Tesco spring cleans its online offering

Failure is not something that comes easily to Tesco. For a supermarket giant that accounts for £1 of every £8 spent by UK shoppers, succeeding online should have been a matter of course. However, the past few weeks have revealed a few glitches, suggesting that, if anything, Tesco is having a fresh look at its online strategy.

Last week the retailer dropped its Interflora-style flower delivery service from its website, with experts suggesting the decision was taken after Valentine’s Day sales proved disastrous (MW last week). In the same breath, Tesco also announced that it is selling its cut-price online property business to a chain of estate agents called Spicehaart – one of its most vocal critics when the business first launched.

And, in March, the retailer suspended the sale of clothing online just five months after it became the first UK supermarket to launch such a service, and after putting 200 lines of women’s and men’s clothing on its Tesco Direct website (MW March 27). At the time Tesco said it only intended to sell clothing online for a trial period, and failed to say if or when the service might resume.

Mintel director of retail Richard Perks says: “The future will see less of internet-only players like Amazon and more of players who complement their brick-and-mortar with online. So I am surprised that Tesco has decided to stop selling clothing online, and the decision to sell its estate-agent business is, perhaps, a knee-jerk reaction to the falling market.”

Another e-commerce analyst says that consumers expect retailers to match their online offering with what they are used to seeing in-store. “So I can’t quite understand why it has had to shut down its clothing operation online when it has had huge ambitions in that sector,” he adds.

According to Nielsen Online, clothing and beauty continue to be some of the fastest growing sectors online.
To some industry experts, news of cuts at Tesco.com do not come as a surprise, as the retailer has started its most extensive round of cost cutting for five years. The cost cutting, which started in March, follows the tough economic climate and news that Tesco’s food sales in the UK are rising at the slowest rate of the Big Four grocers, below Sainsbury, Asda and Morrison.

Pali International retail analyst Nick Bubb says that in a “much slower consumer economy, where no one wants to carry a dead business, Tesco is focusing on cost savings”.

He adds:“It has been jumping on the bandwagon when launching a range of online services and, personally, I wouldn’t dream of buying flowers from Tesco.”

Tesco has also been losing its unique users in most of its online businesses, including Tesco telecoms, insurance and Tesco Extra – which includes travel store, opticians, DVD rental and wine delivery. Tesco Extra has gone down 29% from 1,146 unique users in March last year to 816 this year. However, the number of unique users for its core business Tesco.com, which includes Tesco Direct, has risen 11% in the same period. Tesco Direct, its non-food catalogue and online business, was launched two years ago and sells more than 10,000 items from phones to baby products and cars.

Sales at Tesco.com and Tesco Direct grew by 24% over the six Christmas-shopping weeks up to January 5 this year. The retailer said revenues from this channel reached £190m with more than 2 million orders delivered in the six-week period.

As one insider says: “Tesco continues to be a growing business with growing margins and growing returns, and the share price response to the business proves that. Changing its online strategy is about positioning itself towards significant growth. The florist service online, for instance, was an irritant.
But, as a dynamic business, it is looking to expand beyond its core expertise and businesses in Thailand, Japan and Korea, and online represents that hunger for growth.”

The move to halt the sale of its fashion line, for instance, coincided with the launch of made-to-order furniture over the internet to compete with retailers such as DFS and Ikea.

It has also launched TescoDownloads.com, which goes live this month. It starts with music content, but promises to eventually offer music, television shows and video games. The retailer has not discussed its pricing model, but is widely expected to build in rewards for its customers to cross-promote its offline business. Experts say that Tesco Digital is unlikely to attract music afficionados, but will target the impulse buyers visiting its site, much as books and CDs in the supermarkets are positioned to attract passer-by shoppers.

But Nielsen Online’s European internet analyst Alex Burmaster worries that Tesco’s online strategy is reminiscent of “Yahoo!’s peanut-butter manifesto”. Two years ago an internal document by the then Yahoo! senior vice-president Brad Garlinghouse said that Yahoo! is spreading its resources too thinly, like peanut butter on a slice of bread.

“Tesco has branched out massively and continues to do so online,” he says. “But it needs to remember that the internet is mainstream now and even the niche players have a lot of expertise to offer, which it has to compete with.
“Our continuing research also shows that retail has less of a share of e-commerce in the UK than it did a year ago, with more people likely to hit sites that are more engaging, such as social-network sites. So, if retailers are competing not only with other retailers online but with every other site, then there needs to be some consolidation. Tesco might just be getting its house in order.”

However, Perks adds: “It might be true that there is a limit to how much people want to buy online from one retailer, but you cannot forget that Tesco owns the lion’s share of the online grocery market, leaving everyone else far, far behind.”

Chief executive Terry Leahy recently reported that internet sales now contribute 4.2% of Tesco’s group profits and 3.1% of sales. Profits from Tesco online foods sales were up by almost 50% on sales that grew 31%.
It might be too early to say that Tesco is losing its golden touch. But analysts will not be surprised if there are a few more twists and turns in the Tesco online strategy.