Our extensive coverage of Tesco has mostly focused on its attempts to establish its American operation known as Fresh & Easy.
Although the litany of problems Tesco has had in trying to establish this operation is long, we have been told, time and again by players in the British food retailing that we should never underestimate Tesco. As one Pundit pal put it:“They will seem like a complete failure, perhaps on the verge of closing, then you will turn around and Tesco will be whipping every American chain and a success like you can’t believe.”
We doubted it but it was easy to say why a Brit might think that way. For almost two decades, Tesco has known little but success. After all, it was not Tesco but Sainsbury’s that was the iconic British retailer. Tesco beat Sainsbury’s in hand-to-hand combat in 1995 when, for the first time, Tesco became the Number One food retailer in the United Kingdom.
Now, however, there is a sense in the UK that Sainsbury’s — which recently announced both very strong sales and, more of a threat to Tesco, the raising of almost three quarters of a billion dollars to expand — is a renewed threat to Tesco in its home base.
The Telegraph in London ran a story titled, Sainsbury’s v Tesco: The Rumble in the Supermarket Aisles, and subtitled Sainsbury’s Stunned the City Last Week With its Strong Sales and Aggressive Expansion Plans. So is Tesco’s Supermarket Crown Finally Slipping?:
Seasoned supermarket watchers talked of the tide turning. After a decade and a half of Tesco’s dominance, power among the big grocers appears to be subtly shifting. It was 1995 when Tesco did the unthinkable and overtook Sainsbury’s as the UK’s biggest grocer after a massive growth spurt. Tesco and its chief executive Sir Terry Leahy have not looked back since. But after 14 years of dominance, is Tesco now on the back foot while Sainsbury’s is on the front foot?
“A pendulum takes quite a long time to swing and when it does it tends to stay in its new position for a long time. It has been a magnificent 15 years of progress that Tesco has put together; confidence breeds confidence and momentum breeds momentum. But it just feels as though the momentum has started to switch to Sainsbury’s,” said Jonathan Pritchard, analyst at Oriel Securities.
“It is premature to say that Tesco’s crown is slipping — it’s lead is so dramatic — but there is definitely positive momentum at Sainsbury’s and negative momentum at Tesco,” he said.
A long-time former Tesco executive gives his take on the situation. “It is fascinating. Sainsbury’s is doing to Tesco what Tesco did to Sainsbury’s in the early 1990s,” he said.
There are a lot of reasons why Sainsbury’s is doing better. As it explains in the article, its store locations are in areas less depressed than the north of England, and Sainsbury’s is a tad more upscale than Tesco so those looking to trade down from the carriage-trade UK retailers — Marks & Spencer and Waitrose — would find Sainsbury’s more congenial.
But it is not just Sainsbury’s… Morrisons, which includes the old Safeway stores, has been gaining on Tesco. ASDA, Wal-Mart’s subsidiary, has been gaining on Tesco, plus the so-called “hard-discounters,” though slowing recently as efforts by Tesco and others to offer “value lines” take root, have been gaining market share for some time.
We went to visit a Sainsbury’s store in Beckton in East London. It was originally a Savacentre — an early supercenter concept that was a joint venture between Sainsbury’s and British Home Stores. The joint venture ended in 1999, and the store was basically a Sainsbury’s supermarket with a large back room. Then Sainsbury’s remodeled completely, opening a store that was strikingly reminiscent of a Target Supercenter.
Although we feared the timing might not be great for a push into non-foods, the store, to our American sensibilities, was such a joy to shop compared to the Tesco stores we visited… we thought it might succeed. Perhaps we were correct.
Sainsbury’s fall offers a warning to all businesses. It was a well managed company by the Sainsbury family until the mid 1990s. At the end, the family pushed margins too high.
Subsequent management teams were not particularly innovative, but the big problem was they were focused on maintaining profits and to keep those profits they were consistently willing to lose market share.
Then a disaster occurred from 2002 to 2004 when already high pricing collided with a technological snafu that caused lots of out-of-stocks as the company attempted a major logistics change that went awry.
The current CEO — who had worked for both ASDA and Marks & Spencer — has improved price image — although reality is still unclear — and product availability is much improved. Performance has been very strong, especially because, with its more up-market positioning, it was expected to be hurt by the recession more than Tesco was.
But there has been a price paid in keeping margins tight. Tesco has often reiterated its intention to keep margins at 6%, and its margins now are about 6.1%. Sainsbury’s earns only 3.3%, though the comparison is not precisely fair because Sainsbury’s leases many stores whereas Tesco owns many more of its stores free and clear.
Still, the more important story may be that Tesco’s attempts to maintain 6% margins are not appropriate in this environment, and that doing so costs Tesco market share, as Sainsbury’s has learned, market share, once lost, is not easy to get back.