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.

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