Tesco: just what went so wrong?

Fresh and not so easy.

The big number in today’s results is profit, which is down by a whopping 51.5 per cent on last year. In large part this is down to a series of one-off items, including a write down of the value of the UK property portfolio amounting to some £804m. This in itself is notable as it arises from a decision not to build new stores on more than 100 sites that the company owns and once intended to develop. In essence, this signals the beginning of the end of the grocery space race. Tesco recognises that the opportunity to profitably open new stores is more limited due to both saturation and the continued growth of online. Indeed, its own online sales now stand at over £3bn, up 13 per cent on last year; a clear indication that this, and not new space, is one of the prime drivers of growth going forward.

Profit has also been impacted, albeit to a lesser extent, by a reduction in trading profit. Overall this was down by 13 per cent on last year. This reflects both the refresh activity in new UK stores and also the sharpening of prices. Arguably, both are necessary moves to restore growth to the UK business. Indeed, it can be argued that deterioration in profit to improve stores should rightly be seen as a critical investment that will, over the longer term, pay dividends.

Improvements on the home front

On the home front, while Tesco’s results remain muted there is a sense that the business is now heading in the right direction as the “Build a Better Tesco” strategic plan starts to deliver. While for the full year, LFL sales remain in negative territory there is a clear momentum over the reporting period with a particularly strong performance in quarter 4 (LFLs up 0.5 per cent), which encompasses the all-important festive trading period. Given the scale and maturity of Tesco’s business and the highly competitive state of the market this is a solid underlying performance that indicates that some of the initiatives are now having an impact on consumer behaviour.

Over the next few years, the clear priority in the UK is investment in the customer experience across all channels, but especially in-store. This is something Tesco has been guilty of neglecting in the past and it has damaged customer loyalty, retention and, ultimately, sales. Going forward, given that Tesco’s growth will be much less reliant on opening new space, getting more out of existing stores becomes doubly important. The refreshes, which now number 300 stores and around a quarter of Tesco’s UK selling space, are not necessarily ground-breaking in their thinking but they are a significant step up and provide a more pleasant and engaging shopping experience for the consumer.

The various acquisitions and partnerships Tesco has put in place, including Giraffe, Harris + Hoole and Euphorium bakery, provide a clear indication that it intends to significantly enhance the future in-store experience by introducing strongly branded added-value propositions. Directionally, this thinking is correct and it demonstrates that Tesco clearly understands the importance of providing differentiation over and above competitors, giving its stores more of a destination status, and the increasing importance of leisure within traditional retail.

The incorporation of new initiatives in-store may also help Tesco utilise space more effectively within its larger formats. The latest results clearly indicate the underperformance of non-food, which declined slightly overall and was down by 5% on a LFL basis. Given that clothing has performed strongly, there will be some non-food categories where Tesco has seen a significant deterioration in sales. The market outlook for non-food looks fairly anaemic for the next couple of years, meaning that Tesco would do well to look to reduce the footprint given to some of these categories.

Looking ahead, with the store refresh programme continuing and the re-launch of the flagship Finest brand firmly on the agenda, continued progress from Tesco over the short and medium term should be expected.

The American misadventure

The decision to abandon the Fresh & Easy venture cannot have been an easy one. That it has been made is a credit to CEO Phil Clarke and his team as it underlines their willingness push through the tough measures needed to put the group back on track. While over the longer term Fresh & Easy could have become a profitable venture, it is clear that there were no shortcuts to success and creating a sustainable business was would have required a great deal of time and capital. Arguably, at this point both of these resources are better directed at Tesco’s core business where returns are much more certain and can be delivered over a shorter period of time.

Retail history will likely record Tesco’s American foray as something of an unfortunate misadventure. On paper the Fresh & Easy concept sounded reasonable enough. There was, and to some extent still is, a gap in the local neighbourhood grocery market in the US. However, despite its extensive pre-research, from the get-go Tesco’s execution was off pitch: self service tills did not go down well with a consumer used to high service levels; a lack of vouchering and couponing alienated many price sensitive shoppers; and, an unfamiliarity with ready, convenience meals meant some part of the range were unsuited to local tastes. Soluble as these issues were, they were compounded by a downturn in the market which saw many American consumers turn to tried and trusted grocers, including hypermarkets like Walmart, where they knew they could save money on low price food. These same players also looked to exploit the neighbourhood market with a range of smaller, local formats; exerting pressure on Tesco and undermining its long term vision.

The bottom line is that Tesco probably bit off more than it could chew in the US. As in most mature western economies, to be successful mainstream grocery needs scale and volume. To attain scale and volume requires extensive investment. Given that the Fresh & Easy proposition was suboptimal, Tesco could not be certain that such investment would pay dividends. As such, the inevitably painful decision to cut and run was correct.

Photograph: Getty Images

 Managing Director of Conlumino

Photo: Getty
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Jeremy Corbyn sat down on train he claimed was full, Virgin says

The train company has pushed back against a viral video starring the Labour leader, in which he sat on the floor.

Seats were available on the train where Jeremy Corbyn was filmed sitting on the floor, Virgin Trains has said.

On 16 August, a freelance film-maker who has been following the Labour leader released a video which showed Corbyn talking about the problems of overcrowded trains.

“This is a problem that many passengers face every day, commuters and long-distance travellers. Today this train is completely ram-packed,” he said. Is it fair that I should upgrade my ticket whilst others who might not be able to afford such a luxury should have to sit on the floor? It’s their money I would be spending after all.”

Commentators quickly pointed out that he would not have been able to claim for a first-class upgrade, as expenses rules only permit standard-class travel. Also, campaign expenses cannot be claimed back from the taxpayer. 

Today, Virgin Trains released footage of the Labour leader walking past empty unreserved seats to film his video, which took half an hour, before walking back to take another unreserved seat.

"CCTV footage taken from the train on August 11 shows Mr Corbyn and his team walked past empty, unreserved seats in coach H before walking through the rest of the train to the far end, where his team sat on the floor and started filming.

"The same footage then shows Mr Corbyn returning to coach H and taking a seat there, with the help of the onboard crew, around 45 minutes into the journey and over two hours before the train reached Newcastle.

"Mr Corbyn’s team carried out their filming around 30 minutes into the journey. There were also additional empty seats on the train (the 11am departure from King’s Cross) which appear from CCTV to have been reserved but not taken, so they were also available for other passengers to sit on."

A Virgin spokesperson commented: “We have to take issue with the idea that Mr Corbyn wasn’t able to be seated on the service, as this clearly wasn’t the case.

A spokesman for the Corbyn campaign told BuzzFeed News that the footage was a “lie”, and that Corbyn had given up his seat for a woman to take his place, and that “other people” had also sat in the aisles.

Owen Smith, Corbyn's leadership rival, tried a joke:

But a passenger on the train supported Corbyn's version of events.

Both Virgin Trains and the Corbyn campaign have been contacted for further comment.

UPDATE 17:07

A spokesperson for the Jeremy for Labour campaign commented:

“When Jeremy boarded the train he was unable to find unreserved seats, so he sat with other passengers in the corridor who were also unable to find a seat. 

"Later in the journey, seats became available after a family were upgraded to first class, and Jeremy and the team he was travelling with were offered the seats by a very helpful member of staff.

"Passengers across Britain will have been in similar situations on overcrowded, expensive trains. That is why our policy to bring the trains back into public ownership, as part of a plan to rebuild and transform Britain, is so popular with passengers and rail workers.”

A few testimonies from passengers who had their photos taken with Corbyn on the floor can be found here