LONDON Tesco, the undisputed leader in UK grocery marketing for so long, has lost its spark, according to some observers. The well-oiled retail machine could be looking less untouchable after 15 years of unrivalled success. While Tesco predicted its global 2008/9 preliminary results, released yesterday (Tuesday), would show it is in ‘great shape', critics expect them to show it struggling to match its competitors' growth.
This dip seems to be reflected in much of Tesco's recent domestic marketing, which critics say is reactive, bland and uninspiring, compared with previous campaigns. Some also believe Tesco faces a strategic decision as it wrestles with the difficulties of maintaining market leadership and its huge scale - indeed, its continuing power means few industry players are willing to talk on the record about the retailer. Others trace its problems back to the departures of two key team members in 2006 - marketing director Tim Mason and UK marketing chief Simon Uwins, who decamped to the US to launch Tesco's Fresh & Easy chain.
A spokesman for Tesco disputes the suggestion that it has been outsmarted by the UK's next-biggest player, Asda, in the price-comparison ad wars. It says its ‘real baskets' campaign covers a wider range of products than its rival would ever dare to compare. Nonetheless, Tesco has pulled the plug on some of its forays into the online and non-food sectors which fell short of expectations, and question marks hang over other brand extensions.
At the beginning of this decade, Tesco's three main rivals were in crisis. Asda was facing financial difficulties, Sainsbury's was struggling and Morrisons was wrestling with the integration of its Safeway acquisition. Tesco took advantage and streaked ahead of the pack. However, all three have since been revitalised and are providing stiff competition. Asda, under the stewardship of ex-ad man Rick Bendel, has been particularly aggressive in targeting Tesco with its marketing. Morrisons, with Angus McIver heading its marketing, has relentlessly focused on freshness, while Sainsbury's has promoted its Basics own-label range to its existing shoppers.
As a measure of the difficulties this presents, Tesco's like-for-like sales growth has trailed behind its key competitors for the past year. Its market share has fallen to 30.4% over the period, according to TNS Worldpanel.
It would be a mistake to write off Tesco's UK performance - it dominates the high street and is taking more than £1bn a week at the tills. Its market-share gains over the past decade give it a dominant position, with a turnover of £48bn. Like-for-like sales growth may be lower than its three main rivals, but Tesco is more than twice their size and had an £88m adspend last year, according to Nielsen. Critics say sales have been dragged down by its high proportion of non-food goods, which have been hit by the downturn, but it has other advantages, such as an unrivalled property portfolio. It has also created a service brand it can stretch into untapped areas.
However strong its rivals appear, Tesco still has some aces up its sleeve. Clubcard, the UK's biggest loyalty scheme, is a powerful weapon in the fight to retain customers, and the ‘Every little helps' line is considered the best in the sector. Tesco also boasts stores in a range of styles and sizes, enabling it to segment shoppers. The big question is how effectively it can exploit these to retain its connection with consumers.
Some claim that the retailer needs to pull out all the stops and embark on an even more aggressive price war, which it stands a good chance of winning, given its huge size and the associated economies of scale. Equally important, though, would be to refresh its marketing and ensure the needs of customers are at the heart of its strategy.
Since the departures of Mason and Uwins, many believe Tesco's UK marketing has become too focused on sales. Board-level marketing responsibilities were handed to commercial director Richard Brasher, described by one source as a focused and disciplined commercial marketer, although perhaps lacking a little of the marketing magic associated with the Mason/Uwins era.
‘Without the marketing powerhouses of Mason and Uwins, the business has been two-dimensional and the commercially oriented people that now control the brand have a poor understanding of how to be customer-focused,' claims the source.
‘They reacted to customers in a very straightforward way, but not in a way
that is true to the Tesco brand.'
Price battles
Tesco has had a swift turnover of marketers since Mason and Uwins' departure, with a succession of three executives filling the UK marketing role in two years. Uwins was replaced by Ian Crook, who in turn was replaced a year later by former Vodafone marketer Lance Batchelor. When Batchelor was shifted to head Tesco Telecoms in mid-2008, commercial director for non-foods Carolyn Bradley took over. The Tesco spokesman says it is healthy ‘to move people around as the business grows so that we all benefit from wider experience and knowledge of other areas'.
However, a leading marketing director from a supplier to Tesco believes an important priority for the chain is to refresh its advertising and give it greater personality. He describes the campaigns created by ad agency The Red Brick Road as ‘very clever but lacking the common touch' and refers to the celebrity-voiced ‘Every little helps' TV campaign as a ‘holding campaign that became long-term'. He argues that Tesco is fighting a price battle it cannot win. ‘Asda has set a trap and Tesco has walked straight into it. It has focused on its competitors, but has to get back to the basics of what customers want,' he says.
Asda launched its price-comparison ads at the beginning of 2008 following Tesco's ‘swingometer' ads comparing ¬ supermarket prices. In response, Tesco launched its 'real baskets' ad campaign at the start of the year. Despite these efforts, in reality, it is hard to change shoppers' price perceptions through advertising.
Asda has wrong-footed Tesco on other occasions. When the latter launched its ‘Britain's biggest discounter' campaign last September, taking out ads in the first 20 pages of many daily newspapers, Asda hijacked the campaign by booking space in the remaining pages. While not stealing all Tesco's thunder, it undermined the exclusivity of the advertising blitz.
Meanwhile, there are question marks over Tesco's 2008 Christmas ads, which starred entertainer Des O'Connor. While these created a strong Yuletide association and were warm and humorous, rivals seemed to connect more effectively by using younger celebrities - Sainsbury's employed Ant and Dec, Marks & Spencer used Take That and Morrisons had Top Gear presenter Richard Hammond. Yet a supporter of Tesco's approach says: ‘There's not too much room at the moment for an emotional approach to advertising as it is all about price, but this isn't going to last forever and I wouldn't be surprised if Tesco changes tack and moves on to something more substantial quite soon.'
Research on how shoppers switch between supermarkets appears to back up the impression that Tesco is losing out. According to TNS Worldpanel, in the 12 weeks to 2 November 2008, £22m of spending was switched directly from Tesco to Asda. More than £10m went from Tesco
to Aldi, and a similar sum was lost to Morrisons.
Some analysts believe Tesco needs to take action to head off the gains made by Asda and Morrisons and stem the drift of shoppers to discount retailers such as Aldi. A massive investment in price-cutting might lower margins and share of spend, but could also maintain the chain's leadership. Jonathan Pritchard, supermarket analyst at Oriel Securities, believes this would be the best strategy for Tesco. ‘It should put the cat among the pigeons and invest materially in gross margin,' he says. ‘It would cost it relatively less than its rivals in basis points off its margin.'
The chain is facing criticism for becoming too obsessed with maintaining its profit margins rather than making deeper price cuts. Analysts at JP Morgan said in a note recently: ‘We believe that Tesco is making the mistake of letting the margin dictate its strategy. Its over-ranged stores, the Discount Brands at Tesco initiative and excessive range flexing are all indicators of this.'
The broker noted that Sainsbury's, while not a price leader, remains competitive with Tesco on price, but has maintained its market share while Tesco has lost 0.4% share in 12 months as shoppers trade down. JP Morgan believes that its average basket price is still too expensive for many of its shoppers.
Tesco's central strategy to halt the shift to budget chains was the launch of the Discount sub-brand last September - a development some analysts argue has confused an otherwise perfectly pitched pricing strategy. Patrick Woodall, executive director at retail consultancy Pragma Consulting, says: ‘The range is having a very good effect and people are buying into it. But it has skewed Tesco's price architecture, which was, historically, a thing of beauty and clarity.'
He also believes that the range risks undermining Tesco's ‘good, better, best' price structure. The lowest-priced Tesco Value lines are deemed ‘good', Tesco own-label goods and branded products are ‘better', and Tesco's Finest range fit the ‘best' tag. Shoppers understand this distinction and have adapted to it, often buying Value versions of some lines and Finest for others.
Woodall says it is not clear where the discount brands fit into the accepted three-tier pricing, because the prices of these goods sometimes come in below Value
lines and at other times are closer to the Tesco own-label ranges.
The retailer, on the other hand, believes consumers are not interested in where the Discount range fits into the brand structure. ‘[They] don't need to understand how it fits in, they just need to know that it is a good quality at a fantastic price,' says the spokesman. He adds: ‘People [made the same criticisms of] Tesco Value when it launched in 1993 and few people would now say it has had a detrimental effect on our brand.' According to the retailer, 30% of its customers are now buying products from the Discount range.
The Clubcard loyalty scheme is also in the spotlight. Some observers believe Tesco can make even greater use of it. ‘Clubcard is a key weapon, but it needs a bit of revitalisation,' argues one source. He says the card is still being used in the majority of transactions, more people are taking up deals on offer and it has managed to keep people coming back to Tesco.
However, he adds: ‘People take it for granted. The question is whether there is enough value on the Clubcard to ensure consolidated spending with Tesco.'
Meanwhile, there is a school of thought that Tesco is facing a classic crisis of scale and risks a backlash over the perception that it has got too big. ‘It needs to align its brand with its corporate strategy,' says one senior marketer. This resonates with those who believe it needs a softer image. However, yet others point out that Tesco's overriding strength is its operational efficiency and the fact it delivers on its promises. The majority of shoppers are
less concerned about its ethical position.
There is no doubt that Tesco believes its future lies in pushing into new areas. In financial services, it bought out RBS' stake in joint-venture Tesco Personal Finance last summer, and will soon relaunch the brand with in-store banks. However, these forays have not always been a success. Last summer, it axed its online flower-delivery service after seven years, and it closed its online clothing store early last year after just six months. Last month, it pulled the plug on its in-store TV service, launched with sales agent JCDecaux in 2004. Tesco Direct, its catalogue and online shopping arm for non-food goods, was beset by problems even before its launch in 2006.
Launched last year with ads featuring TV magician Paul Daniels, one of its latest ventures is price-comparison site Tescocompare.com. One of its main offers is car insurance, an extremely competitive sector in the online comparison market. Companies in the sector spent £170m on advertising last year. According to Steve Weller, marketing director of price-comparison and switching website Uswitch, Tescocompare has made few waves. ‘The marketing spend overall is quite minimal and the traffic is small relative to the big players,' he says. ‘You have to spend heavily to establish yourself in this market. The barriers to entry are significant.'
Overall, there is a feeling that Tesco may have experienced a ‘wobble' in recent times. One observer says that Tim Mason and chief executive Sir Terry Leahy acted as sounding-boards for each others' ideas, Leahy's brilliant business brain combining well with Mason's customer-focused marketing. ‘The thing that Tesco has always struggled with, that Mason and Uwins brought to the business, is the creative, intuitive thinking. Brasher is commercially minded, but lacks warmth in his marketing approach. Mason is a very charismatic marketing man, but [Brasher] is a businessman in the Leahy model,' says the source.
Even so, some insist that Tesco has the right long-term strategy to retain its dominance of the UK retail sector. ‘This is a lifestyle and service brand that can stretch across categories because it has the credibility,' says one observer. ‘It has got the right long-term approach, even if the marketing has looked a bit price-focused recently - that's just the state of the market.'
For its part, Tesco is taking a more bullish stance. ‘We are cutting prices, creating jobs, investing in communities, driving forward our climate-change agenda and opening stores,' says the spokesman. ‘There aren't too many British companies that can claim to be doing all these things at the moment.'
The coming months will reveal whether Tesco's recent performance is a function of the current tough times or a business having reached its peak.
Tesco Talks Back : .