Warren Buffett is dead wrong about Tesco

Tesco: developing a ‘multi-channel’ approach

Up until last week, Warren Buffett seemed to be a keen Tesco devotee. I’m not entirely sure what got him so enthused in the first place – nor what’s got him dumping the stock now.

Maybe he felt Tesco was the closest Europe could come up with as a Walmart equivalent. After all, Buffett has been a long-term holder of Walmart,  an American grocer claiming about 25% of the US market. And with 30% of market share, Tesco is about the same over here. These are classic Buffett investments – good old-fashioned bricks and mortar business, with big ‘economic moats’ which make them hard to compete against.

But last week Buffett lightened up on his Tesco holdings, cutting his stake in Tesco by nearly a third. So should holders consider dumping too?

Now, while I don’t like to go toe-to-toe with an investment legend, sometimes that’s exactly what you’ve got to do.

It looks to me like Tesco’s ‘multi-channel’ approach is clearly starting to pay off. If it manages to add a coherent online strategy to its solid bricks and mortar businesses, and it could turn a retail giant into a dotcom monster.

Tesco leaps into the 21st century

When Jack Cohen founded Tesco in 1919, it was little more than a group of market stalls selling leftover groceries in Well Street market, Hackney. Nearly a century later, Tesco has about 2,500 stores in 12 different countries. But it’s about to break out of its classic mould.

Tesco’s about-turn comes with good reason. Recent trading figures haven’t made for happy reading. Like-for-like sales were off 2.3% – and it gets even worse if you look at its classic large format stores, where sales were down 3%.

But looking on the bright side, sales at its Express convenience stores were up 1%. Even better, online sales as a whole were up 10%.

Moving away from the grocery sector, we see general online sales up a very satisfying 25%. And when you look at its online video and music streaming service, Blinkbox, then suddenly you’re looking at sales growth of a whopping 245%.

For Tesco, the message is clear: throw everything at a new online strategy. In fact, more than just online, they’ve termed the new approach ‘multi-channel’. That is, a ‘seamless experience’ where consumers can buy online, offline, or both, allowing purchase and delivery in whatever way the consumer wants.

This approach makes a lot of sense. There is a whole host of new and amazing online offerings. Amazon and eBay, for instance have taken the world by storm. But at the same time, they’re missing a vital piece of the jigsaw. And that is a convenient way of connecting with the customer in the real world. Sure, Amazon has tried to bridge the gap by developing drop zones, and even customer lockers. But there’s still a significant divide.

Traditional supermarkets have something that many online retailers just can’t match: a physical location. And in many ways, with the push towards convenience stores, the supermarkets are increasing their unique presence.

Yet of the supermarket majors, it strikes me that Tesco is the only one to have developed a coherent strategy to exploit this inherent advantage. Yes, it’s late in the day. And by its own admission, it’s messed up in the past. But, by Jove, Tesco seems to have got the message now.

Online punters spend twice as much

Some of the figures and ideas divulged in a Tesco presentation last week were groundbreaking. To date, the supermarkets haven’t been keen on releasing this sort of sensitive information.

First, Tesco divulged profitability on its online activities. It turned a profit of £127m on £2.5bn of online sales. And at first sight, those margins aren’t too far removed from the business as a whole, which is a good sign.

Industry insiders had previously assumed that online profits were all but zero. Online strategies were seen as a way of maintaining market share, that’s all. The fact that there’s money to be made in this fiercely competitive area of the market is certainly welcome.

But more interesting still was the nature of the online business. It turns out that online savvy punters are likely to be higher spenders. So what? Well, it turns out that they’re higher spenders by a factor of two. Now that is interesting.

And when you drill further down into the figures, you find that customers making full use of the multi-channel offer, ie buying in-shop, online and non-food online (through Tesco direct) suddenly spend three times as much as the average punter. This is most certainly interesting for Tesco.

Tesco could yet be an internet giant

The findings, while perhaps a little predictable, are incredibly important. If Tesco can make a connection across the retail channels, that is, online and offline grocery as well as its catalogue business, then it could be offering something unique.

It strikes me that Warren Buffett has been a little hasty in exiting his position in Tesco.

Tesco already takes nearly 30% of Britain’s spending in supermarkets. It controls a wide and growing retail portfolio.  It owns its loyalty card business and thereby wields a fantastic amount of information about its client base. Tesco’s catalogue business is growing and has the potential to become every bit as large as any rival. Put everything together, and you’ve certainly got the makings of not just a dotcom, but a dotcom giant.

This could be a great turnaround play. Any thoughts?

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  • Paulent

    Hi Bengt,

    Have you seen the recent (Mar 2014) rankings of UK supermarkets? Tesco 9 out of 10 and online 4 out of 5. i.e. pretty much the worst.

    They could well be a turnaround play, but it seems there is some work to do first. I guess after years of – let us be kind – imaginative marketing, customers put their loyalty and trust elsewhere!

    (I hope WB appreciates my support!)

  • Paulent

    Whoops sorry – ranked by the Consumers’ Association in Which magazine 3/14.

  • at

    In the last three years Tesco has written down 1.6 billion pounds. In 2013 net profit was almost 0 due to these writedowns. So the directors have taken what is very profitable company, gambled the cash and lost it. I’d rather we had stable profits for the past three years rather than chasing dreams and losing billions! Have the directors responsible for this theft of money (yes, I call it theft), been charged with anything? Obviously not, they are still around earning millions and gambling someone else’s money. Tesco has to undo more than three years worth of disastrous results and like a toxic bank there may well be more writedowns yet to come. Had they installed a trained monkey as chief executive, a monkey that would leave things be, we would not be in this mess today. I do not blame Buffet at all. Tesco and a raft of other companies are mismanaged by cretins that have absolutely no skills other than climbing the corporate ladders. But when it comes to actually running a company, well, they are not worth two pence. There was a recent article in Moneyweek about the short term incentives which cause directors chase short term profits and thus destroy the company long term. I say, this article does not go far enough. It is a ludicrous system when the owners of a company have practically no say as to how it is run and the clowns at the top can get away with murder. Until that system is improved, the stock market is just a casino.

  • Echinoderm

    Just logged off Tesco.com after buying one can of paint. £25 plus £3 delivery is still cheaper than driving into town and buying the same paint from Homebase.

    The Hudle is excellent too but I don’t know if their plan to get people shopping at Tesco with it is working – my son is eleven and just plays games on his.

  • RedBaron

    Gosh at! What makes you so bitter and twisted? Stock Market a Casino – I think not- when reputable companies ( Tesco, Sainsburys, Morrisons in the retail sector ) plus a host of others paying 3,4,5% dividends compared to miserable returns in savings accounts. I know where I’m keeping my money.

  • Warun Boofit

    I just do not believe the projections for online sales growth they are too optomistic. I tried getting groceries delivered by Tesco and not happy, I want to go into a supermarket ( preferably not those as grim as Lidl and Aldi ) and savour the experience. I enjoy the whole thing, getting my price reduced bread for 1p a loaf and fighting off the pensioners for my venison sausages at 10p/kilo , they dont do these bargains online and its boring getting a delivery of full priced items especially when they substitute my order for reggiano parmesan with something the order picker thinks is the same thing but has more in common with talcum powder. I firmly believe the future is in bigger and better supermarkets even though they are all increasingly resembling big glass and metal sheds, must be a boring job being a supermarket architect, but visiting them is part of my weekly activity, you can keep your online grocerys.

  • Merrall

    Er! Anyone, Bengt for example, been shopping in Tesco’s?

    It is a soulless way of shopping.

    From one who has 30 odd years experience of retailing, shopping is part of an entertainment. I can go into my local Morrison’s or Sainsbury’s and be recognised as a customer, in Tesco I am recognised as a money machine.

    As for getting goods online, I trust my own sense of a product I wish to ingest and let’s be honest, does Tesco even know where it gets it’s meat and veggies from?

    Morrison’s and the Co-Op have their own farms, slaughter houses and dealers and can guarantee their product’s sources. Aldi and the other inexpensive retailers can name their sources. Tesco can not.

    There needs to be a complete change of senior management of Tesco’s and I can’t see it happening.

  • Kent man

    Quite right Bengt,

    Tesco is a great investment. Very trendy to bash at the moment but I use the delivery service, no problems at all. Also have a very handy Tesco Express as well.

    Management has dropped a few clangers, but that is why its a turnaround opportunity. It only needs half decent management.

  • gamesinvestor

    The tone of the article is a little skewed – while Buffet has sold 30% of his investment this inherently means he has kept 70% so the onus on his belief in the company is on the positive side. In the short term he probably sees other opportunities to yield a better return so has freed up some of the cash.

    Buffet gets things wrong, but the basis of his investments have probably not changed for 20 odd years so I see no problem with his approach here.
    The contrast is often drawn between Buffet and Neil Woodford who were poles apart on Tesco – Woodford selling when Buffet was buying.
    I guess in investment your decision is right or wrong depending on the timing – in the long run who knows who will benefit most.

    At today’s price 13March 2014 – it’s just nudged below 300p — probably one for the sock drawer with a dividend getting close to 5% and the prospect of less Capex in the coming years as big store openings are no longer a plan. I suspect “at” has a point in that the money spent on store refurbishment has not reversed the decline and ultimately only margin reduction (price cuts) will make it work because the public have rumbled that the offers and gimmicks that Tesco and other supermarkets push out are just that “offers and gimmicks”, and not real savings to the average customer – hence the LIDL and ALDI’s – but their day will be had and their sun will go down as sure as “eggs is eggs” as my grandma used to say.

  • Rabster

    “Warren Buffett is dead wrong about Tesco” says financial journalist about Billionaire Buffett.

    Ermmm…. doesn’t really work does it Bengt?

  • mr clyde

    …that would be Multi, Multi Billionaire Buffet

  • joe sod

    Tesco has had a tough few years but it is still embedded in the street, it is still number 1 and still has the financial and logistical muscle to stay there. Its not something like Facebook where competitors can emerge out of nowhere and wipe them out. Tesco simply cannot be wiped out, its a behemoth. I think its investments in Eastern Europe will deliver in time but I think they need to adopt a more continental image there. Maybe Tesco needs a warmer continental image even in the UK to counteract the Lidls and Aldis. I know these are not known for warm continental feel but I think some of their success may stem from their european image

  • CKP

    As a Tesco shareholder now showing red, wish I hadn’t betted against Neil Woodford, even when Buffet was buying. There will be more short to medium term pain as Tesco cuts its margins. The hope for turnaround comes from banking, online and overseas but none of these is a cert. I often shop at Lidl and Aldi and they have a strong offer, Tesco needs to up its game and differentiate vigorously if its going to hang onto market share. Despite the dividend i may sell out on positive news flow. Has lost much of its upside IMO.

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