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Flaws in Tesco’s strategy

Wednesday, April 25, 2012
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BUSS4 students can accumulate some useful evidence about changes in business strategy by examining the reasons for Tesco’s fall in UK profits, and their strategy to reverse the trend. There is an opportunity to do some ‘compare and contrast’ with the strategies of other businesses which are struggling to turnaround disappointing business results such as Nokia and others that have such as BA and Starbucks.

For Tesco’s this is the first such fall in 20 years, although it was not unexpected as it followed the profits warning that Tesco’s issued to the market in January. UK trading profits fell by 1% to £2.5bn in the year to the end of February, despite a rise in UK like-for-like sales of 2.8%. Overall group profits, which include overseas sales, were stronger, up 5.3% before tax to £3.8bn, and group sales also rose by 7.4% to £72bn. However, as two thirds of their business remains in the UK the fall in profitability here is seen as more significant.

Tesco remains Britain’s biggest retailer, with just over 30% of the UK grocery market, but as this report from Reuter’s shows they have been losing market share to Asda, Sainsbury’s and Morrisons over the last few months, while smaller competitors such as Waitrose, Aldi and Lidl, who are aiming at narrower segments of the market, are also making significant gains.

Last week Philip Clarke (who succeeded Sir Terry Leahy as CEO in 2011) announced that Tesco would spend £1bn overhauling its UK business in an attempt to revive its fortunes in the home market and win back shoppers from rival supermarkets. The plans involve several changes (see also this report from the Guardian):
1. Staffing: recruiting more than 8,000 staff to improve levels of customer service, particularly in its fresh food departments and its larger stores. This will include spending on the training and tools they need to improve levels of service.
2. Product: revamp 8,000 products in its standard ranges - 40% of its UK food sales.
3. Stores: new-look stores with a “warmer” atmosphere after shoppers complained that its stores felt cold and clinical, while slowing down its expansion programme in the UK, so it can focus on overhauling the existing chain. Emphasis for new stores will shift from the mega Extra superstores to the Tesco Metro and Express convenience stores
4. Delivery of the product: creating an Argos-style Click & Collect business where shoppers can collect goods ordered online, to be rolled out to 700 stores this year, and “dotcom-only” stores, which are used to fulfil internet orders.

Will these changes do the trick? It depends on whether the planned solutions address the real causes of the problem. Analysts seem to broadly agree on those causes. There is a good article on the BBC website (linked here) which identifies five main issues:
1. Shabby stores with a low-rent, outdated feel, and too few staff - Tesco’s staff per 1,000 sq ft of selling space had fallen from 6.3 six years ago to 4.8, putting it behind its main rivals.
2. Failure to update its product range, sticking with the three tiers of Value, standard and Finest for many years, while competitors have been more innovative with ranges such as Asda’s ‘Chosen by You’.
3. Starting a price war, and then failing to win it – last September Tesco launched their ‘Big Price Drop’, which placed their image firmly in the low-price area of the market, but was immediately matched by Sainsbury’s Brand Match and Asda’s Price Guarantee, so they gained no competitive advantage from the strategy.
4. International Market development - losing focus on the core business. Instead of keeping the UK at the heart of its strategy, the management team have been distracted by their other markets, particularly the US and China. David Gray, a retail analyst at Planet Retail, highlights a classic problem of businesses looking to expand overseas:
“Tesco went on an acquisition and diversification spree, but at the same time it under invested in existing stores in the UK and lost its focus on food” – but Tesco needs the UK business - which has historically done very well and has a market share of around 30% - to generate the funds it invests overseas.
5. Product development – losing focus on the core business. Ansoff can help again in analysing the rapid shift away from Tesco’s core food business into all sorts of other areas such as banking, second hand cars and home services.

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