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Tesco – blue sky times ahead or in the eye of the hurricane?

Great news for Tesco. They are reporting best-ever sales growth at the end of last quarter for more than 5 years. With Christmas sales above expectation, their company is excited to be projecting at least £1.2 billion profit for the period 2016 to 2107. Shares are about 25% higher than 6 months ago, and dividend payments are projected to restart.

The storm has passed, the skies are blue, the birds are singing and good times are here again.

Or are they?

You see storm subsided, blue skies and birds singing can also  the same description as the calm before the onslaught in the eye of the hurricane!!! A hurricane that could be considerably more damaging than anything that has happened in the last few years.

The new threat is not going to come from the traditional competition e.g. the Lidl and Aldi’s of this world which have grown so fast this last year or so. As impressive as their business performance gains have been, their business model is close enough to traditional to give and traditional competitor at least the chance to compete and regain some of the lost market share.

Consider this. What happens if a company emerges where:

  • You can buy any grocery or supermarket item of any quality and quantity.
  • The customer trusts that the quality delivered is consistently as stated (so I don’t need to physically see it)
  • You ALWAYS can get your purchases cheaper than any other source
  • You will get your groceries and purchases delivered within 1 hour
  • Their need for the traditional shop front and distribution approach disappears.
  • If they have a shop front – because thats the way you have always done business, you can still have it and this option is still cheaper than any of the competition.

There is one company who can do this and they already have the operating model proven.

This company is already in the retail business, is accelerating its foothold into the retail food business and has already expressed an ambition to enter the wider supermarket business.

It’s Amazon.

It’s so obvious actually when you think about it?  They have so much of the model in place to do it – it is only a matter of time before they can really effectively do it and it is only time before a significant proportion of the current customer base will realise and trust they can get a quality/availability/price mix that is consistently better than anybody else out there.

As of 2017, none of the top 8 traditional players has the infrastructure to effectively compete against Amazon. They have been working it for 20 years and are better at it than any other company that operates at scale, by some margin. Just look at what they have recently done in the office supplies market, in one year they have captured $1b worth business when competing against the likes of Office Depot, Staples, etc.

The margin per item in supermarkets is now so small that any company that has traditional bricks and mortar shop fronts will have too high a cost base.  Amazon has built a cost, choice and availability operating model plus scalability that will be very difficult to compete with.

Now, it is easy to say – nothing new here.  Online food and grocery shopping already exists and the percentage of online shoppers is increasing. That is not my point. Today, online shopping pricing is roughly the same as physically going to the supermarket.

The advantage is mainly convenience.

The Amazon model will bring pricing down to below the cheapest for almost everything they sell, with availability up and delivery time down as a mix which none of the current players will be able to compete with.  Tesco has expensive infrastructure to maintain and they do not have the operating model efficiency of an Amazon.

That is the combination that will be tough to beat.

So YES this is the eye of the hurricane.

If Tesco’s carry on as they are, they will enjoy a few good years and then, in my opinion, they risk extinction.

Tesco’s know this and that’s why they have merged with Booker Group.

The Booker Group merger came to a surprise for many analysts and market pundits but it’s quite easy to understand if you think about it.

If Tesco is going to compete with a disruptor like Amazon, it is going to need a multi-prong customer strategy:

  • The merger now makes them the UK’s largest food business.
  • They have appointed a new Chief Customer Experience Officer to strengthen the differentiation of the brand.
  • It has to cement its position as the biggest food retailer. The merger of Booker has done just that.
  • It has to bring down its cost base substantially. It is doing that, although what is going to happen to the traditional shop and pay supermarket is yet to be decided.
  • It has to deliver against a convenience outcome. The merger partially delivers in that it allows a hybrid click and collect model for purchases needed today with delivery for online purchase tomorrow. This is still someway off what Amazon will be able to deliver but it is a step in the right direction

The biggest issue is what to do with the traditional bricks and mortar storefront. The answer at least in basis is already defined, and I think Tesco already has a really good idea how to do it.

Have you ever been to a large mall in the Middle East? You will find a large area often on a higher floor called a food court. At this food court you can go to different stalls a little like the Hawker concept in Singapore and buy food and drink which are quick, convenient, fast and cheap. They are massively popular in both parts of the world.

Marketeers talk about what is a slightly different version of this concept. Its called the “out of home” concept and its growing very fast. Now suddenly Tesco has the lifeline it desperately needs. The storefronts we see today are a complex cost overhead for the traditional model but a massive enabler if customers are drawn to the locations for other reasons – and those reasons pay for themselves.

  • The opportunity to eat tasty home cooked food without waste at prices not much more than eating at home
  • the opportunity to see food cooked in front of you and learn new recipes that can be taken home with you
  • the opportunity to take a few hours out for fun, enjoyment – great experiences. Very different to the experience of trudging up and down aisles!
  • The click and collect model means you shop from home and then pick up your shopping when you go to the location for other reasons. Not everybody will want to but if 20% of Tesco’s customers are drawn to an “out of home” eating concept then there is an opportunity to meaningfully compete. “Click and Collect” is much cheaper than delivering to your home. It is going to take time for Tesco to create an infrastructure to directly compete with Amazon. Actually, this strategy does not have to completely. It needs to create delivery outcomes that are good enough and use experiences in the new look store to innovate. Shopping for food could actually become fun!

A year ago, I would put money that many of todays supermarket chains would be gone within 5 to 10 years. From what I see today, I don’t think Tesco will be one of them.

Charles Bennett

Founder & CEO. Charles is an acknowledged leader in customer-driven performance change using both best practice and emerging next practice perspectives. He leads, mentors and coaches in both strategic and operational initiatives. A strong believer is the potential for "supercompany performance" he innovates using next practice thinking and methods to enhance the business. He researches heavily to retain his reputation as a thought leader, which he has applied across 40 countries, multiple sectors and companies such as Citibank, Nielsen, Microsoft, Vodafone, Tracker and governments in Middle East and Asia. Contributes to business journals and often invited as a speaker or chairman to events all over the world.