Tesco: new strategy shows signs of progress
09 March 2015Tesco CEO Dave Lewis has drawn significant media and industry attention in his first few months. Following the close of Tesco's financial year...
Tesco CEO Dave Lewis has drawn significant media and industry attention in his first few months. Following the close of Tesco's financial year IGD Senior Retail Analyst Nick Gladding looks at how Lewis is reshaping the group to prosper in a changed market place.
From plans on price and range to store closures, international markets and leadership announcements, here are four things defining the early stages of Dave Lewis’ time at Tesco:
1. Regaining competitiveness in the core UK business
Restoring performance in the UK is Tesco's number one priority and while it is still early days, Tesco is showing signs of turning a corner, with latest market share figures showing a return to sales growth for the first time since January 2014 of +0.3%1. While this rate of growth was still behind the market, it reflects Tesco's progress in appealing to shoppers over recent months. In particular, performance has been lifted by a focus on higher levels of staffing and better availability.
Tesco is keen to build on this, restoring its reputation for price integrity by working with major suppliers to refine the product range and drive volumes with lower, more stable prices. In an update to investors in January, CEO Dave Lewis highlighted how the retailer had seen good results from applying this approach in the paper products category. Suppliers of the new ranges will welcome the efficiency that comes from putting all-important predictable volume through their production lines after removing the peaks and troughs of demand that high-low pricing creates.
Tesco is now rolling out these principles to all categories, supporting its new price cuts campaign on popular brands in a bid to tempt back shoppers who have migrated to discounters. The retailer has indicated that January's 25% cut in the prices of 300 brands is just the start of its ambitions.
2. New management structure taking shape
Lewis will also be committed to building the right team around him to deliver change across Tesco. In June, Matt Davies, Halfords Group Chief Executive will join Tesco in the new role of UK and Ireland CEO. Davies has a reputation for focusing on customer service and building staff morale. A non-executive director of Debenhams, he will also bring valuable non-food retailing experience to his new role. His people skills will be much-needed as Tesco takes action to reduce costs across head office functions by 30%.
Another significant move has been the promotion of Tony Reed, the One Stop CEO, to head up a new small formats division that brings together Express, Metro and One Stop. Reed is widely credited with driving sales and profits at One Stop while also bringing innovation to the business. He will now use this thinking to steer direction and consolidate buying across Tesco’s entire small store estate.
Newly-appointed chairman John Allan, who took up the position on March 1st, will also be a key player in guiding the group. Having held roles in many FMCG businesses, including latterly as chairman of Dixons Carphone, he will play a crucial role in engaging investors as Tesco implements change.
3. Reshaping the store portfolio
At the start of the year Tesco announced it would not be going ahead with plans to develop 49 sites for large format stores in the UK and that it would close 43 existing stores. Half of these store closures affected the retailer’s Express format, with the changing retail landscape calling the commercial case for these stores in to question. The cutbacks follow Tesco's tight control over capital expenditure: this year it plans to invest £1bn, down from £4.7bn in 2008/09.
That said, Tesco will continue to open stores where opportunities exist and is displaying some imaginative thinking in all sizes of stores. In Lincoln for instance, Tesco's new Extra store sports high-tech checkouts that automatically scan products, freeing up checkout staff to help shoppers. At the other end of the space spectrum, Tesco's Philpot Lane Express features its latest food-to-go concept, FRED's - a New York deli style concept that offers premium on-trend products for time-pressed City of London office workers.
New style checkouts at Tesco Extra, Lincoln (Left), Fred's Food Construction at Tesco Express, Philpot Lane (Right)
4. Targeting international investment where it counts
Internationally, Tesco faces many local challenges and there has been significant speculation about possible exits from underperforming markets. However, having retreated from the US and China, and given that it is a leading player in many of its territories, Tesco will be reluctant to withdraw from further markets if there are other options available.
In central Europe, Tesco is trimming its estate through limited store closure programmes across all four markets it operates in. However, it is also investing in its convenience operations. It is, for instance, bringing Tesco Express to Poland, remodelling its large format stores in the style of the flagship Watford Extra and extending the reach and choice of e-commerce services. In Asia, Tesco faces restrictions on Sunday trading in Korea, while trading in Thailand has been affected by political unrest, but the rapid growth of consumer spending in these markets makes them attractive long-term investments.
With far reaching changes being introduced across Tesco's business in 2015, it's never been more important to stay close to developments. Subscribe to our Retail Analysis service for all the latest news and insight.
1 Source: Kantar Worldpanel
Nick Gladding
Senior Retail Analyst