Global

Details

  • Industry: Retail, Food, Drink & Consumer Goods
  • Type: Business and industry issue
  • Date: 6/9/2011

Is there anything supermarkets can’t sell? The risks and rewards of diversification 

Anything supermarkets can’t sell

From low-budget movies to mortgages, the biggest retailers have made diversity their watchword. But can they remain profitable and mitigate risk as they move away from their core competency?

When a young model is found murdered during Paris Fashion Week, a defiant investigative journalist travels the world to find the truth behind her death. Her mission brings her up against brutally ambitious designers and shadowy oligarchs. But will she become the next victim?


It sounds like the staple of a satellite channel’s afternoon schedule. But Paris Connections, adapted from a Jackie Collins novel, is more than a straight to-DVD movie. It is a recent brand extension from Tesco, which entered a joint venture with Amber Entertainment to create movies for sale in its British stores and online.


Supermarkets have always sold more than just groceries. Thirty years ago Japanese retailers tapped into the country’s “economic miracle” by offering financial services. Today, their global successors are selling everything from real estate to pets – and the appetite for diversification is growing.


The UK and its largest retailer, Tesco, is especially innovative – fierce competition and a maturing market has meant innovation is a way of life.


Supermarkets account for three-quarters of food sales by revenue. In 2010, NEMS Market Research found that only 5.9% of consumers had not bought non-food products from a supermarket in the previous six months. Faced with such saturation, they must try new formats, look abroad or move beyond core sectors.


Tesco’s list of diversifications is dizzying. The company has a catalog sales business, owns a record company, and sells fuel, financial services and pharmacy goods. It plans to build homes, and has dabbled in used autos. Verdict Research says supermarkets own 42% of the homeware market, and are growing in music (41%), clothing (28%) and white goods (25%).


“Some major retailers are perpetual innovation engines – it’s hard for others to catch up”


 

Tim Clifford, a KPMG retail partner in the UK firm, says three factors are driving diversification worldwide.


First, bigger stores have meant more efficient supply chains. Secondly, CRM and customer data have exploded – Tesco has insights into the habits of 16 million loyalty card holders – with opportunities to monetize relationships. Finally, e-commerce and new business models mean serving customers beyond the store network.


Professor Josh Bamfield, Director of the Centre for Retail Research, says: “Because people use supermarkets routinely, there are fewer barriers to brand stretch [than other retailers]. The question is whether they have the expertise.”


Clifford adds: “If you own a relationship with a customer and sell them things that are appropriate and relevant, there’s no limit. But appropriate and relevant are the key words.”


To date, financial services have been especially appropriate. Tesco Bank’s 2010 profit of US$433m was up 5.6%, although UK supermarkets’ financial services account for less than 5% of the loan market. The aim is not just profitability: keeping credit card transactions in-house cuts out interchange rates, and Tesco has spoken about the risk analysis benefits of understanding customers. The retailer has shown that customers who use its credit card spend 30% more in store, and bank customers are 25% less likely to visit a rival grocer. Walmart has taken the trend further, opening “money centers.”


Diversification involves risk. Challenges include managing supply chains very different from the traditional grocery chain, and recruiting and retaining talent in non-traditional areas such as telecoms and financial services. And, says Clifford, not all extensions are transferable: “Just because something works in the UK doesn’t mean it will work in Japan. Outside the core grocery business, the differences can be huge.


You can also become too diversified. Investing in spin-off subsidiaries was a major factor in the undoing of Daiei, once Japan’s largest supermarket, which required government intervention when its debt-to-equity ratio hit 9:1.


Clifford believes CEOs must think about the business model for new ventures, including the impact on the organization, and what kind of financial return would be attractive. They might also have to adjust management information and reporting, especially in a multi-channel environment.


“Diversification has put the spotlight on joint ventures and alliances,” he says. “Companies have to select the right partner and manage that relationship.” Some retailers, he adds, enter joint ventures expecting to later buy out their partner or re-enter the market on their own if successful.


The trend is being repeated worldwide. Carrefour’s new hypermarket format is based around a substantial non-food offering; Brazilian giant CBD has acquired a majority stake in electronics retailer Globex Utilidades; Walmart has entered the movie download market, and Poland’s Biedronka is selling airline tickets.


Rivals will need new strategies – and a focus on cost – to keep pace. As former Tesco CEO Terry Leahy saw it, the retailer is a shark that must “keep moving – or it will sink.” Clifford concludes: “Some major retailers have built their operations up over years and it’s hard for others to catch up. Certain companies are perpetual innovation engines.”

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ConsumerCurrents Issue 11

ConsumerCurrents – 11

This edition of ConsumerCurrents examines daunting supply chain challenges, volatility and uncertainty in food commodities, the growing diversification of supermarkets and what airlines can teach other industries about online customer satisfaction.