Following Tesco's latest and biggest profit warning, with group earnings now expected to be 15-20% lower than previously indicated and the interim dividend cut by 75%, incoming CEO Dave Lewis will no doubt be advised to cut prices more aggressively and take other radical measures. Price cutting is the easiest weapon to deploy in the battle for market share, but also the costliest and least effective when everyone is cutting prices at the same time. Despite the margin investment they have made so far this year, value perception for Tesco, Sainsbury and Morrison has continued to decline, in both absolute terms and relative to the hard discounters Aldi and Lidl. This is partly because the relative gap hasn’t moved that much and partly because it is very difficult for mainstream full range supermarkets to match the value for money that the limited range discounters’ own label provides.
Tesco’s main problem is customer satisfaction, which started declining before Terry Leahy left as CEO due to under-investment in staff and stores and continued throughout Phil Clarke’s tenure, reaching record lows today. People just don’t like the experience, it’s too bland and the staff attitude is too variable. Meantime the shift to online shopping adds more cost than it does incremental sales; Tesco’s share of the online market is nearly 50%, double its offline share. Yet that hasn’t helped stop erosion of its market share and profits. As we said in a previous blog, the changes Clarke was trying to make, notably adding staff and renovating stores, were along the right lines but far too incremental. You don’t escape a tidal wave created by a perfect storm of change by taking small incremental steps. So Tesco’s new CEO should heed calls to take much bigger bolder action.
Fundamental change is needed in three areas. First, Lewis needs to address Tesco’s culture, which is too siloed and still retains a bully-boy element that keeps good people down. Archie Norman’s turnaround of Asda and Justin King’s of Sainsbury were primarily cultural turnarounds. This is by no means easy and takes time, but is crucial in such a people-intensive business.
Second, Tesco store staff at all levels should be trained and empowered to be able and willing to advise customers on how best to choose, prepare and store food –i.e., actually sell food, instead of just sticking commodities on the shelves and letting customers fend for themselves. Consumers, especially the less well-off, desperately need help in figuring out what’s good for them and what’s not, and on how to prepare healthy, tasty meals easily and cheaply. Stop treating staff as robots or they will be replaced by robots (Amazon’s or Ocado’s). Take note of the fact that the food retailers that spend the most on their staff actually end up being the most profitable.
Third, Tesco needs to find a way to address the elephant in the room – i.e., that the cost of serving online customers is eating into overall profits, and that this problem will only worsen as the online market grows, as picking is shifted from stores to “dark stores” that add incremental cost but minimal incremental sales. Solving this dilemma will require true out of the box thinking and testing new models and formats that combine the best of the online and in-store experience.
It will be a formidable challenge, especially given Lewis’s lack of food retail experience and the ineffectiveness of Tesco’s chairman Sir Richard Broadbent, who it could be argued should share some of the blame for Phil Clarke’s failure to stop the rot in his three and a half years at the helm. It will be interesting to see how Lewis approaches the task. In the meantime, I can only wish him the very best of British luck.