Tesco should split up in 3 store formulas: one for the high-end of the market, one typical supermarket formula and a discounter to fight off Aldi and Lidl. That is Sandford C. Bernstein analyst's, Bruno Monteyne, advice to Dave Lewis, who will become Tesco's CEO on 1 October.
Radical choice is only option
Monteyne had worked for Tesco for years, between April 2002 and July 2012, where he was active in logistics and store operation management. The Belgian-born analyst believes Tesco will be be better able to fight off competitors like Waitrose if it created a separate, exclusive formula to service the higher echelons of the British market. Like its own high-end home brand Finest, Monteyne suggest using this name for the entire formula as well.
Tesco would be the name for the regular supermarket formula, set in the middle of the market, while a "Everyday Value" formula should become its discount formula.
The analyst agrees this is a radical change, but he believes it is Dave Lewis' only option to stop Tesco's slide. "Rip out 20 per cent of the range, have cheaper shelving and cheaper products in the more deprived areas and give customers a better deal. In London, where people want someone behind the counter who knows the difference between a Parma ham and a serrano ham, that requires more investment", Monteyne said.
Difficult struggle on several fronts
Tesco's position as a market leader in the middle segment of the market, means it has to fight on several fronts: Waitrose for the high-end, Aldi and Lidl at the bottom and Sainsbury's, Asda and Morrisons in the middle. It is a difficult struggle, as British retailers have self-imposed price guidelines to avoid possible competition inquiries. "By Tesco promising to have the same prices in the most affluent areas as the poorest areas, it's basically tied its hands behind its back by committing to an uneconomical model."
That is why the analyst believes Tesco no longer uses a singlebrand and multiformat strategy which proved so successful since the 1990's and which has helped Tesco soar above its competitors. The company has lost ground each quarter, for several years in a row, and only unconventional methods, like differently positioned formulas with own price settings.
Tesco still under pressure
Tesco's share has lost a lot of value, which won't change any time soon, according to other analysts. Price competition has resulted in a first food turnover drop since 1989 and it is logical that the market leader suffers the brunt of the drop.
That is why not only Monteyne, but also other analysts and stock market gurus claim Tesco's position is still under a lot of pressure. The new CEO, Dave Lewis, faces a turnover which dropped 10 %, profit that dropped 20 % and increased pressure on the margins. These have all been impacted by an increased price competition and are challenges the new CEO will have to tackle from October onward. It remains to be seen whether he will decide to split up Tesco's multiplatform portfolio into separate formulas.