Five things Tesco got wrong

Tesco's UK profits have fallen for the first time in decades. The supermarket giant hopes to boost its flagging domestic operation with a £1bn investment. But what went wrong?

'Shabby shops'

In the aftermath of this week's disappointing domestic results, there has been much talk of store shabbiness and outlets having a dated, low-rent feel.

Image caption Customers complain Tesco stores have a shabby, cheap feel to them

Tesco seems to acknowledge this, pledging to spend some of the £1bn on "introducing a warmer look and feel" to stores. It plans a "refresh or refit" of 430 existing stores, at a cost of £400m, to make them rather less clinical and intimidating.

It has also promised to take on and train 8,000 new staff for its existing stores , rising to 20,000 over the next two years.

The critics have noted that Tesco's staff per 1,000 sq ft of selling space had fallen from 6.3 six years ago to 4.8, putting it behind its main rivals.

The facelift, and increasing number of staff faces in stores, is long over due, according to the Grocer magazine's chief reporter Ian Quinn.

He says the supermarket giant's strength is it "got really good" at increasing margins and running a smooth, streamlined operation. But he says the business model went too far and customers noticed the squeeze.

"Tesco was 'running hot' - there wasn't much leeway if things went wrong - and it slipped behind in terms of stores, service and innovation.

"Tesco has admitted that. It knows the word of mouth factor is absolutely critical, and that the reputation of being somewhere and not getting good service is damaging," he says.

David Gray, a retail analyst at Planet Retail, agrees putting efficiency first made stores look less smart.

"There was too much focus on ready packaging - products were already in boxes, and just lifted up and put in shelves - which doesn't give a premium feel," he says.

'Branding botch-up'

Another thing Tesco is charged with neglecting is its own-label food ranges. Gray argues Tesco seems to have been stuck in a time warp, while its competitors have constantly reinvented themselves.

Image caption The 20-year Tesco Value brand is being replaced by Everyday Value

"Tesco has stuck to its three-tier strategy of Tesco Value ( which was replaced by Everyday Value in April ), standard range, and Finest - essentially it is still in same stage as it has been in for the last 15 years.

"There have been a lot more changes and overhauls in core ranges in other supermarkets. For example, Sainsbury's brought in By Sainsbury's, and Asda brought in Chosen by You," he says.

Gray concedes Tesco introduced a new discount range in 2008, but says the brand seemed confusing and products - with names such as Creamfields cheese, Packers Best tea and Daisy washing up liquid - came under fire from consumers for being strangely named and erratically priced.

"I can see why they launched the discount range - Tesco wanted to compete with low-price German discounters Aldi and Lidl - but in my view they over-reacted to a limited competitive threat," he says.

'Big Price Drop flop'

Image caption Tesco is the UK's biggest retailer and has about 2,700 stores across the country

According to Quinn, Tesco's Big Price Drop, which was launched last September and saw 3,000 everyday products slashed, was meant to be the start of its fightback.

But Quinn says the £500m campaign was not only widely criticised for not working, but the branding strategy also backfired.

"All the attention went on them being about price, which accentuated the negative perceptions of the quality of products, whereas Tesco's rivals were able to be more sophisticated with their marketing," he says.

He says the Asda Price Guarantee, which offered to give customers the monetary difference if it was not 10% cheaper than rivals, and Sainsbury's Brand Match system meant no supermarket stood out in the price war anyway.

"Tesco didn't convince people it was cheaper but drummed in a message that it was not about quality but about cheapness," he says.

'Eyes on China'

Image caption Foreign grocery retailers are looking to China and the other Brics countries

With China now the world's largest market for food and grocery retail , it is hardly surprising that savvy supermarket bosses have had their eyes on the Chinese prize.

But analysts argue Tesco's expansion in emerging markets such as China, Thailand and India has led them to neglect their UK business.

"Tesco went on an acquisition and diversification spree, but at the same time it under invested in existing stores in the UK and lost its focus on food," says Gray.

But Gray argues Tesco needs the UK business - which has historically done very well and has a market share of around 30% - to generate the funds it invests overseas.

"Tesco needs the UK core business in order to generate lots of mergers and acquisitions, which is how they go about expanding abroad.

"For example to gain a foothold in China, Tesco initially went for a joint venture with the Hymall chain of stores , which were one of the leading chains in the country," he says.

Shareholders have also called for Tesco to rethink its US supermarket chain Fresh & Easy which is has come under fire for racking up losses.

'Forgetting about the food'

Some analysts think another factor in Tesco's troubles is its rapid shift away from its core food business into all sorts of other areas such as banking, second hand cars and home services.

"All these things are optional extras, they are not Tesco's heartland, and it can result in a business being overstretched and under-resourced.

"There is a suggestion Tesco has gone too far away from its core business and needs to get back to basics," says Quinn.

Gray says one of the issues Tesco will continue to face is an accelerating trend to buy some items, like big ticket electricals, online - especially during a period of austerity, when consumers seek out the best deals.

But Gray thinks Tesco could turn this to its advantage.

"The online penetration in groceries is about 15%. With electrics it is much higher, and is likely to continue to go much higher, so moving more product ranges online is a good idea."

What Tesco says

Announcing the investment earlier this week chief executive Philip Clarke said: "Whilst our international business is delivering excellent growth, contributing £1.1bn of profit to the Group, we fully recognise that we need to raise our game in the UK.

"As a result, we are committing over £1bn to make the UK shopping trip better for customers: more staff giving improved service in-store; refreshed stores that are better and easier places to shop; lower prices and even more value from an improved product range. As we improve the shopping trip for our customers, it will follow that our sales growth and financial performance will improve too."

The supermarket giant is also investing in its internet operation and has promised a more relevant communication with customers.