It is the sixth biggest corporate loss in British history and the largest ever in British retailing. Tesco’s £6.4bn loss last week was significant and has many companies looking to learn the lessons.
City opinion is divided on whether Tesco’s new management can reverse a halved share price and one analyst believes Tesco will have to transfer lots of pain and risk to its workers in order to be able to survive.
So what are the lessons for other companies who look at Tesco and want to avoid their pitfalls?
1. Don’t lose sight of your customers
Tesco’s success was based, in part, on understanding the habits of their customers. However they have not kept pace with the scale and breadth of changes within their industry sector.
Shopping habits have changed. Online sales continue to increase, there is lower brand loyalty and Tesco’s have found themselves in “no-man’s land” where more affluent customers are moving to Waitrose and Marks & Spencer, and those on a budget (increasingly middle income families) are moving towards discounters.
So not only have Tesco failed to understand their customer they have also failed to understand those who are not their customers.
2. Behavioural changes
Tesco has been banking land to prevent competitor expansion. However there has been a surge in convenience store formats in town and city centres. These are now the preferred format for many shoppers and as such, alongside online, the large retail space is not required. This has meant that the investment decisions of Tesco have been poor and out of kilter with the market.
Reacting too slowly and being rigid in online retailing options have also impacted on Tesco’s success. With income being derived from non-grocery sales, there has been a lack of agility in serving the online customer.
3. Shareholders are not the most important
For over 10 years, Tesco has been akin to a money printing factory. It’s already been shown how they lost sight of the customer, but what they did was to create an organisation which served shareholders and drove up directors’ pay.
Add into this a change in the leadership (often a new leader will articulate every single loss so that the platform to grown from is rebased to a lower level) then the issues have been heightened.
4. Lead with a clear values proposition
The messaging of Tesco became confused. Competitors seized on important messaging such as community engagement. Tesco tried to be all things to everyone and failed to listen to their employees who had been telling them what the issues were. The result was that all parts of the market could find homes elsewhere.
5. Implement one strategy
Tesco found itself trying to implement two strategies, but neither successfully. On the one hand they were attempting to achieve cost leadership, whilst simultaneously attempting to differentiate themselves amongst numerous customers.
As such they ended up doing neither successfully and became marooned.
6. Stick to what you know
Tesco began venturing into more and more markets. Each venture requiring a significant investment and back office set up.
Also some of their ventures pitted them against experts. For example Tesco Broadband and movie streaming service Blinkbox required market knowledge in a highly competitive and evolving market, which Tesco didn’t have. To launch these during a recession was also fool hardy. The result was expensive services, ill-conceived and loss making.
Sticking to core markets would have improved returns.
7. Don’t fall for your own PR
Complacency is at the root of many corporate failures. With Tesco being the market leader, they are there to be shot at. By failing to do a lot of the above, Tesco became complacent.
Competition is a big issue in any business and quick analysis of the Local Data Company research shows that 39% of Tesco supermarkets (not convenience stores) have six competitors within a 20 minute drive time.
Tesco failed to move with the times and assumed customers would continue to spend blindly. They didn’t.
The lessons from Tesco show that even the most established business needs to be open to change and transformation in order to maintain its position. Tesco remains strong and dominant, but that dominance is under threat. Unless Tesco do something (which they have indeed begun) it could be a slippery slope. Of course whether it is enough and whether the company will experience the dominance it has enjoyed will be seen.