A Wake Up Call For Tesco?

Yesterday, Tesco announced that over the next three months they are going to exit the US market – their Fresh & Easy stores have not been the success that they hoped for. The 199 stores have never made a profit and the exit is going to cost their shareholders £1.2 billion. This is not like the Tesco we all know of in the UK. To me it highlights fundamental business issues.

So, why did Tesco expand to the US and why was it a mistake?

For quite a number of years now, they have held the biggest market share in the UK superstore market, so like all businesses, they saw the opportunity for expansion, and what better place to go than the ‘land of opportunity’. It seemed like the next logical step, however, in this circumstance, this is far from the case, due to one, yet fundamental reason – Walmart. Walmart is not only the dominant supermarket in the US, but the world. In 2012, they were 3rd largest on the list of the Fortune 500 companies in terms of revenue ($447 billion). This is a list dominated (especially in the top 10) by oil companies, which just shows how much Walmart are worth and the power they possess. Trying to compete with such a powerhouse was a very bold move, but predictably, it didn’t work. They were trying to distinguish their stores to consumers looking for ‘fresh and easy’ food, but why wouldn’t they just go to a supermarket they know and trust, that will provide them with everything they need in one visit? That is the question everyone was asking, but one they could not answer.

Tesco were greedy to expect that they would be able to break into the US market with instant success. Walmart is a big part of the American culture so it was always going to be extremely difficult to enter and establish themselves in the market.

So what next for Tesco?

Well, Tesco have also expanded to Asia and all around Europe, which again has not had the success in comparison to the UK market. Therefore, for now, it looks like Tesco are going to stick to what they are good at; expanding and dominating in the UK market. They have led the way in the UK market for some time now, and they now what works and what doesn’t, so it is the best step.

It was predictable that Tesco would not survive in the US, or at least have the impact that they have in the UK. This result has now left Tesco looking a little weak for the first time in almost 20 years; well in terms of profitability anyway. The position Tesco are now in is well summed up by Robert Peston (Business Editor, BBC) “In the UK its huge market share now makes it look less like an unstoppable juggernaut and more like a massive tanker that’s hard to manoeuvre quickly or easily.”

The focus for Tesco will now be on it’s “most important market” (Phillip Clarke, CEO). This is a positive move. It will get the company back up to strength – they will be able to focus on expanding their product portfolio in the UK, increasing their dominance and if in the future they also concentrate on trying to ‘crack’ the Asian market, exciting times could be on the horizon for Tesco. The next 5 years will be key, due to the changing economic conditions and the ever increasing demands from consumers.

The US was not the right move, but sometimes greed can blind a business.

A Suffering UK High-Street

The first 16 days of January 2013 saw three giants of the high-street go into administration; Jessops, HMV and Blockbuster. The most surprising aspect is the fact that Blockbuster lasted as long as they did. The service they provide has been completely squashed due to the rise of internet retailing and borrowing of movies in a digital format.

Jessops was the first business to go under. On January 9th, they decided to shut all 200 stores in the UK. HMV was the next one just under a week later and have in the last few hours been bought by Hilco, who also own HMV Canada. Blockbuster then followed suit 2 days later, with a possible 528 stores to be shut. All these businesses have something distinctly in common; the service they are providing is out-dated with new forms of retailing pushing them out of the market. I believe there are a few main reasons for collapse of these once big players:

Firstly, the rise of the digital world. Consumers have turned to buying a lot of their DVD’s, CD’s, Camera’s and any other electronic products online as it is cheaper, requires less effort and there is more choice. In 2011, people in the UK spent £68 billion online, which caused losses for many high-street retailers, with Amazon being at the forefront of this phenomenon. The rise of online piracy has also massively hit these stores.

Secondly, the increasing power of supermarkets. HMV and Jessops especially have been out-muscled by the likes of Tesco, Asda and Sainsbury’s. They diversified and increased their product portfolios to include many electronic products, often at lower prices. Consumers have to visit a supermarket to get their food shopping and may just go to buy a DVD at the same time, instead of going into the local town to HMV. It is easier for customers to get all their products in one store.

Thirdly, rapid product innovation. The rise of the Tablets and Smartphones has enabled online retailers like Amazon to thrive. It is a lot easier for consumers to download a film straight onto their devices instead of renting or buying a physical copy.

Finally, the long tail. This is where the online retailers have a true advantage over high-street retailers. Amazon, for example, are able to have a vast range of stock of many different products, as they have huge storage warehouses. HMV, Jessops and Blockbuster have not go that option and are only able to offer a limited range of products due to storage and shelf space. It is a lot easier to find exactly what you want on the internet as there are so many more products and options. A customer is much more likely to find exactly what they want online than in store. A greater degree of choice is what customers want.

It can be seen that the internet and the new movement of retailing is what has killed off these once much loved stores; HMV were founded in 1921 and Jessops in 1935 with Blockbuster moving over to the UK from the USA in 1994. There are other factors that have contributed to their collapse; costs of premises on the high street (it is a lot cheaper to sell online) for example. A fascinating point to make is that not all stores on the high-street are having hard times; the John Lewis Partnership announced record sales over the recent festive season, with Waitrose’s sales up 5.4% to over £300 million in the last two weeks of 2012. Halfords are another store doing well, due to the fact that cycling is becoming an increasingly popular means of travel due to the current economic conditions.

It is clear then, that it is especially hard for high-street stores in the electronic sector of the market to survive. It will be very interesting to see what happens to the high-street over the next decade. I would suggest that many of these retailers adapt to the market changes by making strategic changes in order to survive. For example, expanding their online presence and carrying out detailed market research in order to see what the consumers want, which is understandably expensive in the short term, but it could significantly improve long term prospects.