Are Tesco’s issues a result of dominance, misjudgement or wider industry trends?

Yesterday’s Tesco results where £6.38bn of losses were announced when the market expected £5bn made for quite a day of headlines. Whilst this is the biggest retail corporate loss in UK history the top spot still remains with RBS and its £24bn loss in 2008. Much of Tesco’s loss was linked to the property portfolio’s value being slashed, its international division shrink, the costs of offloading loss-making parts and redundancy payments for 5,000 staff. Like for like sales were however down -3.6% and this week also saw wider industry numbers where retail sales (excluding petrol) rose a mere +0.2% which was a significant reduction on February’s numbers of +0.6%. If we are to believe that low inflation and wage rises will filter through to retail sales then all is not lost. This week also saw for the Bank of England MPC unanimously agree to hold interest rates at 0.5% – good news for the heavily indebted consumer (£168bn in January 2015) but bad news for our ageing population who had hoped to retire with good income from their savings.

With such a massive loss this week one would assume that Tesco’s CEO, Dave Lewis, has now completed his strategic review, pierced the boil and now the only way is up! Tesco is a massive business and significant employer and contributor to the UK economy. Being the biggest at anything always puts you centre stage in both good and bad times. It should not be forgotten that Tesco’s market size relative to the others in the pack is significantly greater as the chart below shows. It is 12% ahead of its nearest rival and this gives it scale and greater opportunity to bounce back but of course all the while those behind it will be fighting to close the gap.

Screen Shot 2015-04-24 at 08.33.44

This closing of the gap has in the last couple of years focussed on the impact between the discounters and the big four supermarkets. For some of the big four the discounters were not take seriously in the hope it would be a recessionary trend that would disappear as consumer spend comes back – how wrong they were especially when you are being attacked by private companies who have to reveal very little of what they are up to. Post the General Election we will be releasing an in-depth report that will loo at the changing balance of power between the big four and the discounters and see who has most discounter ‘tanks parked on its lawn’!

Competition is a big issue in any business and quick analysis of the LDC analytics dashboard shows that if one just looks at other supermarkets alone then 39% of Tesco supermarkets (not convenience stores, petrol stations etc) have not just one but six or more competitors within a 20 minute drive time – see below;

Screen Shot 2015-04-24 at 09.01.42

The other big question is how Tesco’s expansion both in terms of stores and store formats along with online sales has actually cannibalised their overall store sales. Overall online grocery sales still remain fairly low at c.5% whereas clothing at footwear is up at over 14%. Whilst a small percentage the spend is not! This is estimated to be just under £6bn versus the overall grocery market of £157bn. Whilst Tesco’s latest results had quite a few negatives the one major positive, numbers wise, was that their online sales grew by 20% during the year and as the first online UK grocer they have established a strong position. So does this strong online position result in less spend going through stores? I don’t have the answer but if it does then why in the last 12 months has Tesco increased the number of supermarkets by +2%, the number of Tesco Expresses by +4% and the number of One Stops by 14%? The relationship between online activity and store performance is something that we will be looking into at our first Thought Leadership event being held in partnership with the Consumer Data Research Council (CDRC) and the University of Oxford on 5th May.

So I leave you with some questions that you might want to consider or reply to;

1. Are the Tesco issues just indicative of the wider market but just much more prominent for Tesco in light of its size? Sainsbury’s announced today more job cuts.

2. To what extend have online sales, store growth and increasing store formats cannibalised existing sales as you can’t be in two places at once?

3. How much of food grocery is about servicing the consumer or is it about the race for space in terms of keeping the competition out or at bay?

4. Have the big four supermarkets been so focussed on each other that the discounters have managed to achieve much more than they could have possibly hoped for?

5. The discounters have been around for a long time but how long did it take for the supermarkets (less Asda) to focus on the value end of the market?

6. Is Tesco’s announcement of 43 stores not opening/being closed so small that more radical closures are needed. Some in the media argue that it needs to be 200+.

7. Even for a large company such as Tesco has international expansion, diversification into non food retail and a lack of consumer trend understanding resulted in its current decline? Self inflicted?

All of these changes and numbers are massively significant for companies, consumers and communities. Just ask those towns that were expecting a Tesco to open and what will now become of what lies as an ugly, empty and detracting development site.

More insight will follow post the General Election when we will look at how the supermarket and discounter market has changed and where and with impact on whom in the last five years.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s