit and value they provide and the burden and complication they cause.

Tesco owns the analytic company Dunnhumby as a subsidiary to perform in-house the important work of analysing purchase and personal data of Clubcard customers, and exploiting new possibilities of Big Data, to produce intelligible insights. Yet, the retailer needs to make sure that Dunnhumby keeps to its original charter. Expanding services to external clients, for instance, could complicate its activities too much, distract the company from fulfilling its vital duties for Tesco, and expose it to unnecessary business risks.

Customer Service —  Tesco is repeatedly criticised that its in-store staff is not available and helpful enough. It has been further argued that over-reliance of the retail chain on automatic self-service scan & pay posts in its stores (instead of human cashiers) signals to customers that the staff tries to avoid contact with them. These customer concerns are worrying especially given the difficulties in shopping at large and product-crowded stores. Problems with customer service may better be resolved in parallel to issues of merchandising as well as store layout and interior design to obtain greater improvement in customer-shopper experience.

Tesco has made great effort to execute an inclusive Brick & Click approach in its retailing business, not to foresake any of the physical and online channels. The retailer furthermore works to keep the channels inter-linked. It established, for example, a Click & Collect service —  to their convenience, customers can make the order online in the morning before work and pick-up the shopping package from a store of their choice (out of 260) on their way home. It is a demonstration of effort in the right direction.

Reaching Internationally — Tesco is operating store chains in twelve countries beyond the UK, either under direct ownership or through franchising and co-operation with local retail chains. Besides nearby Ireland, the group’s overseas reach is mainly into Central and Eastern Europe (e.g., Czech Republic, Poland, Hungary, as well as Turkey), and Asia (e.g., India, Thailand, South Korea). A discussion of global operations should take into account economic, cultural and legal considerations with respect to each country. For example, operations in China had to be ceased; they are expected to restart in a new formulation with a local chain. Nonetheless, the venture of Tesco in the US, that lasted between 2007 and 2013, is knowingly the most damaging and embarrassing for the company. Its Fresh & Easy chain of neighbourhood supermarkets on the West Coast was hit by a strong opposition from US-based strong retailers, mainly Wal-Mart and Trader Joe, and in addition its approach was not well accepted by the American consumers. Tesco eventually had to fold out and leave the country.

Vis-à-vis the slip in market share of Tesco in the UK, sales of the retailer at home dropped by 2.6% in first half of FY 2014/15 (Feb.-Aug. ’14) compared with the same period last year. Like-for-Like sales (same-stores, excluding petrol) fell by as much as 4.6%. However, the more alarming outcome for stakeholders and analysts about Tesco has been a decline in profit of 55% in the UK (trading profit for H1 stands at £499m post-correction out of  £23,566m in sales, a margin of 2.3%). (4)

Overall, the sales of Tesco group (£34bn) fell 4.4% and trading profit (£937m) declined 41%.  Both Asia and Europe have seen a fall in sales, though profits in Asia dropped (-17%) and in Europe they increased (+38%). Markedly, Tesco Bank  has enjoyed a rise in both sales (4.6%) and trading profit (16%), to the envy of the retailing business. Analysts doubt that Tesco can overcome and offset these declines by end of the financial year in February 2015. The upcoming Christmas and New Year season is clearly crucial for Tesco. It is also needed as an injection of optimism for its share price that fell from nearly four pounds to £2.50 in the past two years, and then dropped furthermore to just £1.50 in September, recuperating somewhat lately to a little below two pounds.

Undoubtedly Tesco has made positive moves into the 21st century to enhance the consumer shopping experience in its brick-and-mortar stores, establish its presence online, and strengthen endurable relationships with its customers. Yet, improvements it achieved have been swollen in the wave of expansion in different directions, wherever it seemed possible and connected somehow with its main field of business. It is, therefore, ever so important and desirable for Tesco to identify and focus on those areas wherein it is more competent, especially with respect to improving the quality of shopping experiences of individual customers.

Ron Ventura, Ph.D. (Marketing)

Notes:

(1) Tesco Group Interim Results: Financial Performance, H1 2014-15 (26 weeks ended 23/8/14), Press Release 23 Oct., 2014 http://www.tescoplc.com/index.asp?pageid=188&newsid=1074.

(2) Tesco Admits Accounting Missteps; Stock Slides, Stanley Reed, International New-York Times, 23 Sept. 2014

(3) Tesco Share Slumps After Raised Profit Error, BBC News: Business (Online), 23 Oct. 2014 http://www.bbc.com/news/business-29735685

(4) Ibid. 1