Tesco: Five Reasons to Worry About the UK’s Biggest Retailer

 

Tesco Plc unveiled its preliminary results for the 2012-2013 financial year on 17 April, following one of the most difficult years of its existence. Sales per store have seen a decline in the UK, resulting in a sharp decrease in trading profit from its domestic operations, which will be aggravated by the massive bill that the company faces thanks to Tesco’s unsuccessful foray into the US market.

Senior Retail Analyst Antonia Branston looks at some of the areas where the company’s recent conduct has caused concern and where the opportunities are for Tesco to improve its performance in its vital home market.

Podcast: Raphael Moreau, Retailing Analyst, discusses Tesco’s exit of the US Market

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The horsemeat scandal: ‘Tescoburger’ becomes part of the UK vocabulary

When the Food Safety Authority of Ireland announced that products supplied by two meat processing plants in the UK and Ireland had been found to contain horsemeat, back in January 2013, Tesco was one of several retailers to withdraw products from its shelves. Lidl, Aldi, Iceland and Dunnes were all also implicated, and later the scandal spread to other retail chains and food brands. So, why did ‘Tescoburger’ become universal shorthand for horsemeat-tainted food?

Tesco’s response when the scandal broke should have been textbook: full pages of mainstream newspapers carrying effusive and high-profile apologies. Tesco certainly led the pack in terms of its reaction; the problem was that the pack didn’t follow. Instead, Tesco’s competitors, which were also implicated in the horsemeat scandal, were happy to sit back and let Tesco shoulder the blame.

Tesco then failed to move to a more proactive, challenging tack. Having announced significant changes to its supply chain, including massive improvements to traceability, the company still failed to take a lead over other retailers in making more efforts to advocate greater transparency.

The Harris & Hoole investment

Harris & Hoole is a small chain of coffee shops run by a trio of siblings from Australia, with chalkboard menus, artisanal-style sandwiches and all the trappings of a quirky independent start-up. When news of Tesco’s 49% stake in the chain emerged, the company tried to remain low key about its involvement, leaving consumers feeling that they had been tricked by a retail Goliath masquerading as an independent David. This issue still hasn’t been fully addressed, even though Tesco has started to install Harris & Hoole branches in stores, and it is also a criticism that could be levied at the upmarket Euphorium bakery chain, now also quietly backed by the company.

Tesco has missed the opportunity, with both Harris & Hoole and Euphorium, to paint its involvement in a heroic light, as a response to the plight of small businesses unable to access financing from high street banks. This is surely something that would play well with consumers across the entire economic spectrum, given the current economic climate.

Tesco Price Promise: Better late than never?

When Sainsbury’s stole a march on Tesco (and indeed on other UK grocers too) with its Brand Match campaign, the company was slow to react. It has taken Tesco months to launch a parallel offer, but its extension of this to ‘comparable’ private label products has been a contentious move, and risks pushing Tesco into another price war. At a time when consumers are worrying about the provenance of their food, and have been forced to realise that demand for lower prices played its part in the horsemeat scandal, Tesco needs to be careful about how it pushes a ‘lowest price’ message.

Giraffe acquisition will need more support to succeed

As more and more of its business moves online, Tesco has admitted that it is rethinking what to do with its largest stores. The purchase of mid-market family restaurant chain Giraffe in March is part of the plan to transform such stores into “retail destinations”. Group Commercial Director Kevin Grace wrote on the Tesco blog at the time, “Lots of our larger stores in Asia have restaurants regularly used by customers to meet their friends and spend time together; people like being able to take a break and relax after their shopping trip. Similarly, if you’ve ever visited Westfield, you’ll know that people go there to meet, eat and drink as much as they do to shop.”

However, a modern grocery retail experience in an emerging market or a high-end shopping centre in the UK are both more aspirational locations than an out-of-town Tesco big box store. Giraffe is an interesting buy, but without complementary attractions, such as tapping into the burgeoning soft play market, it is unlikely to be enough of a draw on its own.

Tesco remains an unwelcome addition to many communities

Store size is not the company’s only problem when it comes to its property portfolio. The company continues to do battle with anti-Tesco campaigners in towns such as Sherborne and Machynlleth, but it is not being helped by this negative publicity. All its efforts to create a closer connection with consumers will fail if it continues to be the brand that people love to hate.

The ongoing conversion of pubs into convenience stores is a similarly complex issue: Tesco may well argue that it is preserving jobs, preserving local facilities and encouraging price competition, but the reality is that this strategy has almost become a metaphor for the decline of the traditional British community. Tesco should mount a high-profile PR offensive by rescuing some pubs or by replacing them with its newly acquired brands whose image benefits from more positive connotations.

Tesco needs to improve its image

The opposition that Tesco encounters when it tries to expand its store network is a symptom of the company’s basic malaise: that it is failing to convince consumers that it is a positive force that should be welcomed into the community. In the long term, this makes the company less resilient, less able to withstand blows such as the horsemeat scandal, and less likely to succeed in making its stores into attractive leisure destinations. Tesco needs to look hard at how it is perceived by the consumer, and how it can improve this perception, and it may need to proceed more cautiously with its store expansion programme in order to do so.