Tesco – what next?

The question ‘what next?’ could be asked of Tesco trajectory into crisis’s since the last year has brought nothing but bad news, profits free-falling, share erosion, accounting black holes, supplier relations strained, c-suite musical chairs and redundancies across the whole business.

The rough terrain has been traversed in a competent and professional way, and if more rough terrain were to present itself the retailer is well practised in its negotiation, better than any other retailer at this point.

But it is ‘what next?’ in the path to regaining some of what Tesco has lost that interests us.

The balance sheet isn’t positioned to support much more in the way of price cuts and store investment, so the sale of the South Korean business and Dunnhumby are eagerly awaited to provide the cash the business needs. A share issue may have been a possibility in January off the back of a stronger trading quarter but as it stands with another quarter of negative like for like sales, this has ruled itself out.

Assuming that the cash comes in, and with Google interested in Dunhumby, there is no reason to assume otherwise, where should Tesco invest in order to restore profitability and growth?

The big hole in Tesco’s bucket is trust, the trust of its suppliers and the trust of its customers. Let’s leave the trust of its shareholders as one that will be solved as a result of the other two.

Customers have felt ripped off, price cuts to compete with the discounters have only amplified the extent to which Tesco has profited from its customers and where the cuts might help in the short term, they do not restore loyalty or trust in the long term. So while more price cuts might be necessary, they are not going to achieve any increase in sales.

To plug the hole in Tesco’s bucket, it must invest in marketing. A brand re-launch and advertising are planned for later in the year and are desperately needed. If you look at Aldi and Lidl campaigns, they are effective in many ways. Yes price is a factor, but the core message is quality. Both retailers have used blind taste tests or comparison taste tests to reinforce quality at better prices and have done so in innovative and imaginative ways, innovation and imagination that Tesco has sadly lacked thus far.

We will see in time if Tesco has a campaign that can capture the minds of its customers and attract them back to its stores which are in better shape than they have been as they undergo refits and refurbishments. The staff to customer ratio is improved and service levels are better than they have been in a long time. However, the estate is pulled down by the largest stores where excess space is a weight that Tesco can’t afford to continue to carry as customer’s agility sees them being more efficient with their time and shunning Tesco Extras.

Finding a use, or a concession for the excess space seems to be proving harder than Tesco had hoped. Coffee shops and restaurants aren’t delivering the goods. As much as lifestyle and experience are buzz words tossed about in retail, the customer doesn’t want the experiences that Tesco are offering. Tesco made a big deal about asking customers what they wanted early in Dave Lewis’ tenure as CEO but the problem is the customer rarely knows what they want, and doesn’t always realise they want it until they see it.

There is still clearly work to be done on delivering against the customer’s wish list, but it is the ability to look beyond that, see what the customer will want in 2 years time, or 5 years time that has eluded Tesco so far. The customer is continuing to evolve, competition is continuing to innovate and the longer Tesco take to deliver change, the bigger the gap becomes.

Will they deliver a phoenix like performance, our guess is yes to a degree they will, it just might be one that slowly crawls out of the flames rather then flies out.

Decision time for Sainsburys

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Sainsburys lacks dynamism

The last year has not followed the path of the previous 10 for Sainsburys. With the departure of Justin King came the anticipated departure of a wave of customers, culminating in the 2.1 percent like for like sales decline of today’s Quarter 1 trading update. Although expected, it won’t be sitting well for Mike Coupe, or his city backers who will be looking for a plan to return the business to growth.

We’ve had decisive action from Morrisons with the arrival of Dave Potts the new CEO and a new wave of price cuts earlier this week. We’ve had Tesco cuts jobs, prices and waste, designed to save costs, protect margin where it can and appeal to the discounter audience where price is the key criteria on which purchase decisions are made.

But as yet, we have not seen anything quite so decisive from Sainsburys.

We see three areas of opportunity for Sainsburys:

  1. The Sainsburys brand has an excellent reputation for values, fair trade and is already associated with causes close to the nation’s heart but, simply put, it isn’t marketed well and is not pulling the customer into stores. Sainsburys desperately needs footfall and a memorable marketing campaign can do that. What was the last Sainsburys advert you can recall? If it was the Christmas WW1 advert then that pretty much sums up the problem. Lidl are the biggest media spenders in UK grocery at the moment and it shows in its market share. Sainsburys must invest in its marketing, and the power of its brand, to keep it top of mind.
  2. Sainsburys Tu Clothing launched online recently to select customers with a full launch expected imminently. Online the range looks strong, fashionable, very well priced and presented in inspiring outfits. In store however it looks like an afterthought: the merchandising is lazy and often obstructed by sale rails.
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    Inconsistent merchandising of Tu clothing

    Some of the design credentials from the clothing should be translated into in-store presentation to generate interest outside of the frequent 25% off events.

  3. Finally, the need to compete on price is ever more pressing. Our recent Sainsburys walk through with execs and PR did little to address the issue. Sainsburys has more to lose when Tesco resurges as it faces Tesco with more of its stores than any other grocer. In the meantime Aldi and Lidl have considerable headroom in terms of postcode penetration and basket size. A good response to its simple pricing initiative is desperately needed.

sainsburys great offers

We will eagerly await decisions and strategic choices that do more than just follow the crowd because following will not be enough when Tesco and Morrisons are fighting so hard. Add Asda on a mission too and the landscape is only going to get more threatening for Sainsburys.

With supermarket sales predicted to fall over the next 5 years according to IGD, Sainsburys must make some hard hitting decisions and work out how to stand apart from the pack or it will find itself scrapping over leftovers.

Matalan Opens on Oxford Street

matalan oxford street

We have written about Matalan before, how we admire its strategic direction against strong competition from other value fashion retailers. What was missing was a presence in City centres favouring out of town retail parks in the past.

Well that missing link is being addressed with store openings in Liverpool and Cardiff city centres and on Thursday, the opening of its flagship store on Oxford Street, London. In close proximity is Primark, H&M, Zara, all well established on High Streets so opening on the capital’s busiest street is a bold move.

Range, price, fashionability, stock density are all there in spades at Matalan but it is not the first retailer you think of for any of them. Because they lack that city centre presence, the customer does not have Matalan top of mind, and historically low key advertising campaigns do little to change that. However, new collaborations like the exclusive beachwear range from Julien Macdonald, and the addition of brands like Falmer, plus further in city openings planned can start to make an impression.

matalan macdonald

A visit to the Oxford Street store on opening day reinforced our belief that the strategy is spot on. The store was laden with all the latest store fixtures and visual merchandising highlights that pleasantly interrupted the shopper’s journey screaming high fashion and excellent prices. It is not a large store by Oxford Street flagship standards but manages to remain airy despite holding an impressive stock density.

matalan denim

However conspicuous by its absence was a home department or any menswear. Leaving homewear out of the mix can be forgiven with space at such a high premium but neglecting menswear is a massive omission given the current brand message of “Made for modern families”. Dad’s, you need to shop elsewhere.

Matalan know they have made a mistake in this. Space will be found from somewhere, according to the management team seen walking the store with furrowed brows. We might suggest the first floor which was over-ranged with Disney merchandised clothing which although providing a premium offer, was over-spaced and confused what is an already strong kidswear range.

Teething problems aside, a city centre Matalan is an exciting addition to the competitive set and gives Matalan an edge over supermarket clothing ranges which cannot access that shopping occasion. Calling the Oxford Street store a flagship is an overstatement but as a model for further City centre rollouts, it has the right mix of visual interest, stock density and high fashion to cater for families on budgets.