Wednesday 11 April 2012

Tesco's strategic options, suppliers' strategic response

What is this about?
Tesco’s core issue is its profit warning in January, ultimately a driver of ROCE, in turn affecting the share price. With 2/3 of its business in UK, any setback causes the company to challenge one of the basic ‘rules’ in global retailing – ‘dominate the home market’. However, any company having more than 25% of a national retail market attracts negative attention from media, politicians and ultimately shopper-voters. Within the home market, supply chain efficiency made some large space redundant unless freed-space is filled via product diversification. Meanwhile, having grown share at the expense of less efficient competitors, Tesco is now being challenged by retailers that are as good as, or better, for a share of a zero-sum, flat-line market in terms of range, quality and service, as it strives to return to the Tesco 'rule of 25'.
Finally, the early retirement of a strong unchallenged leader left at least four people who felt they should fill his shoes…

Where is it headed?
Essentially, Tesco has four complementary options:
  • Sell more of its current products to current users (increase basket size)
  • Sell new products to existing users (Clubcard data, trade up via diversification)
  • Sell current products to new users (use Clubcard data to profile ideal Tesco users and attract more of this profile with current products)
  • Sell new products to new users (high risk, given two unknowns)
They need to re-apply this formula in the UK, delivering greater perceived value to shoppers, vs. competition, and then roll this strategy out globally.
They need to re-assess their competitive appeal in the eyes of shoppers, vs. the competition in terms of range, quality and service, vs. price. The leadership issue needs sorting in order that the entire company pulls in one direction, rather than each function attempting to ‘rescue’ Tesco. This was the challenge faced and successfully dealt with by McLaurin many years ago….
How does it affect you?
Essentially depends upon category, geographical spread and degree-of-partnership, but in the short term the above strategy will put pressure on all aspects of the supplier-retailer relationship, especially price and supply-chain efficiency, as Tesco re-appraises its supplier-base vs. alternatives available
What to do about it?
  • Re-assess your competitive appeal to Tesco as a company, and brand within key categories, and re-engineer to optimise, where necessary
  • Re-evaluate your match with trade partnership criteria (Potential, Partnership, Profit and Performance)
  • Invest (time, money, people) in what can demonstrably help Tesco implement its strategies, and meets your ROCE objectives 
Above all, insist on fair-play in all aspects of your Tesco trade partnership, a once-only opportunity…

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