Announcing its full-year results in April, Tesco became the first UK supermarket operator to hit the Â£2 billion ($3.7 billion) in profits mark. And office products are playing an important part in the success story
Tesco seems to know no bounds. A little more than ten years ago, it was only ranked as the #3 supermarket in the UK with no overseas operations whatsoever. And it sold only food. How things change.
Today, it ranks as one of the top three retailers in the world, with some 2,318 stores in 13 countries, with non-food lines growing at twice the rate of food. Indeed, Tesco’s non-food lines offer the best growth rates in the sector.
In the UK, for every Â£8 spent at retail, Â£1 ends up in the Tesco coffers. As the company’s tagline says – every little helps. And fuelled by non-food, this looks like just being the tip of the iceberg. CEO Terry Leahy sends out this chilling warning to resellers that previously may not have counted Tesco’s among their competitors. "We’ve seen that non-food is growing faster [than group rate] and we would hope we could keep up the rate of good growth, there’s plenty to go for."
Growth is the word. With the top five superstores accounting for 75 per cent of UK grocery sales, it is a recognised fact that the sector is saturated, so a continued broadening of its product lines is inevitable.
A main worry for OP retailers is that, due to the rules of scale where size most definitely matters, it is virtually impossible to compete on price.
Funded by this growing scale and supply chain efficiency, which increasingly features direct sourcing from regions such as China, the non-food categories are being priced even more aggressively than the traditional product lines.
Essentially, companies like Tesco will consider selling practically anything within reason that will fit in its stores. Currently its home and office range accounts for about 400 SKUs, but it is growing. Computer consumables – which typically account for around 40 per cent of the average office products dealer’s mix – are becoming particularly attractive, as in they can be piled high and sold cheap.
Tesco’s non-food sales growth rate in the past financial year was over 17 per cent, hitting the Â£6 billion mark. And in the stationery, news and magazine category, where much of Tesco’s traditional OP offering falls, sales were up 26 per cent. In the home entertainment sector, which includes electrical, sales lifted 20 per cent.
There are some commentators who claim that the likes of Tesco are good for the OP sector, inasmuch as they are helping to grow the market. But OfficeStore Europe managing director James Wilson sounds a warning. "Vendors need to be careful," he says. "Tesco has a strong own brand strategy and will happily source direct from the Far East."
Indeed, its own brand strategy is one of the envies of the retail world. Even Staples, much admired itself for its work in this area, has closely studied Tesco’s private label strategy as it moves its policies forward.
Tesco has made the OP retail front more competitive than ever, and is a formidable opponent. It is not the fact that the aisles are crammed with office supplies – far from it – but when you multiply the 400 SKUs or so by the sheer scale of its rapidly growing retail presence, it is taking a significant share. To illustrate a point, in the US Wal-Mart, which Tesco is fast becoming an image of, sells roughly as much OP as OfficeMax does at retail level.
While Staples declined the offer to comment in this article, anecdotal evidence suggests that it is feeling the effect of Tesco’s increasing push into office products and computer consumables.
After all, this share Tesco is taking has to come from somewhere. Says Wilson: "Where did consumers and small businesses buy their products before – large retailers such as Staples and PC World, mail order and small retailers. Staples should worry about a segment of their business – the segment that Tesco is targeting. But range, price and value will ensure Staples keeps its higher spenders."
According to a recently published report from Verdict Research – Where Britain Shops: Supermarkets 2005 – more than half of all supermarket shoppers visit Tesco stores, and 45 per cent of all consumers pass through its doors.
"Tesco is in a golden stage of development," says Andrea Cockram, client services analyst at Verdict Research. "It is experiencing strong growth and significantly boosting market share to strengthen its hold on UK grocery market leadership.
"And with non-food development and the development of a stronger range structure – supported by its Finest and Value development – Tesco is becoming more things to more people. It is hard to see anything but continued outperformance across several fronts at Tesco."
And Tesco plans to maintain this outperformance outside of the UK as well. Over the next 12 months, it intends to open a staggering 5.3 million sq ft of floor space abroad, including 15 hypermarkets in China, 11 in Thailand, 14 in Poland, 13 in Hungary and seven in the Czech Republic.
And the effect it is having on these markets is every bit as significant as in the UK. George Bartucz is commercial director of wholesaler Corwell, which supplies Tesco with much of its OP offering in Hungary. He says: "In Hungary, no other hypermarket chain has as many outlets as Tesco does. Currently it has 43 stores and has ambitious plans to expand further. This means that there are Tesco outlets even in relatively small cities where the population is 20,000 – 30,000 people."
And just like in the UK, its non-food approach is dominant, to such an extent, says Bartucz, that it is forcing many OP traditional retailers out of business. "We find that wherever a Tesco outlet is opened, it gains a considerable share of the OP market in a very short time. Therefore, the turnover of most of the resellers falls back sharply and some of them even close down."
While Wilson points to the narrow range of OP that Tesco and the supermarket sector currently sells, he concedes it is still significant. "I don’t see them offering a threat elsewhere, but that said, the High Street retailers take around Â£880 million in stationery sales and the multiples are already up to Â£110 million, with growth rates of 50 per cent plus in the last year.
"Undoubtedly consumers like to shop for consumables and stationery as part of their weekly shop. Extended opening hours and a broadening range make it an attractive stop for emergency supplies."
And it is not just the large hypermarkets that can have an impact. Wilson adds: "With government policy turning against edge of town superstores, the superstores are returning to the High Streets they decimated some years ago. There won’t be much room for stationery in those Metro style stores, but again the emergency consumables and impulse purchase stationery will make an appearance and further increase their market share. In three years, Tesco could be bigger than Viking Direct."
Bartucz echoes: "Especially in the smaller Tesco outlets they focus only on the basic OP range, but these are the fastest moving products which generates the majority of the turnover. In the back-to-school season, they have a very strong school product portfolio."
Increasingly, many dealers have been fighting back by becoming a one-stop shop themselves. And while not quite advocating selling baked beans, some are not that far off. Wilson says: "Water, soft drinks, tea and coffee are among the products that dealers have added to their daily deliveries. Euroffice now sells flowers to its online office supplies customer base.
"If it fits with your existing customer base, or will attract new customers without diluting your brand image, then why not extend the range? As long as you hold your core values – Tesco is a low cost grocer – and you have saturated your existing target, then where else will growth come from-
In the US, Staples has taken clear steps to combat the growing threat from the grocery and mass market channel by collaborating with Stop & Shop Supermarkets and Giant Food stores. From the beginning of next month, all 550 outlets will feature a Staples-branded store-within-a-store section. The move further sates Staples’ thirst for growth by tapping a consumer segment that it does not typically reach, while at the same time negating any threat of Stop & Shop moving independently into its territory.
Bartucz adds: "The resellers have various options to ensure the survival of their business. Good location is very important, which can be the city centre or a popular shopping mall. But although many resellers do have very good strategies for their survival, not all of them succeed, and in each city where Tesco opens a new outlet, the number of OP shops will decrease."
Perhaps Wilson has more reason to be concerned about the rise of supermarkets than most, as he rolls out the OfficeStore concept across the UK. "Are they a concern to OfficeStore? Of course," he freely admits. "But it will not affect our progress as a specialist retailer of office products with a full range of services and direct delivery of 30,000 plus products. Our business is convenience, and our stores are and will be situated where the businesses are."
And while some may cry foul, Wilson is not one of them and says Tesco is perfectly entitled to sell what it wants. "I think it is fair that it sells office products," he says, "as long as it doesn’t develop anti-competitive practices in doing so. There is obviously a demand and Tesco is fulfilling the needs of its customers."
And he says there is little point fretting over whether the likes of Tesco have become too strong, as the horse has long bolted the stable.
"It’s too late to worry about Tesco becoming too powerful, when it has dominated the market in so many categories for so long," he says. "It’s a good retailer and deserves the success that good retailing brings. That said, with 30 per cent of the UK market and 80 plus new stores planned for this year, it cannot go unchecked. 5,000 filling stations have closed in the last eight years, as the multiples have taken 23 per cent of that market, marrying price with convenience."
Could a similar fate yet befall OP retailers?
Threat of the superpower retailers
Tesco is rapidly growing into a phenomenon along the lines of Wal-Mart. Indeed, it has even been dubbed the Wal-Mart of Europe, with its aggressive pricing and no-holds barred expansion, not only breaking down geographical barriers but product barriers as well.
Incredibly, visits to Tesco stores around the world increase by 10 million every week, but while CEO Terry Leahy rubs his hands in delight, calling it vindication of the retailer’s strategy, the company has received severe criticism in some quarters, not dissimilar to the sort Wal-Mart has long experienced in the States.
Environmental pressure group Friends of the Earth has been particularly strong in its criticism, claiming that its unchecked growth is putting small retailers out of business and reducing the public’s choice of where to shop. It is even calling on the UK Government to intervene and has asked the Office of Fair Trading to open a new investigation into its rapid expansion into non-food goods.
And Andrew Simms, policy director of the New Economics Foundation, adds: "The danger of the rise of the superpower retailers is that the process becomes a one-way street. Once small independent stores get sent to the wall, there are often insurmountable barriers to get back into the High Street.
"Our biggest supermarkets are killing off diversity on our High Streets while the regulators stand idly by. If the Government is to be the entrepreneur’s friend andÂ save space in the market for smaller, independentÂ businesses, it needs regulators with teeth and it needs them now."Â
Leahy, however, says that all Tesco is doing is listening to its customers. "You have to allow them right into your business," he explains. "You have to be prepared to act on what they say. If you do, and if you trust them, I promise you this – your customers will give you the best and most honest service you will ever get about your business.
"All our innovations, every single one has come from our customers."