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View transcript

Tesco takes a shopping trip.

Tesco takes a shopping trip

When the company that takes £1 in every £7 spent in British stores admits that it needs to improve its customer service, pricing, quality and the appearance of its stores, something major is afoot.

Shares in UK supermarket Tesco fell 16% - their sharpest drop in almost 25 years - after the company announced that sales had fallen 2.3% in Britain during Christmas 2011. On the same day, shares in Ocado, the online supermarket delivering Waitrose goods directly to the customer, rose 33%.

Tesco chief executive Philip Clarke announced plans to shift from expansion to improving existing stores. The company will refurbish them and put more employees on the tills to 'improve the shopping experience' and 'reconnect with the customer'.

Part of the reason for Tesco's troubles is that its mainstream rivals - Asda, Morrison's, Waitrose and Marks & Spencer - have improved, while discounters Lidl and Aldi have increased sales during the credit crunch.

But that does not tell the whole story. In the December 2011 edition of Harvard Business Review, Darrell Rigby points out that retailing tends to change significantly every 50 years or so. A century and a half ago, the growth of big cities and the rise of the railways made possible the department store. Mass-produced cars came along 50 years later and prompted the arrival of shopping malls in the suburbs. The 1960s and 1970s saw the spread of discount chains such as Walmart and Kmart. And the last few years have seen the rise of what the author calls 'omnichannel retailing', in which retailers can interact with customers through websites, physical stores, kiosks, direct mail and catalogues, call centres, social media, mobile devices, gaming consoles, televisions, networked appliances and home services.

'Each wave of change does not eliminate what came before it, but reshapes the landscape and redefines consumer expectations, often beyond recognition,' says Darrell Rigby, head of global retail and global innovation practices at Bain & Co. 'Retailers relying on earlier formats either adapt or die out as the new ones pull volume from their stores and make the remaining volume less profitable.'

He argues that existing retailers like Tesco must embrace omnichannel retailing and transform their stores - the one big feature that internet retailers lack - from a liability into an asset.

This means turning shopping into an entertaining, exciting and emotionally engaging experience by skilfully blending the physical and the digital, while also hiring more imaginative and technology-savvy people who can fuel innovation.

Ron Johnson, former senior vice-president for retail at Apple and now chief executive at US department store JC Penney, uses the example of Apple stores to show exactly how this can be done.

In an interview with Gardiner Morse in the same issue, Ron Johnson reveals that Apple stores are the highest performing in the history of retailing. Yet they operate in a category that, in 2000, pundits said would move entirely to the internet.

A key to their success is that customers can test any product, loaded with the applications and types of content they are going to use, and get someone to show them how to use it.

If they buy the product, the store will set it up for them before they leave the store. If they need help after that, they can go back for personal training. And if there is a problem, they can usually get it fixed quickly.

Apple stores sales associates are not on commission. Their one job is to help the customer to find the right product - even if it is not an Apple product.

John Lewis Partnership chairman Charlie Mayfield similarly places innovation at the heart of the strategy of the company that incorporates both John Lewis department stores and Waitrose.

In an interview with Nicholas O'Regan and Abby Ghobadian in the Journal of Strategy and Management, Vol. 5 No. 1, he says: 'Innovation is core to our business. It is inherent in formats, merchandising techniques, product sourcing and design; online innovation through technology and innovation through services. It is about bringing products that are difficult to source elsewhere and delivering better those that customers can find elsewhere. It is engendered in the culture as everyone strives to do what they do better every single day. It is all about relationships and trust.'

Innovation, relationships, trust, emotional engagement, connecting with the customer - retailing has moved on apace since Tesco's founder Sir Jack Cohen adopted the motto Pile it High and Sell it Cheap for the title of his autobiography.

The lessons have clearly been learned by the company's current chief executive. Few people are likely to bet against Tesco any time soon.