If you were Sainsbury’s chief executive Justin King, what would you do? For perspective, let’s take an historical tack. Back in the early 1900s, Willys-Overland was a pioneering car company. But when Ford came along with its mass production system nothing Willys-Overland could do, including a desperate 25 per cent price cut, could stem its decline in market share.
Later, Ford would learn what it feels like to be on the receiving end of such relentless pressure. Toyota’s lean production system means that it can make better quality, more reliable cars using nearly half the man hours of Ford. Lean principles such as “create a smooth flow of products without delay or re-work” and “pull product through in response to customer demand” aren’t easy to implement. They require a root-and-branch redesign of the entire system.
But the benefits in terms of a new trade-off between quality and price means that successful, lean producers, like mass producers in the past, are creating a new baseline of competition that’s sweeping everything before them. No matter how good your marketing is, if it’s built on top of a below-par business system, you’re at a disadvantage. Toyota’s market capitalisation is now higher than DaimlerChrysler, Ford, General Motors and Volkswagen put together.
Fascinatingly, for the past decade, Sainsbury’s arch-rival Tesco has been applying Toyota’s lean principles to UK retailing to create what it has called “a step change” in competition. Having studied its soft drink supply chain, for example, Tesco believes it can reduce the number of times a product is touched on its journey from factory to consumer eightfold; cut the time this journey takes twentyfold; stocking points sevenfold; decision points eightfold and transport trips twofold. That’s quite an efficiency saving.
Tesco is only scratching the surface so far, but the message is clear. Like Toyota, Tesco believes it has found a way to continually drive down costs – and prices – while simultaneously improving customer experience in terms of right products in store and on shelf. It is shattering traditional industry quality/price trade-offs and transforming consumer expectations in the process.
Take a superficial checklist approach to everything Tesco and Sainsbury’s do and offer and you would be hard pressed to find a big difference. They’ve both developed sophisticated own-label ranges targeted at different customer segments; moved to multi-format offerings; responded to consumer concerns in areas such as organic foods; created enviable fresh and prepared food ranges; developed sophisticated information exchanges with suppliers; launched loyalty cards; moved into new categories such as financial services; launched home-shopping services; broadened their ranges into non-food areas such as clothing, and so on.
But when it comes to “basics”, such as price and availability, Tesco stands out. The value of everything it does is multiplied by those elusive “supply chain efficiencies”. So that’s why, for instance, Tesco.com makes money while Sainsbury’s To You does not.
Tesco isn’t alone. Asda is ploughing a similar furrow with its Wal-Mart-inspired Retail Link system. Elsewhere in Europe, hard discounters such as Aldi, Lidl and Netto are pursuing the same underlying strategy in different but equally successful ways. And together they’re changing the rules of consumer goods marketing: from being margin-focused to value-focused.
Brand this phenomenon disparagingly as mere “discounting” or “price competition” if you like, but you risk missing the point. This is not simple cost-cutting. It’s continuous performance improvement. It’s not simple price competition either. Price competition involves squeezing margins so that ultimately everyone gets drawn into cut-throat alley. This is different. This is about reducing prices while maintaining margins. And it’s not restricted to one particular segment of price-driven consumers, either. Quite the opposite. It’s the new mainstream; the new entry stakes for all retailers wishing to compete in these markets.
Think of a set of ball-bearings dispersed across a rubber sheet. If one ball-bearing is heavier than its neighbours, it sinks lower. As it does, others in the neighbourhood roll in, adding to the weight, extending the sink’s “gravitational field”. In a system of increasing returns, the ball that sinks lowest sucks in the momentum of any neighbouring company that cannot develop its own comparable “weight”. “Good marketing” on the back of a lightweight business model won’t pass muster. As King admitted in his business review, Sainsbury’s business model is now “unsustainable”.
So what can – should – King do? Yes, Sainsbury’s still has a lot going for it. As King pointed out, the Sainsbury’s brand still has huge equity. Its store and customer base are still big. Some improvement is inevitable, even if it is the sort of improvement that comes when you stop banging your head against a brick wall. Also, Tesco isn’t invincible. Regulatory pressures, management arrogance and inflated City and media expectations could all ensnare it a few years down the line. But fundamentally, Sainsbury’s needs to embrace a new era.
King has two core options. Option 1 is get as far away from the Tesco/Asda gravitational field as he can. Willys-Overland eventually re-emerged from bankruptcy as a niche jeep producer. Sainsbury’s could carve out a niche as a mecca for middle class foodies. Option 2 is an “if you can’t beat ’em, join ’em” stance. That’s what former chief executive Sir Peter Davis was trying to do with his &£3bn investment in Sainsbury’s supply chain: trying to leap-frog Tesco by installing state-of-the-art hi-tech automated processes.
Neither option is a tea party. The middle class foodie approach probably couldn’t sustain Sainsbury’s at its current size, and it could leave the brand vulnerable: look at Marks & Spencer’s recent performance in food. Meanwhile, having messed up its supply chain overhaul, beating Tesco at its own game looks like a long shot.
So what about that business review? In it, King promised everything: to fix the basics; refocus investments on things customers will notice; drive sales-led growth; reinforce Sainsbury’s “unique” reputation for good food; capitalise on consumer concerns about diet, health and nutrition; restore staff morale; maintain Sainsbury’s “universal appeal”. But by promising everything, he effectively said nothing. This wasn’t a strategy statement. It was a holding statement.
King called his presentation “Making Sainsbury’s Great Again”. In fact, the one option not open to Sainsbury’s is to hark back to a golden age that’s gone forever. Sainsbury’s has to look forward. In reality, Option 2 is probably the only option open to it. Unashamedly copy everything the market leaders are doing to minimise their lead. The “secrets” of successful mass-market retailing (and marketing) are being reinvented. To survive, Sainsbury’s has to reinvent itself too.
Alan Mitchell, firstname.lastname@example.org