Fresh from a week tramping the aisles of the Carrefours, Kauflands, Lidls and Tescos of Central Europe, we return reflecting on the steps Tesco is undertaking to harness the scale of the business but, more importantly, the advance of the group’s capability.
In particular, we were struck by how the Central European region is being operated on a much more unified basis and how it is seeking to link into pre-existing group-wide processes and initiatives such as Clubcard, format diversity and global procurement.
The procurement plans are especially interesting because we had sort of expected Tesco to be putting together the capability to source own-label foodstuffs on a pan-European and even global basis. Indeed, structures have been put in place from as far apart as Chile to China to do so. Such initiatives do not just offer the chance to improve buying terms, but also to secure supplies in volatile markets and enhance product consistency, which we witnessed in-store. What was more of a surprise is how Tesco is seeking to deliver benefit to its customers and shareholders alike from applying scale and capability to proprietary brand lines.
In essence, Tesco is seeking to bulk up orders so its major suppliers can operate longer production runs for products that already have universal appeal and reach across Europe largely lines in household goods, personal care and ambient grocery. By bulking up production, Tesco can explore the case to buy better, reduce prices and, it hopes, also boost its return on sales. However, the carrot of a more efficient and exclusive supply chain is not the only ingredient here; there is a stick available, and this is quite radical to our minds, reflecting capability over scale.
Tesco has found there are major international manufacturers that charge higher prices to the business in Europe than the UK. We sense surprise at this revelation. However, rather than just accept it, Tesco has started to procure branded lines in the UK and ship them to Central Europe, and offer lower prices to customers in Bratislava, Budapest and Krakow.
Moves are afoot, we sense, for a more efficient supply chain to emerge; one that it will be interesting to see if Tesco can harness. There will, we believe, be some interesting negotiations forthcoming, with many keen observers of how matters pan out.
Dr Clive Black is head of research at Shore Capital Stockbrokers