Tesco: Innovation and ineptitude

16th March 2012

It is almost impossible to find anyone who dares suggest that innovation is not important. It has become the holy grail of growth: "Innovation – in the form of developing new products and services – has become as important to growth for CEOs as raising their share of existing markets. A survey by PwC of 1200 CEOs from around the world has found innovation, along with increasing their existing business, now outstrips all other means of potential expansion, including moving into new markets, mergers and acquisitions, and joint ventures and other alliances."

But innovation brings with it a certain amount of creative destruction, as this piece from The Atlantic on the evolution of the tractor suggests: "The mechanization of the farm invented the modern U.S. economy. It made us richer, better fed, more productive, and more fully served by workers freed from agriculture. But the robots have moved off the farm, and the mechanization of the non-farm economy is currently one of the great challenges facing the middle class." 

Mindful Money has documented Tesco's problems before; Its latest difficulties are the result of the departure of its UK head Richard Basher. The reasons for the departure appear to be chief executive Philip Clarke's heavy involvement in the UK business. Robert Peston of the BBC writes: "Mr Clarke took the view at the beginning of the year that his priority was to fix the UK. He felt he had to immerse himself in this programme for recovery. Which, in Mr Brasher's view, left very little space for him."

But why is the UK business broken? If, as many suggest, that innovation is the path to the regeneration of the UK economy, Tesco has been among the most innovative retailers and should be reaping the benefits. It was the first to introduce club-cards; it tied up with the dunnhumby group to collect invaluable data on its customers, created International Sourcing and expanded into non-food products in its out-of-town stores.

The trouble is that much of these innovations were easily copied, had no first mover advantage and Tescos neglected its core business while it was making them. The Robert Peston article drew a huge response, but RickyRocky's response was typical: "Tesco is not a nice place to shop, their stores are designed to pressure you into buying worthless stuff, their "promotions" are often deceitful or manipulative, they squeeze their customers by nickle-n-diming them, their personnel is unhappy and uninterested, their products are low quality. Yet the savings for buyers are less than at discount stores."

Tesco's management believe that the UK business can be revived. Others are not so sure. Peston says: "One of the smartest investors I know thinks that, through no fault of Mr Clarke, Tesco is as big as it can get, with a market share of a third or a tenth (depending on how you define the market)." It is a lesson that if customers in a retail business start to think of a company as ‘the bad guy', innovation will not turn it round.

The Tesco experience seems to contain a few lessons. It suggests that innovation may generate growth in good times, but companies neglect the basics at their peril. Innovation is a growth strategy rather than a preservation strategy. Equally, for innovation to be useful in growing a company's revenues, it needs to be something that is not easily and quickly replicated by competitors. Also, perhaps more controversially, it suggests that there are businesses where innovation is important and other businesses where it is not so important. Tesco arguably effected a retail revolution and it didn't protect it.

 

More on Mindful Money

Tesco: What's love got to do with it?

Has Tesco forgot 'retail is detail'?

Tesco in U-turn as sacked minister calls for easier sackings

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