Tesco is back

Late in 2014, I wrote a column predicting a rebound for the UK’s biggest and at the time most embattled retailer. With strong results released this week, Tesco has shown it is ready to start winning in the revolution retail world. CEO Dave Lewis deserves credit for sure, but so do an underlying core of experienced omnichannel veterans.

Smart stores are the future

A research report we published four years back said that the key to success for retailers dealing with digital demand was leveraging the unique advantages of brick-and-mortar stores while integrating the online shopping experience.

The specific recommendations are all in line with Tesco’s apparent strategy:

• Know the consumer, not just the shopper – Dave Lewis, having come from Unilever, totally gets this. It explains why his “farms” branding initiative and SKU trimming efforts are working. Merchants tend to overweight the shelf appeal of their assortment rather than solve the consumer’s underlying problem. This adds unnecessary complexity and explains why discounters like Aldi and Lidl thrive.
• Empower your associates to solve problems – Contrary to what investors fear about rising wages, this trend favours Tesco. Our research forecasts fewer store staff, but higher pay and higher skill levels. Tesco aggressively uses in-store automation to reduce headcount and can accommodate pay rises, which should buy better customer service. Store beats online when face-to-face personal advice matters.
• Use the store as a supply chain asset – Click-and-collect, merchandise returns and in-person customer service are all part of enabling consumers to get what they want without adding infrastructure cost. The backbreaker for an omnichannel novice is fulfilment complexity in the face of millions of unique customer interactions. Tesco’s two decades of experience here is obvious on their website and is now also showing up in sales growth.
• Organise for value chain success, not just sales volume – Lewis’s influence in this area is especially critical to Tesco’s turnaround. As the Daily Mail reports: “He is trying to revive Tesco with a focus on lower prices, streamlined product ranges, better customer service and new simplified relationships with suppliers”. This is music to the ears of manufacturers, who hate having to jump through costly hoops in terms of special packaging, complicated orders and exclusive SKUs. Cost savings generated will help beat back the discounters.
• Do not ignore information technology – Tesco’s loyalty card programme is a potentially huge advantage, especially when coupled with massive online sales volume and the resulting clickstream data. Amazon is well known for collecting and using precise data on shopper preferences at an individual level. Tesco is in the same boat. Big data analytics is the hottest emerging technology out there today and a perfect tool to apply to Tesco’s trove of knowledge about individual consumers and the local stores they shop at.

With all the hard lessons learned and smart moves now being made, it seems Tesco’s turnaround is much more than just stopping the bleeding. Tesco is positioned to grow.

A bright future

Britain is the most evolved e-commerce market in the world. For a decade or so, this was great news for Tesco, who led the charge and earned big money. Much of that cash was wasted on ill-fated diversification while the UK grocery business faded. The near-death experience brought on by undisciplined overreach, poor governance and customer indifference could prove to be a turning point.

Lewis has simplified things by selling unfit units, concentrating on the core business, and maybe most importantly, bringing a value chain perspective to big retail. The emergence of digital demand has forced retailers to break out of their traditional merchant mentality and think about consumer needs holistically. This means worrying less about the basket and more about the lifetime value of the consumer.

The future promises direct-to-consumer sales from manufacturers that could dull the edge of deep discount retailers, while e-commerce specialists offer endless item variety for long-tail shoppers. Basic replenishment needs for grocery, however, can drive tremendous loyalty so long as consumers feel a bond.

Tesco is the ultimate neighbourhood retailer, with regular shoppers visiting up to 50 times a year. Lewis’s moves might just revive this bond and return Tesco to its former greatness.