Tesco’s chief executive Dave Lewis, has had a good first full year and Tesco’s strategy of getting back to basics and eliminating excess is yielding results. However, he’s also been reducing prices on a number of well known brands, driven by continued downward pressure on prices from deep discount stores. It’s not all good news.
Market Approach vs Market Position
When we analyse business models we look at the consistency between the approach to business and the market position sought. These two aspects are aligned right through the business models of the best businesses.
Deep discounters like Aldi and Lidl seek a Market Position of best value, Tesco’s one of supporting and meeting customers’ needs, (“Every Little Helps”) and Waitrose of high quality.
The discounter’s approach has two specific elements, generally absent from the major supermarket’s modus operandi, that help them achieve their goal. Those are a) they sell brands you may not have heard of, and b) when they are gone they are gone.
The ‘traditional’ supermarket model needs continuity of supply. When they choose to compete on a single dimension (price) that their overall approach isn’t designed for its inevitable that pressures appear in other parts of their operation. To cope they have sought, perhaps aggressively, to share price pressure along the value chain. The impact of that deeply affects the business models of suppliers. For some, beyond the point of no return.
External influences on pricing like the reduced oil price helps, but it helps everyone. (If there is a differential benefit it falls more to those where distribution costs are a higher proportion of turnover)
In the long run the overall food supply model is strained in several places and could break. That may take an external shock, like a sudden rise in oil price or a crop damaging weather event. When a market is strained, as this one appears to be, something quite small can trigger a shift in the whole market environment. It’s our view that the risks of that happening are now very high.
The danger is that if it does fail, the number and variety of suppliers will shrink significantly and quickly. Any market that moves (catastrophically) to less competition and fewer alternatives tends to see prices rising very steeply.
It’s probably in all our interests to care more about the supply chain than we do, and, just a little bit, less about the headline cost.
Managing risk in business
Managing risk in business is not being fearful, it’s good practice. William Buist was head of business risk management for Lloyds TSB and brings that experience and skill to bear for xTEN Club clients.
If you would like a no obligation discussion about the risks your business faces fill in the form and we will be in touch.