Three big mistakes Tesco made in the run up to its profit warning today

Tesco CEO Philip Clarke announced he would be stepping down amid the supermarket giant’s profit warning. We take a look at its three biggest mistakes leading up to this point (with the help of some analysts).

1. It forgot we care about prices and the shopping experience

Tesco

The first and, some would argue, most crucial mistake Tesco made was it forgot that customers want low prices.

Ed Garner, director at retail analyst Kantar Worldpanel, says customers have the perception Tesco is expensive.

“Bearing in mind around 40% of the country shops in a Tesco Express in a year, perhaps it could be seen as a mistake to start at a higher price point in those stores. This is something Tesco has said too – it quite consciously doesn’t offer low prices or promotions because it’s about convenience – but it leaves the customer with the impression it’s expensive.”

If you’ve ever had trouble grabbing a staff member when you need one, or have had to queue for 10 minutes just for a pint of milk you’ll understand that Tesco has also been accused of stretching staff too thin among its stores. It’s pledged to hire more staff to keep up with the number of stores after staff per 1,000 sq ft of selling space fell from 6.3 to 4.8 between 2006 and 2012.

2. It lost focus

Tesco

The supermarket giant has so many business areas, it’s hard to keep up. And perhaps it was hard for Tesco to keep up too.

In April 2013, it pulled out of the US after failing to launch its Fresh & Easy chain there, signalling the first time its profits fell in more than 20 years.

It now has fingers in pies such as a postal gold selling service, an online tyre shop, a range of beauty salons and even its own record label. And these are alongside the services we’ve become familiar with, such as its mobile phone network, opticians and bank.

This lack of focus could be what made investors turn on CEO Philip Clarke.

Joshua Raymond, chief market strategist at Cityindex.co.uk, says: “The writing has been on the wall for sometime now and given the fact another profit warning has now been issued, this seems to have been the final straw in Clarke’s tenure.

“Clarke failed to garner a united executive board, with senior figures leaving the ship in the last six months and his turnaround plan never gained momentum. If Clarke had not have moved on, the odds are that a shareholder revolt would have done it within a few months.”

3. It’s got some serious competition

Tesco trollyes

New competition in the shape of discount retailers Lidl and, particularly, Aldi, which is growing 35% year on year in the UK, has meant Tesco has had to contend with an unfamiliar rival.

The recession forced consumers to be more concerned about value for money than buying certain brands, allowing discount supermarkets to capture market share from the big four.

Consumers also appear to be revolting against the biggest retailers and supporting smaller chains and independent shops – but they’d be mistaken in thinking the discounters were small, says Kantar Worldpanel’s Garner.

“We view Aldi as an underdog, but it absolutely isn’t. It’s owned by the richest person in Germany, and is massive on the continent. In fact, some items it probably buys in bigger volumes than Tesco.”

What’s next?

Tesco’s share price rose rapidly after the announcement of Clarke’s departure – unusual considering the retailer also issued a profit warning at the same time.

However, the retailer’s strong online presence could help it weather the changing grocery market, and the new CEO Dave Lewis will be able to look at the giant with fresh eyes.

Did Philip Clarke do a good job? Tweet me your thoughts @robynvinter

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Readers' comments (2)

  • Anonymous

    They pioneered customer centric service in UK supermarkets and then abandoned it for profit and got what was coming to them. The new CEO has a monumental task ahead for him

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  • Anonymous

    Quite frankly, this article, along with many others, completely misses the point - big time. The product that they sell is fundamental, as it is to any organisation. Much of Tescos food, especially own brand, is appalling - not to say total c**p.

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