The Tesco Effect

One of the great things about living in Abingdon is the proximity to Oxford, and as I now (mostly) have Thursdays off, I decided to head off into the city with Alex for a few hours.

As you might expect given its situation and student population, Oxford has three large bookshops. Blackwells is far and away the best, and is good to pop into for general inspiration, replenishment of the soul, and worshipping at this cathedral of books. Waterstones and Borders on the other hand are good for the odd spying raid (mentioned before on this blog), and having Alex with me is a good excuse to hang around the children's room for a while without being escorted from the premises.

Being anonymous in these places allows me to engage the staff in conversation about business - and everyone agreed that the last month or so has been quieter than normal. I got this message from several other (non-book-related) businesses as well.

But it was the very revealing chat I had with one business owner that got me thinking. He runs a fantastic little shop in Oxford (which will have to remain anonymous for the moment as I was sworn to secrecy). Apparently, he had been approached by the manager of a well-known UK chain in the same line - who was a bit desperate, having seen a massive fall in sales over the past couple of months, and had come in to ask, with much humility, what on earth was going on.

Now, my sample here is small, and it could be due to lots of factors such as the weather, rising interest rates, etc. But I think we're about to see some dramatic changes in retail (a Tipping Point if you like), partly due to the inexorable rise of the Internet, but mostly due to what I like to call the Tesco Effect.

Back in April Tesco posted record profits (again) of approximately £2.5 billion. Sales increased in excess of 10%, and if you are the size of Tescos, and increasing sales by that much, your competitors must be suffering pretty badly. Add increased sales by Sainsburys, and that's a big hit for anyone competing with the big supermarkets.

And that can be just about anyone. I don't think it's any surprise that the retail chains suffering the most at the moment are media (including books), clothing and electricals. These are all the areas that have fuelled the impressive sales growth of Tescos et al. Next Wednesday sees sales figures released by Next, DSGI (what used to be Dixons), and Sainsburys. What's the betting that Next (clothing) and Dixons (electricals) are hurting, whilst Sainsburys post some new records?

In their seminal (though slightly clumsily-titled) book, The 22 Immutable Laws of Marketing, authors Al Ries and Jack Trout explain that, as any market matures, usually only two major players are left in the game (the others having gone bust, or have been bought out). These would be Tesco and Sainsbury then. However, what market are we talking about? Not the grocery market - after all, we can't be using 10% more toilet paper every year. No, the eventual market will be "everything-that-can-be-sold-by-a-supermarket" market. And what can't they sell?

So if you're selling something that's sold by the supermarkets, and haven't worked out your niche yet, start getting worried. Depressing? I don't think so. You just need to work out your niche (if you're not a big supermarket). And this report from the US - who are a few years ahead of us on this, having been battered by Wal-Mart - say that there are fantastic opportunities for independents.

I think if there is going to be an imminent massacre on the British High Street, people are going to want to do something, and supporting local shops might be an easy, rewarding way for people to feel empowered in the face of these retail behemoths.

Abingdon is in the front-line of this paradigm-change in consumer habits BTW. We have one of the UK's most profitable Tescos on the outskirts. Fed up with several years of small expansions (which don't trigger planning reviews, but are slow and messy) Tesco has now decided to go for broke and apply to increase its store by a third (or 19 independent shop sizes). I wouldn't mind, but the store is already huge. It's a Tesco Extra store. You have to walk half a mile to find the milk. On a foggy day, you can't see the far wall. On Monday, the District Council will decide to approve this application. They can't really do anything else. If they oppose it, Tesco will continue to appeal until they win, and then the council will have to pay Tesco's legal bills. Tesco has deeper pockets than the council (and better lawyers and expert witnesses probably). Sad, and democratically-emasculating, but that's the modern world for you. If I were Tesco, I'd do exactly the same. The politicians set the rules, Tesco maximise their shareholders profits within them. And don't forget, Tesco got so big by being brilliant at customer service. If Tesco weren't #1, we'd be moaning about Asda Wal-Mart. I think Tesco is actually a great business. But it's ironic that I get several communications a week asking my opinion about THE taking over Bertrams (Titanic and deckchairs anyone?) and a deafening silence about the big supermarkets taking over the world.

So - I think we can forget some brave local councillors standing up for choice and biodiversity in retailing. Instead, I think we need to get creative, and work out what competitive advantage we have over Tesco. I think it's a lot - but what does everyone else think?