Store: Tesco Extra
Store of the Week this week was going to be Morrisons in Royal Leamington Spa. Given this morning’s events, continuing with that selection would seem something of a missed opportunity, so instead we’re taking a trip to the beautiful city of Coventry. As a former Warwick student, my previous visits to Coventry included a few trips to watch the Saints at Highfield Road, a couple of jaunts to the General Wolfe public house to admire the musical joy that is Half Man Half Biscuit and a single journey to the Tic Toc nightclub, the details of which remain rather sketchy.
This time, my roaming around the Midlands was more retail-focused, with trips to Morrisons in Leam, Asda in Coventry, Tesco Extra in West Bromwich, the Tesco Extra next to the Ricoh Arena and a thoroughly enjoyable meeting with the lovely folk at One Stop headquarters. Sandwiched between this retail fun was a corking Northern Premier League fixture between Halesowen Town and Belper Town, accompanied by a splendid burger and chips & gravy. Happy days.
Amidst this morning’s Tesco carnage was quite a few bits of bad news for investors. Obviously, the profit warning was an unwelcome item, as was the slashing of the dividend. For long-suffering shareholders, one of the few silver linings of holding Tesco shares was the 6% dividend yield, a consolation prize that has now been jettisoned as the retailer looks to start building a war chest, hopefully to be used for sharpening prices and getting more hours on to the shop floor. Tesco’s announcement today was a master class in kitchen-sinking: dragging every conceivable skeleton out of the cupboard so Dave Lewis can start his earlier than expected uphill climb with a clean slate.
There was also the news that the pause button was being pressed on the store revamp programme in the UK. Hopefully, this will be a temporary hiatus rather than a full-on cessation of the programme, as some decent progress is being made. A lot of this progress is on display in Tesco Extra Coventry Arena. Huge improvements in general merchandise and the F+F clothing department are clear to see, and I was also taken with a strong back to school effort and the use of some high traffic areas to showcase £1 pricing.
Less convincing, perhaps, is the instore merchandising for the Blinkbox digital download operation. Looks pretty, but I’m not sure it adds much to the shopper experience. Health & beauty in refurbished stores is a real highlight, with much more of a department store feel and a strong emphasis on service. F+F’s progress has been very good indeed over the last year or two. I clearly know next to nothing about fashion, but I sense that the range has improved and the merchandising of it has undoubtedly come on in leaps and bounds in terms of the store-fit. There was a nice nod towards multichannel with an online ordering point to access the full range, although I must point out at this juncture that being a scruffy middle-aged man holding a camera in the lingerie section is a slightly worrying situation to find yourself in.
Grocery in Coventry is in fine shape. The excellent bakery (including fresh pancakes and a giant popcorn machine) sat alongside a strong produce section, with plenty of examples of decent cross-merchandising. Service counters were also excellent: well merchandised with good availability and staffed by very friendly and knowledgeable folk. The rest of grocery was solid in terms of range and merchandising, with categories such as home baking highlighted through the by now familiar wooden goalposts. Booze was done very well, a highlight being a Watford-style cocktail bay with spirits, mixers, fruit and glasses etc. Perhaps the only criticism would be what seems to be Tesco’s attempt to enter the Guinness Book of Records for ‘World’s Highest Concentration of Beef Jerky Clip Strips’.
Despite the general levels of excellence in this particular store, the place was incredibly quiet, confirming that the problems facing Tesco run deeper than a lick of paint. There is no shortage of commentary suggesting what should be on Dave Lewis’s to-do list, ranging from the ludicrous (sell off international and get rid of Clubcard) to the more sensible (sharpen pricing and rethink store refurbishments).
There can be little doubt that the troubles besetting Tesco are substantial. Structural shifts in shopper behaviour, most notably those seeing shoppers flock to online, convenience and discount, create some mixed messages for Tesco. It is a clear beneficiary of online and convenience shopping, with its strong positioning in these two channels both at home and overseas. At the same time, it is a clear victim of the rapid growth of discounters in markets as diverse as the UK and Ireland (Aldi, Lidl & high street discounters), Poland (Biedronka) and Turkey (BIM).
An important caveat about ‘winning’ in e-commerce is important here. Tesco, with 50% of the online grocery market in the UK, is locked into a vicious turf war for internet food spending, trying to fight off Asda, Sainsbury’s, Morrisons, Waitrose and Ocado. The quest to attract new online punters and retain existing shoppers is a noble cause on the face of it. However, initiatives like the introduction of cheaper delivery and free Click & Collect (together with liberal couponing) are having two unfortunate side effects: Actively migrating shoppers to an inherently less profitable mode of shopping and aggressively providing disincentives for shoppers to visit larger Tesco stores.
Regarding the rest of the UK business, a few priorities are immediately apparent to me:
Accept that the ROCE KPI might have to suffer: No matter how you look at it, most of the components of Return on Capital Employed are under pressure. Sales are inevitably going to be sluggish in the face of weak demand and unparalleled competitive pressure. In terms of costs, Tesco would actually be well advised to proactively increase labour costs (see below). With the likelihood of price cuts, operating profits will almost certainly decline. Stock turns, particularly in non-food, will remain troubled and Tesco’s asset base (barring any further international disposals or some monumental sale & leasebacks in the UK) is set to remain static.
Resume a modified Extra refresh programme: The reinvention of the Extra concept was essential, and the progress made so far has been superficially impressive. However, we suspect that initial surges in sales quickly fall back to levels that make the return on investment of a full Extra refresh highly dubious. Improvements to non-food, fresh, bakery and instore dining are palpable and make the stores a generally more attractive proposition, but these refreshes need to be cheaper and backed up by higher service levels. Which brings us to…
Invest in people and hours: With morale low and execution patchy, all the store refreshes in the world are not going to do the trick. A recent visit to the refurbished Slough Extra showed that, despite all of the new coffee shops, counters and merchandising kit, basic housekeeping was still disappointing and execution was mediocre. Phil Clarke initially put some cash back into hours, but this has really slipped since. A huge priority for Lewis.
Provide Real Value: Real Value, a concept frequently touted by Andy Clarke at Asda, states that value is not just about price – it also encompasses quality and service. Prices need to be sharper at Tesco, doubtless, but it is arguably the latter two that need more attention. Providing an illusion of quality and service is no longer good enough. Furthermore, with price-matching now rife across the supermarket sector – is price that relevant anymore? And is trying to beat the discounters on price either possible or desirable?
Sell less stuff: Many categories in Tesco carry a preposterous number of SKUs – meaning that the stores have become confusing to shop and presumably more complex and costly to operate. Do shoppers need 450 air fresheners? Are ranging choices made by cash-hungry buyers rather than traders who care about the shopper?
Makes shoppers jump through fewer hoops: If I want to achieve value at Aldi, I turn up and shop there. If I want to achieve value at Tesco, I have to: turn up and shop there, use my Clubcard, remember my Clubcard vouchers, use Price Promise, remember my Price Promise Vouchers, use Fuel Save, drive a car, buy petrol, and buy items on promotion (multibuy, BOGO, BOGT etc.) I’m not just spending my money at Tesco, I’m also spending my time and my goodwill, and Tesco is short-changing me on all fronts. Prices do not necessarily need to be low; they need to be appropriate and transparent.
Treat the UK like London: Tesco’s local management team in London has succeeded in honing both strategy and execution in a highly targeted way, leading to huge improvements in its offer and sales uplifts. Sadly, 90% of the population live elsewhere: is there scope to replicate the benefits of regional autonomy in other parts of the country?
A quick plug again: to explore these issues and help identify Tesco’s likely future direction – and the implications for suppliers – we are running a day-long workshop on Tesco in London on the 15th October. This event will give you a great roadmap for Tesco’s future as Dave Lewis takes the helm, pinpointing likely threats and opportunities as the new regime attempts to turn around the fortunes of the giant retailer both at home and overseas. Details are here: http://www.kantarretailiq.com/Events/EventDetails.aspx?id=607031
Store design: 7
Customer service: 8
Private label: 7
Total score: 37