News & Views

What Tesco taught us about disruption

by Patrick Jeffrey

Tesco’s dramatic drop in profits, announced yesterday, reminded me that truly disruptive companies aren’t always tech-savvy startups from Silicon Valley. Brands need to be aware of disruption, in all its guises, not just future-facing, digital ones

Someone recently asked me what the world’s most disruptive company was.

After trying to think of a lesser-known brand from a small island off Papua New Guinea (that would have made me sound very clever), I finally settled on Uber. I’ve just finished writing a feature on this ride-sharing service for our forthcoming Contagious X issue (a special, bumper edition that will celebrate our tenth anniversary), and found the speed and ruthlessness of Uber’s expansion pretty mind-blowing. In 2009 it was a mere idea in the heads of Travis Kalanick and Garrett Camp. Five years later, the company is operating in 200 countries and has been valued at $17bn.

To me, Uber has all the hallmarks of classic case of disruption. A West Coast entrepreneur digitises a staid industry, using technology to streamline a previously painful customer journey. It’s a similar story for Airbnb, Paypal, Amazon, Nest and Square – all of which feature prominently on MIT’s 50 Most Disruptive Companies list.

But, as I read about the decline of supermarket giant Tesco yesterday, it reminded me that disruption can come in many forms. It’s not always driven by digital, it’s only sometimes caused by young upstarts from San Francisco Bay, and it doesn’t have to happen at lightening speeds. In Tesco’s case, disruption has come from two budget, no-frills, German supermarkets: Aldi and Lidl. And there’s not a nifty smartphone app or open API in sight.

Trouble at Tesco

Over the past few years, Tesco’s fall from grace has been clear for all to see. On 23 October, the supermarket giant announced a 91% year-on-year drop in pre-tax profits. Sales also fell by 4.6%, shares tumbled by 6% and the company’s chairman, Sir Richard Broadbent, stood down. Compare that to 2007, where one pound in every seven passed through Tesco’s tills and profits of £2.5bn ($4bn) were recorded.

It’s not only Tesco that’s struggling. Kantar Worldpanel recently reported that Morrisons’ earnings have dropped by 51% and earlier this month Bloomberg announced a 6.9% share drop for Sainsbury’s. On 1 October, the three of these grocers saw £1bn ($1.6bn) wiped off their collective market value. Now it’s not exactly curtains for the so called ‘Big Four’ (Tesco, Sainsbury’s, Morrisons and Asda), they still have a 75% share of the market, but things aren’t exactly looking rosy.

Let’s compare this to Aldi and Lidl. Kantar reports that Aldi’s growth between 2013 and 2014 came in at 27.3%, edging out Lidl on 18.1%. A few weeks ago, Aldi announced a 76% gain in annual profit, and pledged to re-inject this back into the UK with a planned £600m ($960m) investment over the next two years. Within a few months, these retailers will own over 10% of the £174bn ($278bn) UK supermarket industry.

Sowing the seeds of success

Clearly, this has been a seismic shift. But it feels a million miles away from the ‘classic case’ of disruption outlined by Uber. For starters, there’s no mention of digital – The Big Four all offer complex ecommerce options whereas Lidl and Aldi have none at all. Nor has the customer journey been streamlined – if anything, it’s a more laborious process to shop at Lidl and Aldi than any other supermarket. The cause of this success, then, is down to a good old fashioned concentration on price and quality – it’s not sexy, but it’s effective, and it’s disruptive.

For brands, I think it’s important to bear this in mind. Our industry is obsessed with new technologies, platforms, startups and innovations. And we should be – just look at how the likes of Google, Facebook and Amazon have fundamentally influenced the world we live in. It's only just the beginning of tech-fuelled disruption. As Google’s co-founder, Larry Page, told employees at last year’s I/O conference: ‘We're really only at 1% of what's possible, and maybe even less than that...we're still moving slow.’

But it’s also important for us to recognise and learn from all types of disruption, not just the sexy, future-facing stuff. Perhaps your local German supermarket can teach you just as much as today’s hoody-wearing, computer-coding, Silicon Valley CEOs.

For an in-depth case-study on Aldi, which charts the brand’s rise, see Retail Week's interview with the managing directors, here.