Going For Broke With Tesco?
By Brian Moore, Global retail consultant and CEO of EMR-NAMNEWS

Given Tesco’s rate of growth and level of expertise, and accounting for upwards of 30% of a supplier’s business, many companies are faced with the dilemma of whether to go all the way in optimising the potential of their Tesco business, or invest in lesser customers at Tesco’s ‘expense’, with the aim of attempting to slow down the rate of trade polarisation and thereby reduce the risk of overdependence upon their major customer.

Taking the former option, risking everything in one big effort in committing most of a company’s resources to achieving the full potential of their Tesco business, may represent too extreme an approach for many players. However, unless Tesco’s success also becomes the subject of government restraint, their current growth rate may simply represent a temporary window of opportunity in the market...

There is a fundamental idea in business that opportunities are not created. They are independent of the company, are transient and are also available to the competition in varying degrees. Business success lies in keeping in mind one’s essential business model, being realistic about levels of competency vs. competitors and then being able to identify appropriate gaps or opportunities in the market for the company’s best output.

Tesco are approaching a stage in its UK development where their scale is provoking increasingly negative reactions in terms of share of market, buying power, social and environmental impact. Eventually, the government will probably take it upon itself to attempt to curtail Tesco’s influence and in effect punish the company for being successful, simply to help its less successful competitors, suppliers and the consumer-voter. If a company attempts to abuse its position, the market, not government, should provide the ‘punishment’. Retailing is an accelerated and immediately responsive medium, in that if consumer-shoppers are not being satisfied, or sense they are being over-manipulated, or even ‘deceived’, they tend to vote with their feet, immediately.

Tesco has become successful by driving the business from the front end, the consumer. Using consumer need as a benchmark, they have focused upon each aspect of retail, and systematically improved their performance in terms of combining consumer insight with analysis of shopper demand, providing appropriate assortments by format, and evolved a balance of brand and private label in a 50/50 mix, by volume, that optimises margin and differentiation. They have worked back through the demand-supply chain via trade partnerships that are demanding but fair, in the main.

All of this has been captured in levels of ratio performance in terms of ROCE, margin, rotation, and sales per sq.ft. that exceed current levels of other UK players. As a result their share price is beginning to reflect some of the potential of the company in the UK and globally. In fact, they have even succeeded in attracting the attention of the Sage of Omaha, probably the ultimate ‘accolade’. As a result Tesco has evolved a business model, has set and achieved state-of-art standards in retailing, and thereby grown faster than its competitors, and it does not come much better than that in retail...

In fact they have become a template for state-of-art retailing, everywhere. However, they may be reaching a point of diminishing returns in the UK, where the effort required to achieve and defend increased market share is diluting resource best applied on greater potential in global markets. This could result in their placing the UK ‘on hold’ and concentrating on maximising growth elsewhere.

This means that risk-seeking suppliers should seriously consider matching Tesco standards, raise the bar in supplier-retailer relationships and attempt to realise the full potential of their Tesco business, while others wait outside the window….

Date article published: 01/03/2007