Tesco Time

Tesco

Tesco are poised to announce a multibillion pound annual loss this week so say many papers and media outlets, heres one.  Lets say £5bn, that’s more than £10 million per day.  Of course, one can’t really apply such basic arithmetic to the performance but it does show in stark light the depth of the problems.

So how did this happen?

I am no expert but from reading the press seems to me:

  1. Loss of differentiation of any material value
  2. Price wars (see point 1)
  3. Poorly executed  internationalisation strategy
  4. Market unawareness (massive investment in real estate when the market is moving on line and/or to smaller local stores)
  5. Slow decision making

It’s a fascinating case study of a rise and fall of a mamouth (fall might be too harsh but it’s a significant tumble).  Between 1997 and 2007 (ish) the business rocketed and primarily because it was the first to nail using customer data to underpin advertising and product strategy, they key cornerstones of the business.

Specifically this allowed Tesco, more than anyone else to put the right products in the right place at the right time and at the right price.  They did this on the most granular level to-date, that is to say as much as possible on a customer by customer level via the Club Card system.  Porter would be proud.

So what do I think went wrong?

  1. They lost the Club Card differentiation (sophisticated customer targeting), others caught up.
  2. They did not produce a material diffrentiator which forced them to reduce price to gain market share.  This position is almost always unsustainable in a competitive market because someone will come along with a more cost effective model (see Alidi)
  3. It’s reasonable to say the internationalisation strategy was a disaster.  It’s easy to think tis the way to grow, in actual fat it’s very difficult   In short, they underestimated the barriers to entry.
  4. They made poor capital allocation decisions regards buying more real estate, just a basic unawareness of what the market was / is doing.  Not only does this lead to less cash being available it creates distractions.  I think this is a trap many businesses have fallen into when times are good.
  5. Regards all of the above they didn’t react quickly enough.

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Its easy for me to write about this but I know for the management teams this is an incredibly difficult time with very tough decisions to make.   Whilst the principals remain the same for all businesses I think they become harder to make the bigger the business.  They shouldn’t, but they do.  I for one hope Tesco’s turns things around under the stewardship of Dave Lewis.  I am sure they will.

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