Tesco top-line figures drill down

While Tesco may be on the ropes in the UK — it is not on the canvas. Like any retailer hoping to succeed globally, Tesco now needs to rebuild its original position of secure dominance in its home market in order to be able to focus on international expansion, especially in high-potential markets such as Asia.

However, while UK trading issues are top-of-mind and can provide valuable insight, Asian retailers can learn even more by drilling down from Tesco’s global results to examine the retailer’s dealings in each region in order to anticipate how Tesco will optimise its competitive appeal in the Asian market.

A brief examination of Tesco’s latest results, the 52 weeks ended February 28 this year, will show interesting differences in their trading margins for the UK, the EU, and Asian businesses.

While the Tesco overall trading margin is 2.2% — itself too low for a city such as London that would prefer at least 4% — it can be seen that the results are significantly different for the three geographies. This would suggest that global suppliers would need three different strategies to optimise the profitability of their overall Tesco relationship, thereby creating different trading opportunities for Tesco’s competitor retailers in Asia.

In other words, Tesco’s three retail businesses have to be viewed and managed as separate Strategic Business Units to optimise the overall global potential of their retail brand, and thus how they will compete at the local level.

In practice, with trading margins in the UK at 1.1%, the EU at 1.9%, and Asia at 5.7%, Tesco will clearly have a need for three different but complementary strategies:

The UK: With Tesco’s ex-VAT sales of £43.5 billion (US$67 billion), coupled with competitive pressures arising from Sainsbury’s and Morrisons’ falls in profits in latest results (Sainsbury’s £72-million loss, compared to a profit of £898-million in 2014, and Morrisons’ £792-million loss, following property write-downs), maintaining market share at the expense of competitors via deep price-cutting, has to be a priority for all of the major multiples.

Given these margin pressures, the temptation for Tesco to transfer ‘excess’ back margin to front margin may be difficult to resist. In addition, suppliers’ willingness to invest in the trading partnership via lower trade prices in exchange for long-term commitment to Tesco’s customer-centric policy may become a negotiating point.

Obviously, 100%, zero-defect service levels and availability have to be a given, from now. In other words, Tesco is still strong enough to insist on these ‘basic’ conditions.

On balance, UK suppliers need to come to terms with structural (that is, ‘permanent’) changes in the market, and make fundamental decisions regarding the relative importance of the multiple players versus discounters, and Tesco in particular, to their UK business. Having made these decisions, calculating and demonstrating the impact of a supplier’s trade investment and retail margin on Tesco’s trading profits has to be a must.

The EU: With ex-VAT sales of £8.5 billion, Tesco needs to both increase its EU geographical footprint and grow share in key countries.

It is essential for suppliers and retail competitors to ensure that EU colleague-suppliers conduct harmonised dealings with Tesco in order to avoid compromising trading relationships in either territory. It is also important that prices and terms are defensible versus other retailers, in the event that Tesco decides to sell off low-margin local business.

In addition, given Tesco’s move from individual teams for Czech Republic, Hungary, Poland and Slovakia to one regional team focused on buying and operational synergies, there will be more emphasis on investing in the customer offer. Suppliers will need to match this CEE (Central and Eastern Europe) restructuring, if only to ensure their fair-share levels of investment in Tesco’s customer offer.

Asia: With ex-VAT sales of £9.9 billion, and a trading margin of 5.7%, it is obvious that Tesco will resist selling off their Asian interests to help re-build their global balance sheet. Instead, it is possible that they will try to increase their regional footprint, possibly at the expense of some trading margin in the medium term.

Given the potential scale advantages of round-the-clock retailing, South Korean restrictions on opening hours means suppliers need to focus on increasing store productivity, especially the use of space, during permitted times. Restricted demand due to economic conditions in Malaysia and Thailand means that a focus on availability, service and targeted price reductions is essential in order to optimise the productivity of available traffic, without compromising the bottom line.

On balance, it is time for Tesco suppliers to step up and be counted, time to decide if their biggest customer is going to make it via their 3-for-1 global policy.

Signs are that despite these unprecedented times, they will lead a comeback in retail, meaning this is a real opportunity for innovative suppliers to think long term and join Tesco for the return journey.

Tesco’s space productivity, getting into the space behind the headlines

While the headline numbers provide some indication of the unprecedented pressures on Tesco and the other multiples, in a marketplace changing faster than at any time in the past 30 years, suppliers and competitor retailers in Asia can derive usable insight by digging deeper into Tesco’s latest results, as follows:

Having written its UK space down heavily, Tesco is focusing its attention on sales productivity, that is, Sales & Profit per sqf per annum.

Tesco can easily hit £1,000/sqf per annum, in the UK, and this has to be an objective in Asia, especially in South Korea where Tesco need to counteract store opening hours limitations by increasing store productivity.

In other words, for the coming year, Tesco has to be very receptive to supplier initiatives that drive Sales & Profit productivity, especially in Asia (and if Tesco can do it, this £1,000 space objective should be possible for its leading-edge competitor retailers.)

For suppliers in Asia, this means calculating the ex-sales-tax consumer sales generated in Tesco by a brand’s footprint per annum — think number of facings x on-shelf backup stock x number of stores x SKU footprint — will give a figure at least twice Tesco’s current Asian figure of £298 per annum.

Tesco still has to carry all of the in-store waste area — non-sales space such as aisles — but it will still be possible to demonstrate that a given brand is a high net contributor to Tesco’s major KPI for this year and the next.

However, a brand’s real contribution is via its brand’s ability to improve on Tesco’s operating profit/sqf/annum. (Sales per sqf will keep a brand listed; profit per sqf will keep a brand in the inner circle.)

As can be calculated from their latest figures, shown earlier, Tesco is currently generating operating profits of £17/sqf/annum, that is 4.6 pence/day!

A typical brand’s footprint, with its retail margin of 25%, trade investment of 20% and 30 days credit, has to be generating a lot more than 4.6p/sqf/day for Tesco Asia. Why not grab an envelope and try it out, using your figures? (For precision, take off 15% to cover handling and shrink.)

A new era in retail space-exploration has begun.