Tesco outlines detail on new strategy

Date : 21 November 2016

At a presentation to investors last week, Tesco provided new detail about the six strategic drivers it revealed at last month's interim results presentation. Below we summarise the key points:

1. Creating a differentiated brand

Having made good progress in restoring customer trust in Tesco since he took charge of the group, Dave Lewis spoke of how Tesco's adoption of the "Five P's" model is driving the retailer's recovery. The 5 P's are:

  • Purpose - Tesco's purpose of serving Britain's shoppers a little better every day is the starting point for the retailer's strategy
  • Proposition - This is made up of the value equation of Tesco's Brand Guarantee and 'the unique Tesco offering' that extends across range, service, Clubcard and digital as well as price. Communicating how Tesco has changes is now a vital part of strategy and Tesco reports big improvements in the effectiveness of its communications as measured by brand attribution and ad memorability.
  • Product - Tesco pointed out how it now slightly over indexes with AB customers and that with a 5.1m AB shoppers, it attracts more of them than Sainsbury's, M&S and Waitrose combined. At the price sensitive end of the spectrum, it attracts more 'E' shoppers than Aldi and Lidl combined. Tesco's research also shows it has a considerable opportunity to win more customers through the quality of its products. In blind tastings customers rated its own brand products more highly than its main competitor, but not when they knew the product was Tesco's. Tesco is therefore working to strengthen its three tier pricing architecture to maximise traction with different customer groups and occasions.
  • Price - Sharp prices will continue to be a priority for Tesco. Prices fell by 6% in the two years to August 2016 and multi-buys by 37% to re-establish customer trust in everyday low prices, helping Tesco to regain the loyalty of price sensitive shoppers.
  • Place - Tesco sees colleague engagement, improving the store environment and championing of community projects as key ways to differentiate.

2. Reducing operating costs

Tesco plans to reduce operating costs by £1.5bn over the next three years from its £14bn directly addressable cost base (£12bn in the UK and Ireland and £2bn in international markets). This will be broadly split between the store operating model, logistics and goods not for resale.

3. Cash

Tesco aims to generate £9bn of retail cash, by improving profitability, optimising working capital to drive volumes and improve stock turn and refocusing capital spend. Areas of opportunity include reducing back room stock, better sales forecasting and reducing the master assortment. Over the last two years, stock has been reduced by 19% and availability has risen from 93% to 96%. Meanwhile capital expenditure will grow from £1.0bn last year to £1.25bn in 2016/17. Over three quarters of this will be spent on the existing business, a complete reversal on five years ago when new space/businesses accounted for the vast majority of this spending.

4. Property

Tesco has a three pronged approach to property: to optimise the freehold and leasehold mix, to release value from the estate and to repurpose space, both in the UK and internationally. Feeding into this, Tesco is increasingly working with third party operators such as Holland & Barrett and Arcadia Group to drive footfall to visit its larger stores. It also sees a significant opportunity to build new homes above stores and car parks, particularly in London where the the housing shortage is most intense.

5. Maximising the mix

Tesco has provided further detail on how it plans to work towards its 3.5-4.0% group margin ambition, with opportunities determined by geography, portfolio, channel and product. In the UK, improving the profitability of large stores is a priority. Already 54 stores are back in profit through initiatives such as replenishment by day instead of at night, the rollout of 'Scan as you Shop' and introducing RFID to F+F. A refit programme has already been rolled out to 50 stores while 'one touch replenishment' has boosted availability. Smaller stores have been lifted by work to make the range and promotions more relevant to the channel, while in online Tesco is prioritising spending by its loyal Delivery Saver customers, over customer acquisition activities. General merchandise is a further opportunity. In this sector, Tesco is targeting specific categories which people are open to buying from a grocer, such as small electrical products, and a structured abnd presented range has boosted its margin.

6. Innovation

Finally, Tesco highlighted six examples of how it is stepping up innovation. Fresh produce and bread has been a priority area while Tesco's work on healthy eating (for instance Free From and reduced sugar products) demonstrates how seriously it wants to engage with the public health agenda. A new 'Back It' venture for supplier start-ups further demonstrates its innovative zeal.

For more on Tesco's priorities, visit Trading with Tesco: 2016/17 interim results and strategy update