Tesco Challenges Budget Stores by Taking Page from Amazon Playbook

Photographer: Simon Dawson/Bloomberg

Customer orders are placed into plastic carrier bags at a Tesco Plc online distribution center, in Erith, U.K. Close

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Photographer: Simon Dawson/Bloomberg

Customer orders are placed into plastic carrier bags at a Tesco Plc online distribution center, in Erith, U.K.

Ask Tesco Plc (TSCO) Chief Executive Officer Philip Clarke how he plans to stop budget food stores from taking more of his customers and he’ll talk about Amazon.com Inc. and Apple Inc. instead.

Rather than battle retailers like Aldi on price, Clarke is modelling Tesco on the tech giants, building a digital one-stop shop centered around its Hudl tablet that includes everything from movies to banking. A smart phone will join the stable later this year. The aim? Lock in customers by incentivizing them with loyalty points to buy everything from mortgages to grapes from the Cheshunt, England-based retailer.

“I see competition emerging from non-traditional retailers and I watch all of them,” Clarke, 54, said in an April interview. “I’ve always been impressed with Amazon” and their execution.

Clarke, who has presided over three years of annual stock declines, invested 550 million pounds ($931 million) last year into the online endeavor. That’s almost triple the amount he plans in price cuts to lure more customers back from discounters like Aldi and Lidl this year and help stem the grocer’s worst same-store sales decline in a decade. Market share data released today showed that Tesco is starting to claw some ground back.

The digital strategy “is well ahead of many domestic and global competitors,” said Bryan Roberts, an analyst at Kantar Retail. If Clarke succeeds while also fixing store sales “it will certainly help secure Tesco’s future as one of the big international players. If not, they risk being left seriously behind by more innovative companies.”

Global Retreat

After two decades of growth that saw the retailer expand into 13 countries and become one of the world’s biggest grocers, it has reined in its global reach under Clarke and exited two markets. At the same time, its dominance of the U.K., where it collects about one in seven of every pounds spent in retail, is threatened by increasingly price-conscious Britons defecting to the discounters. Also gaining ground domestically has been J Sainsbury Plc, which today reported estimate-beating full-year earnings and predicted a resumption of sales growth this year.

Tesco accounted for 29.1 percent of British supermarket revenue in the four weeks to April 27, compared with 28.6 percent in the period through March 30, analysts at Citigroup Inc. said in a report today, citing data from researcher Kantar Worldpanel that isn’t publicly available. The grocer’s sales rose 0.9 percent, versus a 7 percent drop in March.

The Hudl

Whether Clarke, who has never worked anywhere other than Tesco, can turn the 95-year old grocer into the British Amazon (AMZN) remains to be seen. For one thing, the younger U.S. company is already nipping at his heels, selling general merchandise across the country with speculation rife on whether they will soon sell fresh food. For another, Amazon took almost a decade to turn a profit, a grace period Tesco investors are unlikely to grant Clarke in the current environment.

The gateway to Tesco’s online world is the Hudl, the tablet introduced in September and which can be bought for as little as 60 pounds with the company’s Clubcard loyalty points. That’s half the price of Amazon’s Kindle Fire HD and less than a quarter of an iPad mini.

The Hudl comes with a raft of Tesco apps to encourage users to buy everything from new release movies and e-books via Tesco’s BlinkBox to its F&F clothing and then pay off their mortgage via a Tesco home loan. Coming up: a smart phone and a mobile phone digital wallet that will allow customers to spend across the Tesco universe and shorten the time at the till.

Second Weapon

Clarke bought BlinkBox in 2011, inspired by Amazon acquiring local rival Lovefilm. Aside from being a revenue generator in its own right, the service also drives “frequency and loyalty,” the CEO said. Customers who download Blinkbox movies spend another 13 percent on top of that on Tesco goods and services, while those who shop online and in stores spend three times as much as those that just go to the outlets.

The bad news is that currently just 4 percent of Tesco’s 20 million weekly U.K. customers also shop online with the grocer, though it’s a market that’s growing 11 percent a year, according to Robin Terrell, a former Amazon executive and Tesco’s group multi-channel director. Clarke has charged Terrell with integrating the physical world of stores and the digital future.

For now, that future is tied to Tesco’s roots: stores. “You have to work absolutely hard on the core because if the core isn’t right, then people aren’t spending in store,” Terrell said.

Tesco has sold 550,000 of the 7-inch screen Hudl devices that run on Google Inc.’s Android platform, capturing 2 percent of the tablet market in the U.K., according to Kantar Worldpanel. Hudl users tend to be older –- 82 percent are over 35 -- and are more likely to visit grocery stores.

‘The Basics’

That means they are more prone to be attracted with the Clubcard, the loyalty program that gives holders money-off coupons for items like diapers and gas. It’s the reason why Clarke bets someone would buy Disney’s “Frozen” from Blinkbox for the same price as Amazon. The former earns 14 Clubcard points.

Still, true “loyalty will come from how it delivers the basics and Tesco has taken the eye off the ball with the basics,” said Miriam Burt, an analyst at researcher Gartner.

Tesco lost more than 1 percentage point in share of the 170 billion-pound grocery market in the year through March 30, while discounters Aldi and Lidl gained 1.7 percentage points combined. Their push has led analysts including Shore Capital’s Clive Black to say Tesco must fight harder on price.

The shares fell 0.6 percent to 286.05 pence at the close of trading in London today, extending their drop this year to 14 percent.

Whether Clarke’s investors will give him the two-to-three years to prove the analysts wrong remains to be seen.

“I have plenty of conversations with shareholders about these things,” Clarke said. “I hope they get it.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Paul Jarvis

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