Retail analysts have questioned whether Tesco boss Dave Lewis' £250m cost-cutting measures will be enough to reverse its fortunes and connect with shoppers.
The cost-cutting measures, revealed by Lewis today (8 January) included the sale of its movie and TV streaming service Blinkbox, and broadband arm, to TalkTalk for an estimated £5m while its pension scheme and 43 of the worst performing stores will be axed in the coming year.
Lewis expects to save £250m a year with the new strategy, implemented to regain ground following its £263m deficit left following an accounting error last year.
However, analysts have questioned what the changes announced today will do to improve things for customers.
Danielle Pinnington, founder of research agency, Shoppercentric, said: “Moving forward it’s going to focus on the cost-cutting. The reality for customers is they still haven’t really seen an improvement in basic shopkeeping issues – service level, ranges, replenishment.
“There is still a lot for Tesco to do to reconnect with shoppers and today’s announcement hasn’t put forward the plans of how [Lewis] is going to do that.”
What the supermarket boss has done is plough an undisclosed amount into price cuts, which will see thousands of essential products marked down by around 25 per cent.
This is what Tesco believes customers want, and so “this is what customers will get”, according to Jon Copestake, chief retail analyst at The Economist Intelligence Unit.
“Every CEO of every company talks about the customer experience, but if you’re closing pension schemes, reducing store numbers, making staff cutbacks, and introducing pay freezes, I’m not sure how you’re going to be able to implement good customer service from that,” he continued.
“What its customers want is lower prices. And what customers are going to get is lower prices. I don’t see service levels significantly improving.”
Copestake added that when former-CEO Philip Clarke joined the business, customer service was his mantra.
“He put £800m into making stores look and feel better. It was a store facelift. Not new stores. The nuts and bolts of what Dave Lewis is saying is that at the moment it's really getting beaten on price by discounters, but [discounters] don’t have the same level of customer service, so let’s just try and [match them on price].”
However, it is a delicate balance and Pinnington warned: "Tesco still has a lot of work to do to understand what today's shoppers need and what is going to make shopping better. And it's not going to come through price – which is just too easy for the discounters."
The closure of 43 stores, predominantly its Express convenience stores, was also a surprise given the well documented change in consumer habits away from one weekly shop and towards frequent smaller shops.
Pinnington said Tesco pioneered the convenience model for supermarkets, but has ultimately failed to understand the different opportunity it provided.
“Their convenience stores haven’t been tailored in any specific way. It’s been a formulaic approach and that’s what shoppers want to see changing. But again, [today] Lewis didn’t follow through to explain what will happen to the stores left and if they will have the right ranges to meet the shopper needs specific to the area they’re in.”
The supermarket is also understood to be courting an acquisition of Dunnhumby, the data business behind ClubCard. It’s valued at around £2bn with WPP rumoured to be one interested party.
Unlike the sale of Blinkbox, a service which introduced Tesco into the digital movie streaming business, the potential sale of Dunnhumby makes less sense strategically, according to some industry experts.
“The sale of Dunnhumby strikes me as odd,” explained Nigel Walley, managing director at media stragy consultancy, Decipher.
“Tesco quite rightly are moving to focus on their core business, but the analysis of sales data and the insight it can generate would seem to support that core?”
He continued: “Clearly, the Dunnhumby business has long had aspirations to build services outside their Tesco client base, and it may be that part of the business is seen as surplus to Tesco’s current requirements.”
Pinnington suggested the hiring of Goldman Sachs to feel out buyers was another sign that Tesco is looking at pound signs over retaining a part of its business which has undoubtedly helped build a connection with consumers.
“There is plenty of evidence to show Dunnhumby and ClubCard helped Tesco connect with shoppers. I can’t help but think, for all the reasons they want to sell Dunnhumby, it feels like they risk disconnecting with the shopper,” she explained.
However, some analysts believe Lewis' new measures will result in a resurgence for the supermarket. John Ibbotson, director of the retail consultants, Retail Vision, maintained that the decisions made by Lewis have finally put Tesco in a place to compete with discounters.
“Lewis has grasped the nettle and done what needs to be done. Finally, we are witnessing the beginning of the Tesco fightback. Tesco needed a completely new direction to thrive in the brave new world of retail and hang onto its market share. It now has one."
“The journey won't be easy but if anyone is capable of re-establishing itself as the leading force within grocery, and the consumer champion, it is Tesco.”