STRATEGIC PREVIEW
Strategic Preview: Q4
December 2013 - February 2014
14 April 2014
planetretail.net
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David Gray
Retail Analyst
Strategic Preview: Tesco Q4
1. Expectations for the Quarter
2. UK: Q4 Strategic Changes
3. Global: Q4 Strategic Changes
4. Outlook
5. What’s new at Planet Retail
2. UK: Q4 Strategic Changes
Tesco is investing in permanent price reductions
across core food lines.
 Tesco plans to invest an additional GBP200 million (USD327.7 million)
in lowering prices on essential lines consumers purchase on a regular
basis. This commitment will be reinforced by Tesco’s Price Promise
programme.
 This clearly shows how seriously Tesco takes the threat posed by the hard
discounters, which are increasingly threatening some of Tesco’s key
customer groups. This is driven by the discounters becoming more
mainstream – by (1) targeting high street locations, (2) listing more brands,
(3) introducing more fresh food and (4) developing premium ranges.
 Tesco’s price investment also marks a fundamental adjustment in strategy
as it moves away from a high-low promotional policy to one more like its
arch-rival, Walmart-owned Asda and its EDLP. It is clear this method of price
investment is perceived as more honest by consumers. It also reflects a
growing propensity to shop little and often – which in itself requires fewer
multi-buy promotions.
 The move, however, could also spark a price war – something that is not
good for any retailer as it could drive down margins industry-wide. Rivals
have already begun matching the price of products included in the
investments e.g. four pints of milk. Even so, such a price war is unlikely to
happen, considering it is not in retailers best interests.
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2. UK: Q4 Strategic Changes
Tesco is directing investment during FY14 into
the refurbishment of the Extra format.
 Tesco Extra refurbishments are the number one priority in FY14,
with 110 planned. A further 50 superstores, 40 Metros and 450
Express stores will be refurbished with total capex of GBP500 million
(USD819 million). Plans are to complete the entire estate by 2017.
 Although requiring significant capex, it has the potential to drive up sales at
out-of-town stores. Considering sales uplifts at converted stores are
understood to be running at 3-5%, a wider roll-out will have a positive
impact on sales, not to mention the long-term profitability of the format.
Hypermarkets remain one of Tesco’s most profitable formats despite a
slowdown in their roll-out.
Tesco is experimenting with its foodservice
proposition – launching a New York-style diner (Fred’s
Food Construction) at an Extra store in West London.
 The general merchandise transformation is progressing and will be
completed by autumn 2014. Tesco is anchoring ranges around
family, food, cooking and home.
 Further work on the general merchandise transformation programme
involving the adjustment of ranges away from less profitable products such
as big-ticket electricals will have a positive impact on margins.
 It will also make Tesco’s larger stores more compelling by offering non-food
products more relevant to customers on a weekly food shopping trip. To
this end, ranges such as clothing – a category which is profitable and where
having space instore is clearly of benefit to consumers - is being given more
sales area. Electricals, by contrast, is seeing instore space scaled back.
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Tesco is adjusting general merchandise space towards
more profitable categories such as clothing and
homewares. Electricals are seeing space reduced.
2. UK: Q4 Strategic Changes
Tesco has pledged to improve customer service
as part of the UK improvement programme.
 This is a key strategic objective in fiscal 2014. Tesco has
committed to make productivity improvements which will free
up staff to serve customers on the shop floor. Priority is being
given to fresh food departments and will focus on instore
service points.
 Further work on customer service is clearly needed considering this
remains one of the key methods the Big Four grocers use to
differentiate themselves from hard discounters. Price alone is not
the answer. Customers also want service and a positive overall
shopping experience.
 However, even among the mainstream grocers – competition is
fierce – with Tesco’s rivals such as Sainsbury’s and Waitrose arguably
providing better service. Clearly further investment from Tesco will
be necessary.
 Tesco’s decision to focus staffing on highly frequented categories
such as fresh fruit & vegetables is a sound strategy – giving customer
service improvements the widest possible impact. Nevertheless, it is
unclear which productivity improvements Tesco will be making in
order to free up staff. It may be a case of giving with one hand and
taking away with the other. So far no additional investment has been
committed in this area.
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Tesco has pledged to put more staff on the shop
floor in core categories such as fruit & vegetables.
More staff are needed considering the poor
availability in the category in some stores (above).