13th January 2012
Saturday December 17 – eight days before Christmas – was always going to be a vital 24 hours for retailers. That day, Tesco took large spaces in a number of national newspapers to advertise just one product, a Duracell smartphone charger (a portable pack which pumps power into juice hungry mobile devices).
It retails at around £39. Tesco was selling it for £19.99 – plus another 500 points (worth £5) for those in its Clubcard loyalty scheme, making it a great value stocking filler.
The offer should have drawn customers into Tesco, and a pre-Christmas spending spree. But it did not because there were too few chargers in stock. Tesco has just issued its first profits warning for two decades,
I wanted four chargers plus loads of groceries. I went early to my local large Tesco. The charger was not on the Duracell display. The staff had no idea what I was talking about while the help desk failed to find the item online.
I abandoned the food. Back home, the Tesco website was out of stock. I went to Waitrose.
Retail is detail as my story shows. Why spend money on advertising a great value deal if it is not easily available? And why risk customers going elsewhere because the store falls short of expectations which Tesco itself has created?
Was my experience an isolated instance? Maybe but probably not. So should anyone have been surprised by Tesco’s profit warning which sent the shares crashing down 16% (wiping £5bn off its market capitalisation)? The subsequent equity value recovery has been just over 1%.
So as retail is detail, how many hours do City analysts and investors spend in Tesco (nearly a third of the grocery market) and other outlets, looking at customer behaviour and testing service levels? And if they had visited stores, did they find the experience pleasurable or a distress purchase (going to that store because you have no option)?
Some questioned Tesco’s highly publicised half billion of price cuts in late autumn last year against rivals’ deeper price cuts and money off vouchers. But how many went the stage further and really analysed shopper behaviour? For consumers are not idiots. They have become cynical. They believe that a publicised reduction on one item means a not-publicised increase elsewhere. In Tesco’s case, the £500m in the “big price drop” cuts were largely offset by ending the double Clubcard points promotion.
Many investors have written off the US Fresh & Easy expansion, which is trying to replicate Clubcard with “Friends”, as a costly experiment. But how many probed Tesco’s massive expansion into hyperstores? How many have asked the value or otherwise of Tesco’s “carpet-bombing” areas with smaller format stores? In at least one London suburb, there are several Tesco Express outlets within ten minutes’ walk of each other. Residents complain of Tesco Fatigue.
The recession, unemployment, VAT changes, the internet (with or without Duracell chargers) and all the other excuses retail bosses come up with apply to all stores. They should have strategies to deal with them before they become apparent – that’s why shareholders pay them so much. Investors should not give huge salaries for excuses. Sainsbury’s Morrisons and Waitrose all did better.
Investors should also be wary of like for like (LFL) sales – a measure that compares turnover at stores open now with those in operation a year ago. Sales made at closed stores drop out but are not replaced by those in the new store. “Repentant Banker” commenting on Tesco in The Financial Times points out:
“If a new store makes a sale that would have been made in an old store (if the new store had not been opened ) then the LFL sales which the old store contributes (unlike the new store) will be down. So although total sales may be the same the LFL is lower. Simples! But also illustrates the point some have been making that the obsession with LFL sales does not tell the whole story.”
But until this obsession goes, then investors are stuck with it, as it will determine market behaviour.
Tesco is now likely to scale back huge out of town openings – even cut space at some existing stores. This is bad news for property developers and for insurance companies with large real estate portfolios.