The Science of Retail

Liz McShane of @PortlandDesign tells @pollycurtis why Tesco's star has waned.

"Tesco has taken its eye off the ball for some time now, focusing more on the science of retail rather than the emotion of it. By that we mean the prioritisation of the loyalty card programme and harvesting customer data, which has lead to the fundamentals of good service being neglected, for example the first thing you are asked at the check-out is for your loyalty card, rather than a simple (but appreciated) hello. ... Reliance on discounts as a point of differentiation has in turn neglected the in-store experience."

Polly Curtis, Why are we falling out of love with Tesco? Guardian, 18 April 2012

In the past, I have praised Tesco for its mastery of the science of retail, and this is certainly one aspect of its organizational intelligence. This included the following elements.

• The Loyalty Card innovation led to the creation of a new data class called Customer. (Retailers previously had no way of recognizing a customer as "the same again" - which is a fundamental requirement for a data class).
• The collection and analysis of very large quantities of customer purchasing behaviour.
• The planning and execution of very large numbers of pricing and marketing experiments, such as special offers.
• Optimizing prices and promotions based on feedback.

In the old days, retailers ran special offers for a number of reasons.

• To shift surplus inventory (either their own or further up the supply chain)
• As loss leaders, to get customers into the store.
• To attack other retailers.

All of these reasons are still valid, but we can now add a further reason.

• To differentiate customer behaviour - e.g. testing the elasticity of demand for different products for different customer segments.

Many companies collect large quantities of data, but few companies seemed to be able to use the data as effectively and profitably as Tesco. Clearly this is not just about the IT systems but about integrating sophisticated management information and analytics into the business process. This is a big part of my Organizational Intelligence story.

And as Alan Mitchell explains, Tesco's Clubcard benefited from a unique combination of favourable attributes, which other retailers couldn't duplicate. Luck or intelligence?

But this must now be balanced against Tesco's neglect of other success factors, which several of Polly Curtis's correspondents have identified. It now becomes clear that Tesco was failing to respond to a number of other weak signals, and has fallen behind its competitors in some areas. Responding appropriately to weak signals is another key part of the Organizational Intelligence story.

Liz McShane seems to imply that Tesco's success in one area (loyalty card programme, data harvesting and differentiation) was a cause of its neglect of other success factors. What could explain this neglect? So perhaps Tesco only has a finite amount of organizational intelligence, and deploying it in one area means that it is not available in other areas. Or perhaps Tesco's success in one area made it complacent in other areas.

But instead of just attributing the shift in fortunes solely to neglect on Tesco's part, we could also explain it by changing circumstances, which even a good company might be unable to anticipate. So perhaps customers might be starting to become aware/wary of Tesco's cleverness - thanks in part to media coverage, as well as such anecdotes as pregnant women receiving targeted marketing before anyone else knew. (I have heard this anecdote attributed to Tesco as well as Target.) This would either mean that this form of intelligence has diminishing returns, or that it requires continual leaps in intelligence to keep one step ahead of customer resistance.

Some commentators have seen the recent change of CEO as a proximate cause for Tesco's latest results, but I doubt that it will have made much difference, not yet at least. For many years, Sir Terry Leahy was one of the most respected CEOs in the UK; but then so (for a time) was Sir Fred Goodwin. We shouldn't confuse public reputation with real effectiveness, and we shouldn't be in any haste to assess the true contribution of any individual to a large company. In any case, the personality of the CEO may only have a marginal effect on organizational intelligence of the whole enterprise.

Nevertheless, in his Wikipedia entry, Sir Terry Leahy is credited with devising and implementing the Tesco Clubcard loyalty program and also successfully monitoring the shopping habits, movements, and political opinions of Clubcard holders. Leahy only stood down as CEO in March 2011, so it is a bit unfair to blame his successor if it turns out that the overwhelming success of Clubcard programme has masked under-investment in other areas.

Some commentators have also noted that Leahy's successor, Philip Clarke, had been CIO of Tesco, although he did not have an IT background.

After graduating from Liverpool University with a degree in economics he joined the Tesco Management Training Programme which provided him with a perfect platform to work his way to the top. In 1998 he was appointed to the board with responsibility for the supply chain and a year later information technology was added to his brief. ... Six years into the role, Mr Clarke then became responsible for the businesses outside the UK, leading Tesco's entry into the huge markets of India and China.

http://www.bbc.co.uk/news/business-13114113

My interpretation of this series of appointments is that the Tesco board (including Leahy and Clarke) saw supply chain, IT and international as the strategic capabilities for Tesco, and this may be a good indicator of Tesco's present strengths and weaknesses.

It is however worth pointing out that Tesco's profits have only fallen by 1%. Although this may be an unwelcome surprise for Tesco shareholders and senior management (especially as the stock market generally overreacts to this kind of news), it hardly signals the end of the road for Tesco just yet.



Later note: Tesco's data-driven strategy was reflected in a change in the business capability model, from the traditional PLAN-BUY-MOVE-SELL loop to a BUY-MOVE-SELL-INSIGHT loop. For a few years, this model was included in annual reports - I found it in the 2012 report.

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Philip Clarke, Retail is detail: Tesco boss Philip Clarke explains new retail strategy (BBC Today, 18 April 2012)

Glynn Davies, How Tesco became Britain's top supermarket (MoneyWeek, 9 May 2007)

Clive Humby et al, Scoring Points - How Tesco is Winning Customer Loyalty (Kogan Paul 2003)

Alan Mitchell, Why Tesco Clubcard is a dead end (Marketing Magazine, 16 April 2010)

Rachel Shabi, The card up their sleeve (Guardian, 19 July 2003)

Zoe Wood, Five problems for Tesco's new boss to deal with (Guardian, 21 July 2014)


Updated 11 October 2019

Sudan 1

It's an ill wind that blows nobody any good. A large quantity of the carcinogenic Sudan 1 has got into the food chain, via some contaminated chilli powder, which was used to make a flavouring sauce, which was then used in a large number of manufactured foods.

The list of products being withdrawn from foodstores is still growing. In other words, the extent of the contamination is still emerging.

Here's the twist. On the radio, the word goes out that large supermarkets will be more efficient than small corner shops in removing the suspect foods from the shelves. Therefore we should trust large supermarkets more.

Er, excuse me? Let me guess, where did this advice come from anyway? Doubless when politicians and journalists want inside information about the food chain, there are PR departments in the large supermarket chains who are more than happy to help.

There has always been a tendency for people to trust in size and power. I know people who openly wonder about the honesty of the organic butcher in the village, whether his meat is always what he says it is. But it wouldn't occur to them to question the accuracy of the labels in a major supermarket. It is as if they believe that only handwritten labels lie, while computer-printed labels always tell the truth.

There is certainly a desire to trace and track food sources and additives through the manufacturing process. This is not just relevant for contamination, but also to control foods according to personal requirements of health or faith or values. (Nut allergies, vegan, kosher/halal, and so on.)

So there is a Faustian pact emerging between the food manufacturer, the major supermarket and the consumer. You can eat food that is totally inauthentic and unhealthy, but we can guarantee that all the ingredients are organic/kosher/nutfree. And if they aren't, we'll withdraw the products from the shelves immediately. And if we somehow fail to do this, we'll give you double your money back.

So an occasional food contamination scare helps to remind all of us who's really in charge of the nation's food. Life Support System, huh?

(In a previous post, John asked: When is an in-store bakery like a life-support machine? In my reply, I said that we may easily be persuaded to think of the supermarket as a life-support system as well. This is a dangerous belief - because if we stop supporting the small shopkeeper, the belief may become true.)

Jon Borresen makes two important points.

• Firstly the level of integration in our processed food network. A single source of chilli powder, sold to a single company to make a single product ends up contaminating over 350 supermarket products in every supermarket in Britain.
  
• Secondly, do you know what you are eating when you buy a ready meal? ... [Supermarket meals are] packed with things you would never add yourself if you were cooking dinner at home. Every supermarket meal is also stuffed with sugar salt and saturated fat.

Update February 23rd

Taste the Difference - a good article in today's Guardian by Joanna Blythman, author of Shopped - the Shocking Power of British Supermarkets.

"The current Sudan 1 episode ... cannot help but shake consumer's trust in supermarkets."

Well that's the rational response - but look at the clever tactics on the radio yesterday, which might well have the opposite effect.

"Supermarkets have fostered the notion that we have no time to cook. ... This is because supermarkets make far bigger profits from selling us value-added processed foods than they do from straightforward raw ingredients."

Agreed. This looks like John's life support system again. (Presumably the term "value-added" is sarcastic.)

"Unable or unwilling to give us the true variety that comes from using a large number of suppliers and manufacturers with geographically distinctive, often seasonal foods, produced with specialist expertise, supermarkets present us instead with a phoney choice of merchandised factory food in all its chameleon-like forms."

Instore Bakery

John asks: When is an in-store bakery like a life-support machine?

This is a great example. Many large supermarkets have inauthentic bakeries at the back, with the following features.

• They are always situated at the back of the store, where they produce the smell of baking bread. The air circulation is deliberately designed to send this smell to the front of the store. Shoppers are thus attracted to the back of the store, buying more stuff on the way. (You don't get quite the same smell in a real bakery, which prompts me to think that the supermarket smell may be chemically modified or enhanced.)
• The machinery is simple to use and highly automated, with preprocessed ingredients, to avoid reliance on skilled bakers.
  
• Bread is commoditized. Shoppers expect a complete range of breads, plain or fancy, white or brown, finest, organic, free trade, nut-free, wheat-free, kosher, diabetic, you name it.

When John first spoke to the baker in his local supermarket, the baker didn't know one or two things.

1. What were John's exact requirements.
2. What was the exact content of the oven.
   

As a result, the baker gave a true but unhelpful answer, and John was given false hopes of organic white bread. The store achieved its tactical objectives (John went to the back of the store twice) but what of its strategic objectives?

In the UK and elsewhere, the large supermarkets are taking an ever-larger share of the food market, and are invading many other retail domains. Doubtless bread is a life-support system - symbolically important as well as real - and the supermarkets would love us to visit them not just every week but every day, to satisfy our demand for "daily bread". Unconsciously programmed by the bakery smells we increasingly associate with a supermarket visit, we may start to think of the supermarket as a life-support system as well. This is a dangerous belief - because if we stop supporting the small shopkeeper, the belief may become true. To the extent that John has embedded the supermarket system into his life-support system, it has become his chosen technology for embreading his life.

John, you have three authentic responses to this situation.

• Eat wholemeal bread. (It's better for you, anyway.)
  
• Go to a real bakery.
• Bake your own bread.

In Scimitar, we could draw a stakeholder map showing the power (low), proximity (high) and interest (questionable) of the baker, both in relation to the customer (tactics) and in relation to the company (strategy). Bread is a small purchase for most of us, but the same technique helps us to think about questions of trust in very large procurement situations.

Trust the technology

originally posted by John

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When is an in-store bakery like a life-support machine?



This riddle popped into my mind as I called for bread after listening on the car radio to a discussion on the government’s proposed legislation on the ‘living wills’ of people on life-support.


Scimitar’s perspective model prompted it. This is the tool we use to try to develop a risk-manageable balance between a firm’s strategy, and the combination of technology and people it uses in trying to achieve it. There is an inherent risk that the technology constrains the people to such an extent that they become detached from the strategy and ultimately detached from their work. Risk management is impossible without this state being addressed. So is trust.


Seen from this perspective, the technology of life-support systems keeps people alive who are detached from life’s generally agreed strategy. My hope is that the legislation is aimed at doing something about it in terms of restoring some trust. The in-store bakery in my local Sainsbury’s does the same for the guys making bread. But nobody seems to be doing anything about it at all.


‘Any organic?’ I asked the guy in the baker’s hat. He looked at the meter on his oven and said ‘five minutes.’ I came back after a stroll round the store. ‘Large white organic, please,’ I said. ‘Only doing wholemeal today,’ he replied.

Cross Fertilization

One of my favourite examples of cross-fertilization is in the relationship between Tesco and the Royal Bank of Scotland. Some years ago, they set up a joint venture called Tesco Personal Finance, which basically provides financial services to Tesco's retail customers under the Tesco brand name. I have discussed this elsewhere as an interesting example of the "plug-and-play" component-based business (Tesco plugs a bank into its retail business, RBS plugs a retail channel into its banking business.)



What I want to discuss here is the impact on innovation.



One of the creative strengths of the venture is that each company has a distinct view of customer demand - clear but different. This is very roughly how it works. Tesco takes a retail perspective, and seeks to develop financial services that fitted this perspective. Taking a banking perspective, the Royal Bank does not immediately recognize the validity or viability of what Tesco wants to do. However, the Bank finds a way to implement it for Tesco's customers. Subsequently, the Bank recognizes the value of this, and makes the service available to its own customers as well. The joint venture is therefore a source of innovation for each partner; the clash between the retail perspective and the banking perspective is creatively productive.



Perhaps it's important to put this into context. Both companies are already well-managed and innovative, with strong leadership, and there is undoubtedly a great deal of mutual respect and growing trust, based on similar values. The joint venture merely amplifies and extends existing competence in innovation. This is essentially a symmetric venture, where the partners deal as equals.



Of course, innovation can also come from asymmetric ventures, where one partner is much larger than the other. Perhaps one side has economic strength or market position while the other side has technical strength or innovation competence. If such arrangements are well-managed, they can bring benefits to both sides. But genuine cross-fertilization may not occur, especially when the traffic in ideas is assumed to be one-way.

Unilateral Changes

My local baker has changed his opening times, and now doesn't open until 7:30. First thing I knew about this was when I went out in the rain at 7:20 to buy bread so my children could take sandwiches to school.

But the bread is good, and the baker is my neighbour, so I went back at 7:40 (the rain now even harder). I complained about the change. Aha, I was told, but you should have observed a small notice about the later opening, on the wall INSIDE the shop. Sorry, that's just not good enough.

This is a trust issue. I am put to some inconvenience, because a service provider has made a change without consulting me, or even properly notifying me. My willingness to trust that the baker will be open when I expect him to be open has just gone down a notch. Of course I understand that changes are often necessary, but there are surely better ways of implementing a change without impairing trust.