While Tesco recently recorded its worst UK sales performance for decades, Kantar Worldpanel statistics show the retail behemoth still leads the way on Irish soil.
Mar 9 2012 By Gillian Hamill
Once dubbed Tesco’s ‘treasure chest’, when in 2009, The Irish Times claimed Tesco Ireland’s profits were at least 50% higher than other parts of the company, the emerald isle has once again proved fertile ground for the grocery giant whose UK parent company is looking a tad worse for wear.
Although Irish margin has undoubtedly since diminished at the group, which famously doesn’t publish its profits for this jurisdiction, Tesco’s UK rivals have inflicted much more pain upon the supermarket than its main two competitors here. So much so, that at the start of this month, chief executive Philip Clarke announced a multi-million investment – as much as £300 million according to some reports – to boost service standards and attract shoppers back to the floundering UK chain.
Profit warning scare
This dramatic reaction followed the group’s worst UK sales performance in decades, when like-for-like sales for the six weeks to 7 January excluding VAT and petrol dropped 2.3%. Tesco’s market share in the UK also dipped below 30%, to 29.9%, for the first time in seven years. This nightmare at Christmas represented the worst result of all four major UK supermarket chains – namely Tesco, Asda, Sainsbury’s and Morrisons. In a flash, it wiped £5 billion off the behemoth’s market valuation.
In comparison, the retailer’s Irish results – while unlikely to blow anyone’s socks off due to our well-recorded low consumer confidence – would surely have made for much more appealing reading for Tesco execs. The latest grocery market figures from Kantar Worldpanel in Ireland, for the 12 weeks ending 19 February 2012, show that Tesco outperformed the market and increased its market share to 28.1% this period, up from 27.3% last year.
In a recent press statement, David Berry, commercial director at Kantar Worldpanel, said: “Tesco is setting the pace among the big three grocery retailers in Ireland. This record high, which has been driven by the opening of new stores, is particularly pleasing for the retailer considering its recent drop in share of the British market.”
Berry also explained to ShelfLife that Tesco was driving growth by encouraging existing customers to spend more with the chain. “Each shopper has spent 2% more in Tesco this year by choosing to make more frequent visits to one of the retailer’s stores. One significant factor driving this is that there are now more Tesco stores to choose from, with a number of new stores added over the past year.”
Tesco chief executive Philip Clarke is determined to improve upon the “long-standing issues” afflicting the retailer in the UK
What went wrong?
So while the future outlook appears more positive on Irish soil, where did it all go wrong for the retail behemoth on its home turf? What were the mistakes that prompted Philip Clarke to issue a unexpected ‘mea culpa’, letting it be known that the festive mishap had resulted in much “soul searching” at the group’s Hertfordshire headquarters? In fact, the discouraging news even prompted him to resort to Nietzschean philosophy, eagerly highlighting for shareholders that: "This isn't going to kill us, it is going to make us stronger."
According to Dave McCarthy, an analyst with Evolution Securities, the group has serious problems to overcome. "I have been saying for 18 months they face a number of problems including quality of service, quality of the product, as well as issues linked to price – they are too expensive in relation to the competition," he said.
Race for space victory
Even the fact that Tesco possesses more retail space than its main competitors hasn’t boosted its latest UK market share figures. McCarthy points out Tesco had actually “acquired two million sq ft of extra space in the last year or so,” but had still managed to lose market share. In The Guardian, finance correspondent Nils Pratley ponders whether Tesco’s burgeoning property portfolio created complacency that ultimately led to its downfall. “Did Tesco become too complacent?” he asks. “Was it too happy to believe it had won the "race for space" in the UK and think the business could be treated as a cash machine?”
Kantar Retail analyst Bryan Roberts is one commentator who believes that yes, the group had been guilty of the kind of "complacency" that had enabled it to overtake former market leader Sainsbury's in the 1990s. Tesco’s £500 million Big Price Drop introduced late last year is “clearly not enough to win shoppers,” according to Roberts. “Value is not just about price. It is also about standards, service, quality, and freshness and Tesco has been letting all of these slip. The business has not had its eye on the ball, both in the latter stages of the Leahy reign and in the Clarke era too."
Of course, in Tesco’s defense, the retailer was expected to have a tougher time than smaller rivals at Christmas, due to its large clothing and homewares business which is the area where shoppers have been cutting back most. A more potentially serious problem for the group is that following a consistent stream of elaborately-engineered offers at the chain, customers become somewhat immune to their charms, and view them through increasingly cynical eyes. The fact that Clubcard points were halved during the “Big Price Drop,” may also been viewed by some shoppers as an underhand tactic. Especially when Tesco had previously been highly successful at attracting shoppers towards the Clubcard scheme. And at the same time, rivals bombarded shoppers with money-off coupons and promotions that overshadowed Tesco's campaign, later renamed the "Big Price Flop" by analysts.
Discussing the high level of competition encountered by Tesco in the UK, David Berry told ShelfLife: “The Asda Price Guarantee and the Sainsbury’s Brand Price Match will automatically respond to the Tesco Big Price Drop and, to a large extent, defuse it. Whilst Tesco may well have thought the Big Price Drop was a game changer (with £500m diverted from the cessation of Double Club Card Points), as far as the consumer was concerned it was ‘just another price promotion’.”
Acting on feedback from dissatisfied UK customers, Tesco has vowed to employ more staff and improve its training programmes
Hypermarkets losing share
Another obstacle faced by the UK division, is its earlier investment in hypermarkets, which are increasingly falling out of favour with a generation of consumers hooked on Internet shopping. From the customer’s point of view, it’s cheaper and less stressful to order online and pay for home delivery, rather than shelling out on petrol to drive to an out of town location. As Phil Clarke himself told the media: "Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electricals, in clothing, in general merchandise?"
Indeed, industry experts have now conceded it was probably a mistake for any supermarket to open stores over 60,000 - 70,000 sq ft, as it is becoming a challenge to fill them with attractive products when many things sell better online.
David Berry adds that in his view, there are two main reasons why Tesco would wish to rein back on megastore development. “Firstly, there is evidence of more frequent smaller shopping trips and competitors are responding to this with convenience format development (Sainsbury’s Local, Asda Supermarket and Morrisons M Local). Shoppers are trying to curb trip spend and additionally high fuel prices make a megastore excursion less attractive. Secondly, the Tesco Extra format is more dependent on non-food sales which are proving to be much more vulnerable to a downturn than food”.
This development could potentially have ramifications for the Irish market. The Competition Authority has long argued that Ireland’s retail cap on store size should be removed in order to allow larger operators to join the market here and deliver greater choice for consumers. Yet if hypermarkets are going out of fashion, this argument could ultimately become redundant. If large retailers no longer see the benefits of constructing super-sized stores, the impact of the cap becomes irrelevant. Indeed, even Tesco is currently on the lookout for suitable locations for convenience-type stores here in the Republic.
Connecting with consumers
While hypermarkets are no longer as attractive for consumers, Kate Jones, a director at brand consultancy Added Value, says another problem may be that customers are not "connecting emotionally" with the overall Tesco brand: "Its stripped-down communications and focus on the money promise [discounts] does not resonate powerfully enough," she said.
Connecting with consumers alongside increasing retail space is clearly a recipe for success. A potent example here in the Irish market can be seen through the growth rate generated by Aldi. According to the Kantar Worldpanel statistics for the 12 weeks ending 22 January 2012, the German discounter posted the highest growth rate among all retailers with sales growth of 26.2%. This represented the 15th consecutive period that Aldi had grown by more than 20% here.
Aldi is the fastest growing retailer in Ireland and now operates 90 stores here
Aldi’s growth rate triumphs
Kantar Worldpanel’s David Berry told ShelfLife that he believed Aldi’s growth could be attributed to store expansion and its good value offerings. “There is no doubt that Aldi’s continued store expansion is a significant factor driving its strong growth within the ROI market,” he said. “Aldi now has more than 80 stores from a standing start a decade ago and history shows that store expansion is a tried and trusted method of delivering growth. However, this alone would not deliver the 20% year on year growth we have seen from Aldi for almost a year and a half. In addition to this Aldi has established clear tiering within its own brand range, highlighted its commitment to Irish sourcing and also communicated its potential saving efficiently to the consumer”.
Illustrating Aldi’s efforts to resonate with Irish consumers, a spokesperson for the discounter told ShelfLife that, “almost 50% of all grocery sales at Aldi are now generated on products bought from Irish suppliers, producers and manufacturers”. In fact, over the past three years Aldi’s suppliers have won a total of 66 Blas na hÉireann National Irish Food Awards and Great Taste Awards, which the discounter states is “a fantastic endorsement” of the Irish suppliers Aldi works with.
On the subject of future growth, he added: “Aldi now operates 90 Irish stores. In 2011 new Aldi stores opened in Kilkenny (two stores), Portarlington, Waterford, Sandyford, Blessington, Clonee, Letterkenny, Castleisland and Dunmanway. Aldi has further plans to add to its Irish store network and will open new stores in Bunclody, Sligo Town, Carrick-On-Shannon, Nenagh and Bray in the coming months”.
Finding a solution
Over in the UK, Tesco is likewise feeling the heat from its smaller competitors such as Waitrose and the German discounters who are increasingly winning over Britain’s middle classes with their value propositions. However the supermarket which recorded a multi-billion profit in the UK last year, is certainly not down and out yet.
Tesco has announced plans to create 20,000 jobs over the next two years in a bid to improve customer service. The group also plans to refurbish hundreds of its existing stores as well as open new outlets.
The solution subsequently appears relatively straightforward for a cash-rich retailer like Tesco; simply throw money at the problem. However the difficulty with this approach according to Nils Pratley is that the cost will “frighten shareholders who hadn't considered the Tesco profit machine might become unpredictable”.
Yet regardless of what alarmed shareholders may think, it is clear Clarke has decided to nip Tesco’s “long-standing issues” in the bud now, before they wreak any further damage.
As for the Irish market, last June’s report from Tesco Ireland showed like-for-like sales were down 3.9% in the first quarter of the year when compared to last year. The Republic therefore obviously isn’t the show-stopping cash cow for Tesco that it once was. Nevertheless, with the group consolidating its position as Ireland’s number one grocery retailer, its long-standing profits generated on these shores look set to continue.