Tesco, the Only Show in Town?
How to cope when a major customer dominates the market
By Brian Moore, Global retail consultant and CEO of EMR-NAMNEWS, mailbox@namnews.com

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With the announcement of its latest figures and track record vs. its rivals, it could be said that Tesco is on the way to becoming a solo act in UK retail. Also, given that the world’s two most ambitious retailers Tesco and Wal-Mart are currently competing head-to-head in the UK, as a prequel to what could eventually become a global ‘battle of the giants’, there could also be insights in the analysis for those operating outside the UK.

Whilst it is possible to argue with the pace and degree of resultant trade concentration in the UK, it is perhaps useful to explore this endgame-scenario as a means of suppliers factoring appropriate action into long term trade and risk-management strategies. Essentially, Tesco’s growing trade dominance is due in part to the inadequacies of its competition in the UK.

Wal-Mart’s Asda still not punching its weight

In spite of its global scale, clear price-based offer and low cost-base, Wal-Mart’s Asda has not yet managed to meet expectations in the UK in terms of gaining its ‘fair share’ of available market. Its ROCE and CAGR is lower than that of its parent, and its resultant diluting effect upon Wal-Mart’s global performance will eventually become more of a concern in Bentonville.

Other players struggle

In the case of Sainsbury’s, it appears that despite radical changes in management, repositioning of the offer, and a dedicated focus upon improving supply chain efficiency, the fact remains that improved like-for-like sales performances are being gained at the expense of the bottom line. This means that despite reductions in stock levels and wastage reduction, ROCE performance is currently lower than could be obtained via a bank deposit.  As a result the share price is low, interest rates on bank borrowings are high, and key suppliers are choosing alternative invest-partners.

Meanwhile, Morrisons has suffered the misfortune of taking over a competitor nearly twice its size, performing at half its rate on some key ratios, which had to mean that the combined performance would be less than the sum of the parts. Added to this was the problem of combining two radically different cultures, and two operating systems that were effectively incompatible, in a City environment that expects takeover turnarounds to yield positive results within 12 months…   

Tesco not missing a beat

Tesco meanwhile, through a combination highly focused yet visionary management, a determination to relentlessly seek out and meet consumer-shopper needs in all categories via its Clubcard mechanism, supply chain efficiencies that allowed it to lower prices cost-effectively, develop and manage a four-generation approach to private-label in a balance with brand that optimises differentiation and margin. And all of this at a time when radical change in global politics made their business model both infinitely scalable and transferable to most markets and categories around the world.

Thus, due to a happy combination of circumstances and relative competencies, Tesco is set upon a course that is delivering gains in market share that are now attracting the critical attentions of the politicians and special interest groups. 

If Tesco succeed in managing the transition to ‘solus status’ in the UK, achieving a  market share of over 60%, it will be impossible for risk-averse or risk-neutral suppliers to invest sufficiently in other retailers to ‘neutralise’ this degree of polarisation.

Better for all suppliers to accept the inevitable and model their businesses completely upon the Tesco requirement, explore opportunities for joint-value-creation, and adapt the model to the remaining customers… This means that all surviving retailers will adopt Tesco KPIs or perish. Moreover, it will be in Tesco’s interest to ensure the survival of the remaining players by setting out, applying and conforming with industry standards at all levels in the spirit and letter of the law.

Any deviation will result in government action to reduce the impact of what will have become excessive polarisation…..

Treating Tesco As Your Only Customer…

If Tesco truly possesses the capability to so dominate UK retail that all other retailers are reduced to playing bit-parts, it is perhaps useful to explore how they should be managed in order to optimise joint-value-creation, in spite of the power balance.

Essentially, one has to assume that by focusing exclusively upon identifying and meeting consumer-shopper need, Tesco is in fact meeting the needs of our consumer, thereby meeting the needs of our business.

Finding the brand’s consumer in Tesco traffic

Having identified our consumer-profile in Tesco’s traffic flow it is essential to take a category view of the choices available to that consumer-shopper. This means objectively positioning our brand relative to its natural competition, both branded and private label, from the perspective of the consumer (see EMR Buying Mix Analysis at www.kamcity.com/namcalc and attempting to ensure that Tesco allocates fair share in terms of space and support. Any lack of objectivity on our part would result in Tesco imposing the view of the consumer-shopper with such damaging consequences that the system would be self-policing. 

Having achieved this degree of objectivity in meeting consumer need, it is then necessary to ensure that the supplier organisation be fully integrated with Tesco as an invest trade partner (see www.kamcity.com/library/articles/partner.htm for criteria).

Given that in this scenario Tesco will effectively be the only customer, alignment and compatibility are crucial. By the same token Tesco will have a vested interest in selecting the correct invest-supplier, in order to optimise the relationship. Incidentally, as far as risk is concerned, it is taken for granted that only risk-seeking suppliers need apply for this level of trade partnership. Risk neutral and risk averse suppliers will by definition be reduced to transactional relationships, in this scenario.

With consumer need and trade partnership on the right footing, both parties are in a position to explore opportunities for joint-value creation. This means examining Tesco’s value creation processes, and achieving a thorough understanding of the goals and concerns of its organisation.

Joint value creation

Specifically, it means assessing its value creation process in terms of strategic management, business development, analysis & choice, purchasing, selling, core business activities, and follow-up to ensure that both parties adapt their processes to the partner in order to create value for both.  In practice this means integrating consumer marketing, marketing to trade and retailer marketing, within the customer’s decision-making-process. Measures will include combined supplier KPIs and customer’s KPIs in one system. The process will be optimised via effective networking, and genuine joint business planning, to cut costs, drive sales and optimise trade funding…

Again, given the extreme polarisation represented by the scenario, half measures will not be tolerated. Also because of the political vulnerability of a dominant Tesco, the partner-supplier will in effect become the conscience of the customer in the interest of self preservation…

Given the above, and on reflection, perhaps a customer with a 30% share of market is worth a little dedication…

Date article published: 01/05/2006