I was lucky enough to fit in a week’s vacation over the summer, which we spent exploring the rich tapestry of history that is Rome. Now as I’m sure you all know, Rome was, for a while, the centre of the world – first, literally, as the hub of the Roman Empire, and second culturally, during the time of the Renaissance.
Now, walking around the Colosseum, Pantheon and other such archaeological delights from the time of the Roman Empire, I couldn’t help but wonder, like I’m sure countless people have done before me, how such an advanced and successful organisation could collapse. The answer, like the demise of many great businesses, is complicated but often is based in hubris and a relentless pursuit of growth that it cannot afford and struggles to control. Rome’s expansion across three continents meant that whilst conquering the known world was one thing, managing it became something else entirely.
I was drawn to the parallels between this lesson and the fall from grace from a number of high profile organisations – and also to an interesting piece in the broadsheets on the poor return on investment the big 4 retailers have managed to achieve from their relentless pursuit of growth, and how this pursuit has now exposed weaknesses that have caused them to rethink the strategy and write off some serious money. There is now talk of withdrawing in order to ‘refocus on the customer’. For example, the Guardian and then the Daily Telegraph both ran articles reporting the fact that in 10 years between 2003 and 2013 Tesco’s has spent £17.9bn on doubling the number of stores in the UK from 1,877 to 3,356, but its market share has hardly moved and there has been little benefit to the bottom line, as operating profit in that time has only increased by £1bn. Sainsbury’s has also spent £10bn, and its profits have only crawled from £667m to £788m.
Returns like this has led to analysts like Philip Dorgan from Panmure Gordon to describe the supermarket sector as “uninvestable” in its current form. Dorgan has calculated that, over the last decade, Tesco, Sainsbury’s and Morrisons have sunk £34bn to increase operating profits by a measly £1.7bn. But could it have expected a better return than £1bn more in operating profit?
That is no longer good enough, as Tesco’s Philip Clarke admitted when delivering his profit warning early last year. The new Tesco, he said, would be focused on the customer, but also on delivering better returns for investors by cutting back on areas where Tesco cannot be a market leader. The US and China, where Tesco are number eight, both fall into that category – and there is trouble afoot in its flagship South Korean stores as well where legislation allowing local governments to impose shorter trading hours is hitting sales.
Clive Black, analyst at stockbrokers Shore Capital, says:
“this was the decade where the progress of the hypermarket hit a brick wall. We’ve seen the march of the big international supermarket groups come to an end…not just Tesco, but Carrefour, Metro – each one is focusing much more on where they have a significant presence. They realise their corporate eyes were too big for their balance-sheet bellies.”
The problem is what to do next. So long seen as the conductor of the FMCG orchestra, making suppliers and manufacturers play their tune, now the big four have to be smarter about capital expenditure and finding a more profitable business model at a time when customers demand ever more, and new rivals compete closely. They are, to coin a phrase, having to drink their own soup.
Customers’ demands of retailers are changing, so instead of simply driving to a superstore to carry out a weekly shop, they will now happily order non-food from any website with the best price. The recession has led to segmentation, and segmentation has seen the rise of more cost focused supermarkets like Lidl and Aldi successfully catering for those consumers eager to save few pounds on their food bill, and high quality, innovative premium offerings from retailers like Waitrose appealing to the more discerning customer’s sweet-spot as well. The big four, in trying to appeal to everyone, everywhere, have seen their empire threatened on all sides.
However, the real Hannibal to the Big Four’s Roman Empire has to be Jeff Bezo and Amazon. The Daily Telegraph article quoted a leading retailer as stating;
“You have to believe Amazon is looking at food. Why wouldn’t they? Why wouldn’t Jeff Bezos do food here in five years’ time? Then it will get really interesting.”
The thing is, if you go onto Amazon now you will see a beta site that shows that they already do...
The move by Amazon has been supported by big brands, including Nestle, PepsiCo and Procter & Gamble, many of which feel they have received poor treatment and returns from the dominant UK supermarkets. Amazon has also formed a partnership with smaller ‘marketplace’ suppliers to offer fresh produce and meat.
At the Battle of Cannae, Hannibal exploited the Roman’s overconfidence and used their size and superior numbers against them, suckering them with a misplaced belief that capturing ground equalled success – his ability to move at speed allowing him to outflank them on both sides, and the Romans sheer numbers became their downfall, constraining their ability to quickly react and adjust.
Like at Cannae, the outcome for the current rulers of retail if they are outflanked could be very messy indeed...
Sean CuleyBusiness Transformation Expert (SCOR-P, FCILT)Sean Culey (SCOR-P, FCILT) is a global keynote speaker on the topic of disruptive technologies and their impact on businesses, the economy and society. He is the author of 'Transition Point', a detailed look at the causes of technological disruption and the impact it has had on our society, and how the current wave of technological change - from robotics to AI - will completely disrupt our business models, economy and society at large. Sean is also the author of numerous articles published in magazines such as Forbes, The World Financial Review and The European Business Review.
Sean is an expert at helping companies develop and deliver new customer centric business models, and he advises supply chain leaders on how to align their organisation to ensure they are executed successfully. He has 25 years of experience including six years as CEO of business consultancy ‘SEVEN’, and a decade working for Cadbury Schweppes, where he was the Global Design Authority on what was the world’s largest SAP implementation. He has developed a series of masterclasses about Disruptive Technologies and how companies can create new business models to exploit them.
Sean is also Visiting Fellow at Cranfield University and a Fellow at the Chartered Institute of Logistics and Transport (FCILT). He is also the UK’s only certified SCOR Master Instructor and a futurist for IBM Watson.