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Legacy UK Retailers Tesco and Marks & Spencer Think Radically to Expand Margins and Revive Revenue Growth

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Coresight Research

Key Points

  • Tesco will cut around 9,000 store-level jobs as it closes fresh-food counters across a swath of stores. 
  • M&S and online grocery platform Ocado are said to be in talks for some form of partnership — possibly for M&S to supply its products to Ocado. 
  • Both moves underscore the pinch legacy retailers are feeling from twin structural shifts to discount formats and to the online channel. Incumbent retailers are adapting by stripping out costs and searching for new revenue streams in e-commerce, including through wholesaling to online retailers such as Amazon and Ocado. 

On January 27, The Mail on Sunday broke two stories relating to U.K. market-leading retailers: 

  • Tesco is planning to close meat, fish and delicatessen counters across a raft of stores, and reduce opening hours of counters in some stores. The Mail reported this could cost 15,000 jobs, though Tesco subsequently estimated it would impact 9,000 roles. 
  • M&S and Ocado are in talks for some form of partnership: The Mail reported that “M&S would buy key distribution centers, delivery vans and lorries” from Ocado, and suggesting that M&S would replace grocery rival Waitrose as a key supplier of grocery products to Ocado. 

Tesco Looking for £1.5 Billion in Savings

In a press release on January 29, Tesco confirmed plans to close fresh-food counters in around 90 stores, with 700 further stores retaining a “full or flexible” counter offer. It will also simplify stock management at store level, close store canteens and make job cuts at its head office. The company estimates that up to 9,000 roles could be impacted but it expects up to half of these people could be redeployed. 

Under a plan outlined in October 2016, Tesco aims to find £1.5 billion in savings and to improve group operating margins to between 3.5% and 4.0% by FY20. The latest move is in the context of a U.K. grocery sector scrambling to strip out costs so they can lower prices and shore up margins as they battle no-frills Aldi and Lidl. Second-place Sainsbury’s announced in January that it would remove thousands of store-level management jobs by eliminating the roles of deputy manager, department manager, team leader and store supervisor.

A large-scale closure of service counters would reduce Tesco’s differentiating points versus the discounters, which could further encourage shoppers to compare the retailers on price alone. That said, U.K. shoppers in the midmarket are generally not looking for high-service propositions or quality store experiences when they shop for groceries: The evidence of recent years is that, more and more, they are prioritizing low prices. And even if Tesco does close a large number of service counters, its brand-heavy offering, breadth of grocery range and nonfood offerings will remain key differentiators.

M&S Trying to Recover Growth in Its Food Division

The Mail reported that M&S could “buy the Waitrose parts of the [Ocado] business” and that “M&S would buy key distribution centers, delivery vans and lorries” from Ocado. However, Waitrose has only a 10-year supply agreement that ends in 2020. M&S could be looking to displace Waitrose as Ocado’s supply partner. Or, the parties could be looking at a deal whereby Ocado fulfills orders placed on marksandspencer.com, as Ocado already does for Morrisons. M&S has a very limited online grocery service, because its typically small basket sizes do not justify a regular online service — so we view a full online launch as the less likely of these propositions.

A supply deal with Ocado would echo the recent moves of grocery rivals Tesco and Morrisons, which have looked for distribution channels beyond their own stores and websites: Tesco completed its acquisition of wholesaler Booker in early 2018; Morrisons started wholesaling to Amazon in 2016 and to convenience stores in 2017. 

Dwindling underlying sales at M&S Food are likely prompting this search for new channels. After many years of trying and failing to improve underlying performance in its Clothing and Home segment, it is now experiencing declining comparable sales in its previously outperforming food division. The company’s current strategy is to offer more everyday value and products that appeal to those undertaking a regular family shop. We remain unconvinced that M&S should shift the positioning of its food business close to that of a regular, full-basket grocery supermarket, which it is not: it is an upper-mid-market convenience retailer with a focus on product innovation.

Through 3Q19
Source: Company reports

What It Means

Both moves underscore the pinch legacy retailers are feeling from twin structural shifts in European retail: the shift of spending to discount formats and to e-commerce. Incumbent retailers are looking to strip out costs and tap new revenue streams in e-commerce, including by wholesaling to online names such as Amazon and Ocado.

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