Alongside a bumper set of results, Tesco boss Ken Murphy set out his stall for post-pandemic growth. Retail Week analyses his new strategic priorities

  • After upgrading Tesco’s full-year performance, boss Ken Murphy announced four new priorities he said would help the grocer “thrive”
  • Driving value and leveraging its extensive Clubcard ecosystem are high on the agenda alongside cost-cutting
  • Murphy said Tesco’s supply chain is “holding up well’ but warned of “bumps in the road” in the run-up to Christmas

Buoyed by a strong first-half performance, chief executive Ken Murphy today unveiled what he called “the next chapter for Tesco”. Four new strategic priorities: ‘magnetic value for customers’; ‘I love my Tesco Clubcard’; ‘easily the most convenient; and ‘save to invest’. 

Tesco’s aim is to generate between £1.4bn and £1.8bn of free cash flow a year. In the 2020 financial year, Tesco generated over £1.5bn in free cash. 

“The retail sector is undergoing significant change. Customers are faced with an increasing range of choices as to where, when and how to shop. The competitive environment has materially changed,” said Murphy. 

“But against this backdrop, we can thrive. Tesco has a uniquely strong position in terms of reach, capability and market share built up through decades of focusing on customers needs.”

What do the new priorities mean in practice for Tesco? 

Attracting customers

When asked what ’magnetic value for customers’ means for Tesco, Murphy emphasised that value is about more than just low prices. 

He maintained: “Value is the combination of price, quality of the range and the customer experience. We’re also thinking here about the value we bring to the community and the planet – particularly in terms of sustainability. This strategic driver is all about providing reliable value that removes the need for customers to shop elsewhere.”

One key aspect is building Tesco’s Aldi price match guarantee. It now covers 650 products, up from 250 a year ago. 

Tesco has also relaunched Everday Low Prices on 1,600 lines, and is rolling out Clubcard Prices to its Express c-store format. “All in all, we believe customers should be seeing lower prices, wherever they shop with us,” said Murphy. 

Tesco market share gains graphs, October 2021

This value focus already appears to be making inroads. Tesco data shows it has been “gaining from all competitors”, particuarly Morrisons and Asda, but increasingly from Aldi as well. 

Murphy said Tesco would seek to further leverage its Finest range as part of a “renewed focus on premium products”.

“We see an opportunity for Tesco to increase its share of food-for-later and meals-for-tonight,” Murphy said. He explained that even after the end of lockdown and opening up of hospitality, many customers are still eating more meals at home than before the pandemic. 

“The fact that they are eating out a little bit less means they are looking for a better experience at home. They’re looking for a slightly more upmarket experience and a bit of a treat,” he said.

Murphy also highlighted Tesco’s sustainability values: making the grocer “an easier place to shop for healthy and sustainable foods” and touching on the work it is doing to ”reduce the environmental impact of both our own and our supplier partners’ operations” for the long-term future of the planet. 

A Christmas cracker?

The big immediate focus for Tesco is, of course, Christmas. As HGV driver shortages, increased shipping costs and other supply chain pressures blight UK retail, Murphy was quick to reassure customers that Tesco’s supply chains are holding up. 

“There are some pockets of issues in some subcategories, the obvious one being soft drinks with the CO2 shortages. We’re maintaining very good availability,” Murphy said. “We will probably see ongoing bumps in the road right up to and beyond Christmas, we’re seeing our share of challenges. But our supply chain has so far coped incredibly well.”

Tesco is stocking up on Christmas essentials in anticipation of festive spending being brought forward by customers fearing shortages. Murphy said Tesco has “secured 10% more turkeys than we sold last year”. He said every year “60% of all the turkeys we sell are frozen turkeys and we’ve seen an elevated demand for frozen turkeys this year”.

Tesco has already hired half of the 30,000 seasonal workers it would normally recruit for Christmas. 

Murphy said: “We have really planned, with every inch of our lives, our capacity requirements, how much product we’re going to need to move and what that will take. We’re making sure that we’ve got the people and the vehicles in place at the right time to make sure that happens”.

Maximising Clubcard opportunity

Murphy doubled down on the importance he sees Clubcard playing. 

Ken Murphy, CEO of Tesco

Ken Murphy believes Tesco must be the most convenient retailer for customers in-store and online

“Customers expect more immediate and personalised service than ever before,” he said. Murphy outlined plans to continue the ongoing process of better integrating the physical loyalty scheme for both online and app customers to create “an unrivalled digital platform”. 

“It’s about making sure that the more customers use Tesco, the more useful Tesco is to them,” he added. 

There are 20 million Tesco Clubcard households in the UK, and 7 million Clubcard app users, which Murphy said was “a fantastic base to build from”. Clubcard usage in large stores has jumped from 67% of sales in 2020 to 80% this year, and from 50%  to 70% across all formats. 

Murphy’s ultimate ambition for Clubcard is for customers to “take ownership” of the product by “getting preferred prices on items in their most valued shopping basket”.

He also sees it opening up new revenue streams for Tesco through its suppliers. Tesco’s partners will be able to access Clubcard data to “understand customer needs more directly from relevant customer groups that are very engaged in their categories”, which they can then use to inform new product development. 

“One of the greatest things we can do is help suppliers to improve the hit rate of their innovation because that saves them a lot of money and frankly saves us a lot of money by being much closer to customer needs,” he added. 

Convenience is king

Murphy believes Tesco must be the most convenient retailer for customers, not just in terms of stores but also online. 

In terms of bricks-and-mortar, Clubcard Prices are now available in over 1,900 Tesco Express stores and the retailer intends to roll out 35 new c-stores by the end of the year as well as 100 of its One Stop stores. 

However, Murphy made it clear that he sees the digital space as being the new battleground for convenience food retailing. “This is about being available wherever, however, and whenever our customers want to be served,” he said. “We already have a very strong position in both channels but we see further opportunities for growth by making the most of our unparalleled reach and scale.”

Tesco coronavirus Delivery

Of the 1 million new customers who went online during the peak of the pandemic, 700,000 are still shopping with Tesco

Tesco generated more than £6bn in online sales in the last 12 months and Murphy anticipates more growth. Tesco has rolled out its one-hour Whoosh delivery service to 50 Express stores and expanded its partnership with Deliveroo to 450 branches. It will also open its second urban fulfilment centre in Bradford in January 2022. 

Murphy said increasing convenience would allow Tesco to better serve the new online customers it attracted during the pandemic. 

Of the 1 million new customers who used the service at the peak of the pandemic, 700,000 are still shopping online with Tesco now. “These are excellent customers that we didn’t have in the past, pre-pandemic,” said Murphy. 

While online basket sizes have fallen since the peak of the Covid outbreak, Murphy said customer sales frequency has grown. He said: “Now we’re seeing that with these shoppers, online shopping has become part of their routine. They find it incredibly convenient and reliable”. 

Cutting costs

The grocer said it has identified £1bn of savings “following an extensive review”. 

Chief financial officer Imran Nawaz played down speculation of further job cuts at the grocer, instead highlighting other areas of the business that could be streamlined. 

He said: “We’re talking about end-to-end simplification. Looking for savings opportunities in property usage, shared services, procurement of goods and overall automation in general.”

When pressed, Nawaz highlighted the increase in flexible working for Tesco head office staff. “Think about working from home versus the properties we currently have – do we need to keep them all?”

Murphy pointed to Tesco’s investment in renewable energy sources. “We’ve changed all the lighting in our stores to 100% LED lighting over the last six years. That cost us about £1bn in investment but not only has it massively improved our sustainability credentials, it is also saving us about £250m a year.”

Armed with this £1bn in gross savings, Tesco also said it would “consider any inorganic growth opportunities that may arise”. 

While Nawaz would not go into great detail about which categories Tesco was looking at, he said it was “thinking about bolt-on type acquisitions which strengthen our presence in different channels”. 

While Murphy’s new strategy represents more evolution than revolution, the business continues to go from strength to strength under his leadership. With money to invest and a solid foundation to build upon, the next chapter in Tesco’s story seems set to be a good one. 

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