Tag Archives: strategy

The future of Tesco – a recovery strategy

Tesco’s share price has fallen dramatically after yet another profit warning. A once thriving supermarket chain finds itself in real trouble. Tesco blames the discount supermarkets, but although that is an easy excuse and some of the other chains are also suffering, it is too simplistic an analysis and merely distracts attention from Tesco’s own blame for the profit drop. The reason some others are suffering too is that similar problems also apply to them, the big chains copy each other a great deal. They take similar approaches and suffer the same consequences.

The root of the problem

Overall basket price is a big factor in customers migrating to the new discounters, but failure of trust is an even bigger one. A customer who is worried by prices still knows they have to eat and accepts having to pay, but is particularly worried about being overcharged, so trust becomes more important. It isn’t just the absolute shopping budget they care about. Feeling confident that they are getting the best value for what they have is equally important. Having to be constantly on their guard to avoid store tricks while doing what is already a boring chore is a sure way of making them want to shop elsewhere, and that is exactly why Tesco is suffering now.

Death by accountant and marketer

Accountants are critical to a successful company. If they are good, the company can flourish. If they are bad, it can die. The worst employee a company can have is an accountant who thinks they are cleverer than their customers. If they work with an equivalent self-regarding boss from marketing, they can destroy a company. Tesco sells a lot of products and its accountants and marketers have developed a large number of tricks to get customers to pay more than they should. It is easy to trick customers occasionally, and easy to think up new ways of doing so, but it isn’t clever. Eventually the customer notices. The practice of trying to trick customers to spend over the odds destroys trust and customer loyalty. When another supplier arrives that doesn’t abuse the customer in the same way, people vote with their feet, as we are now seeing.

I discussed death by marketing in a blog 9 months ago: https://timeguide.wordpress.com/2013/11/29/fake-sales-death-by-marketing/. If Tesco had read it and acted on it, perhaps the share price wouldn’t just have dropped.

I don’t need to list all the tricks here, you know them all too well, so just a few headline ones – reducing sizes while keeping the price the same, fake 50% off offers by charging double for a period, selling larger boxes at higher price per unit weight and so on. These are all technically legal, but any idiot can do that, and only an idiot would. A trivial short term gain may be had from a customer not concentrating enough, but the customer soon loses trust in the company. While it is inconvenient or more expensive overall to shop elsewhere they might still keep coming, but all the unnecessary effort they have to expend every time they go to avoid being fleeced all adds up. In the end, they walk. Nobody wants to be the poor sucker who paid £10 for a £5 bottle of win just so that others can be conned by a half price offer.

Trust has most definitely been squandered by repeated bad experiences of being fleeced. Frequently bad signage and misleading labelling don’t help. Some of that seems to be quite deliberate confusion marketing too, another fundamentally bad idea that only looks clever to the dumbest or marketers or store managers. Add to that rubbish customer service that seeks to defend the store against refunds and just argues that the customer is in the wrong and it’s a sure recipe for failure. The adverts may try to portray Tesco as the shopper’s best friend, desperate to give them the best possible value and service, but the reality experienced by the shopper is often the opposite. Many customers think of Tesco as the enemy rather than a friend. The share price drop is the direct result.

Solving this isn’t rocket science and it is astonishing just how reluctant previous managers have been to abandon so obviously flawed practice. The new boss needs to avoid these obvious mistakes. Treating customers as fools to be fleeced at every opportunity will not restore profits or the share price but will instead ensure continued collapse of loyalty.

The first foundation stone for a recovery is to stop trying to fool customers. The above points firmly to that. If you want that as ancient wisdom: “Once bitten, twice shy”. All the fake half-price and special offers have to go, and all the confusion marketing and confusion pricing. I know that accountants and marketers want to show off to their peers how smart they are, but really, fooling customers is NOT smart. The smartest way to show off to customers is by getting them really good deals occasionally, genuine special purchases.

Secondly, there can be no profit without customers. The customer is not the enemy and certainly not prey. The second foundation stone is to start treating the customer as a friend, as a potentially loyal source of future profit who just wants good value and good service. If the ethos is right, that customers should be looked after, then Tesco will recover. That the marketing says so but the reality is the opposite is a key clue to finding out where the problems really are. All the areas where customers are seen as the enemy need to be eradicated from corporate thinking. The new CEO should look down that avenue and kick the butts that need kicked.

Customer services should also go back to the old wisdom that the customer is always right. That was understood by retailers for centuries. Why has Tesco forgotten it? It needs to learn it afresh.

Thirdly, customers want consistently fair markups. They don’t want to get bread cheap and pay double for fruit and veg to make up the profits. They’d rather have purchase price + x%. Profit isn’t a dirty word and customers don’t expect shops to be charities. Markup is both expected and accepted. They just want a fair deal.

These foundations can create a solid platform for recovery. More bricks are needed on top of course, but that will come down to company flair. Tesco is huge and has enough market clout to get excellent special buys on occasion. It can offer some things the discounters can’t. It can add value in a myriad ways without adding to cost. Survival ultimately isn’t about price wars, but about looking after your customers.

My 6S guide to retailing is my view for high street retailing from 18 months ago, and is only partly appropriate to superstores, but a company the size of Tesco should know better that me anyway:

https://timeguide.wordpress.com/2013/01/16/the-future-of-high-street-survival-the-6s-guide/

Tesco was once a great company. You could be sure of getting good quality at a good price and you didn’t have to be on your guard the whole time. On that strategy, it grew from a tiny company into a huge one. All it needs to do to recover is to remember its old values and apply them again. Those are the very same techniques the new discounters are using. They treat customers as friends, they try to get them the best deals, they offer good service, and they don’t try to fleece them. Tesco can even charge a little more than the discounters and survive, because price isn’t the only factor in play – the environment, types of display, range and quality of produce all count too. But it needs to go back to its original ethos. Genuinely.

If Tesco wants to survive, it can’t carry on treating customers as dumb prey. The trust has run dry.

 

Death by accountant

Some people are not very good at their jobs. Accountants are one of the critical roles in a successful company. If they are good, the company can flourish. If they are bad, it can die. I have come to the conclusion that the worst employee a company can have is an accountant who thinks they are clever but is actually an idiot. If they work with an equivalent self-regarding idiot from marketing, they can destroy a company. Again, many marketing people are essential and very talented, but some just aren’t.

Permit me one rant as a good example:

My dishwasher just broke, again. It is Hotpoint. I wasted a fortune and six hours of my time to get one of their engineers out to fix it, under guarantee, then another to repair the damage he’d done by doing it wrong. Total repair time was 3.5 weeks because they don’t have enough engineers. They cost money apparently. The 6 hours was because an accountant had decided that they should use fewer staff in the call centre to save costs, and even though their customers probably earn more than a call centre staff member, that would be their money, not Hotpoint’s. It’s OK to waste customer’s money and time, even if they never want to buy from you again as a result. And I won’t!

I would normally have trashed the dishwasher, but the girl in the call centre assured me that this model should last for several years after the repair, and they’d give me a 3 month extended guarantee. So I did. Big mistake. Now, 3.5 months later, it has broken again, £110 for 3.5 months dishwasher, not good value at all. This time I decided to fix it myself, but I’d watched a TV program about people who had dishwashers repaired by independent engineers and they wouldn’t work because they weren’t allowed the codes to reset the machine. An accountant had worked out that that blocking independent fair-priced repairs would guarantee high-priced work for their own engineers. However, this is a broken hinge, so might not be part of the control system. I found the broken part, a far-too-thin for the job bolt, which had sheared due to normal everyday forces on it. The thin bolt is cheaper than a strong one, saving several pounds a year for Hotpoint, and designed to last past the initial parts and labour guarantee. After that, the few pence for the bolt is covered by the 5 years by the parts guarantee, but changing it is a £110 call-out fee. Savings are minimal, the potential extra high value work for already overloaded engineers is actually minimal, but the cost of no more sales of white goods ever again to that customer is large. The outcome is a small short term gain, followed eventually by death as customers blacklist them one by one.

This kind of accountancy decision happens everywhere. Identifying tiny savings here and there presumably wins a little praise from a line manager, perhaps an extra bonus for the staff that thought it up, but who  checks the cost of losing the customer by thoroughly annoying them? That usually isn’t one of the beans that gets counted.

Comet went bust a while back. I remember going there. They had a price guarantee on all their products, so why would anyone need to go anywhere else? Well, an accountant and a marketer decided they could offer a price guarantee to fool all their dumb customers by adding a different letter at the end of each product code, so that they could claim that it wasn’t actually the same product, so the comparison didn’t count. So all their customers stopped buying from them. Death by accountant.

A few of our local restaurants suffered presumed death by accountant too. They were doing very well, filling the place, with lots of happy customers. One day, they look at the books and an accountant explained that if they sold lower quality food, or smaller portions, then profit per meal would be higher. But they presumably didn’t take into account the effect on sales volume of selling lower quality food or reducing portions. Customers stop coming and buying, so they went bust. Death by accountant again.

One or two well-known supermarket chains frequently tried for far too long to fool their customers with fake half price offers and selling large packs at higher price per kilo than small ones. Then it seemed to catch them by surprise that people were going elsewhere. Their accountants and marketers presumably think that customers don’t ever realise the tricks and don’t mind having their intelligence insulted and their time wasted calculating value every time they visit. Their accountants and marketers are actually by far the most valuable employees to their competitors, who see their market share increasing rapidly at their expense.

Telecoms companies, TV companies and many others who sell contract based services take confusion marketing and trick contracts to extremes, with relative novelties such as putting everything possible on their sites except links to let you end a contract, which they make as difficult and time consuming and error ridden as possible. Tricking customers by auto-renewing and making sure that the auto-renew engages a month before a contract expires, and not letting the customer know near that time is tantamount to fraud, but is apparently legal. As long as they mention it in the small print once during the entire life of the contract they can avoid punishment. Obviously their customers don’t check every service they have every week and enter diary reminders to check years ahead on everything they buy, so this is very deliberate trickery. It might make a short-term win, but once a customer is fooled once, they are very likely to avoid doing business with that company again. It may take time, but those customer migrations will eventually be death by accountant too.

Automatically increasing insurance and hoping customers won’t check also trades short term wins against long term survival. The problem seems to affect many industry sectors. This suicide-by-accountant trend seems to be an epidemic at the moment. It must surely end soon, because customers are proving that they are willing eventually to migrate their custom to companies that treat them better. Those accountants that are praising their own cleverness today are actually accumulating a huge volume of angry customers who will happily leave them to die when the market inevitably provides such a sensible competitor.

Customers aren’t stupid. You can treat them as fools for a while, but eventually they will resent it. Then you’ll lose far more than you ever gained.

The bright potential future for BT

I left BT in 2007 after 22 years. (For my US readers, BT is Britain’s version of AT&T). Like most employees of most companies, I had a few gripes over the years, but overall, BT was a good company to work for – humane to its staff, while trying to do a good job for both shareholders and customers in a difficult political climate, with pretty sound ethics. It wasn’t perfect, but what company is?

I currently have BT broadband problems, as you do, again, but I still like BT and still keep all my shares, hoping one day they might get back up to what I paid for them. BT holds a unique place in my investments, being the only one I have ever lost money on (well, if I actually sold my shares now I’d lose). But it is a good company, and entirely fixable. My perhaps unjustifiably high regard for the company in spite of any evidence to the contrary doesn’t extend to the board. BT has a lot of excellent and devoted staff, and they are the reason for its survival, I would say very much in spite of it a long history of rubbish CEOs, including Livingstone. (I would exclude Vallance from my rubbish CEO list, I thought he actually did a pretty good job in the circumstances he faced.) As an engineer who could see the vast potential profits from relatively small investments that were open to a decent sized IT company, they all seemed incompetent to me, determined to ignore those potential markets and investing stupidly in others but focusing mainly on cost cutting as the only tool they could really understand. I don’t think any BT CEO since 1985 has deserved their grade or pay. BT gives its staff appraisals, and if I was his boss, I’d have given Livingstone 3 out of 10. At least now he’s in government, he will just be one incompetent among many so he will blend in just fine.

I won’t bother with the details of mistakes made. They are history. The future could still be bright if the new CEO is any good. Sadly, I don’t know Patterson. He joined the board after I left and I had no contact with him beforehand so I know nothing about him. I wish him the very best of success, for everyone’s sakes and if he does well, I’ll very happily sing his praises.

(I know it’s easy to say I could have done a far better job than most BT CEOs. I am certain that I could, and I certainly wouldn’t have made most of the huge errors that I saw, but anyone could say that and of course it is unprovable , and in any case,  I knew lots of other employees that would still have done much better than me. I guess it is a bit like US presidents. With 300 million people to pick from, you really have to wonder how the hell some of them ever got elected.)

So, what should BT do now? I declare my financial interests. I have a few shares, and one day if I am still alive they’ll give me a pension, and I remain a customer, so I do really want them to flourish, but otherwise I have had no financial exchanges with BT since I left in 2007.

A lot of the potential for BT has existed for a long time, and it is proof of previous CEO incompetence that it remains mostly untapped. Other areas are quite new.

There are a few valuable assets that BT makes too little use of to date. One is trust. BT has always achieved a very high trust rating from customers. Sure, they might whine about occasional lousy customer service or call centre delays, but mostly they still trust BT. Technically, customers assume their kit will work pretty reliably and they will eventually fix it with only modest annoyance when it fails. That’s better than it sounds compared to a lot of companies (Hotpoint, British Gas and O2 to name three at the very top of my most recent customer service hate list). They also trust BT on security, again an advantage not to be sniffed at. More importantly, customers trust it morally. It is quite a nice company. It pays its taxes. It has good old fashioned values and doesn’t do services that are morally questionable except where required to by law. It leans towards the customer’s side on questions of privacy v state surveillance. Again, a whole lot better on several important topical points than many big IT and web companies right now. A decent CEO would make his marketing departments do wonders with those advantages.

BT’s main physical asset is a very widespread network, much of which is fibre. But is has seriously floundered on decent speed broadband roll-out for badly miscalculated economic reasons and has ended up losing large numbers of customers onto mobile and other broadband providers. Firstly, it has to fix that by greatly accelerating its roll-out of fibre to cover the entire population within towns and suburbs. Further than that, it can plead poverty to government to extract subsidies for uneconomic roll-outs in some country areas, and fob others off with custom solutions. How close the fibre actually gets to the end customer is not important and there are many feasible architectural solutions. The data rate the customer gets is important.

The data rates it needs to provide via that fibre must be at least 50Mbit/s, which I calculated a long time ago is the latent demand of an average household today. It must be ready to increase those basic rates quickly through 100Mbit/s in 2015 into Gbits/s soon after.

It should by default provide high speed wireless from all of those homes into the nearby area. This will allow serious competition with mobile companies, especially since many customers carry tablets with only wireless LAN access. Those tablets and many smartphones rely on cloud provision for many services such as photo, video and music storage, as well as download services such as TV on demand. Decent wireless rates in the vicinity of most homes and business properties would make fairly ubiquitous broadband a reality, with none of the tiny date rate limits and poor connections offered by mobile operators. (As an aside, not doing that ages ago instead of crippling the company with the costs of unnecessary 3G licenses was one of the big errors I mentioned).

With high speed ubiquitous access, and still loads of building space to place storage and servers, BT could be a first class cloud provider (as Bonfield should have understood, coming from a computing company in the days when the cloud was still called distributed computing and computing on demand). Its engineers have understood cloud technology principles since the 80s, but it has never really invested in it properly. Now that other companies are threatening to put in their own access to their own clouds, BT is vulnerable to attack if it doesn’t quickly seize the opportunity by the throat. This may well become another missed opportunity for BT.

Another one (that CEO Heiffer should have understood, coming as he did from the finance world) is banking. BT manages to charge profitably on calls that cost just a few pence. Micro-payments is resurfacing once again as a valuable service. So far, no company has succeeded in delivering an acceptable micro-payments service but BT has the geographic coverage and technical skill to pull it off. It could go further and do proper full-service community banking. Again, a huge advantage has fallen into its lap thanks to the demise of trust in conventional banks. If any company could make community based banking work, BT could. The political climate is very favourable to get appropriate regulatory consent, society is ready and even eager, and the technology is available and proven with which to make it. Trust is the magic extra ingredient that BT has more of than other players.

Cloud financing, buying and other community based enterprises are all up-and-coming now, drawing from social and business versions of cloud thinking. Again, the core ideas go back decades. BT has been involved in their debates since over 20 years ago and holds a good hand of cards. It still could help a great deal to stimulate economic redevelopment of the UK by implementing just some of its ideas in this space. It is ironic that Livinsgtone failed to understand this enormous opportunity while he was CEO of BT, yet has now been made Minister of State for Trade and Investment. Why would anyone think he will suddenly understand now?

BT could also develop some of its many inventions made at its research labs. In many cases, small development costs are all that should be needed to generate large incomes. BT’s policy for ages has been to starve any forward looking R&D and only feed proven markets. That is no way to grow. Serious R&D investment could reap many times over in rewards. AI, convergence of IT with biotech, sponge nets, augmented reality, novel interfaces, 3D comms, digital bubbles, biomimetics and many others offer potential. Even the railways are open to attack. Conventional rail is still only equivalent to BT’s old circuit-switched lines that it used until the 1970s. A company that has been in front runners for 40 years of packet switching developments ought to be able to apply equivalent thinking to rail and road to gain rich rewards, converging time-wise as it does now with self driving cars, electrics, self organisation, high speed wireless, super-capacitor development and a host of other technologies BT understands well. Here again, rich pickings are available, and BT has one of the best positions to capitalise.

I could go on, but that is enough examples for now. BT has been offered a fresh start with a fresh CEO. If he is even a bit brave he could easily achieve things very far beyond any of his predecessors. As I said, I don’t know him so have no idea if he will be good or bad. Let’s hope he is up to the job and not just another huge disappointment.