How can Tesco arrest it’s decline?

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Recently, I read Graham Ruddick’s excellent article in the Telegraph about how Tesco can still have a bright future:  http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11062235/The-future-can-still-be-bright-for-Tesco.html. I’d like to look a little more at the challenges facing one of the world’s biggest grocery chains, and some potential directions to ensure they remain the top dog in this market.

Competition on all fronts

The grocery market is fundamentally changing , with Tesco being squeezed at either end of the market. Over the past few years, Waitrose and M&S Food have taken small but meaningful inroads at the top end. Waitrose in particular has extended it’s reach whilst maintaining it’s brand image of high-quality produce and offering an almost unparalleled customer experience. Market researchers Nielsen estimate that Waitrose now have 5% of the UK market on the 19th July 2014. There has been less of a concerted response from the ‘Big Four’ to this threat than to the price discounters.

Much more publicised has been the rise of the German discounters, Aldi and Lidl. Their rapid gain of market share and expansion has been astonishing in the context of the UK grocery market, Aldi’s market share rising to 5.4% of in July 2014. 14% more customers are choosing to shop at these discounters than the same time last year. Unexpected from the major players in the market was the willingness of consumers to swap brands for ‘like-brands’ which can be offered at a fraction of the price. Tesco’s major response has been a price war which has cut profits and sliced dividends to it’s shareholders.

These two trends are culminating in a greater polarisation of customers, a very worrying trend for Tesco. Customers are increasingly either opting for price over quality or vice versa, rather than picking the classic middle ground that Tesco have dominated for years.

This has left the Tesco brand and it’s offering a little lacking, particularly for new customers. In what aspect of shopping is Tesco now leading? What is it known for? Is it catering well enough for young customers? These are questions they are having to contend with.

Three areas that Tesco can regain a competitive advantage in

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1. Focus on own brand goods

Apart from the price, the startling shift brought about from the rise of the discounters has been the reduction in brand loyalty amongst customers. How should Tesco respond to this? By pushing their own brand goods. The Tesco Value and Tesco Finest brands are well established, but are often found at the top or bottom of the shelves, on the periphery rather than central in the customer view.

By focussing on growing Tesco own brand’s revenues rather than traditional brands, Tesco can shift it’s dependency away from other companies to products where they can control their supply chain. With the huge resources available to Tesco, they should be able to drive costs down, increasing profits. It will also further differentiate Tesco from competitors, increasing customer loyalty and helping to combat the competition at either end of the market.

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2. Use clubcard data better

As eluded to by Graham Ruddick, the 38m customers currently using clubcard internationally, and the data gleaned from these transactions, is not currently being used effectively enough. In the digital age it is not enough to simply hoard and gain market insights with this information; it needs to be used to improve the customer experience. None of the big grocery retailers have yet explored the opportunity to personalise the experience, both in store and online, using the data collected.

An exciting potential future of online grocery retailing will be the customer setting a budget, which then a basket will be created with commonly bought items by the site. This can then be edited to the customer’s desires, and who also can add ‘meals’ suggested by the online site. This represents a shift in the buying patterns of customers – and the established nature of the clubcard system means Tesco can become leading in this future aspect of grocery retailing due to the huge amount of already amassed information.

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3. Change the market

A much more long term challenge facing Tesco is to secure it’s future by reducing competition. The important way of achieving this will be fundamentally altering the market to prevent the constant threat of new arrivals challenging on price or quality. This will prove extremely difficult to do, and will require some seismic shifts in it’s direction and ethos.

Rather than viewing themselves as part of the grocery market, Tesco’s real success is as a distributor – a network of stores delivering goods to the customer with convenience and offering great value. In the digital age, bigger worries than other grocers will be the likes of Amazon and Asda (owned by Walmart) – those with equally powerful capabilities in this area. Facing these competitors now will help to smooth the transition into the digital economy of the future.

 

By implementing these changes into Tesco’s new strategy, Philip Clarke can help regain Tesco’s market-leader authority. Key to all of these is leveraging the current size of Tesco and using it’s bulk to develop new capabilities that differentiate them from the market. This central point is vital to Tesco’s future survival as one of Britain’s biggest firms.

For updates, follow me on Twitter: @edwardlowe13.

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