Tesco set to take Direct hit with catalogue venture

As Tesco launches a new TV ad campaign featuring soap star Martine McCutcheon to promote its latest Tesco Direct catalogue, some wonder whether the chain has bitten off more than it can chew with its non-food home delivery venture.

Tesco Direct, which sells 10,000 goods such as furniture and electricals via the internet and from a catalogue distributed in stores, has just been hit by the departure of chief executive Steve Robinson. The former Argos finance director, who joined Tesco in 2005 to set up the Direct operation, is leaving “to explore a new career path in private equity”.

The retailer would not comment on reports that he was paying the price for technical glitches at the launch of Tesco Direct last September and the subsequent low profile of the service. It says Direct has had a “successful” first year of trading. Analysts are expecting an update at Tesco’s half-year results in October.

Any hint that Tesco Direct has underperformed would dent the retailer’s otherwise spotless reputation for efficiency that has helped it become the UK’s number one supermarket over the past decade, with a grocery market share of more than 30% (TNS).

But there are a number of challenges to Tesco’s future prospects. It has fallen a year behind target on its international expansion plans and faces a brain drain of top executives quitting the company as they become frustrated at the limited promotion opportunities. Now rivals are rubbing their hands at the prospect of Tesco getting a bloody nose in catalogue retailing.

Competitors are sceptical that the Tesco brand is powerful enough to take on home shopping operations such as Argos, John Lewis and Next. One rival says: “Tesco is successful in the UK because it won the property battle in the late 1980s and 90s. Its real success is in the property department. 

“Tesco has massive footfall every week and it leverages that to sell other things in stores. But it doesn’t have that online. It will have to fight it out on an even playing field with everybody else.” 

Tesco has made expansion of its non-food sales a key target for the future and some analysts predict that it will throw massive resources behind the Direct operation in a determined effort to make it work.

There were fears that the arrival of Tesco Direct would dent sales at Home Retail Group-owned Argos, its closest competitor. Yet according to Nick Bubb, analyst at Pali International, HRG chief executive Terry Duddy recently said that his company had “hardly noticed Tesco”.

Meanwhile, Matthew Hardcastle, managing director of shopping comparison website Shopping.com, says Tesco Direct has failed to make the impact the company was expecting: “With Tesco’s buying power, you would think it could compete aggressively on price in categories like electricals and home and garden. But I don’t think it has made much headway in those categories.” 

Hitwise figures show Tesco Direct is number 13 in the league of Web visits to UK online retailers, a long way behind Argos at number five. Some 40% of visits come via Tesco.com, the online grocery site.

One observer points out that Tesco Direct has introduced a £4.85 charge to pick up goods worth under £25 in-store, underlining the unexpectedly costly nature of the operation’s logistics. Meanwhile, Mike Godliman, analyst at Pragma Consulting, says penetration of the catalogue in homes is tiny compared to Argos, and that Tesco has barely promoted Direct. He claims the branding fails to stand out.

Pressure is mounting on the chain to prove that its online presence is strong enough to stretch into furniture, electricals and other non-food items. That said, it would be wrong to underestimate Tesco’s determination to succeed against the odds.