If you're Argos or Amazon, this Christmas would have had an extra 'edge'. For, while being chiefly obsessed with your own sales at the most crucial period of the year, you might also have been wondering how Tesco was getting on.
The country's biggest retailer launched an online sales arm, Tesco Direct, last September, with the aim of dominating the non-food sector in the same way as it does groceries. According to the latest estimates, Tesco takes one in every £7 spent by UK shoppers. The service, which is almost entirely focused online, although it is supported over the phone and in stores, represents Tesco's most significant initiative since its grocery web service, Tesco.com, went live in 1995.
In charge is Steve Robinson, a retail veteran who was most recently finance director at one of Tesco Direct's main competitors, Argos, until he was poached in July 2005 to develop Tesco's non-food offer. Tesco Direct is the result. Having gone quietly about his business while Direct geared up for its first Christmas, Robinson is now ready to explain why the service was developed and how it can help Tesco reach out to more customers with more products.
As you'd expect, Robinson's Christmas was all but consumed by the desire to check how sales were going. Naturally, he says things went well, though he can't say how well until Tesco releases its official post-Christmas trading statement. In the end it reveals that Tesco.com, through which Direct's sales are made, claimed 1.3 million orders in the month running up to Christmas and enjoyed a 30 per cent increase in sales during the period.
Given the success that Tesco has had with its online grocery delivery service, traditional and online pure-play non-food businesses could have a problem on their hands. "In terms of food you have to say Tesco has been as successful online as it has in the stores - it is the world's leading online grocery retailer," says Robinson. "The reason is that it offers a great service, it has great availability and, at the time these services first launched, it did a better job. So, it has done all those things it does great and moved them online.
NON-FOOD EXPERIENCE
"In offering non-food in stores it did the same thing and I think Tesco Direct is the final extension. It says: 'We seem to be really good at this online grocery business; we've got a great non-food team that has been helping the stores with their non-food business - let's combine the two and launch Tesco Direct.' The only thing that was missing was a bit of multi-channel non-food experience. That's why I came and why we brought others in."
Still, in classic Tesco style, Robinson says it's more about giving customers what they want than blowing their new rivals out of the water. "Essentially, more of our customers told us they wanted access to non-food products through Tesco," he reveals. "Before Direct, only about 25 per cent of the country was within reach of the kind of range you find in an Extra (Tesco's super-sized stores, which have a strong focus on non-food). At the same time, our non-food customers said they wanted to be able to buy a greater range of products."
Direct offers more than 8,000 lines, from CDs to sofas, compared with the 4,000 items available in an Extra. However, taking on the world of online non-food retail is no easy task, even for Tesco. Competition comes from traditional rivals like Argos, online pure-plays such as Amazon and, perhaps more daunting, less conventional players like eBay and shopping-comparison sites. Just getting a product seen by shoppers when experts in the dark arts of search are hard at work is hard enough. In the end, price is often the differentiator.
"I think, online, you are open to a broader set of competitors because you're operating against old-school competitors that have gone online; you're competing with multinationals like Amazon and with Joe Bloggs in Putney who has an electrics shop and has decided to put his products on a site. So, you're up against a much broader competitive set, but I think Tesco has still got a place in that with its strength, which is customer focus, and that's why it set up Tesco Direct."
He is confident that, while Tesco's bulk will help its pricing to be competitive, its brand and service will also tip the balance. "We live in a world of perfect information and the challenge is that, for a sub-section of people, it all boils down to price. But, I think customers will increasingly realise that it isn't all about price and there are other things involved in your choice - the service you offer and, without being flippant, Clubcard points. These things really make a difference to people."
BROAD CHOICE
He adds: "We have a high number of people who place an order and then ring up and ask 'have you got my order'. They like to speak to someone; they like that choice. So, a sub-section will go to a price-comparison site, go through all that and then buy from the guy in Putney, but we work with a broader set of customers. It is essential that retailers allow their shoppers to buy through any medium they want. They also want to mix and match, so they can buy online and return items to stores, or buy in-store and have items delivered. Retailers that offered the broadest choice this Christmas will have been successful."
After the success of Tesco.com, it's clear the company has a track record and an idea of how it can succeed. The key seems to have been the way in which web retail has been integrated into the business. Robinson is clear that the two channels - store and online - shouldn't be viewed separately. "It's an extension; it's a part of how you deal with people. It's about taking what Tesco already does and adapting it to online. As soon as you start to compartmentalise it, you start to get into trouble."
This approach goes back to when Tesco.com, unlike its rivals, opted for an online grocery-delivery service where orders were fulfilled from stores. In-store 'pickers' gathered items to be delivered locally via its van network while Sainsbury's infamously went for a model using central warehouses. While Tesco could grow the service with demand by adding new stores to the network, Sainsbury's central system incurred heavy costs when web shopping was still finding its feet. Tesco's strategy also meant its store network was incentivised to buy into the new service since revenues could be attributed to individual stores.
Robinson explains: "Dotcom sales on food are picked in-store. The stores get the sales from that, the drivers report to the individual store manager and there's nothing more exciting about retail than someone being responsible for their own sales line. So, absolutely, there is massive buy-in from the estate to dotcom, because, if they go from being a non-dotcom to a dotcom store, they see their sales grow and they love it."
DIFFERENT PATH
Despite that success, Robinson says the nature of the non-food business necessitates that Direct will have to follow a different path. "What picking in-store did was to get the dotcom business coverage of 98 per cent. Direct is different because one of the issues with food is keeping it fresh throughout the supply chain. For Direct, it's almost the opposite. I can sell a £5,000 TV and have one in stock in a distribution centre because I know that I'll only sell one in six weeks. If I had that £5,000 TV set in 200 stores, at the end of the year I'd have lots of out-of-date TVs that no-one bought. Multi-channel retail means you have a very low stock risk, so it makes sense to hold stuff centrally."
To that end, small items - called 'one-man' products - will be fulfilled from a centre in Daventry, while 'two-man' products, including furniture, are handled through a deal with logistics giant TNT in Crewe.
Having held senior positions at Kingfisher and Argos, Robinson's experience will be crucial, but he is clear that a full commitment to non-food retail gives Tesco the chance to see what can be shaken up; how it can better what's already on offer.
So far, this is best reflected in its delivery terms. Consumers can pick a two-hour delivery time slot for all but the biggest items, and just one day if they pick their items up in-store. Meanwhile, for bigger items such as sofas, delivery is five-to-10 days; much shorter than the 60 days promised by sofa retailers that build to order.
Tesco can do this, says Robinson, because "80 per cent of sofas bought in the UK are black, brown or beige". Tesco offers a limited range in these colours, with stocks ready for delivery. The company hopes decisions like this will establish a new order in non-food retail. Such gambles have defined the success of Tesco.com since it launched in 1995.
But, while non-food has taken off in-store, online efforts have been less effective. Tesco previously partnered home-shopping giant Grattan to offer non-food via its site. Robinson is loathe to criticise the arrangement, but says "this Christmas will certainly see us do far better". He adds: "When I came here we had a joint-venture through Grattan and it was obvious we wanted to bring it in-house to move it forward. Plus, we wanted buying in-house because that's the way it should be. Now, if you have a chat with the commercial guys, who have to buy a broader range to go online, they're loving it. They've got more responsibility and bigger jobs and can develop better relationships with suppliers. It's what people in retail are motivated by - selling things."
Robinson has been building a non-food team of buyers, support and site-development expertise via a media publishing centre in Milton Keynes. This has brought what he considers a trump card: the site. "It is something I'm very proud of. It is incredibly simple, but incredibly effective. We believe it's one of the best."
To promote the site, Robinson intends to continue relying on the firm's retail estate and database of customers, all made possible by the runaway success of Tesco Clubcard. Still, added to the availability of in-store catalogues and emails to the thousands of registered Clubcard holders, he is investing more in search marketing (through Bigmouthmedia), price-comparison sites and an affiliate programme. Trials are also in place to mirror Currys and Comet, which allow customers to reserve products in store for delivery, and he is looking forward to seeing how white goods and furniture sales go in the first part of 2007 when more of those kinds of products are bought.
It is clear that Tesco is putting its full weight behind the Direct offer and, as Christmas sales have shown, that could prove bad news for the many players already plying their non-food wares, whether online or off.
CV: STEVE ROBINSON
1995: Finance analyst and medicine buyer at Superdrug
1998: Moves to parent company, Kingfisher, as group chief analyst for
the finance director
1999: Head of strategy for Kingfisher's general merchandise division
2001: Joins Argos as finance director
2005: Arrives at Tesco as CEO of Tesco Direct