The trials and tribulations of successful retail strategy
Today's profit announcement by Tesco provides some food for thought; no pun intended!
Any business that can achieve a 5.3% increase on it overall group pre-tax profits (to £3.8 billion in the year to February), cannot be doing too much wrong.
However, it is in UK sales that there is disappointment. These were £2.5 billion which is a 1% fall when compared with a year earlier.
As a result Tesco's chief executive Philip Clarke announced an intention by the company to spend £1 billion on store improvement and hiring more staff.
So what has gone wrong for a retailer that, in the UK, has become a behemoth? Interestingly the answer is something of a paradox. Tesco has been able to do what other retailers find difficult; being successful overseas. However, achieving the overseas success has resulted in senior management losing focus on the UK operation.
Tesco's rise to dominance in UK retailing has been spectacular. It now accounts for 30% of purchases and in the 1990s showed others what could be achieved by aggressive expansion and cost-cutting.
As BBC business correspondent Robert Peston put it, even though it was 'admired' it was also feared by competitors who appeared to be like rabbits caught in the 'juggernaut' that was Tesco.
For those who like a bit of history it is worth recalling that Tesco started as a group of market stalls in 1919 by Jack 'Slasher' Cohen whose belief was that what was required was to 'pile it high and sell it cheap'. His approach, proved successful and by 1939 he had over 100 stores.
Cohen was a hands-on manager who believed that you have to inspire others by leading from the front. After the war the expansion continued but it is in the 1980s and 1990s that Tesco under the leadership of Ian Maclaurin and Terry Leahy that its dominance became really apparent.
Tesco showed other retailers that it was possible to trade in more than the traditional lines of food and drink. In the 1960s and 1970s the idea that you went to a supermarket to buy, for example, clothes and electrical goods would have seemed ridiculous.
Given that in Tesco you can also purchase services as diverse as financial services, insurance for the home and car, that you can buy optical glasses or medicine, and you can leave with a computer which will be sold with software, there has been a massive shift.
In effect, Tesco rewrote the manual for retailing. This led to a rapid increase in market share that, correspondingly, reduced that of competitors. Crucially, the ability to do this was based on being able to negotiate with suppliers in a way that meant it could pass savings onto customers.
So far, so good? Tesco incredible rise has not been without criticism. If you expand as rapidly as it has done it is not without some 'collateral damage'.
There is a maxim that there is no such thing as bad publicity. The trouble is, you can become over-exposed. Tesco seems to be everywhere. There are the metro stores, the 'normal' stores and, of course, the cathedrals are the out-of-town mega stores.
Many smaller independents complain that they cannot compete and for anyone like me, who grew up in the 1970s, see how many traditional corner shops still exist?
Another incentive that Tesco uses to attract shoppers is fuel (petrol and diesel) through discounts. They do this because of its strategic alliance with Esso which means that it procures fuel in colossal quantities. Like corner shops, anyone trying to find an independent filling station will have their work cut out. Their relatively small size means they simply cannot compete.
Perhaps an even bigger concern is the consequences of squeezing the supply chain aggressively to cut costs to Tesco. Remember that the 'buy one, get one free', is almost always funded by the supplier and not Tesco. It's no wonder many farmers reckon they are working for almost nothing.
Another problem that Tesco has caused is its operational tactic of 'continual replenishment'. This involves having practically no stock and a huge fleet of Tesco lorries to keep the shelves stocked with items that sell regularly (such as milk).
This is not good for the environment. It also means that as a society we are now utterly dependent on the regular supply of fuel to enable us to eat. It begs the question of what would happen there was a genuine shortage of fuel; such as if a strike by fuel delivery drivers took place?
Finally, Tesco felt that it could reduce costs further by employing fewer people. In recent years customers had to scan and pay for their purchase themselves. As well as being counter-cultural, it frequently caused queues.
All of the above concerns can, to varying degrees, be equally levelled at Tesco's rivals. However, as Tesco has discovered, with success comes criticism (and jealously). But it also seems that Tesco may have succumbed to the complacency that comes with hubris.
Philip Clarke, whose approach seems to be more candid than his immediate predecessor Terry Leahy, admitted as much in his statement to accompany the annual results:
"Whilst our international business is delivering excellent growth, we fully recognise the need to raise our game in the UK [...] Tesco didn't put enough into the stores and maybe took a little out".
Robert Peston on the BBC website compares Tesco's current situation to that experience by Marks and Spencer who, in the 1990s, enjoyed a period of rapid growth (being the first UK retailer to make £1 million profit). As he suggests, Tesco may be simply going through the normal cycle for any organisation which, following growth and maturity, involves decline:
"... once the growth ends, as Marks & Spencer and Sainsbury demonstrated in the 1990s, restoring it will certainly not be easy, and may prove impossible."
Indeed, he believes that the changes announced by Clarke today could have an impact upon the British economy. For instance, he predicts that stores will be less sterile and, on the basis of data elicited from loyalty cards, the range of goods more orientated to local needs.
Inevitably there will be more focus on customer service (it would be strange if he said there would be less), and that expansion will occur at a lessened rate (1.5 million square feet this year as opposed to 2.4 million).
Perhaps the strategic change that will have most impact is Peston's report that Tesco will massively increase its internet provision. Apparently, by Christmas it intends to offer twice as many lines as its current 40,000. Additionally, he explains, Tesco wishes to take Amazon on by increasing to 200,000 lines what is available by other retailers through its marketplace.
What Tesco does need to be applauded for is its ability to trade successfully overseas. In research carried out by Carstjens and Lal, which is reported on in their article 'Retail Doesn't Cross Borders', (published in the April edition of the Harvard Business Review), they found that 'with very few exceptions', expansion abroad rarely provides any benefit.
Success for Tesco overseas is mixed. In the United States Tesco's brand, Fresh and Easy, made losses of £153 million with losses predicted for the current year. However, in Asia, profits rose by almost 22% to £737 million.
Because of the importance of local preferences Carstjens and Lal caution retailers against seeing overseas markets as the way to grow their business. Indeed, as they warn, 'outsiders' have to try and guess what the heterogeneity of tastes and culture are in local markets and, as a consequence, are 'prone to errors'.
As part of their conclusion, Carstjens and Lal offer a number of 'rules' that any retailer should apply when considering expansion overseas. One of these is that the home market is the lynchpin of globalisation and that there is a danger of 'divert[ing] their attention from what's happening at home'.
It seems that Tesco has learnt this lesson the hard way. Whether the changes announced today result in a return to the success it once enjoyed, and made it so dominant, remains to be seen.
The three other 'rules' that Carstjens and Lal posit as a result of their research provide useful suggestions for any organisation developing a strategy it hopes will create success. These are:
1. Always bring something novel to the market
2. Differentiation is more important than synergies
3. Timing is crucial