I have had the p*** taken out of me unmercifully in the last couple of weeks. This follows my article at the beginning of April in the FPJ. I hasten to add it wasn’t the article that caused such amusement but the description of me as a business “guru”. I am not a Hindu and I am certainly a long, long way from being “influential and revered”.
However when reviewing the Tesco results this month perhaps the word guru would not be misused in describing Terry Leahy’s leadership of Tesco over the last five years. There is perhaps a mystical quality about how such sustained improvement has been achieved in what should have been a pretty aggressive retail environment.
In my last article I referred to two key things in relation to development of strategy. They were the four key strategy modes - Passive, Active, Proactive and Monopolistic - and secondly the critical use of information and market data. Tesco has followed an aggressively proactive strategy and using its performance in the fresh produce market can illuminate this.
In the last 10 years consumers have been shopping more frequently, a reversal of trend, and have been visiting a greater variety of stores. Fresh food in general has been the key battleground in getting consumer loyalty. Fresh produce has been at the forefront of the battle as the most visible and sensitive of the markets to get right. This is the area where consumer’s perception of the store branding is most accurately decided.
Fundamental to the process of basic category management is the measurement of consumers’ visits to stores (propensity) and amount they purchase from the store relative to their total purchase within a particular category or product (loyalty).
i.e. LOYALTY X PROPENSITY = SHARE OF TRADE
It sounds pretty simple but which of them comes first and what’s the priority? Getting people into the stores is vital and is the same as getting a product listed in more stores; it raises the potential for increased penetration of consumers. So increased propensity gives the opportunity to increase sales, but if the product offer is not good enough then consumers will not buy, loyalty will drop and propensity will drop over time.
So with thanks to TNS, let’s look at this process using real data:
Charts 1 and 2 show that five years ago Tesco had just fewer than 60 per cent of purchasers buying just over 40 per cent of its fresh produce and this produced a share of trade of 23.5 per cent. Tesco had already put together a good offer on fresh produce and had increased propensity with a major drive to increase store numbers, store size and opening hours. In terms of strategy, the increased propensity from expansion was, and is, the deciding factor. Relative to the limits of propensity and loyalty imposed by availability of stores to consumers, Waitrose, Sainburys and Safeway were outperforming Tesco within the fresh produce market.
Chart 3 shows the retailers’ loyalty propensity relative to “fair share”, therefore are they outperforming or underperforming versus the total business. Waitrose was doing a great job in attracting large numbers of consumers to the fresh produce area relative to the total numbers visiting its stores and was getting customers to purchase loyally. No surprise to any in the trade but the major restrictions on store openings imposed by Partnership constraints had left Waitrose positioned as a niche player.
Given the space available to Asda, Waitrose would have been as big as Tesco on fresh produce. Safeway was doing a great job of utilising significant niche areas in produce to establish a base of loyal consumers. Hence it had large, promotionally driven, market shares in products such as cherry tomatoes. Sainsbury’s has, quite frankly, always been good at fresh produce and the relative position above was a weakening position as it continued to let the market slip away by not opening stores and by under investment in its core stores. How can you have 40 per cent of the highest spending area in the UK (London) and not protect it? NB. There is some positive news to follow!
So five years ago Tesco had a great mass-market position with 60 per cent of consumers shopping fresh produce and good loyalty. However the chain could have had real problems from there as convention says that the bigger you are the more difficult it gets to keep control and manage the detail of more and bigger suppliers controlling vast volumes in a short life market.
In addition to all of this, it had Waitrose, Sainsbury’s and others creaming off the top end and Asda, Morrisons and the discounters expanding rapidly. Asda and Morrisons, with large, efficient stores, would always be a threat but, at this stage, were not convincing consumers of their fresh produce credentials relative to other parts of their businesses.
So where are we now in 2005? Morrisons has acquired Safeway, Waitrose has added about 60 stores, Sainsbury’s has refurbished and expanded and Somerfield still has the apparently insurmountable problem of huge numbers of small stores. Tesco has expanded to nearly 1,800 stores including 100 Tesco Extra Hypermarkets. This involves massive expansion in numbers, space, ranges, complexity and of course profitability. So what is the competitive position today? (see chart 4).
We see propensity up by retailer as shoppers move from store to store but only Waitrose has actually improved the real loyalty of its consumers as it has expanded. We see that with a massive influx of shoppers Tesco has increased share to over 27 per cent in the 52 weeks in question and is actually approaching 30 per cent at the end of this period. Whilst Sainsbury’s has lost share to about 18.5 per cent, fresh produce is still a core strength in the relative positioning. This could lead its recovery. Asda still under performs (see charts 5 and 6).
Generally the job of the category manager is to do this sort of exercise by product and to plot a path from the bottom left hand quadrant up along the loyalty axis and right into the top right quadrant. As Tesco has demonstrated, if you do this consistently over years you can dominate a market.
Space restricts any further explanation but I will return to this in the next article.
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