Tesco threatened by Amazon’s success

Tesco may be adding more frills to its offerings in a bid to compete with the likes of Amazon, but all it really needs is to go back to its food basics, an analyst has said.

Earlier this week the supermarket’s chief executive, Philip Clarke, said he would work to put “the love back” into the brand following a one percent drop in the company’s UK profits – the first in 20 years.

As part of this, he announced that the company would be overhauling its website to compete with the likes of Amazon. He wants the store to sell products from other companies, via the Tesco website as well as extend its “click and collect” service, which allows customers to buy products online and collect them at Tesco stores.

However, in a bid to kick online retailers to the curb, Tesco has to focus on what it does best, and that’s food.

Clive Longbottom an analyst at Quocirca, told ChannelBiz: “Tesco’s competition from Amazon is still around white goods and other non-food goods.  This is a world-wide phenomenon, not one just for Tesco.

“BestBuy failed in the UK and is failing in the US as it just cannot keep up with the cost efficiencies of an on-line only retailer using just-in-time inventory to provide the likes of TVs, fridges, freezers, washing machines and small electrical goods.

“However, Amazon cannot hope to make much in the way of inroads when it comes to food.  People want to be able to pick up their fruit and veg and see the quality before buying – and a lot of the food retail experience is based on individuals impulse buying – ooh, look, an apple pie – must have that.  Better get some cream to go with it, and maybe some custard for those who don’t like cream.

“Far less likely to have gone in for a can of baked beans and go – ooh, look – a £1,500 American fridge/freezer.  Must have that, and then buy enough food to fill it…”

He said that while Tesco had done a good job on building up its on-line presence for food buying – although it received plenty of complaints about how it manages its fresh veg/fruit picking as people often get short-dated or last-in-box goods –  This is where Tesco’s future could lie.

“In the shop, it has to get back to basics – major on food and possibly clothing, as this is another area where shoppers prefer to go hands on,” Mr Longbottom said.

“Electrical goods should be part of the on-line experience only – maybe have a small area in the shop to showcase some special offers, but the main experience for such goods should be to go head-to-head with Amazon.”

He said that in order to do this, Tesco needed to lower its inventory of such goods and make the most of the web, which would allow it to do this.

“Whereas as now each large shop needs to carry the majority of the goods for showing in the shop (and these then often have to be sold at lower prices as shop soiled), a web-only experience means that the shop only needs a kiosk or a large interactive screen for the shoppers to get an idea of what is on offer,” he added.

“Inventory is down to just enough goods to meet demand – no show items, and the majority of the goods can be shipped directly from the master wholesaler or even direct from the manufacturer.

“The savings are massive – the capability to compete with Amazon strong.  Work will need to be done to ensure that Tesco performs well on comparison sites and that the public see Tesco on-line as being different to Tesco the shop.”

However, he warned that the changes wouldn’t happen with a flick of a switch.

“It will require work,” he said.

This week Tesco’s CEO said the chain was investing £1 billion into stores to try and turn the ship around.

It has started a process of overhauling its stores, making them more consumer-friendly, warmer and with a focus on fresh food and customer service. The painters have also been in, decorating stores in warmer colours, while freezer sections have been fitted with sliding doors to keep customers warm.

However, Mr Longbottom isn’t convinced that this will help.

“Sure, a refresh of the shopping experience is required,” he said.

“But [Philip Clarke] has to realise that the white goods/small electricals market is completely different to the food retail market, and that more investment in a different retail approach for certain parts of the Tesco portfolio is required.”