Lessons From Tesco’s Brand Fiasco

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Dean Crutchfield was right when he wrote: “First, know that brands who think they’re invincible tend to fall harder or lose their franchise because they fail to recognize that brands go through three phases: triage, organic growth and reinvention” in his article ‘In Light of Coco Expose, Brand Chanel Must Soldier On’!

The news of TESCO’s Fiasco surprised everyone involved in retail business.

“Tesco confirmed in April 2013 that it was pulling out of the US market at a reported cost of £1.2 billion.” & “Tesco’s American experiment, Fresh & Easy, has failed and the company has been lucky to hand over more than 150 of its stores to billionaire Ron Burkle’s Yucaipa Cos.” & “Tesco to be investigated by FCA over accounting scandal…” & “Warren Buffett admits ‘thumb-sucking’ over Tesco cost him $444 million…” are a few of the headlines that were seen in the media for over a year and a half.

The Past Glory:

Tesco PLC is a British multinational grocery retailer with its headquarters in Hertfordshire, England, UK. Measured by revenues, it is No. 2 and measured by profits, it is No.3 in the world.

In 1924, Jack Cohen started a new name/brand when he bought a shipment of tea from ‘Thomas Edward Stockwell’ and made new labels with the name Tesco, from the first letter of each of the three words in the supplier’s name and adding the first two letters of his own family name Cohen.

His motto was “Pile it high and sell it cheap.”, and had motivated his work force with the motto (if you want to call it a motto) “YCDBSOYA = You can’t do business sitting on your arse.”

After getting established as the ‘King of Convenience Stores’ in the UK grocery market, Tesco, in 2001, started Internet grocery retailing in the USA and in 2007, moved into the States by opening a chain of small format grocery stores named ‘Fresh & Easy’ in Arizona, California and Nevada.

Tesco made David McCarthy, Citigroup retail analyst, wonder how it had pulled off a trick that he had not been aware of any other retailer achieved. That was to appeal to all segments of the market.
“Tesco was once the darling of the high street…”Mary J Clarke, CEO, Congnisco Group commented.
However, suddenly there it was…

The Hot Spell:

2013 was a bad period for Tesco. Things started falling apart; however, there was little being done at the boardroom though signs of the doom were apparent.

There was this Horse Meat Scandal that shook the large retailers, especially the ‘big four’: Tesco, Asda, Sainsbury and Morrison. The media was abuzz with the news that traces of horse meat in processed beef and other meat products were found, including the value Tesco and Iceland burgers. Everybody knew it was not actually the fault of the producers or retailers but of the suppliers; nonetheless, the retailers who were in direct contact with the customers had to face the brunt of the accusation.

Though that seemed a little glitch that could be done away with easily, and the then Tesco boss Phil Clarke made promises to introduce ‘industry-leading benchmarking’ on food testing and to get to the bottom of the crisis and that it would certainly not lead to food price rise, the scandal certainly took away the customers from their stores. Most of those who had favoured cheap processed food, took the extra mile, literally, to reach those family-owned local butcheries and farms to personally make sure what they were getting was fresh and the same that they were told of; not horse meat or something else, though it was a bit more expensive.

Then the monster blow on the home turf: The £250 million ‘Overstatement of Profit’!

The general counsel at Tesco got a shock when a whistleblower alerted it of the ‘overstatement’ of profit, an accounting scandal, and things began to move faster than a bullet train.

Share fell 8% to an 11-year low, making Tesco the biggest faller in the FTSE 100 index when shares dropped by 40%, wiping £1.5 billion off the retailer’s market value. The CEO Phil Clark was ousted. It was estimated that more than £6 billion share value got wiped off in just four months.

Mary J Clarke, CEO, Cognisco Group, lamented that the trusted brand image Tesco had built over almost 100 years was now being ridiculed.

Julia Kollewe mentioned Warren Buffett admitting in his 50th annual letter to shareholders that his ‘thumb-sucking’ over Tesco cost him $444 million. She quoted Warren Buffett as saying: “An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.”

Reports of this kind did not help any business, let alone Tesco. The shares fell and most of the stores had to be closed, laying off 10,000 employees from all levels!

In addition, just a week later, the news that Tesco had purchased a private jet some 20 months ago, and was known to take delivery of the jet just some 15 days after the account scandal added extra fuel to the already blazing fire. Though the jet was worth £31 million, it certainly landed at a bad time, infuriating the investigators of the Overstatement scandal. (Sejal Patel, 6th October 2014, On RETAIL GAZETTE Friday 6th March 2015)

Tesco’s troubled exit from the US:

In his analysis ‘Why Tesco’s Venture into the United States supermarket industry failed’ for the Undergraduate Exeter, University of Exeter’s Interdisciplinary Academic Journal, Jack Gilbert discussed the problem with clear insight.

In his paper he mentioned that ‘limited cultural adaption, minimalistic marketing strategies and poor customer service’ made Fresh & Easy struggle to access profits from the $400 billion US grocery industry. According to him, Tesco reported losses of £142 million in 2009 and over the six-year period it accrued losses totalling $1.8 billion before deciding to exit the US market.

He stated in his report that Tesco failed in the four main areas: ‘entry strategy’; ‘risk assessment’; ‘market analysis’ and ‘human resource management’.

1. In ‘entry strategy’, the small-format stores Tesco followed did not meet the demands of the US consumers despite its popularity in the UK. (People in the USA buy more items with long intervals between each purchase but in the UK people buy fewer items more frequently.)
2. In ‘risk assessment, the company’s selection of locations, (Arizona, California and Nevada) did not pay off because those were the areas hit hard by the recession and the collapse of the real estate market.
3. ‘Market analysis’ failed because the use of self-checkout lanes and minimal levels of customer service proved to be too much to bear for consumers that had been used to being attended to.
4. In ‘Human resource management’, it did not do well because it went through various transitions of cultural adaptation but these operational transitions were induced by cultural discrepancies between the US and the UK retail industries.

On Fresh & Easy failure, Regan Morris, BBC News, Los Angeles wrote in April 2013 ‘Fresh & Easy failure: Can UK firms make it in the US?’ quoting the head of retail at Barclays, Richard Lowe as saying: “The mistake many British retailers have made is to treat the US as one country.”

Margaret Heffernan in CBS Moneywatch, in her article on 12 Sep. 2013 wrote that the lesson Marks & Spencer’s flop with Brooks Brothers taught Tesco was ‘impatience’: Don’t wait for the market to change — get out now! And she expressed her opinion that Tesco failed in the USA not because they did something wrong but because they had more trouble at home. She further added that ‘killing off a young venture was always easier than fixing the old one’. However, she questioned her readers if it was really smart to do so?

There are some experts who believe that there are indications that the consumer buying practices are changing and the mega convenience stores will soon go out of business.

Sam Wollaston, for instance, predicted in his article ‘We’re beginning to shop around, shop smaller, shop more smartly’ on The Guardian, Culture, Feb., 2015 that the days of the Big Shop were numbered because of the online marketing. He strongly suggested that we should shop less in stores and more on the Internet.

What’s to be done to get back on track?

What should start-ups learn from this fiasco?

You can’t say that you don’t have to worry because yours is a small business and you can always get out before it’s too late.

No!

Once you’re in, you’re in and it takes a lot of ‘courage’ and ‘experience’ to pull out of something you start with a passion. There is this ghost of ‘hope’ and the challenge of ‘adventure’. You can’t escape them.

And $444 million may be a morsel for Warren Buffett, one of the world’s richest men, but not to you, and certainly not to me. A loss of mere $44,000 at the initial stage may upset the entire venture and throw you into debt or, even worse, throw you into depression.

Here are some suggestions by some experts on how Tesco can pull off this time:

“Change the “culture” and get back to serving the customers.” is what the KPMG/Ipsos Retail Think Tank (RTT) has to say to us.

Mary J Clarke, CEO Cognisco Group, has suggested that Tesco needs to change the in-house ‘culture’ and focus on building a brand and culture which suit its customers and to understand its employees’ behaviour, starting at the top and down to the salespeople.

[And what is ‘culture’ of a business, you might be wondering. ‘Culture’, according to BusinessDictionary.com, is a “pattern of responses discovered, developed, or invented during a group’s (business’s) history of handling problems which arise from interactions among its members, and between them the their environment.”]

Following the lead seriously, Dave Lewis, Tesco’s new boss, in his mail to the staff, reiterated this fact that to turn their business around, they would require change in their ‘culture’ as well as in their process and their brand proposition. {Sejal Patel, 6 Oct., 2014 on Retail Gazette, 6 March, 2015.}

How is Tesco faring after learning the lesson the hard way?

Though the lapses have been haunting Tesco, like the guilt haunted Macbeth in Shakespeare’s The Tragedy of Macbeth, it is making a comeback.

Nick Swan, CEO of VoucherCodesPro, was confident that Tesco already stole back those customers the German Aldi and Lidl retailer had stolen from it during the rough weather.

The KPMG/Ipsos Retail Think Tank (RTT) is also confident that Tesco will make a comeback, citing the recovery of Starbucks, and McDonald, and Argos’ ongoing transformation to win back the “trust” of its customers.

Veebs Sabharwal, in his 5 March, 2015 ‘Tesco Voted Britain’s favourite supermarket’ on Retail Gazette 6 March, 2015, was very happy to announce that despite board shuffles and the accounting scandal last year, 29% of the Brits voted Tesco the nation’s No. 1 grocery!

So, no start-up these days needs to learn a lesson the hard way, like Nokia or Tesco or some other business. A simple research on what and how of setting up an organisational ‘culture’ in their own business will keep their business high and dry!

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