Thursday 22 August 2019

Tesco bets on digital world to secure its dominance

Global retailer's CEO is pouring money into online business

Shape of things to come: Browsing in the aisles of your local supermarket is on the way out
Shape of things to come: Browsing in the aisles of your local supermarket is on the way out
Customer orders are placed into plastic carrier bags at a Tesco on-line distribution centre. Photo: Steve Dawson/Bloomberg

Gabi Thesing

ASK Tesco CEO Philip Clarke how he plans to stop budget food stores from taking more of his customers and he'll talk about and Apple instead.

Rather than battle retailers such as Aldi on price, Clarke is modelling Tesco on the tech giants, building a digital one-stop shop centered around its Hudl tablet that includes everything from movies to banking.

The aim? Lock in customers by incentivising them with loyalty points to buy everything from mortgages to grapes from the Cheshunt, England-based retailer.

"I see competition emerging from non-traditional retailers and I watch all of them," Clarke, 54, said. "I've always been impressed with Amazon and their execution."

Clarke, who has presided over three years of annual stock declines, invested €670m last year into the online endeavour. That's almost triple the amount he plans in price cuts to lure more customers back from discounters this year and help stem the grocer's worst same-store sales decline in a decade. Market share data released last week showed that Tesco is starting to claw some ground back.

The digital strategy "is well ahead of many domestic and global competitors", said Bryan Roberts, an analyst at Kantar Retail. If Clarke succeeds while also fixing store sales "it will certainly help secure Tesco's future as one of the big international players. If not, they risk being left seriously behind by more innovative companies".

After two decades of growth that saw the retailer expand into 13 countries and become one of the world's biggest grocers, it has reined in its global reach under Clarke and exited two markets. At the same time, its dominance of the UK is threatened by increasingly price-conscious Britons defecting to the discounters.

Also gaining ground over the water has been Sainsburys, which last week reported estimate-beating full-year earnings and predicted a resumption of sales growth this year.

Tesco accounted for 26 per cent of Irish supermarket revenue in the 12 weeks to March 30, according to the latest figures from Kantar Worldpanel.

Tesco, the biggest operator in the Republic, saw its position at the top eroded over that period, with market share down 6.6 per cent to 26 per cent. While SuperValu's share slipped 1.6 per cent to 25.2 per cent, Tesco's bigger drop means the SuperValu chain is closing the gap on the market's biggest player.

Aldi's share of the market here rose 21.9 per cent to 7.9 per cent, while Lidl's climbed 11.1 per cent to 7.5 per cent, giving the pair a combined 15.4 per cent share of the market.

Dunnes Stores saw its share of the market fall 3.9 per cent to 21.9 per cent.

Tesco Ireland generated revenues of just under €3bn last year, in what it described as "a challenging trading climate".

This represented a 5.5 per cent decline in like-for-like sales for the Irish division of the international supermarket giant. Tesco Ireland employs around 13,000 staff across 120 stores.

Whether Clarke, who has never worked anywhere other than Tesco, can turn the 95-year-old grocer into the British Amazon remains to be seen. For one thing, the US company is already nipping at his heels, selling general merchandise across the country with speculation rife on whether they will soon sell fresh food. For another, Amazon took almost a decade to turn a profit, a grace period investors are unlikely to grant Clarke.

The gateway to Tesco's online world is the Hudl, the tablet introduced in the UK and the North last September which can be bought for as little as £60 (€73) with the company's Clubcard loyalty points. That's half the price of Amazon's Kindle Fire HD and less than one-quarter the price of an iPad mini.

The Hudl – which is not yet available in the Republic – comes with a raft of Tesco apps to encourage users to buy everything from new release movies and e-books via Tesco's BlinkBox to its F&F clothing and then pay off their mortgage via a Tesco home loan. Coming soon is a smart phone and a mobile phone digital wallet that will allow customers to spend across the Tesco universe and shorten the time at the till.

Clarke bought BlinkBox in 2011, inspired by Amazon acquiring local rival Lovefilm. Aside from being a revenue generator in its own right, the service also drives "frequency and loyalty," the CEO said.

Customers who download Blinkbox movies spend another 13 per cent on top of that on Tesco goods and services, while those who shop online and in stores spend three times as much as those that just go to the outlets.

The bad news is that currently just four per cent of Tesco's 20 million weekly UK customers also shop online with the grocer – though it's a market that's growing 11 per cent a year, according to Robin Terrell, a former Amazon executive and Tesco's group multi-channel director.

Clarke has charged Terrell with integrating the physical world of stores and the digital future. For now, that future is tied to Tesco's roots: stores.

"You have to work absolutely hard on the core because if the core isn't right, then people aren't spending in store," Terrell said.

Tesco has sold 550,000 of the 7-inch screen Hudl devices that run on Google's Android platform, capturing 2 per cent of the tablet market in the UK, according to Kantar Worldpanel. Hudl users tend to be older – 82 per cent are over 35 – and are more likely to visit grocery stores. That means they are more prone to be attracted with the Tesco Clubcard, the loyalty programme that gives holders money-off coupons for items like nappies and petrol.

Still, true "loyalty will come from how it delivers the basics and Tesco has taken the eye off the ball with the basics", said Miriam Burt, an analyst at researcher Gartner.

Tesco lost more than one per centage point in share of the UK's £170bn (€208bn) grocery market in the year through March 30, while discounters Aldi and Lidl gained 1.7 per cent combined.

Their push has led analysts, including Shore Capital's Clive Black, to say Tesco must fight harder on price.

Whether Clarke's investors will give him the two-to-three years to prove the analysts wrong remains to be seen.

© Bloomberg, additional reporting by Nick Webb

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