Tesco (TSCO) has set up the entrance at its store at Upton Park in East London to reflect the neighborhood demographic.
Mango juice at 50 pence ($0.81) a carton sits beside a stock of 21 Asian publications. Garlic comes in big 500-gram (1.1 pound) nets, while bags of potatoes from Kent advertise them as a perfect ingredient for curry. What you won’t see by the door: staples of traditional packet sauces, tinned soups and 10 types of dog food.
Tesco has refreshed 80 stores in London this year with a targeted, local focus to lure back customers who have defected to cheaper rivals and neighborhood shops. In Upton Park’s case, Tesco says almost all of the area residents are Asian or black and many have large families -- hence the 20-kilo bags of rice and 20-liter drums of cooking oil you’d usually find in a catering industry-supply shop.
“You wouldn’t think people would buy these on a high street but they do and bring them home on the bus,” said Andrew Yaxley, Tesco’s first managing director for London.
Yaxley, a 46-year-old former Mars Inc. executive, has been running Tesco’s newest business unit -- London -- since January. While the rest of the domestic business struggles, the British executive tasked with reviving the biggest U.K. grocer’s only separate domestic geographical unit and creating models that can be replicated in the rest of the country.
The Upton Park store also boasts the first Tesco fresh meat counter that sells fresh Halal products from animals killed in accordance with Islamic law. Sales there have improved 10 percent since the revamp in July, Tesco Chief Executive Officer Phil Clarke said this month when the company reported a drop in first-half earnings. Tesco had its first annual profit decline in almost two decades last year and has invested 1 billion pounds ($1.6 billion) to turn around its U.K. business.
“While tailoring the store to the neighborhood isn’t obviously anything new, Tesco has actually taken the fine-tuning to the next level,” said Bryan Roberts, an analyst at Kantar Retail. “It’s not so much what’s been added to these stores, but what’s been left out.” The Upton Park location, for instance, sells less alcohol than a typical Tesco.
Yaxley was appointed in January to run the 450 multi-format London stores as a separate business unit, with its own property and marketing teams who will try to sell more Tesco goods to the super-rich residents of Kensington, St John’s Wood, traders in the Canary Wharf financial district as well as those in low-paid jobs or receiving government benefits.
After analyzing neighborhood data and working with its own market intelligence firm Dunnhumby and results from its Clubcard loyalty program, stores are now divided into on-the-move outlets, which largely serve commuters, and neighborhood shops. These are then further segmented into serving super-upmarket, upmarket, mid-market and price-sensitive customers. After that, Tesco looks at the ethnic make-up of the neighborhoods and decides how to stock each store.
While Tesco has struggled with declining or stagnating U.K. sales in recent years, “London as a whole has been slightly recession-proof, even though there are clearly price-sensitive areas,” said Yaxley.
While the greater London area has a population of nine million people, daily commuters swell Tesco London’s potential customer base to about 20 million, which makes it “more complex” to target customers, said Yaxley, who has worked at the retailer since 2001.
That’s highlighted at the Tesco Metro in Canary Wharf. While the financial district is located in a less wealthy neighborhood, the shop itself is a super-upmarket store that lures shoppers with champagne, artisan chocolates and fresh bread to cater to the office workers who come in every day.
Yaxley said the Upton Park blueprint will also work in other large U.K. cities with multi-ethnic populations, such as Birmingham, Bradford and Glasgow.
Because the stores are centrally designed by the London team and the traditional “hand cranking”-element of the local store manager ordering specific items is removed, “we can just take the individual building blocks and just drop them into a store anywhere in the country where the segment is similar.”
London’s unique position as Europe’s financial center means more than 50 percent of Tesco’s upmarket stores are in the capital, increasing the trading margin from the U.K. average of 5.2 percent. While Yaxley declined to divulge any financial details about the London business, its margin could be at least 6 percent, according to Exane BNP Paribas analyst Andrew Gwynn.
“The logic of London is the unique demographic,” Gwynn said. “On the wrong side of the road with the wrong offer and you go from local hero to just another Tesco. You can definitely see the logic in focusing more management time on the business.”
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