Warren Buffett is dead wrong about Tesco

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?