Tesco’s buyout of Booker, the UK’s biggest wholesaler, delighted analysts, may earn CEO Dave Lewis a new nickname.
Appointed in 2014 to turn the retail giant around, he pruned the company with such ruthless determination that he became known as ‘Drastic’. After this £3.7bn deal, which has delighted analysts, disconcerted rivals, worried some farmers and triggered the resignation of non-executive director Richard Cousins, Lewis might be better known as ‘Dramatic’.
The deal will be scrutinised in excruciating detail by the competition authorities, and Tesco may have to make compromises and concessions to get its way, but it marks a significant turning point for the company.
To understand how significant, it is, unfortunately, necessary to revisit the retailer’s past. In the mid-noughties, Tesco was one of UK Plc’s brightest stars, bringing down prices for shoppers, routinely increasing revenues, crushing the opposition, looking to conquer America and generally flourishing under superhero CEO Terry Leahy. In 2005, when the retailer made a £2bn profit, Leahy even had to issue a statement denying that it had become too successful.
How times have changed. Tesco is no longer the cheapest supermarket in town – a crown now contested by Aldi and Lidl in the UK. America refused to be conquered, costing the group at least £1bn. The mighty Amazon has entered the grocery business with Amazon Fresh and is selling its products in Morrisons. Leahy’s successor, 40-year Tesco veteran Philip Clarke, was brutally ousted in 2014, replaced by Lewis, who had run Unilever’s personal care brands.
Lewis took over at a time when the business model that had made Tesco so powerful needed rethinking. The relentless competition for market share had fuelled a ‘pile ’em high, sell ’em cheap’ model, which added cost and complexity to their business. Desperate to offer customers choice, Tesco’s had ended up offering 228 varieties of air freshener. As Paul Martin, UK head of retail for KPMG, told Consumer Currents magazine: “If the rule of thumb is that 1,400 stock keeping units cover 80% of a food shopping trip, does it make sense to have 3,500 stock keeping units in your store?”
Research by consultants Kantar Retail suggests that British households only buy 400 products a year and 41 in their weekly shop. If retailers could hone in and analyse customer preferences in granular detail, they could simplify their business, reduce costs and make the farm to plate supply chain more efficient and less wasteful.
The drive to offer customers’ convenience has prompted many British grocers to offer home delivery. In France, supermarkets have outsourced delivery to the shopper by focusing on ‘click and collect’ and making bigger margins on each transaction. In the UK, home delivery remains a loss leader. Martin estimates that you need £140 an order to make it pay and the average order size in the UK is only £105.
With Tesco the biggest player in its home market, diversifying abroad seemed logical. The same rationale had driven Walmart to buy Asda. Yet groceries is one sector where globalisation has not triumphed. What we eat varies so significantly from country to country – and is influenced by such a complex variety of cultural factors – that supermarkets’ dreams of global conquest have had a brutal reality check. Carrefour, for example, has sold outlets in Algeria, Chile, Colombia, the Czech Republic, Hong Kong, Japan, Malaysia, Mexico, Portugal, Russia, South Korea, Thailand, the UK and US. By being more selective, especially in Asia, Carrefour has become financially healthier and is still the fourth largest grocer in the world.
These are the kind of conundrums that faced Lewis when he became Tesco’s CEO. He has not resolved all of them – though he did announce plans in 2015 to cut 30,000 products from its range of 90,000 items – but the Booker deal does point to a way ahead for Tesco and, quite possibly, for some of its rivals.
While much of the analysis of Tesco’s struggles has focused on competition and the disruptive power of technology, one particularly significant shift in consumer tastes has largely gone unremarked. Government statistics suggest that American consumers spend roughly as much in restaurants and bars as they do on groceries.
So, in that respect, the Booker deal makes strategic sense. If Tesco can’t keep selling you more food through its stores – difficult, given that its market share is already 30.3% in the UK – it can grow by selling food to the restaurants and bars where you dine out. (Booker is already a key supplier to Byron hamburgers, Carluccio’s, Ed’s Easy Diners, Wagamama and most of the UK's major cinemas.)
This is what makes the resignation of non-executive director Cousins so intriguing. He is understood to have resigned because he felt that as Tesco was embroiled in a fierce price war it needed to simplify its business, not complicate it.
Making Booker work – even with CEO Charles Wilson joining the Tesco board – will require a lot of time and focus. Cousins seems to have feared this might distract the grocer from its core market. Equally, you could argue that Tesco’s real core is food and that the Booker deal strengthens that core, rather than weakening it.
Given the time this acquisition will take to get approved – Tesco may have to dispose of some or all of the Londis/Budgens outlets that Booker owns – it may be a while before we know whether Cousins or Lewis is correct.
Full disclosure: The author is editor of ConsumerCurrents, KPMG’s magazine for the global consumer industry