Tuesday 25 April 2017

Six steps to save Tesco

Retailer hit hard by the rise of the discounters

Angeline Ball pictured promoting Home Cook's Academy, sponsored by Tesco Ireland and safefood
Angeline Ball pictured promoting Home Cook's Academy, sponsored by Tesco Ireland and safefood
Dan White

Dan White

Tesco, Britain and Ireland's largest retailer, is in crisis. A series of profit warnings, a 75pc cut in the dividend, brutal price competition from the discounters, disastrous overseas expansion and now a new chief executive. What can be done to turn this retailing giant around? Here are the six steps that new boss Dave Lewis must now take to save Tesco.

Scrap Clubcard

When it launched Clubcard, its electronic loyalty card scheme, in 1995, Tesco changed the rules of grocery retailing forever. Its major competitors, who had initially disparaged Clubcard as being merely "electronic Green Shield stamps", were quickly forced to follow suit as Clubcard quickly proved to be a huge hit with shoppers, sending Tesco's UK market share to over 30pc. While we may take them for granted now, Club Points and the various discounts and promotions associated with Clubcard represented a retailing revolution two decades ago.

Clubcard gave Tesco an unrivalled knowledge of how its customers shopped, with the then-chairman Lord Ian MacLaurin famously telling Clubcard's developers that they knew more about Tesco's customers after just three months than he did after 30 years. The information gained from Clubcard allowed Tesco to target offerings much more precisely at individual groups of customers. However, this knowledge came at a price. A very high price.

HSBC analyst Dave McCarthy has estimated that Clubcard costs Tesco £500m a year in the UK alone. Dumping Clubcard would allow Tesco to cut its prices by over 1pc. Sanford C Bernstein retail analyst and former Tesco executive Bruno Monteyne has called on Tesco to split itself into three separate chains; premium, mass market and discount with Clubcard being dropped in the discount chain.

Mr Lewis, who started in the job last week, should go even further and scrap Clubcard entirely, freeing up a huge war chest to fund price cuts. Ironically Lord MacLaurin himself did something similar when he ejected Green Shield stamps from Tesco in 1977 and lowered its prices instead. It's time for history to repeat itself at Tesco.

Slash the number of lines stocked in each store

The traditional big supermarket chains, including Tesco, carry an absurdly large number of lines, over 50,000, in their stores. How many types of yoghurt do shoppers really need? The extremely large number of lines stocked places enormous pressure on Tesco's distribution and IT systems. Which of course begs the question: do shoppers really want or even notice this plethora of lines? Are they prepared to pay the higher prices made necessary by stocking so many lines?

Almost certainly not. German discounters Aldi and Lidl average less than 2,000 lines in their stores. Judging by the success of the discounters, it seems clear that many if not most shoppers don't miss all of those lines, preferring lower prices instead.

Tesco's UK rivals are also experimenting with cutting the number of lines which they stock in their stores. Morrison's is trialling a new store in Preston with 20pc fewer lines. Reducing the number of lines stocked in each store simplifies the distribution chain and cuts costs. With the discounters now up to almost 17pc of the Irish market and over 8pc of the UK market, it is long past time for Tesco to follow the example of Aldi and Lidl and slash the number of lines it carries in its stores.

Dump most of its overseas subsidiaries.

Even after the closure of its American subsidiary Fresh and Easy at an estimated cost of more than £1bn, Tesco is still weighed down by under-performing overseas businesses. While its overseas operations accounted for 31pc of its sales in the year to the end of February, they contributed just 28pc of its trading profits. In addition to dumping Fresh and Easy, Tesco also walked away from the Japanese market in 2012 and folded its Chinese subsidiary into a joint venture with a local partner in 2013. More needs to be done to sort out its remaining overseas businesses.

Tesco's European operations look particularly vulnerable with analysts reckoning that, with the exception of its Irish arm, most of them are barely profitable. Unfortunately, as Mr Monteyne observes, Tesco would struggle to find a buyer for most of its mainland European business, which includes operations in Poland, the Czech Republic, Hungary and Slovakia.

Maybe, but with Tesco's core UK operation facing its most serious crisis in more than 30 years, that's no excuse for doing nothing. Sell them, swap them, close them, just get rid of them!

Close most of the large out- of-town-superstores.

Time was when most of us bought the vast bulk of our groceries in a single weekly or fortnightly shop at a giant suburban supermarket. Not any more. Most shoppers now make far more frequent trips to the supermarket or discounter, buying only what they need for the next day or two. This change to "little and often" shopping is rapidly rendering the vast 80,000-100,000 square feet supermarkets obsolete.

This is going to force Tesco to take a big hit when it writes down the value of these now-obsolete stores. Mr Monteyne estimates that these write-downs could cost Tesco up to £1bn. He recommends sub-letting some of this surplus space to other retailers and using some more of it to process online orders. That strikes me as merely papering over the cracks and I would go much further. The big suburban supermarket is rapidly becoming a white elephant. Tesco would be better off shutting most of them as quickly as possible.

The future for Tesco is one of smaller but not necessarily fewer stores, with Mr Monteyne pointing out that the UK actually has fewer stores per head of population than most other developed countries.

Completely revamp its online strategy.

Online is all the rage for retailers as consumers do more and more of their shopping online. That's the theory anyway but the reality is almost certainly more complex. Delivering perishable groceries directly to a customer's home is a very different proposition to delivering books, clothes or CDs. Try delivering fresh meat or vegetables a week late!

While former Tesco boss Philip Clarke claimed that the group made online profits of £127m in its last financial year, many analysts treated this claim with scepticism. They believe that the cost of delivering goods ordered online to customers' homes is much higher than Tesco has acknowledged, often wiping out any profits from such orders..

Tesco charges its UK customers £6 or less for each online order delivered to their homes. The actual cost has been calculated at £20 per order delivered. While "click and collect", where customers collect their online orders from their local store, probably makes financial sense, home delivery certainly doesn't and Tesco should stop offering this service immediately.

Launch an all-out price war to compete with the discounters.

The lesson of the rise and rise of the discounters in the UK and Irish markets is that, in hard times, price matters a lot to shoppers. If it is to get out of the mess in which it now finds itself, Tesco must give shoppers what they want - lower prices.

By scrapping Clubcard, reducing the number of lines which it carries in its stores and closing most of its larger stores, Tesco could cut its costs and free up margin that could be used to fight an all-out price war with Aldi and Lidl. It is only by cutting its prices to match the discounters that Tesco can win back its lost customers.

Mr Lewis, who was previously head of personal care products at consumer brands giant Unilever, is the first outsider to head up Tesco in its 95-year history. By sacking Mr Clarke and appointing him, the Tesco board demonstrated for the first time that they grasped the seriousness of the company's plight.,

As an outsider, Mr Lewis is in a unique position to think the unthinkable at Tesco and drive through the fundamental change it so desperately needs. His position within the company will never be stronger than it is now. He has no time to lose. Tesco's future survival depends on him making the right decisions and implementing them quickly.

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