Tesco’s Big Price Drop - on the Stock Market, or, Porter and Ansoff in action

Such is the importance of Tesco’s and their dominance of the retail market that the effect of a 2.3% drop in their like-for-like sales knocked almost 16% off their share price yesterday. Perhaps not so much a reflection of the figures themselves - although they compare poorly with Morrison’s and Sainsbury’s both of whom managed to increase their sales over the same period - as the admission by the new CEO Philip Clarke that Tesco’s got their strategy wrong, both in the short and the long term.

In an interview with Robert Peston, he said that the store had decided to focus on their Big Price Drop (or cost leadership) and not to match the money-off coupons that were being offered by its main rivals in the run-up to Christmas. Their spokesman has said that “In a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven”. The market is unlikely to like this evidence of failure to understand the customer so soon after Philip Clarke succeeded Sir Terry Leahy as CEO.

In addition though, in the longer term, the group has under-invested in its UK stores over the past few years, as it concentrated its expansion on Asia, Eastern Europe, the US, banking and the internet. This expansion has been effective, with 7% growth in Europe, 8.1% growth in Asia and 40.6% growth in the US - and in the UK a 14% growth in online sales. It is likely, therefore, that their objectives for growth in those markets have been met. This provides a brilliant example for those about to take BUSS3 of the risk of market development; as focus on one set of objectives for international growth of a business takes precedence for a well-established business and shifts focus away from its core business - which in Tesco’s case is very much centred on the UK.

In an effort to correct the position, they also announced yesterday plans to invest in UK stores.This will look at what Philip Clarke describes as the “experience” for British shoppers, with thousands more people hired (Tesco already employs 300,000 in the UK and half a million around the world) and store layouts changed. The scale of the required investment will be very significant, enough to prevent any rise in profits in 2012/13. But Tesco’s fall from grace with UK consumers has quickly convinced them that they have no choice here; if they are to retain their place as the dominant competitor in their sector they will have to fight for it.