Part I: Tesco’s Leahy ID’s Global Opportunities
Sir Terry Leahy, chief executive of Tesco, told attendees at the first World Retail Congress in Barcelona last week that it wouldn’t have made any sense for him to appear at a conference on global retailing 10 years ago.
Back then, he said, Tesco was operating exclusively in Britain and expansion outside the U.K. was not expected to be a financial engine for the company. Today, the situation is much different. Tesco generates more revenues from stores located in 13 countries outside of the U.K. than it does as the number one grocery retailer in England.
“Globalization and the growing power of consumers act like some kind of giant particle accelerator and everything happens much faster than it used to… Just as the opportunities for businesses, which get it right, are greater than ever before, so the penalties for those who get it wrong are equally dramatic. There is no gentle decline, no hiding place for retailers or suppliers who fail to spot consumer trends or adapt to changing markets,” he told conference attendees.
According to Sir Terry, there are seven trends he believes will have a swift and dramatic impact on retailing either presently and/or in the near future.
The first is consumers’ desire for simplicity. The pace and related stressors of life are beyond what many feel they are able to handle. Companies that manufacture or sell products and/or services that make the lives of consumers easier will be richly rewarded.
Closely linked to the first trend, said Sir Terry, is helping consumers save themselves time. “I sometimes think we should rename the species the Human Doing rather than the Human Being. People are working later so they want to be able to pick up something on the way home. That’s why we came up with our Express convenience stores – they are now our most popular format, and provided the inspiration for our expansion into the Unites States.”
Next on the Tesco’s chief list is the concern that people have for their health and looks as they age (immortality as he calls it). This concern is among the reasons, he asserted, that organics grew nearly 40 percent in Tesco stores and why changes the company made in nutritional labeling have led to improved performance.
Globalization, Sir Terry’s fourth trend, is having a dramatic impact as China and now India seemed destined to transform not only the manufacture of goods for sale at retail but other aspects of the business, as well. “At Tesco, virtually all of our IT is now being written in India, and I think that this is just the beginning,” he said.
According to Sir Terry, the access to information will forever alter the consumer/merchant relationship. “It helps retailers know much more about what their customers want and think. But it also gives customers a very powerful tool,” he said. “They can compare prices and buy online at the click of a mouse. They can look at a retailer’s ethical or environmental policies and find out what is being said about them anywhere in the world.”
Number six on the list is trust. Consumers will have a variety of measures to gauge the degree to which they can trust a specific retailer. Maintain that trust and opportunities will grow with it.
On the other hand, he said, “it (trust) can be destroyed overnight. Here is something of a paradox – the bigger a company becomes, the more vulnerable it is to loss of reputation, so its very size is the best guarantor of customer interests. I know this may seem counterintuitive, but the bigger you become, the harder you have to work to look after the public interest and to safeguard your reputation.”
Of all the trends, “green consumerism” is the one with the greatest opportunity to transform society and retailing, according to the Tesco CEO. “All our research shows that consumers are more and more aware of their carbon footprint, and that they want us to help them tackle climate change.”
They also want companies to make a concerted effort to deal with environmental issues. “I know conventional wisdom says that small is beautiful so far as the environment is concerned. But I don’t think it follows. By harnessing the actions of 20 million customers in the U.K. for example, by pledging to halve the price of energy-efficient light-bulbs, by switching our transport fleet to bio-fuels, we will be able to make an impact that a corner shop can never make.”
Discussion Question: What was your reaction to Sir Terry Leahy’s statement that, “Globalization and the growing power of consumers act like some kind of giant particle accelerator and everything happens much faster than it used to… Just as the opportunities for businesses, which get it right, are greater than ever before, so the penalties for those who get it wrong are equally dramatic. There is no gentle decline, no hiding place for retailers or suppliers who fail to spot consumer trends or adapt to changing markets.”?
As information becomes more and more ubiquitous, markets will become more and more efficient. One of the properties of market efficiency that has already proven itself in capital markets and seems now to be making its way into consumer markets is that nothing a business does, be it a success or a failure, is hidden from the consumers eyes, and the consumer judges the business accordingly. So reward or punishment is swift, as Sir Terry put it. Interestingly, trend #7 is something that not too many retailers are leveraging enough. Consumers will have a greater loyalty for retail brands that are more than just a business out to make a profit. If a business is actively taking a role in changing the environment they operate in, it will not fail to be noticed by the consumer, however small that role be. So it is quite impressive that Sir Terry is setting an example in this area.
It would be reasonably impossible to dispute Tesco’s Sir Terry Leahy’s statement that, “Globalization and the growing power of consumers act like some kind of giant particle accelerator and everything happens much faster than it used to.” One factor that makes that statement more true today than anytime in the past is that more people than ever are away from home eight to twelve hours or more and therefore, most people crave a shopping experience based on simplicity, reliability, integrity and consistency. Those four words mean different things to different target markets of consumers and each retail chain needs to be sure that its business models, and the method it chooses for marketing and merchandising, are the right fit. In today’s faster paced world, doing things right will create more consumer loyalty than ever before, and doing things wrong will cause immediate and almost irreversible self-destruction. This is true not only for the retailer but also for the manufacturer, the supplier, and all points and people between.
He’s spot on! As the game accelerates, so do the stakes. Customer expectations are now the product of the Internet; 24 X 7 media; and the evolution of personal consumption ecologies. We keep talking about the impact of globalization on business but we keep missing the fact that that impact is best measured one consumer at a time.
RetailWire readers will no doubt be speculating how Sir Terry Leahy’s views may relate to Tesco’s planned US venture. Let me suggest as follows:
*Saving time: The ready/part-prepared meals category in the US lags that found in other markets. Tesco’s track record of innovation and agility in this area is superlative, and promises much for US consumers.
*Green consumerism: Proximity and intimacy with the consumer is at the heart of Tesco’s customer proposition, and trends in this area will undoubtedly be reflected in what they’ll offer.
*Information explosion: Information from Tesco’s Clubcard has been a key success factor for Tesco. Leahy’s recent comments concerning a global Clubcard rollout imply this may well be a determinant of their progress in the US.
*Globalization: Tesco has shown its ability to export its global business model and shape it to local conditions. Undoubtedly this will be the case in the US.
*Immortality: Tesco have announced they won’t be selling tobacco products!
*Simple choices: One of Tesco’s mantras is “Better for customers…simpler for staff…cheaper for Tesco.”
*Trust: With customer centricity at the heart of their business, we can expect Tesco to quickly resonate with US consumers via a worthwhile, dependable shopping experience–every time.
Having listened to consumers articulating their convenience/neighborhood retail wish list at last week’s Convenience Store News Future Forum focus group, Tesco should have little trouble capturing their hearts as well as their wallets.
Based on this report, I’d say Sir Terry’s remarks in Barcelona qualify as a statesman-like summary of the major issues that large retail companies must confront going forward. Since each is a discussion in itself, let me focus on one of his ideas, the imperative of bigness.
Very large retailers like Tesco, Wal-Mart, Carrefour, Kroger, Metro and the like share an interesting trait–they wield large physical and economic footprints. These companies are highly visible exemplars of energy use, social responsibility, human values, and now globalism. In countries where they operate, they touch every consumer every week.
So while the stakes are very high for these companies in terms of reputation, their opportunity to do well by doing good is equally large:
When a multi-thousand-store retail chain switches to energy-saving fluorescent lighting, it not only saves significant amounts of atmospheric carbon, it also helps shape the market for such lighting products by driving scale economies–making them cheaper and more accessible for others.
When a large supermarket operator decides to emphasize organic foods, it creates an expanded market for growers and CPG firms that redefines their ongoing strategy. Increased supply leads to increased awareness and thereby demand, changing the way some consumers consume.
When a large chain chooses not to sell goods produced by exploited foreign workers, it deals a blow to irresponsible manufacturers, shames foreign governments and sets a highly visible example of responsibility. Better actors are rewarded with increased prosperity, ultimately expanding the global shopper base.
In short–large retailers are flexing their muscles on the global stage. They are realizing their power to make markets and establish new norms for corporate behavior. Because they are closest to the consumer, they have greater incentive to be socially responsible and humanistic than large upstream producers. I applaud Sir Terry’s vision–it hints at a long-term winning strategy that goes beyond consumer-centricity toward global stewardship.
He has some very good points here, but he has forgotten some very valuable lessons that retailers learn everyday. Two of them being customer service, and the Internet. The presence of the Internet is changing not only how we do things, but how we communicate and how we make our choices for products and services around the world. It is truly the globalization of ideas, concepts, implementations and an equalizer in the retail world. The internet represents the cutting edge of retailing and where it will be tomorrow, not so much where retailing is today. Customer service is one of the best definers of how a retailer will fare in a competitive environment. It is the great separator between good retailers and great ones. Customer service defines companies who succeed despite all of the other factors. Companies who recognize this, can compete globally, in any environment, under all conditions. It has been and will continue to be the key to every retailers success.
Trust and saving time are made significant by the explosion of information. I chose them for their philosophical root…simple. The others, especially green, immortality and globalization are mostly spin. To make one of those choices accurately, one would have to know the time frame. Ideas held up by money drain as soon as the plug is pulled.
Terry has spotted 7 big trends for survival, but there are several missing:
Speed to market.
The drive to remove time from the supply chain and so improve a businesses ability to respond to the new trends and the known sales information. This is a top line, profitable sales driver. More products sold and sold at full price. Lower discounted goods e.g. JCP’s new initiative to go direct to Full Service Manufacturers (FSM). Estimated to reduce their $1 billion P2 to P5 markdowns by 10% or $100 million. Nike’s new design and development center in Sri-Lanka. Adidas’ new agreement to set up a new design and development center in India. Polo RL, Dillard’s and VS Design and development centers at the Leun Thai (FSM) supply chain city in South China. Best in class virtual manufacturing locations in Sri-Lanka.
Reduced COGS.
The age old initiative to continue to reduce the cost of the product and so increase Initial Mark Up (IMU). The focus has moved to removing non-value added activities, steps, processes and entities. So moving to point-to-point, Right First Time (Six Sigma) and lean manufacturing (Toyota) principles e.g. JCP’s 48% direct business averaging 7%-8% higher IMU than working with “importers.” Kohl’s chasing JCP’s strategy having a 4%-5% higher IMU. Federated approaching Asian Full Service Manufacturers (FSM) to develop full intimate lines under exclusive diffusion labels.
Differentiation/Innovation.
In a time where consumers are bombarded with an array of choices 24/7/365, where winning ideas are replicated and brought to market in weeks or days by speed enabled competitors; winners are more and more focused on how to move out of a competitive to a differentiated environment. Much of this is driven and created by a distortion of resources to innovative operational models, product or both. As stated by the Economist:
“Innovation is now recognized as the single most important ingredient in any modern economy. Just as this is true about nations so it is equally true about organizations.”
Nike, A&F and Victoria’s Secret creation of R&D focused organizations and infrastructures. Zara and H&M’s unique and innovative operating models. Zara’s consumer demand model. Dell’s Supply chain etc.
Private Label, Exclusive Brands. (Iconic Brands Diffusion Lines)
A significant trend is the movement in mass channels to own or exclusive labels. Focused at the need to differentiate, communicate and capture the heart of the consumer e.g. Limited Brands initiative to be the US distribution channel for the top Iconic Brands in Europe.
Growth of Offshore, Full Service Manufacturers.
Offshore supply chains continue to evolve at an every increasing rate. Many have moved passed the ability to simply develop and manufacture products under the directive of EU or US design and production teams. The loss of practical training environments for designers, development and production teams in 1st world environments has generated a shift in the center of the front-end expertise to offshore locations. In addition, higher standards of living and a fashion forward culture is showing a movement of the front end processes being acquired or starting to migrate offshore e.g. Triumph, the world largest intimate brand and largest independent design group for VS have their head offices in Hong Kong. MAS, the largest manufacturer in Sri-Lanka, staff & host both the Nike and Adidas Design and Development centers. Manufacturing company, Luen Thai, created Supply Chain City to Host the Design and Development centers for US and EU retailers & Brands in south China. Industry Supply chain councils are being established with retailers to create their optimal supply chains rather than prospect existing supply chains. Infosys, one of the world’s largest software writers has its head office in India and manages much of the USA’s code outsourcing.
Full Service Manufactures creating or acquiring Brands and importers.
Offshore FSM’s are buying EU and US based brands and importers in addition to creating new and exciting Brands. These are focused at the new and emerging markets as well as the more traditional US and European markets e.g. Li & Fung buys the Women’s Wear division of Oxford Industries and so gain direct access to the mass channel eliminating significant US based SG&A. Luen Thai buy GJM and now own a domestic brand “The Lingerie Collection” and have direct access to all its channels of distribution. MAS in Sri-Lanka buy the name “Vannina Vesperina” is the top new intimates designer in Europe, and have entered into an exclusive to have her design and develop her lines through them. A South China manufacturing company buys Courtaulds from Sara Lee. Courtaulds was Marks & Spencer’s 2nd largest UK based supplier.
Outsourcing to low cost locations.
This does not need explanation. Deeper insight into the current sophistication of outsourcing can be found in “The World is Flat” by Thomas L. Friedman.
Speaking of simplicity, let me simplify what Sir Leahy may be speaking around: consumer expectations. Maybe I am wrong, but it seems that consumer expectations are behind everything he is talking about. Ironically, despite all the apparent sophistication in retail, our data shows that 96% of retail organizations meet 70% or fewer of customer expectations. This is not a high number. The trouble with this topic is that looked at in the light in which it is presented, it may seem complicated and even unrealistic. On the other hand, consumer expectations are measurable, trackable, “easy” to meet, and the basis of profitability. They are the key to everything, in my view.
Hear, Hear! Companies that don’t believe what Sir Terry Leahy said should remember back to hearing or reading these remarks when they are bought out or filing for bankruptcy! Currently about half the traffic on the Internet is in Chinese. Anyone who thinks the Western view of the world will dominate much longer is wearing blinders. Not only do we have to open borders, we have to learn new business models! I hope Sir Leahy’s remarks get reprinted and rebroadcast over and over so they have the impact they deserve.
I’m not sure it is globalization so much as it is the realization that national boundaries should not be a business barrier. When Tesco figured out that (a) the UK population was not booming, (b) there was a limited amount of business to be gained from chain-switching, and (c) their business model appeals to people in countries outside the UK, they made what appears to be a sensible decision–open stores outside the UK. This is not globalization–it’s opening new markets in order to expand your product sales.
Sir Terry Leahy’s points all sound great, but he left out #1: for most shoppers: price/value is #1. Most retailers are the public’s price/value negotiators. If they get the negotiation wrong, they lose customers and profits. If Tesco did all seven things mentioned in the article, but got its price/value wrong, there’d be no Tesco in any country.
To Mark’s comment above, integrity in pricing and the value proposition cannot be underestimated as the consumer grows more information-literate. Just this morning, a coworker was sharing how he and his wife have moved purchases from Lord & Taylor and Best Buy over what is essentially value. One would expect the prices to be better at L&T and Best Buy, but in L&T’s case it was false promotional “sale” prices (I am holding good thoughts for the new owners) versus the same item at Nordstrom; at Best Buy identical prices but with virtually no service that shifted the sale to Williams-Sonoma, both of which they had thought were too expensive for their pocketbook. It will take a lot to un-do their new perceptions that they can shop at more upscale retailers without paying more.
The response to the poll at the time I checked in showed “exploding information access” as the leading candidate for “greatest impact.” The irony is that the same explosion in information that impacts consumers impacts business as well. We tend to call the result “convergence.”
We do an industry study every three years on the “sales force of the future.” We ask U.S. retailers and senior sales executives what is most important to them now, and what will be in the future. Three years ago manufacturers rated “Globalization” as a more important issue than retailers. This year retailers flipped that result. In fact, the single biggest discrepancy in importance between the two groups was with retailers rating Globalization as significantly more important than the sales executive group.
When asked for a hypothesis of explanation, we mused that going global was very important to U.S. manufacturers when Wal-Mart was doing it–and that it has become very important to U.S. retailers now that Tesco is doing it.
I am in agreement with Stephen Needel; Tesco’s expansion into other markets is a necessary reaction to the saturation of the UK grocery market and a realisation that with a strong business model the company has significant opportunity to generate incremental revenues from overseas.
There is, however, a real challenge in being successful in terms of providing simplicity and catering to an increasingly time starved customer base. Time starvation ultimately leads to a fragmentation of an individual’s shopping time as well as an overall reduction in it. That is to say that people are shopping increasingly on an as and when needed basis for smaller amounts of time in each instance. This tends to sharpen and focus the shopper’s needs on specific issues and elements of the retail offering that are most pertinent at the time. Simplicity therefore needs to be provided (in terms of product range, retail environment and service proposition) in a way that caters to increasingly diverse shopping contexts or missions. To achieve this, retailers must become increasingly sophisticated (and complex) in their approach to understanding and evaluating customer needs and then translating these needs into simple offers, both from the perspective of the shopper in terms of their ability to understand and engage with the offer, and in terms of the retailers ability to execute the offer. Awareness of these issues have been the driving force behind the development of Tesco’s store format approach. As Terry Leahy states, each format is designed to appeal to a defined set of shopper circumstances thereby focusing the offer of the format and making it easier to deliver simplicity in the context of the shopping missions to which the format is targeted.
However, this approach, albeit compelling, will become more onerous as shopper behaviour fragments further and as businesses such as Tesco expand into new markets which harbour new and different shopping circumstances and shopper need states.
Desire for simplicity. Time-poorness. Concern with health. Effects of globalization. Greater access to information. The importance of trust. Environmentalism. These are all important trends that have been in the pipeline for some time (I have been discussing and analyzing them for all of my 20+ years as a business futurist). And yes, the pace of change has quickened (we tend to overestimate change in the short-run, and to underestimate change in the long-run). But I’m surprised Sir Terry did not discuss one of the most important drivers of change, and one of the most important trends in its own right: technology, particularly the Internet.
The impacts of technology on retailing have been profound, and the impact of ubiquitous, affordable, consumer-friendly broadband connectivity is revolutionary in its implications. As readers know, I tend to overemphasize this point, but it is so important I will repeat it again: the most important trend in retailing is the need to integrate in-store and online operations and environments from both management’s and the consumer’s perspective.
We are now and forever in a multichannel universe. And as Sir Terry says, those who leverage trends have great potential, while those who do not risk great failure.
These are all really quite obvious, and because many are aware of these trends, the addition of specific details would be more valuable. From a globalization standpoint, what is the most important trend within each country or region and what is Tesco’s response? Good point raised on price/value, but while price/value is critical, it’s a constant and not a trend.
I had the pleasure of seeing this presentation in Barcelona. Sir Terry was warmly received. I agree with his assessment that companies that are approaching emerging markets (globalization…and to him the US is an emerging market…) are doing so with a fast approach and seeing quick results. At no other time in retail history do you have existing chains in many countries entering emerging markets opening 100 stores within short periods of time. Those retailers that can adapt and move quickly–and keep focus on respecting local cultures and needs may reap great profits. Those that don’t get it right may also lose great profits…so the market will prove the winner once again, by share of wallet. The customer is the ultimate vote–whether in the US or in China.
The one concept that Sir Terry missed was a value equation. Everyone, regardless of country of origin, is respectful of price and value. This may differ from country to country but retailers must respect this as a core tenant.
These 7 trends cover the key areas that retailers need to focus on, regardless of whether they are global or local markets. The important trend that he sites, which allows for flexibility and differences within a particular country or region is trust. “Consumers will have a variety of measures to gauge the degree to which they can trust a specific retailer.” Retailers need to understand the needs that drive trust through consumer purchase decision analysis (e.g. price/value, segments, brands, flavours, formats). The danger when focusing on global is trying to standardize consumer needs across all countries–this isn’t going to work. Retailers (and suppliers) need to respond to changes within a country or region, and not try to satisfy “global consumers” with a “one size fits all” approach.
Leahy’s seven points are terrific. It is great that the retail industry constantly spawns leaders who are able to articulate all of the cross currents of culture.
As good as his list is, just responding to seven trends will not ensure a retailer of sustainable success. There are four other things separates great retailers from copy cats.
First, great retailers are able to connect with the customers with a special experience. Here we are talking about the entirety of experience, delivered every day.
Second, great retailers must provide a stimulating work place. Otherwise, the first line managers and employees cannot consistently deliver on the retailers value proposition.
Third, great retailers must be able to innovate frequently, consistently, and with great skill. Too many can’t move the mountain that is themselves.
Fourth, great retailers must be able to leverage information so that their professionals and managers know far more about themselves than there competitors do about themselves.
In the end it is about the value the comes streaming from consistent excellence in these four areas.
He certainly left a few key trends out. Perhaps the biggest omission is the desire that all of us have for “affordable indulgence.” This is what made Target take off and has Wal-Mart scratching their heads. This is why Coach is one of the hottest retailers on the planet. The voyage of discovery you get at Trader Joe’s alleviates the boring and the repetitive aspects of daily existence. Even with the omissions regarding this trend and the one that a prior person noted regarding price/value, I think this is a thought-provoking piece.
Terrific discussion all around, and quite a few helpful additions to the list of seven–particularly the value proposition. Although the internet has been mentioned by several, I don’t think that the industry yet appreciates the way in which online and offline shopping will blend together to become somewhat indistinguishable as to both boundaries and to an extent, experience for the shopper.
Just as an online shopper click, click, clicks their way through their online shopping trip, so the in-store shopper “click, click, clicks” their way through their bricks and mortar experience. Stop & Shop’s Shopping Buddy (Cuesol) and MediaCart at Shop Rite (in test) both blend the online/offline experience. But offline retailers like Tesco will need to become far more adept at dealing with the in-store “clickstream” if they are going to win–or even survive–in the coming shopper-centric retailing revolution.
Detailed customization of the shopping experience, based on dunnhumby type analysis, will pale compared to customization of the shopping experience in-store, while simultaneously making the internet effective ON the shoppers cart. Fasten your seat belts, retailers!