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

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Theresa May’s Brexit speech is Angela Merkel’s victory – here’s why

The Germans coined the word “merkeln to describe their Chancellor’s approach to negotiations. 

It is a measure of Britain’s weak position that Theresa May accepts Angela Merkel’s ultimatum even before the Brexit negotiations have formally started

The British Prime Minister blinked first when she presented her plan for Brexit Tuesday morning. After months of repeating the tautological mantra that “Brexit means Brexit”, she finally specified her position when she essentially proposed that Britain should leave the internal market for goods, services and people, which had been so championed by Margaret Thatcher in the 1980s. 

By accepting that the “UK will be outside” and that there can be “no half-way house”, Theresa May has essentially caved in before the negotiations have begun.

At her meeting with May in July last year, the German Chancellor stated her ultimatum that there could be no “Rosinenpickerei” – the German equivalent of cherry picking. Merkel stated that Britain was not free to choose. That is still her position.

Back then, May was still battling for access to the internal market. It is a measure of how much her position has weakened that the Prime Minister has been forced to accept that Britain will have to leave the single market.

For those who have followed Merkel in her eleven years as German Kanzlerin there is sense of déjà vu about all this.  In negotiations over the Greek debt in 2011 and in 2015, as well as in her negotiations with German banks, in the wake of the global clash in 2008, Merkel played a waiting game; she let others reveal their hands first. The Germans even coined the word "merkeln", to describe the Chancellor’s favoured approach to negotiations.

Unlike other politicians, Frau Merkel is known for her careful analysis, behind-the-scene diplomacy and her determination to pursue German interests. All these are evident in the Brexit negotiations even before they have started.

Much has been made of US President-Elect Donald Trump’s offer to do a trade deal with Britain “very quickly” (as well as bad-mouthing Merkel). In the greater scheme of things, such a deal – should it come – will amount to very little. The UK’s exports to the EU were valued at £223.3bn in 2015 – roughly five times as much as our exports to the United States. 

But more importantly, Britain’s main export is services. It constitutes 79 per cent of the economy, according to the Office of National Statistics. Without access to the single market for services, and without free movement of skilled workers, the financial sector will have a strong incentive to move to the European mainland.

This is Germany’s gain. There is a general consensus that many banks are ready to move if Britain quits the single market, and Frankfurt is an obvious destination.

In an election year, this is welcome news for Merkel. That the British Prime Minister voluntarily gives up the access to the internal market is a boon for the German Chancellor and solves several of her problems. 

May’s acceptance that Britain will not be in the single market shows that no country is able to secure a better deal outside the EU. This will deter other countries from following the UK’s example. 

Moreover, securing a deal that will make Frankfurt the financial centre in Europe will give Merkel a political boost, and will take focus away from other issues such as immigration.

Despite the rise of the far-right Alternative für Deutschland party, the largely proportional electoral system in Germany will all but guarantee that the current coalition government continues after the elections to the Bundestag in September.

Before the referendum in June last year, Brexiteers published a poster with the mildly xenophobic message "Halt ze German advance". By essentially caving in to Merkel’s demands before these have been expressly stated, Mrs May will strengthen Germany at Britain’s expense. 

Perhaps, the German word schadenfreude comes to mind?

Matthew Qvortrup is author of the book Angela Merkel: Europe’s Most Influential Leader published by Duckworth, and professor of applied political science at Coventry University.