Tesco's nuclear price option, if all else fails...

How to prepare for the inevitable?

No one, including Tesco, can say exactly what will happen, but it would be reckless of any stakeholder not to attempt to shorten the odds by eliminating  or factoring in some of the ‘obvious’ variables in the meantime…

The company patently has deeper pockets and greater scale-advantages than other players, but any positive momentum has to be sustainable in the long term, in order to avoid wasting gains made here and abroad over the past 20 years.

1. Share-price maintenance: As you know, Tesco’s share price has still not budged since its 20% drop following the January profit warning.  Any share price improvement will still be driven by ROCE performance, in turn driven by Net Profit on Sales, and Capital Turn, so these ratios cannot be allowed to be diluted, even in the short term i.e. this will require a combination of cost-price reductions, optimising of credit terms/settlement discount trade-offs, increased trade funding, strict application of deductions and improved service levels…

2. Deep-cut pricing: in order to sustain its current marketing approach aimed at retrieving lapsed shoppers, any price changes have to be credible and sustainable – cosmetic  cutting of a handful of KVIs will be insufficient. The ‘typical ‘shopping basket will obviously have to be cut sufficiently to attract the attention of a savvy shopper, not just the media. However, to maintain any shopper ‘regains’ the company will have to make across-the-board cuts permanent and sustainable, in order to avoid unnecessary de-stabilising of strategies currently in place.

3. Brand–Own label balance: this may be allowed to shift a little from its current 50/50 to perhaps 45/55 in acknowledgement of not only the credibility of the Tesco brand, but also the own-label pull of unprecedented market-change. It will not be allowed or encouraged  to move to levels of 65/35, if the company has learned anything from its last 30 years in the UK market…

4. UK/Rest-of-world balance: The UK as a feeder for o/seas development? NB. Like any globally-ambitious retailer, Tesco needs the security and cashflow of home market dominance in order to drive rest-of-world growth.

5. Market share: Here Tesco has three options, recovery of lost share, stop the current loss of share, i.e. maintain market share at current level, or allow market share to drift down to 25%, thereby removing it from the ‘kicking–post’ role in terms of being a political scapegoat, and a target for grievances of special interest groups. Of these, we believe the more likely will be the ‘maintain current share’ option, then using internal efficiencies to drive profit improvement...

6. Food/non-food balance: who knows, but the fact remains that Tesco's approach to non-foods reflects many of the advantages of being able to apply fmcg food principles to categories that were hitherto regarded as requiring ‘special ‘ treatment  because of tradition routing to consumer.

7. Online/ traditional retailing: Any marketing instinct would cause Tesco to follow natural development of a market, online being no exception…


Supplier action:

In the meantime, suppliers need to be clear about their own limits in terms of willingness to fund what happens. Suppliers also need to take advantage of Tesco’s temporary ‘weakness’ by insisting on a fair-share, pro rata  stance in return for any help given.

Use of a Buying Mix analysis will help in assessing Tesco’s pulling power vs. alternatives available (JS, Asda, Morrisons, Waitrose, the Co-op and ‘all others’ ) based on the retailing 8P marketing mix, all seen from the point-of-view of lapsed customers. It is also important that Tesco and its suppliers do not forget the current customers, those most vulnerable to any neglect in terms of being susceptible to the appeal of the opposition….

Developing an ‘obvious‘ context using the above factors, but fine-tuned to their specific categories, suppliers (and retail competitors) should then devote the remaining weeks/months to monitoring and modifying  the above factors/variables to incorporate latest data, before retiring to the fall-out shelter…