Sticking ones neck out

One of the most impressive things about Tesco is its ability to look forward and to back its forecasts with action. At the moment the business is fighting a rearguard battle to overcome all the bad publicity over the horsemeat scandal, but that hasn’t stopped it agreeing to buy Giraffe because it is concerned about the future of the hypermarket.

Giraffe

Dobbies, Harris & Hoole and now Giraffe. None of these businesses have much to do with supermarkets, and we have usually argued against conglomerates. But when Tesco buys one of these businesses, it doesn’t try to integrate them, cut costs and destroy the whole trading ethos (as can so often happen), it leaves the businesses as independent entities within the group and encourages them to develop in their own way.

What they all have in common is that they target the same people - Tesco never loses sight of its core customer base. All these business should work well either within or adjacent to Tesco stores.

Logic

As a retailer Tesco seems able to look further ahead than most of its competitors and has its own ideas of how retailing will develop. In this deal it is following the logic of that view.

As Tesco says in its blog: "... we’ve been doing a lot of thinking about retail destinations and how our stores might become somewhere that people spend more time, as well as shop. With more general merchandise moving online, we have a great opportunity to rethink how we use the space in some of our larger stores."

That makes sense. If general merchandise turnover moves online and frees up space in the superstores Tesco will be faced with two problems – how can it justify having so much space and how can it continue to attract customers to its larger stores.

Giraffe may not look quite as new and innovative as it did when it first launched, but it still looks fresh and new to the wider population. It is really popular with families without overtly targeting them and alienating other diners. So the business should fit well with Tesco and if the hypermarkets move to being almost an out-of-town food-led department store, then Giraffe will fit in well with them. Harris & Hoole and Giraffe have in common that they are towards the leading edge of developments in their spheres and that is what Tesco needs. The management challenge for Tesco is to make sure that they stay there.

Where next?

All these diversifications suggest that Tesco does not see the future in terms of the hypermarkets we know today. They will have to change. They will no longer be the standard weekly destination store to buy food and they will move to being more of a store to visit occasionally and then spend longer there. The merchandise range will probably widen and the range of leisure options will certainly be expanded. Perhaps the vision is to be part of a large scale retail and leisure centre – one which will justify its presence in part through the online food orders that can be serviced from it as well.

Dalton Philips (Morrisons) may be overstating his case when he says that the Hypermarket is dead, but Tesco’s view is not that far removed.

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