What to make of Black Friday?

Wal-Mart Stores Inc.'s U.K. Asda Supermarket Entices Shoppers With Black Friday Deals

UK shoppers have rushed to buy Black Friday bargains, as retailers and payment firms report strong sales activity for the annual discount event. Barclaycard said it had seen a record number of transactions on Friday, while Argos, John Lewis and Currys PC World reported a surge in orders. Online retailers said initial figures indicated Black Friday, now into its third year, had topped expectations. We witnessed some crazy scenes in the past like at this ASDA (one step too far but across the pond it is even worse). But the question at Boardroom level is whether this is good for business. Here is my perspective in a debate that will go on for some years to come.

What is Black Friday?

Not sure how many people do know where it stems from. When my CEO asked me what it was called in France “Vendredi noir” I preferred to answer that all Fridays are black in France due to the amount of strikes happening at this time of year.

Black Friday is the day following Thanksgiving Day in the United States (the fourth Thursday of November). Since 1932, it has been regarded as the beginning of the Christmas shopping season in the U.S., and most major retailers open very early (and more recently during overnight hours) and offer promotional sales. Black Friday is not an official holiday, but California and some other states observe “The Day After Thanksgiving” as a holiday for state government employees, sometimes in lieu of another federal holiday such as Columbus Day. Many non-retail employees and schools have both Thanksgiving and the following Friday off, which, along with the following regular weekend, makes it a four-day weekend, thereby increasing the number of potential shoppers. It has routinely been the busiest shopping day of the year since 2005, although news reports, which at that time were inaccurate, have described it as the busiest shopping day of the year for a much longer period of time. Similar stories resurface year upon year at this time, portraying hysteria and shortage of stock

What are people looking for during Black Friday and potential psychological impact?

products

According to Retail Week, most consumers will be looking for electricals, as well as, clothing bargains. IMRG predicted that over £1.27bn would be spent.

Andy Webb, of the Money Advice Service, said: “A third of people felt pressure to spend more than they could afford during the whole of Christmas. That leads into debt.”

For some, this can have a serious impact on their wellbeing.

“Short-term discounts encourage consumers to purchase immediately, rather than reflecting on whether you really need to buy a product and if you can afford it,” said Katie Evans, head of research and policy at the Money and Mental Health Policy Institute.

“This can be particularly difficult for people experiencing mental health problems, who sometimes find it harder to resist impulses and might find that shopping makes them feel better, at least for a short while.”

The institute is calling for new rules to allow people to opt out of email marketing or to set a daily spending limit in online shops.

Is Black friday driving profits?

This is the question that has been going on for the last three years at Boardroom level.

Reasons to hate it:

Paul Martin, KPMG’s UK Head of Retail, said: “For retailers, it has always been questionable whether Black Friday really benefits them in the long-run, and in the current environment of rising costs and squeezed margins – perhaps it’s even more so.” I would agree that this is like taking drugs (analogy of course). Give your customers a shot to make them fill good but it has no lasting impact. Last night watching BBC news I saw Peter Ruis’s (CEO Jigsaw) interview, whereby he declared themselves Black Friday refuseniks. His main argument is “In fashion, over 50% to 60% of Black Friday purchases are returned. It stays in the supply chain two or three weeks, churns around and everyone’s lost the chance to sell it, and it just goes straight into the sale at 50% to 60% off. It is a double whammy: loss of profit, loss of margin, and that product just sitting around in supply chains”. Hard to argue against, right? Well not so sure, that is my opinion.

  • Loss of profit and margins? It is all about volumes. Retailers have to work out their equilibrium point. If you manage to drive your revenue by having greater output at a bigger pace than you increase costs (which must include your returns costs). However, I do agree that you have a loss of margins, unless you buy products specifically for the occasion.
    Profit-max-proof.png
  • Products just sitting in the supply chain. For me this is down to forecasting and being confident in your supply chain management. Very easy to write but damn complex to run.
  • Negative brand impact. Discounting is never a happy recipe for brand reputations. it devalues your products. For an established brand, discounting can have an adverse affect on value. Quality and price do not exist as isolated concepts in consumers’ minds. They are interrelated. Research has shown that deep discounts do cause the consumer to believe that something is wrong. Frequent discounting serves to lower the value of the brand because of an almost subconscious reaction by the consumer who believes that quality also has been lowered. Or, in a “value rebound,” consumers begin to perceive the everyday price as too high. The brand is then bought only on deal.

Reasons to do it:

  • Market share/share of wallet: Like any business person my aim is to increase volumes and drive costs down but the reality in a competitive environment is that it is very difficult to do either, especially if you have access to little innovation. Therefore, an event like Black friday is an opportunity worth recognising. It is even harder nowadays when you are not just competing against other high street players but arguably the all world (thank you ecommerce). I find it very difficult to argue against being part of black Friday. Not because I like it, but because if you don’t you become isolated and one or many of your competitors will jump in the space.

Conclusion

My question to businesses who don’t take part in Black Friday is whether they feel that their customers brand loyalty is that high that there is little risk of losing them to competitors (you must have high confidence in your product offering, pricing structure and channel distribution). If the answer is low risk then continue to sit outside but if the answer is high then I am afraid that as you read this post you will already be against it.

Now if you are a football club (low risk of switching allegiance), I would understand but even the likes of Apple answered no to this question and took part yesterday. We are talking of a premium brand with high loyalty customers.

The reality is that core customers only account for a small percentage of your database and, although the most precious segment (profit wise), how much additional incremental growth can you drive from them? Acquisition must be high on your agenda and you must invest and fight for it to grow your active database. Also recognise the channels dynamics. Your competitors are not based in a 40 miles radius, they are all over the world and are called Amazon, Zalando, etc.

Finally, you can’t ignore the macro economic factors. Inflation is kicking in and next year all imports will become more expensive. The pound is weakening and businesses have not hedged for the next 5 years.Therefore, as costs go up, businesses will be under pressure to increase prices, which will suppress demand (simple supply/demand economic model). Consumers are not ignorant to this fact and events like Black Friday can only grow in my opinion as people will be hunting for bargains.

Looking forwards to your opinions 🙂

Benoit Mercier

What strategy for TESCO?

Tesco_UK_main

In the past few months we have read a lot of negative articles about TESCO, a giant UK retailer. It has awaken my curiosity, not that I would pretend that I could solve their strategic issues, but I amused myself this weekend at writing a strategy as if I was the TESCO CEO. Feel free to feedback.

Background

Tesco started in 1929 with one store. By 2006, Tesco had overtaken Sainsbury’s to become the UK’s largest grocery store, and by 2007 account for 31.8pc of the total UK grocery market and the world’s 2nd largest retailer (by sales), operating in 12 countries (UK representing two third of its sales). Tesco got there through diversification and spotting gaps in the market, especially in the field of consumer behaviour. In 1995, Tesco revolutionised how data was collected and used through the Tesco Clubcard.

However, in January 2012, Tesco released its first profit warning in 20 years, and by November 2014 the share price had dropped to less than half the value of its record high of 2007. Its share of the grocery market has dropped to 28.7% by October 2014.

tescofig1

Figure 1: Tesco market price 2007-2014

UK grocery market analysis

Overall UK grocery market:

* Worth £174.5 billion in 2014.

* The grocery market’s share accounts for 54.5p in every £1 of UK retail spending.

* By 2019, the UK will grow by 16.3% to £203bn, with the fastest growth sectors being convenience, discounters and online3.

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tescofig3
Figure 2: IGD UK Grocery: Market and channel forecasts 2014-2019

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Figure 4 – UK grocery market by 2019

Internet UK grocery market:

* Worth £7.8bn in 2014 +98.5% since 2009

* Growing internet penetration (80%)

* Rise of m-commerce with smartphones (+51% yoy)

UK discounting grocery market:

* Worth £9.5bn +35% since 2009

* Aldi (+35%) and Lidl (+17%) witnessed their highest ever growth in sales and market share (3.4% to 4.6%) and (2.9% to 3.4%)

Tesco 3 C’s

Core Customer analysis

Geographic
Region
UK
Density
Rural and urban
   
 
 
Demographic
 
Age
All age categories
Gender
Males and females
Income
Low and middle income category
Occupation
Students, employees, professionals
Education
High school, technical, Bachelors,
Social status
Working class, skilled working class, lower middle class, middle class
Family size
Single individuals, nuclear and extended families
Psychographic
Lifestyle
Traditionalists, contended conformers
Personality
Easy-going, determined
   
Behavioural
Occasions
Regular
Benefits sought
Cost advantage, variety
User status
Active user
Attitude
Sceptical, positive

Table 1: Target customer for Tesco

Competencies

* Online expertise and multi-channel synergies.

* Large scale operations, multifaceted distribution network from supermarkets to convenience stores and online shopping.

* Customer focused (CRM) – Clubcard: significant data collection on consumer habits since 1995

* Large range of products from Tesco Value range to Tesco Finest with significant purchasing power against branded products and suppliers.

* Large store network and very good geographical network across the UK

* Strong financial services division for personnel insurance and banking.

* Designed and implemented supply systems that effectively link existing shops with Tesco.com

* Staff – large pool of talented employees nurtured through internal training facilities

Competition

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Figure 5: UK supermarkets’ market share

The big 6 dominate the UK grocery market with a combined 85% share, but heavy discounters have started to gain market shares due to the weak growth in the sector, limited product differentiation and limited costs for consumers to switch suppliers.

 

Table 2: UK Grocery market competitors

Macro and micro environment analysis

PESTEL analysis

* Political factors – In the UK the key political factor is the competition commissions view point on market share.

* Economic factors – continued economic stagnation, and the fact consumers have less money to spend on groceries.

* Social Factors – changing consumer habits too ease of shopping, value, and online shopping.

* Technological – where changing consumer habits are requiring smarter technological improvements.

* Environmental – reducing energy usage, packaging and transportation.

* Legal – Government policies and legislations over competition, food safety, food labelling impact the legal environment.

Porter 5 forces:

  • Rivalry among competitors – High. High concentration ratio with slow industry growth. Large number of local and global competitors. With the online boom smaller players are now able to compete with big players.
  • Threat of new entrants – Medium. High barriers of entry due to capital requirements, low product differentiation, low access to distribution channels and low switching cost.
  • Threat of substitutes – Low. They are a necessity only available from the industry.
  • Bargaining powers of suppliers – Low. No threat of forward integration, high threat of switching
  • Bargaining power of buyers – Medium. Relatively price sensitive, low switching costs, customers are becoming more knowledgeable about products and distributors.

Current strategy Challenges

Following an article given by Dave Lewis, I have identified 5 key challenges:

1. Tesco doesn’t know which shoppers to target. The supermarket is caught somewhere between the more upmarket offer of Sainsbury’s and Waitrose and the discounters Aldi and Lidl.9

2. The UK retail market is sluggish – Consumers have yet to feel the benefits of the country’s economic recover

3. Brand clarity and consistency is lacking

4. Tesco isn’t well loved – The supermarket has concentrated on high growth, fast expansion and cheap bargains rather than ‘softer’ notions of customer care or having good relationships with its suppliers

5. It lacks a clear management strategy10

Strategic Objectives

* To retain this year market share of around 28-30%. To regain market shares from discounters and upmarket competitors in the next 3 years to reach a 40% market share.

* To stay relevant to all customer segments through its Finest and Value ranges.

* To refresh the brand proposition in order to increase net promoter score.

* To increase store efficiencies and floor space to maximise returns from all stores

* To cut costs by divesting from non-profitable stores and reducing overheads

* To increase margins mix back to the 2014 levels (7.3%)

* To drive Every Day value prices through improved relationship with its subsidiaries to deliver over £300m savings

* To focus on complementary sectors outside of grocery such as children wear and financial services.

* To adapt to changing consumer habits and technological innovations

* To reinstate trust with employees, customers and shareholders

Proposed Strategy

Based on the above analysis, it is evident that the current strategy has not been working and meeting customers as well as shareholders expectations. Based on Tesco’s core competencies, I have developed a holistic new strategy:

1. Define a new brand positioning and segmentation 

Tesco doesn’t know which shoppers to target and its brand is not well loved in the UK. The supermarket is caught somewhere between the more upmarket offer of Sainsbury’s and Waitrose and the discounters Aldi and Lidl.

Our aim is to:

  • Increase revenue
  • Regain market shares by pushing out Aldi and Lidl and capturing some of Waitrose and M&S shares
  • Improve Tesco’s net promoter score

Brand/Marketing and distribution strategy

I propose to revamp the brand and distribution strategy on a cost neutral basis.

  • In terms of brand strategy, I propose to retain the Finest and Value range but to add a new brand “local”. See below.
  • In terms of distribution, I propose:
    • Hypermarkets and supermarkets: close non-profitable and refresh/modernise others
    • Metro/Express: Transform them into Tesco Finest and Tesco local stores based on their current locations and socio demographics catchment area

Based on research, Tesco customers feel they should get more and they feel their expectations are not met. But they want more (choice and quality) but by paying the same or less. Therefore, I would advise to be relevant with the target audience by having a new strapline “Expect more. Pay less”.

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I recommend conducting a major customer research across all brands/sectors with a partner such as TNS, to better identify, define and segment customers. Also, I propose to appoint a marketing agency such as Saatchi & Saatchi to launch a new brand proposition based on the findings of the research.

I decided to let my creativity flow as to what I would do

Brands Tesco Finest New – Tesco Local Tesco Everyday Value
Logo tescofig11.png  TESCOFIG15  TESCOFIG16
Strategy Growth strategy Product differentiation strategy Predator pricing strategy
Positioning Premium range. This range is about high quality ready meals, products and service. Healthy and organic range. This range is about bringing local producers’ healthy and organic products to local consumers. Supporting the local economy. Value/low budget range but with good quality.
Slogan Expect more Premium. Pay less Expect more Organic. Pay less Expect more Value. Pay less
Competitors Waitrose, Marks & Spencer Sainsburys, ASDA, Morrisons Aldi, Asda
Consumer typology Age: 30-70 years old
Lifestyle: Busy lives, work and lots going on outside of work. Enjoy eating great food and going to restaurant but as little time to cook.
Age: 25-60 years old
Lifestyle: family oriented. Love walks and the nature. Strong engagement within the local community
Age: 18-50 years old
Lifestyle: little revenue and always looking for bargains and spending little on grocery in order to maximise their savings
Core Target Segmentation A, B, C1 – White collars B, C1, C2, D social demographics grades – Blue collars

B2B customer base

C2, D, E social demographics grades. Students, working class, unemployed.
Product 1,500 high quality products and packaging 1,000 local products. 2,000 products
Price Premium pricing strategy but remain slightly cheaper than competitors Status quo pricing strategy Aggressive low price strategy. Always cheapest
Place New – launch of Tesco Finest stores – these are small stores in market towns and upmarket locations. They do not range any other products. They have a finest restaurant and café also available. Visual merchandising is optimized.

Hypermarkets and supermarkets – all Finest products are visually merchandised separately from the other products in the aisle. Also, a Finest section is created to create a unique premium experience

New – Convenient stores – these are reconverted Express stores located in the heart of the local communities

Hypermarkets and supermarkets – all local products are visually merchandised separately from the other products in the aisle.

New – launch of Tesco Value stores – these are reconverted Express stores located in popular locations. They do not range any other products. Visual merchandising is done in bulk.

These products are also available in hypermarkets and supermarkets

Promotion Use a combination of above-the-line and below-the-line promotions with a focus on its quality and service Use a combination local below-the-line promotions with a focus on its local products and local activity Use a combination of above-the-line and below-the-line promotions with a focus on its prices and brands

2. Create a new product strategy for each segment 

I suggest to retain but revamp the Finest and Value range but also to add a new brand called “Tesco local” in the grocery division. The aim is to increase ROI and margins through reviewing the number and quantity of brands carried. Focus back on volume through reduced diversity. Allows Tesco to exert purchasing powers on suppliers to increase margins. Finally, like ASDA, there is a need to invest into low prices through improved relationship with its subsidiaries to generate further savings.

3. Streamline the store network

In terms of hypermarkets and supermarkets I propose to not open new stores; close non-profitable and refresh/modernise others and review cannibalisation of stores where too many exist within a 1km radius and determine whether some should be closed.

In terms of Metro/Express, I recommend transforming them into Tesco Finest and Tesco value (no frills approach to compete with discounters) as well as Tesco local stores based on their current locations and socio demographics catchment area

4. Utilise linear space more efficiently

Re-design hyper and super markets to promote value products and high end brands in better designed sections of the store. Make the stores warmer and more interesting to shop, and allow customers a much easier experience to shop quickly and efficiently. I also recommend to maximise hyper and super stores existing space, through strategic partnerships with external partners such as travel companies, gym operators, and other services where that location can accommodate such a change.

5. Define a new set of promotions

Establish better in store promotions of the value ranges giving them a more dynamic feel and identify to promote quality and value. The aim is to ensure customers trust “white label” brands as much as “branded”.

6. Develop strategic alliances

Tesco should consider getting into a strategic alliance with Kuoni or Virgin travel and offer those travel agents shop space with discounted travel possibly 2.5-5% off holidays for Clubcard owners.

7. Restoring investor confidence

The company’s overstatement of profit is clouding the company at the moment. After recent events, they need to take very strong action to try and ensure that they don’t fall out of favour with the people who are investing them. The recent dividend may have short term ramifications however long term benefits as they are signalling restructure.

8. Invest in innovation and new technologies to gain a competitive advantage

Recommend investing more in the online platform by creating a responsive design that will allow m-commerce to grow significantly. Also need to roll out click and collect to all stores and invest further

As I mentioned at the beginning this is factive work but a worthwhile exercise for any company to do when setting up its strategy.

Benoit Mercier