On the comings and goings of a trailblazer. Why the Tesco story contains a lesson for every business.
Tesco used to be a trailblazer of a business but today has posted a record £6.4 bn loss. How did this happen?
The answer to this question is complex, but within it lies a simple story about the impact of digital business and how it’s blindsiding businesses in retail and beyond.
Tesco’s heavy investment in the fixed capital assets of its store portfolio has turned into an enormous liability over recent years. The distribution strategy on which it built its market dominance, the idea of a Tesco on every high street, became a millstone when the intangible value of digital began to rise in significance.
The association Tesco has with its ‘bricks and mortar’ business portfolio, together with the established culture and working processes tied to it, is one the brand has not been able to outpace as digital interaction has taken over.
Saddled, as it now is, with the prospect of massive property markdowns in a pay-per-click world, it has been in Tesco’s business interest to hold onto a world view in which it has enjoyed market dominance, a world in which executives have believed it could bend consumers to its will, which has been in denial about the changing needs of the people it serves, people who no longer have time to drive out of town or do the weekly shop.
Today’s new world is one where the idea of the out of town superstore is redundant, and where sales per square foot is an outmoded algorithm.
Of course, Tesco’s not the only business that’s been slow in reading the signs about how digital is affecting existing business models.
Property-based businesses generally are particularly vulnerable to this kind of blind-siding because of the long-term nature of their assets and how they calculate and perceive value. Perhaps especially so are the business cultures that believe their dominance today equals a ticket to longevity, who believe they are too big too fail, or where it’s simply culturally too difficult to turn one’s back on previously successful track records, processes and methodologies.
All of these factors have undoubtedly played a part in Tesco today posting such a gargantuan financial loss. Its business modelling has been unable to adapt fast enough to what’s happening beyond its store footfalls and it had no vested interest in believing the business judgements that had made it the number one retailer were running out of steam.
The Tesco story is a message to all businesses about how digital networked business is affecting how we live, work and trade.
It demonstrates that being open-minded and prepared to question existing ways of working is a critical business skill. What used to pass for risk management has been redefined. Dealing with big, curved balls is now a business competency every executive needs to be able to consider, whatever the sector.
It’s clear from the Tesco results that digital business is fundamentally altering the essential nature of commercial and social contracts, what passes for commercial leverage and the way value is generated is up for grabs, no matter how entrenched the incumbents are.
How people live and use their homes, how they consume goods and services today, the bandwidth available for brand engagement, diminished job security, zero hours contracting and reduced amounts of available disposable income, all mean conventional businesses, engaged in any of it, have to be prepared to countenance significant rethinking as part of the day-to-day task of doing business.