The UK’s biggest needs just one piece to complete its supply chain-driven creation of a whole new retail ecosystem. But can it evade the regulators?
Should the competition authorities clip Tesco’s wings? In the wake of the accusations of predatory pricing in the convenience market, hardball tactics against suppliers and more hardball tactics against local authorities in new store planning disputes, the OFT has agreed to look again at competition in the UK grocery market.
The debate revolves around three issues. First, is Tesco abusing its market power to squeeze suppliers such as farmers unfairly? This opens up endless argument about what is fair or unfair, and whether it is Tesco specifically or market conditions generally doing the squeezing.
The second issue revolves around market definitions. Is the convenience sector – a focus of much Tesco activity right now – effectively a distinct market? If so, Tesco’s presence here is still nothing to write home about. Or is the convenience sector just one part of a broader grocery market? If so, Tesco already has a quasi-monopolistic stranglehold.
The third debate is more about value judgements. Is it right to cut down tall poppies if they have grown tall on their own merit? (If the tall poppy in question begins to damage the entire ecosystem, then arguably the answer has to be “Yes”.)
There’s nothing much new about the first debate. It could rumble on forever. But issues two and three are important – and they are just different angles of a much bigger, fourth question which nobody is talking about yet, largely because it’s still a twinkle in Tesco’s eye.
To understand the massive implications of hidden issue number four, we need to step out of the world of marketing for a moment, into the arcane world of supply chain logistics.
In the late 20th century, out-of-town superstores transformed retail, becoming an irresistible force by representing a perfect marriage between shopper and retailer interests.
On the shopper side, they offered a triple whammy of extra choice (much more display space than cramped high street stores), convenience (car parking) and price. At the same time, they vastly improved retailers’ economics. Out-of-town land was much easier and cheaper to obtain (in the early days, anyway), superstore sites were much cheaper to replenish (bigger volumes, quicker truck journeys), and much greater sales volumes generated vastly improved cash flows.
out of town, out of favour Meanwhile, Tesco was working assiduously to reinvent its supply chain. With concepts such as just-in-time replenishment, cross-docking and primary distribution (collecting goods from supplier factories or warehouses rather than having them delivered to distribution centres) Tesco began to construct a supply chain that worked according to a new logic.
Superstore replenishment started out as a series of relatively infrequent deliveries of bulk orders of the same thing in “straight line” journeys from A to B. Slowly, over the years, Tesco has moved towards a different system based on frequent deliveries of smaller volumes of many different things in journeys which loop round to drop off and pick up items at many different places.
To a lay observer, it doesn’t sound like much. But it has huge implications.
Via this series of just-in-time loops between suppliers’ factories and warehouses, its own distribution centres, superstores, convenience stores and customers’ homes (in the case of home delivery) Tesco is close to creating a hugely flexible, integrated supply network that does two things.
First, Tesco can increasingly operate its supply chain as a “pull” system, which constantly and quickly replenishes what shoppers decide to buy, rather than as a “push” system driven by the retailer. This turns out to be a lot more efficient, with less cash tied up in inventory, fewer out-of-stock products (and therefore happier shoppers), smaller amounts of excess stock and therefore fewer clearance sales. The same system can also deliver virtually any consumer product anywhere – wherever the shopper wants it delivered – within shrinking time windows of 24 hours or less.
Second, piggybacking on these supply chain capabilities, Tesco can do this at pretty much the same cost as supplying its out-of-town sheds: so, in the convenience market, it has a massive competitive advantage.
But that’s just the beginning. Now factor in internet shopping and home delivery. With this supply infrastructure in place, Tesco would be able to offer its customers a new best of all worlds: the unlimited range of the internet (easier choice but not constrained by physical shelf requirements), with the convenience of delivering to a pick-up/delivery point of the customer’s choice (whether it’s at home, a convenience outlet or superstore); all of it at discount prices.
In other words, Tesco is on the verge of reinventing the triple triumph of the superstore (better choice, convenience and price) in a way that leaves the old single-format model (and those who rely on it, such as Asda) standing, and which also gives it the opportunity to continue expanding its reach in terms of both customer segments and product categories. Like superstores before it, this is a strategy Tesco can grow into over years, leaving its rivals gasping to catch up.
Always at your side Tesco’s move into convenience stores is not, then, just a nifty move into an adjacent market. It’s actually a fundamental building block of an integrated, multi-format, on-demand bricks and clicks strategy that could change the face of retail in the UK and, longer term, globally.
But, regulatorily, it leaves Tesco in a bind. So far, it’s got away with its incursions into convenience territory on the back of the spurious argument that convenience and superstores are two separate markets. Everything about this vision of the future mocks that argument. If Tesco “owns up” to the twinkle in its eye, it risks providing its enemies with the ammunition they need to trigger regulatory intervention.
But that, in turn, leaves the authorities with a dilemma. Is this tall poppy really undermining the health of the retail ecosystem? Or is it pioneering a new and better ecosystem and redefining the market in the process? And isn’t that what customer-focused innovation is supposed to be all about?