At a City presentation for investors on Tuesday 18 June, Tesco outlined some of its medium-term growth ambitions, putting a strong emphasis on its ongoing cost efficiencies and how these gains might be reinvested into the business. With Tesco looking to complete Dave Lewis’ 2016 business turnaround plan, several new initiatives were set out to define the next three years for the company.
A new premium store concept
Tesco announced the possibility it might trial ‘Finest’ stores that would carry only its premium private label – seen as a riposte to M&S Food and Little Waitrose high-end convenience stores. The new stores are likely to be in Central London and other affluent, high-traffic zones, focusing almost exclusively on meal missions. Tesco is not expected to launch the format soon, but rather assesses the concept for the medium-to-long run.
A glimpse of the possible Finest convenience format. (Source: Tesco CMD Presentation)
Strong focus on small box
Tesco also stated it still sees headroom for further franchised growth for its One Stop proximity banner, with around 100 mentioned as an initial target. Leveraging Booker’s existing experience with symbol groups, One Stop expansion is likely to continue in the coming years.
Tesco aims to leverage its Booker acquisition to build its influence in the small-box sphere, with plans to boost sales from the current GBP6 billion by at least GBP2.5 billion in the near term. B2B clients can expect a new online ordering platform powered by Tesco’s strong experience in the channel, and a suite of extra services like finance and telecoms offers.
Activating the Booker acquisition to deliver improved returns. (Source: Tesco CMD Presentation)
Outside the UK, Tesco also has dramatic plans for convenience growth in Thailand, where it believes it has room to add an extra 750 c-stores, shifting its commercial focus away from cash & carries to small-box. One new venture is a new agreement with a Vietnamese retailer to sell Tesco’s private label ranges in that market.
Rethinking Jack’s proposition
Tesco was less bullish about its Jack’s discount format, with no plans revealed for further expansion beyond the nine outlets already operational. It did highlight the latest opening, a concept that appears more of a cash & carry than a standard discounter, potentially flagging a future direction for the chain.
Inspired by Carrefour Brazil's Atacadão model - new thinking around the Jack's concept. (Source: Tesco CMD Presentation)
Tech investments boost back-end agility and efficiency
Finally, a new partnership with robotics specialist Takeoff will see the introduction of mini DCs in store warehouses that will speed up online order processing and make deliveries more efficient. This new micro-fulfilment capability will rely on automation, and is expected to boost performance for online delivery, as well as in-store logistics. One reason this is being brought into play now, it was revealed, was that Tesco has now achieved profitability in eCommerce, presumably following the shedding of the Tesco Direct operation in May 2018. This means online is now better placed to move forward and evolve as a key part of a wider omnichannel strategy.
Efficiency gains through technology are uppermost in Tesco’s thinking, with a goal of all self-scanning transactions being cashless within two years and cashless self-service checkouts across the entire UK estate inside five years. That said, Tesco remains cautious with its capex, diligently assessing the ROI of in-store technologies.
Kantar’s Point of View
- By 2020, Tesco is looking to complete CEO Dave Lewis’ business transformation plan set out in 2016. The business needs a new strategic direction, this time focusing more on growth than stabilisation. Tesco has fixed the basics and can now focus strongly on leading the UK grocery with new tech solutions, testing a new value offer, and strengthening its brand and quality perception.
- Tesco will continue to focus on delivering profitable growth, rather than same-store sales growth. Going forward, cost savings will be the real engine behind the future growth as Tesco will continue to be diligent with conserving cash. This vision has consequences for suppliers, too: supplier optimisation, especially for private label ranges, is the top priority under Project Reset.
- The purchasing alliance with Carrefour, creating a data-driven ecosystem through its Clubcard scheme, and Booker integration across channels are unique opportunities for Tesco in the UK market. For brand suppliers, it is essential to reassess what is changing, what will change and what will remain unchanged in their relationship to Tesco as a key account the next 1-3 years period.
- Tesco’s plans are future-looking and realistic. It has resonated strongly with investors, once again positioning the grocer as not only the market leader by market share, but also in terms of new initiatives and vision. Although the range resets and simplification of promotional activities are likely to continue as a part of ‘business as usual’, Tesco is eager to start new conversations with brand suppliers, especially around shopper activation, value diversification, and inventory management.
- Tesco is currently the most profitable retailer in the market, and very likely to hit all its KPIs set for 2020, including cash flow and profit margin. This gives confidence to the management to invest in new ventures and partnerships that will make Tesco even more responsive to shopper trends.
- Tesco is seeking brand suppliers that would be open and agile enough to support its various initiatives at their test phase. Similar to Jack’s evolution from pure discounter store to a hybrid cash & carry/value store over the months, Kantar expects the putative Finest stores to be shaped and reshaped over the next 12 months. Similarly, suppliers should expect changes to the One Stop proposition going forward, as Tesco is likely to boost the food-for-now/food-for-later offer to capture new missions.
Tesco, along with Carrefour and Auchan, was a focus of the recent Kantar virtual event: Managing Transformation in Key Accounts. To learn more about this event and purchase a recording, click here.