In its battle against lacklustre domestic sales trends, UK retail giant Tesco has launched an investment programme that, it hopes, will return it to its position as kingpin of the UK retail scene.
Tesco is far and away the UK’s largest supermarket group, commanding around 30% of all supermarket sales. And, likewise, the UK is by far Tesco’s largest market, with approximately two-thirds of sales being generated in the country, which accounts for about 70% of the group’s trading profit.
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However, for a number of years it seems Tesco has rested on its laurels in the UK, instead focusing much of its expansion drive and capital expenditure overseas.
In 2011, Tesco’s capex totalled GBP3.7bn (US$5.8bn). A hefty GBP1.7bn of this was spent in the UK, where the company focused on lowering prices and expanding its store count. While Tesco’s strong price position means that it has largely been able to hold its ground and retain its core consumer base, the company has proven incapable of growing its same-store sales in the market.
Meanwhile, the slightly-higher figure of GBP1.8bn was invested in growing Tesco’s international businesses in 2011. This is clearly a reflection of the fact that Tesco has rightly identified international expansion – particularly in emerging markets – as presenting a significant opportunity for long term growth.
Overseas, Tesco is laying down a footprint that will drive profitability for decades to come. However, the scale and focus of investment in the UK fails to acknowledge the fact that the group’s much-larger domestic business is the company’s cash cow and the short-term implications of this have come home to roost.
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By GlobalDataA lack of innovation in Tesco’s existing UK store base has meant that the group’s business has stagnated in the country. The result has been declining same-store sales and a slight dip in market share.
Last week, Kantar Worldpanel released data showing that the retailer’s market share was at its lowest level for seven years, dropping to 29.7%. At its peak, in the autumn of 2007, Tesco accounted for 31.8% of spending in UK supermarkets.
Prior to this, in January, Tesco revealed its fourth consecutive quarter of declining underlying sales in its domestic market. Despite a robust international performance, the group said this would mean annual profits would come in at the “lower end” of market expectations.
With the poor top-line performance in the UK feeding through to the bottom-line, Tesco management has recognised the need to invest at home and revealed that the scale of its investment will weigh on annual profits in the next financial year.
Importantly, CEO Philip Clarke has also acknowledged that Tesco needs to focus this investment on more than just lowering prices and opening new stores. While these strategies will continue apace, Clarke said the grocer will also look at products and service to revitalise the company’s same-store domestic sales.
In an announcement yesterday (5 March), Tesco put its money where its mouth is when it unveiled “significant” investments in improving its customer service and the overall in-store experience it offers by refreshing “hundreds” of existing stores.
Tesco did not say how much it would spend on the programme, which it described as “the first stage” in its planned investment scheme. However, the retailer did reveal that the investment will create 20,000 new jobs over the next two years.
The company added that it would deliver “new levels of excellence” in customer service as it increases staff hours and training.
A spokesperson for the retailer told just-food that an “important part” of its strategy is to ensure that more customer service people are available to help consumers on the shop floor, particularly during busy times.
According to Conlumino analyst Simon Chinn, it is unlikely that the drive to improve the in-store experience will be misinterpreted by its core consumers as a move “upmarket”.
“Tesco’s price competitive position is well ingrained in its core customers, and improvements to the store environment will not be seen as it moving upmarket, but merely as an effective response to the needs and expectations of what its customers want when visiting its stores in terms of service and experience provided,” he told just-food.
By improving the shopping experience offered whilst still investing in price, Tesco hopes that it will broaden its appeal and re-engage with UK consumers, who are looking for an increasingly rounded shopping experience that delivers value through high quality at competitive price points.
Tesco has also indicated that it wants to extend its expertise in what it has identified as the key categories of fresh produce, fresh meat, bakery and counter services. These categories – along with some non-food segments – are areas that commentators believe Tesco has slipped behind in compared to the likes of rivals Sainsbury’s and Morrisons.
“We believe that against more formidable competitors Tesco has slipped back on some basic service metrics,” Shore Capital analyst Clive Black told just-food. “There is a battle in the fresh arena that Tesco is joining, and if it gets its act together in availability, ranging and service, this may cause ripples elsewhere in the trade.”
Given that the group has already indicated that these improvements will come at the expense of margins, Tesco’s move could well increase the level of competition in the fresh aisle – and, indeed, throughout the store. What remains to be seen is whether this will feed through to improved sales.
Nevertheless, Tesco’s increased focus on the customer experience – and the resource that the retail colossus is able to put behind its rhetoric – will heighten the difficulties facing the retailer’s rivals in an already tough trading environment that has seen supermarket margins squeezed.
