It's no good Tesco being the biggest if it doesn't know how to be the best

Graham Ruddick
10 Apr 2014
The Telegraph UK

Tesco’s scale remains an advantage, yet the company seems reluctant to use it
Tesco’s share price is at the lowest level in a decade, Sainsbury’s is the most shorted stock in the FTSE 100 and Morrisons has warned that profits in 2014 will be half what they were last year. Britain’s biggest supermarkets are facing a crisis.
This challenge to the “big four”, which also includes Asda, has not suddenly appeared out of nowhere. It is the result of the discounters Aldi and Lidl growing in confidence over the past few years, the leading grocers focusing on protecting their bottom line rather than growing sales, a lack of trust in big business since the financial crisis and the loss of highly-rated management such as Sir Terry Leahy.
According to Moody’s, over the past four years, Tesco, Asda, Sainsbury’s and Morrisons have lost 3.7pc of market share, while Aldi, Lidl and upmarket Waitrose have gained 3.9pc.
These numbers may not instantly appear striking, but they are unprecedented in the 21st century UK grocery market. The Kantar figures show that in the past 12 weeks Tesco sales fell 3pc and Morrisons 3.8pc, while Aldi grew 35pc. These are dramatic numbers. Even Sainsbury’s, the best performing major supermarket since the collapse of Lehman Brothers, lost 0.4pc points of market share for the first time in a decade.
Retail is all about momentum. Downward and upwards sales trends can be difficult to stop before they represent a fundamental change in a market.
Aldi and Lidl, after 20 years of groundwork in the UK, have finally got themselves into a virtuous circle. With like-for-like sales rising in their stores, they can afford to step up investment in products and pay rent on more and better located shops. This in turn drives more sales growth.
However, retailers with falling like-for-like sales face the opposite.
Tesco has been in a vicious circle since the end of Sir Terry Leahy’s tenure, when the company started focusing investment on the US and other overseas ventures rather than the UK.
As is now clear, both sides of that strategy have broken down. The vicious circle has accelerated under Philip Clarke.
Since Clarke became chief executive in March 2011, the half-year like-for-like sales figures in the UK have been -0.5pc, -1.2pc, -0.7pc, -0.1pc and -0.5pc
The company tried to call the bottom of its vicious circle in early 2012 by issuing its first profit warning in 20 years and resetting margins. Clarke pledged to hire more staff, revamp Tesco’s own-brand food and modernise stores. However, reshaping a business with 3,000 stores is not a small challenge.
Tesco remains stuck in the downward spiral and the figures suggest it is getting steeper.
The company’s full-year results next week are likely to show the sharpest fall in like-for-like sales under Clarke. Sales fell by 1.5pc, excluding fuel and VAT, in the third quarter and 2.4pc in the vital Christmas period.
A critical light has also been shone on Tesco in the past week by the resignation of finance director Lawrie McIlwee amid rumours he disagreed with Clarke’s strategy.
City analysts believe Clarke has to be more drastic to get Tesco back on track.
Jonathan Pritchard, at Oriel Securities, said Clarke was “fiddling while Rome burns” by merely “finessing the own-label product while retraining the staff and giving the stores a lick of paint”.
In addition, Tony Shiret, at Espirito Santo, said Tesco ranked in last place on the key customer metrics of produce quality and value for money, while Morgan Stanley, in a detailed analysis of pricing and promotions, said that Asda’s prices are at a record low compared with Tesco and that Sainsbury’s was cheaper than its great rival over the past three months for the first time ever.
The bear case scenario facing Tesco was succinctly summarised by an analyst note last December by former employee Bruno Monteyne.
Monteyne, now of Bernstein, said: “Tesco is now in an impossible position: it is neither value nor quality, it is simply everywhere, and can’t compete with either the quality or value retailers.”
The retailer that Monteyne describes seemingly doesn’t know what it stands for and has little confidence in its identity.
Clarke has tried to improve Tesco’s food, stores and, belatedly, prices with a £200m investment in core grocery products such as carrots and milk.
But in doing all these things he is trying to compete with other retailers who have made it their hallmark.
The revamp of Tesco Finest was a step towards Waitrose while the cut in prices was a slide nearer to Aldi and Lidl, who remain cheaper.
Much of this investment was needed, but it effectively meant conceding that other retailers have got it right while Tesco has been misfiring.
Also, Tesco appears to be playing down its strengths. Montenye’s dismissive comment that Tesco is “simply everywhere” could be the rocket fuel for its fightback.
Clarke has spoken at length about how Tesco is “well positioned” for the new era of retail with its investment in Tesco.com, the hudl tablet and initiatives such as the digital Clubcard. Tesco has almost 50pc of the online grocery market in the UK.
However, Tesco’s scale also remains an advantage in physical stores, yet the company seems reluctant to use it.
In an interview with The Telegraph in February, Clarke said the Tesco brand has “baggage”.
He added: “I really think that [now], biggest isn’t always best, better is better.”
Yet for Tesco, being the biggest could still be its route back to being the best. The company needs to regain more confidence about being in its own skin.
In an era when convenience is key for time-pressed and cash-pressed shoppers, what could be more convenient than a retailer based in every postcode of the country?
Tesco’s out-of-town hypermarkets have been much maligned, but again, what could be more convenient than a store where you can buy everything you want in less than an hour?
Hypermarkets have faced pressures from an increase in petrol prices, but they do have a place in the “new era” of retailing.
Online shopping is not convenient for everyone, particularly when it means waiting at home for an hour for a grocery order that contains products you did not pick yourself.
The scale of Tesco’s hypermarkets and its reach across the UK is a strength that Aldi, Lidl, Waitrose and even Sainsbury’s cannot match.
However, these retailers have thrived as Tesco has failed to capitalise on this strength. The hypermarkets were laid out badly – with their convenience diminished by fresh food being shunted to the back – and data suggest that Tesco’s prices have risen compared with rivals.
Pricing is another area where Tesco could use its scale. As the biggest retailer in the country with the highest margin, Tesco has by far the most firepower in a grocery price war.
This, after all, is at the heart of Aldi and Lidl’s success. Despite Clarke claiming that biggest is no longer best, the parent companies of Aldi and Lidl are two of the biggest retailers in Europe. They have succeeded by using their scale to drive down prices with suppliers – thereby helping the British shopper forget their size.

Posted in

Subscribe to our free mailing list and always be the first to receive the latest news and updates.