David Kuo chats to Natalie Berg, research director at Planet Retail.
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David:
This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and today we will be looking at what it takes to be the world's largest retailer. Wal-Mart, with over 8,000 stores in 16 countries, is unquestionably the world's biggest retailer, but Tesco, with 4,800 stores in 13 countries, has its sights on global expansion, too. But does Tesco have what it takes to be a global player? Let's find out from my guest today, my guest is Natalie Berg, research director at Planet Retail. Natalie is also co-author of Wal-Mart: Key Insights and Practical Lessons from the World's Largest Retailer. We have a copy of Natalie's book to give away in today's podcast, so please listen out for the quiz for your chance to win a copy of the book, and I must say it's a wonderful book. But first of all, welcome to Money Talk, Natalie.
Natalie:
Thank you, David.
David:
Thank you so much for coming in today. What a fascinating book – in terms of my ratings of books, in terms of the wrinkle factor, which is how long I spend in the bath reading the book, this has a very, very high wrinkle factor. So what prompted you to write this book about Wal-Mart?
Natalie:
Well, Wal-Mart is a fascinating company, and what's interesting about them this year is that they turned 50. No other company in the world has had such an influence on retailers, on suppliers, on consumers, and we thought it would be interesting to take a look at Wal-Mart now at 50, because they're actually reaching a really interesting point in their evolution. So during the recession, they actually had a really challenging time – they had their first decline in US sales; they went on for another over two years' worth of declining comparable store sales. So we thought it would be an interesting time to take a closer look at the retailer, and have a look at what went wrong, and does it have the potential to continue growing and maintain its status as the world's largest retailer?
David:
So you're saying that Wal-Mart suffers, like every other retailer?
Natalie:
Yeah, I think absolutely – they are vulnerable. What's really interesting about Wal-Mart is that they've built their business model around low prices and a wide assortment. If you think about today, consumers can go online for even lower prices, or at least the perception of getting lower prices, and a much broader assortment than you can find in store. So I think, to a certain degree, the internet is actually invalidating not only Wal-Mart's model, but Tesco's and Carrefour's, and all the other big bucks hypermarket retailers around the world.
David:
So what would you say was Wal-Mart's key to success, then? – its success over this period of time? What has made it so successful?
Natalie:
Well, frugality is very much embedded in the Wal-Mart culture, and what was interesting, doing the research for the book, is that we found out that even the Wal-Mart name was chosen because it only had seven letters, and it was cheaper to light the signs at the front of the store, so frugality is an understatement. Various senior executives used to share hotel rooms to save costs. It's very much embedded in their culture. So they've certainly established the model of driving costs out of the business, and passing those savings onto consumers in the form of lower prices. So I think that certainly, the lynchpin of their success is recognising the ability to drive efficiencies on the back end, and offer shoppers lower prices. But again, I think low prices and a big assortment, the convenience of a one-stop shop, putting everything under the roof of a 150,000 square foot store, it just isn't relevant today, and I think, going forward, these retailers are really going to struggle to adapt to today's changing, and increasingly digital, consumer.
David:
So is it also true that executives, or people who work in the Wal-Mart offices, have to empty their own waste paper baskets?
Natalie:
I don't know that, but it wouldn't surprise me!
David:
OK, now you say that Wal-Mart has seven letters in its name. Tesco only has five letters in its name, so does Tesco have what it takes to become the next Wal-Mart?
Natalie:
I don't think so. Wal-Mart and Tesco very much go head-to-head in a number of markets. They're two of the largest retailers in the world, but they are very different. Even when you look back to Tesco's roots, they started out at a market, selling fruit and groceries before the First World War. So they've started out very differently, Wal-Mart started out as a discount department store, selling mainly non-food items. It was only in the late Eighties that Wal-Mart actually really made a big push for groceries, which is astonishing when you consider that they are now the largest food retailer in the world. So slightly different business models, but they are facing a lot of the same issues in that we heard from Philip Clark a few weeks ago – Tescos are struggling. They are facing the fact that a lot of consumers are buying non-food products online, and also grocery online is much more established here in the UK. So people go online, they buy their weekly food basket, those non-emotive categories like your toilet paper and tinned beans and that sort of thing, they buy that online, and then they're supporting it by going to their local shops, so it really invalidates the whole idea of driving to an out-of-town store, and I think this will be a challenge for all the big retailers.
David:
Now the thing is, you say that Wal-Mart is successful, but despite its success, it still only has 15% of the US market. Would you consider that to be a success?
David:
I would. I think, when you hear 15%, naturally that sounds very low to most of us, especially when you hear that Tesco here has a third of the market. But the US grocery market is very different: first of all, it's a huge, huge market, extremely vast, and as a result it's very regional in structure. So Wal-Mart is still by far the largest food retailer in the US, but because there is still a lot of regional chains, and the market is still very fragmented, there are still a lot of independent food stores in the US, 15% is actually very good, considering the size of the market.
So what about the UK? You say that Tesco has a third of the UK's market share for groceries. Asda only has 16%, so why is Asda lagging Tesco, even in the UK?
Natalie:
Well, Tesco is a huge, dominant force here in the UK, its next two competitors, Asda and Sainsburys combined, as you say. So at the moment, Asda's doing a much better job around things like pricing and merchandising, private labels or own brands. Asda's really doing a fantastic job, and I think this is where Tescos actually struggled. They've become so focused on, not a case of providing the best value to consumers, but really focusing on the lowest possible price. I think, if we take a step back, the challenge today is that, especially here in the UK, we pretty much have four grocers dominating the market. Pricing is hugely transparent, and people today are going into stores, they're using their smartphones. They're going online to a lot of price comparison websites. It's so easy to see who genuinely has the lowest prices. What Asda's done is, by launching their Asda price guarantee, they're actually promising shoppers to be 10% cheaper than their rivals, or they get their money back. That has a huge, huge impact, on not only the reality of who is offering lowest prices, but also the perception, because they're making a promise to the shoppers that they genuinely are offering the lowest prices. Now, I think with Tesco, they have struggled, and they also are claiming to be the cheapest, and so is Sainsburys, and so is Morrisons.
David:
Well, everybody does, don't they?
Natalie:
Exactly! I think that's the thing – price alone isn't a differentiator, and the basics have to be there: availability, assortment, price, but it's got to be about something more. It's got to be about the in store experience, about customer service, and because Tescos been so focused on driving costs out over the past few years, I think they've neglected their stores, they've under-invested in their stores, and now it's coming back to bite them.
David:
Now, would that also explain why the likes of Lidl and Aldi only have about 2% each of the UK market? – because the store experience is not that great in these places?
Natalie:
Well, I would say that Aldi and Lidl, at least in the UK, still target a different demographic. There is certainly an overlap, and it's certainly one of the reasons why Tescos panicked, and at the start of the recession they rebranded themselves as Britain's biggest discounter. Even when the discounters entered the market in the early Nineties, Tesco launched its value range to prevent shoppers from defecting to these hard discounters. But location plays a big role here, and I think at the moment, if you go to Germany, for example, where Aldi and Lidl originated, you'll find the BMWs and Mercedes in the parking lots of these discounters, and they're on every street corner. They're more like convenience formats, to a certain degree, whereas here they are still very much located in secondary sites and therefore targeting a slightly lower income demographic.
David:
Let's have a look at some of the countries that Wal-Mart has expanded into: central and South America. These are very popular destinations for Wal-Mart – why is that?
Natalie:
Well, Wal-Mart's first international market was Mexico, and what I find fascinating is that they didn't actually expand outside the US until just over 20 years ago. But Wal-Mart international today, if it was a standalone retailer, its international division would be the third largest retailer in the world, a huge, huge retailer in its own right. But Mexico was their first international market, as I said.
David:
But that was successful, wasn't it?
Natalie:
Well, that's debatable. But certainly Latin America is a region that they recognised an opportunity where they can go in and really dominate the region. They've acquired quite a lot, especially in central America. Around six or seven years ago, they made a big acquisition there. Brazil is a huge retail market, and especially, I think, Brazil, Argentina, Chile – these are all markets where going forward, Wal-Mart, I think they have an opportunity to continue expanding through additional acquisitions of local players, especially in a market like Brazil, where it's such a huge market. You've got a very fast-growing middle class, rising demand from a number of consumers, and rising wealth as well. So I think, going forward, we'll see additional investment, particularly in a market like Brazil.
David:
OK, so interestingly, Europe, apart from the UK, doesn't appear to be on Wal-Mart's radar – why is that?
Natalie:
Well, there have been rumours for a while that they are interested in exploring, or re-exploring, Europe, because of course they were in Germany, but that was one of Wal-Mart's most notable failures, of course. I would say that the UK is one of their most successful international markets, so that business, to a certain degree, runs relatively independently from the rest of the Wal-Mart division. I could see them potentially, in the future, re-exploring Europe, but I think we have to remember that Europe is home to two of its largest competitors on a global scale: Tesco and Carrefour. Typically, if you look at Wal-Mart globally, if you look at all the big retailers globally, they tend to pretty much avoid each other. So there's only two markets in the world where the big three, Wal-Mart, Carrefour and Tesco, all compete, and that's India and China, and those are big markets, a lot of room for growth. But even so, they do tend to avoid each other globally.
David:
So are you saying that there is some kind of tacit agreement between them, that if you're in this country, I will not go into it?
Natalie:
I wouldn't call it an agreement, but I would say there's very little incentive for them to enter a market such as France, where Carrefour is by far the largest retailer. They already go up against Tesco here in the UK, and it's interesting here in the UK, because of course Tesco, as I said, is twice the size of Asda, whereas if you look at the US, where Tesco, of course, entered with its Fresh & Easy model, they're a very small operation in the US, but hoping to expand, and actually, one of the reasons why Wal-Mart is making a bigger push towards smaller stores now in the US, because of Tesco's entry.
David:
OK, so let's have a look at Asia. Asia is also not an area that Wal-Mart is very keen on, whereas Tesco does seem to be sort of taking a big liking to Asia. Why is that?
Natalie:
Well again, I think it's because Tesco is very well established, particularly in south-east Asia.
David:
But it wasn't at one stage though, was it?
Natalie:
No, it wasn't, but I think Wal-Mart had a lot of work to do in Japan. They've only just, over the past few years, really turned that business around. China is still a tricky market. It's still one of the most promising markets for all the big three, but I think Tesco, Wal-Mart and Carrefour are all still trying to get to grips with, how do they effectively target the Chinese consumer, and I think, going forward ...
David:
Selling Chinese food would help, wouldn't it?
Natalie:
It would, it certainly would! – and that's one of the problems, because Wal-Mart is so focused on sourcing globally, getting lower prices to shoppers. At some point, they do need to allow some autonomy to the local store operations, to make sure they are getting the right products on the shelves. That's something that Carrefour has really been pushing lately in China, allowing those local operations the autonomy to make the decisions needed. So I think that's something we'll see more of in the future, but it's a tricky balance between balancing scale with a localised offer. I think Wal-Mart has actually gotten a lot better about doing this, and they're sharing best practice with their international operations, when it comes to things like formats and merchandising. If you look in Latin America, for example, they've had huge success with their Bodega format, so these smaller stores, targeting lower income consumers, they've taken learnings from that Bodega format, and they've launched Wal-Mart Express in the US. They've launched Smart Stores in China, and they're rolling out a similar format in Africa, with Cambridge Food; so very much using local banner names and local merchandising, but using the same concept, and learning how to get the cost down in a smaller format, and rolling that out internationally. So I think they are doing a much better job about sharing best practice, but ensuring that what they're doing is targeting the local market.
David:
So who has a better chance of succeeding in Asia? – Wal-Mart, or Tesco? – given that you've looked at both companies?
Natalie:
That's a good question. I think it depends on where in Asia we are talking about. Tesco is very much well-established in south-east Asia in particular, and I think Tesco's actually exiting Japan. One of the reasons why they're exiting Japan is because Wal-Mart has become very powerful. They're some fantastic things there, and it's a crowded market. I would say you'd have to look at it on a market-by-market basis.
David:
OK, so let's have a look at some of the operations within these two supermarkets, or in particular within Wal-Mart. Why has Wal-Mart avoided loyalty cards, whereas Tesco absolutely adores its Tesco's Clubcard?
Natalie:
That is a great question, and one that causes a huge debate among a lot of retail analysts. I would say that Wal-Mart has always viewed loyalty cards as an unnecessary cost – it just adds cost into the business, and it's unnecessary today, I would say. Increasingly ...
David:
Unnecessary?
Natalie:
Unnecessary because there's so much information that consumers are willing to give you through social media, and working with retailers. Asda's been doing a fantastic job working with its consumers, and they've relaunched their private label range, Asda Chosen by You, by working with thousands of consumers across the UK, having them taste-test their products, endorse them, ensure that the quality's there. So I would say that Tesco has had fantastic success with Club Card and dunnhumby. It has enabled them to get a much better understanding of who's shopping in specific stores. It allows them to effectively merchandise and market, based on the local demographic. But I think, going forward, it will become more important to ensure that the products they have on the shelves are relevant for the local shopper, but at the same time I don't think this necessarily has to come through loyalty cards. I think there are other ways that retailers can access customer data, without actually looking to the loyalty card.
David:
So can you explain to the listeners how dunnhumby actually fits into the Tesco business plan?
Natalie:
Yeah, sure. So basically, Tesco works with dunnhumby, and they analyse every single product that goes through the till. So when you scan your Clubcard at the till, they are looking at every single product, for a number of different reasons. They're looking at, is this product that you've bought for self-consumption, or are you buying it for someone at home?
David:
How would they know?
Natalie:
Well, they look at who the customer is, the age, the sex, the demographic. So for example, if you're buying baby food, unlikely it's self-consumption! But there's actually 45 different questions that they ask for each product that goes through the checkout, so they have a really incredible understanding of who's buying what, when they're buying it as well. Another interesting thing we've seen, Wal-Mart has actually confirmed this as well, is that during the recession, and during general times of consumer austerity when people look to tighten their belts, especially at retailers like Wal-Mart and Tesco, we see huge peaks around payday, when people buy the basics: baby care, diapers, basic foods, because for some of the lower income shoppers, they have to actually wait till they get their pay cheque, and then they go right to the store, which is actually, it's quite disturbing from one point of view, but from a retailer's perspective, it enables them to make sure that actually we can offer discounts around pay day, because people are looking for value, and this is when they're in the stores. So by all means, customer data is crucial, and I think going forward, it will differentiate the winners and the losers, but I would argue that it doesn't have to be in the form of loyalty card data.
David:
Yeah, there is an apocryphal story about the sale of diapers, nappies, and what really happened was that they found out that it was the man who would buy the nappies on a Friday evening on his way home from work. They analysed this data and they said, yes – it is the man who actually does the purchase. So what they did was, they started putting six packs of beer next to the nappies on a Friday, knowing full well that the man would go in there, pick up the nappies, and also pick up the six pack at the same time. It is an apocryphal story – I don't know how true it is.
Natalie:
I've heard that as well, actually.
David:
But it just goes to show how powerful the loyalty cards can be.
Natalie:
Absolutely.
David:
I was on a train once, with somebody who I think worked for dunnhumby, and he was telling me, "David – I can tell you more about your life than any of your friends can, just by analysing your store card purchases."
Natalie:
Yeah, completely.
David:
"I will know how many animals you have in the house, how many cats and dogs you have; when you go on holiday; what you eat; what your lifestyle is, just based on your store card data."
Natalie:
It's scary, isn't it?
David:
It is quite frightening. OK, so let's go and have a look at the strategy that Wal-Mart has adopted. It likes this thing called everyday low price, whereas some of the other supermarkets prefer promotional pricing. Who is right? – promotional pricing, or everyday low price?
Natalie:
That is again a hugely debated topic in the world of retail. I think, going forward, everyday low price, or EDLP, as Wal-Mart calls it, will become more relevant for consumers, because typically a lot of traditional supermarkets have relied on what we call high/low promotional strategies. So sometimes the prices are a little bit higher, and then when there's discounts, they drop to much lower. So they rely on these promotional cycles, and Wal-Mart sees this as renting customers and renting market share, because it's very much, you're driving customers in, you're artificially driving volume for a limited time, and then prices go back to the norm. Now I think, going forward, everyday low prices is a great way to build trust with shoppers, and again if we go back to the fact that pricing today is so transparent, I think the days of gimmicky promotions are over. People are seeing right through it. People don't want to go into a store with a calculator, in order to find out how they get the best deal. So I think honest pricing is something that we're seeing a lot more of, and as more and more people access pricing through their phones, when they're even in the store, it bodes well for those retailers that are offering a consistently low price.
David:
But is that necessarily true, Natalie? – because ultimately, if I know that there is an everyday low price at Asda, but at the same time I know that Tescos is having a promotion on beans, which is going to be cheaper than Asda, the fact that you are everyday low price isn't going to encourage me to go and buy your stuff, because I know that Tescos is going to be 10p cheaper than you.
Natalie:
Yeah, absolutely, and this is where shoppers are ...
David:
There is no loyalty, is there?
Natalie:
No, there isn't. They're cherry-picking, and we heard from Morrisons, they use the term "professional shoppers" recently, which I thought was really interesting. People are becoming so savvy, and they are shopping around for the best deals. That has huge implications on loyalty, as you say. People are really looking for, who's going to offer me the best deal, and I'll be loyal to that retailer on this occasion.
David:
OK, so you talked about the shopper going into supermarkets with their mobile phone, checking up on prices. How are the Wal-Marts and the Tescos coping with online retailers?
Natalie:
They're not, at the moment – that's the problem. They're very much scrambling to make up lost ground in this area, but the term "showrooming" has pretty much evolved over the past six months, and essentially this means, this is the risk that these big bucks retailers face from shoppers who go into the stores, particularly retailers that sell non-food products, go into the stores, they have their smartphone, they check the price while they're in the store, and then they buy it from Amazon, or someone online, because it's cheaper.
David:
This is what you call "scan and scram", is it?
Natalie:
Yeah, Wal-Mart refers it to scan and scram, come in, buy it online, and it's a huge, huge threat for them.
David:
But how can you stop that?
Natalie:
Well, I don't think you can, and this is where it goes back to the fact that we thought this would be a really interesting time to write the book, because low prices, wide assortment – that's Wal-Mart's, that's their strategy. That's what's actually differentiated them. But it's not a differentiator any more, online is really invalidating that. So I think going forward, I think a lot of big bucks retailers are trying to find ways to differentiate from the online channel. I think firstly customer service is going to become a lot more important in the future, and we already heard from Tesco – they're adding 20,000 new employees. They need to engage more shoppers. Online retailers don't have that face-to-face interaction, or that ability to have face-to-face interaction. So I think customer service, I think going forward, exclusive products and exclusive brands are going to become more important, because you can't directly price compare those. It's easy to price compare brands and products that are well-known, but if you have a product or a brand that's exclusive to one retailer, it drives loyalty, it's generally higher margin, and you can't price compete. So I think those are a couple of things that we're going to see. I think generally speaking, the in store experience has to become more exciting. Now, if we take a step back, and look at Carrefour, the big French hypermarket retailer, they attempted to tackle this problem by formatting a lot of their stores, rebranding them as Carrefour Planet. So essentially what they did is, they remodelled the stores, they made them look a lot nicer, more upmarket. They had things like childcare, they had hair salons as well. They really were just trying to increase shopper dwell time, and make it a more leisurely experience.
David:
I can't wait to get out of those stores!
Natalie:
Well, they're pulling the plug on them, so it was a total flop.
David:
It didn't work?
Natalie:
It didn't work. It was too expensive, and I think it alienated a lot of shoppers, because they felt that, because the stores looked nicer, but the prices didn't get any lower, they felt that they were actually funding the remodels, so it had a little bit of a consumer backlash. But that said, I would say that that is the way things are moving. I don't think, on a wide scale, you couldn't have that as a wide scale roll out, because it's too expensive to make all your stores look fantastic. Going back to Wal-Mart, during the recession, one of the reasons why they reported a decline in sales for the first time was because they were so focused on remodelling their stores, and targeting. They saw it as an opportunity to target more affluent shoppers, who were looking to trade down for better value, and again alienated their core customer base, who then thought, actually I'm going to go to the dollar store, because I'll get better value there. So there is definitely a fine line – retailers need to balance, keeping the basics right around price and availability, but also making the in store experience more exciting, using technology to engage with shoppers. I think all these things, capitalising on the fact that online retailers can't do that.
David:
Are we going to be slowly moving away from this big box format, these big hypermarkets, out-of-town stores, where you have to drive out there with a station wagon, and bring back a shedload of stuff – are we moving away from that now?
Natalie:
Yeah, I think we are. I think it does depend on the market, of course, because in the US, there is a very strong car culture, and it's actually more convenient for shoppers to get in their car and go to a Wal-Mart than it is to order groceries online, for example. But in the UK, you could argue, smaller country, higher population density, it's more cost-effective, especially when you're talking about food ecommerce, it's much more established here. So I think retailers like Tesco, Carrefour in France, are more at risk of this demise of big bucks retailing. But I would say, especially for those category specialists, if you look at Best Buy, a big consumer electronics retailer in the US, they're closing 50 stores, because that category, electronics, is just quickly moving online. I think in the future, what big bucks retailers will need to do is, they'll need to become more diverse with their channel strategy, so multichannel is a term that we talk a lot about in the retail sector. This is something that Wal-Mart is doing as well, so having their large stores, but also experimenting with smaller formats – Wal-Mart Express, for example, 15,000 square foot stores. They're also making a big push for Neighborhood Market – again this is a little bit more food-focused, 40,000 square feet, and online as well, so they're investing tons online. I think what we will see is that, it won't just be a case of Wal-Mart.com competing with Amazon. com, but Wal-Mart will need to leverage its 10,000 stores around the globe. So we're seeing a lot of investment in initiatives such as click and collect, where you order online, but you pick it up in store. This is very relevant for Tesco as well – this is what they'll have to use to differentiate from the likes of Amazon and eBay, and all the other peer plays.
David:
And does Tesco have a chance of doing that?
Natalie:
Yeah, I think they do. I think the challenge for these retailers, Wal-Marts and Tescos, is that non-food is, especially for Tesco, a very much food-focused retailer, non-food is a little bit of an afterthought. For Tesco, they rely on food to draw shoppers in on a regular basis. They get them into the stores, and then you don't make a lot of money on food products. So you have to give shoppers an incentive to go to check out the towels or the electronics while you're here, and these products are higher margin, but you don't really go to a Tesco store just for those non-food products. So I think putting those products online will become even more challenging, to get shoppers - well, they already are online. I think it'll be challenging to convince shoppers to go to Tesco.com for their own brand's clothing, for example – something that they're trying to push. If we look, going forward, what we're starting to see now, both Wal-Mart and Tesco especially, are using this marketplace model, which allows third-party vendors to post or to sell their products on Tesco.com, or on Wal-Mart.com. So it gives Wal-Mart and Tesco credentials in some categories, where perhaps they didn't have it, and it also enables them to have a broader assortment than you would find in their physical store. So I think that's something that, they're testing out the model, they're seeing how it works. There's a lot of challenges with that as well, but I think going forward, we'll start to see a lot more investment in this marketplace model, to compete with Amazon.
David:
So do they lose some of the control, if they were to do that?
Natalie:
Yeah, absolutely, and that's the challenge – monitoring quality, monitoring returns as well. That's another thing too – I don't think that online will ultimately take over the high street, because if we think about the fact that people still like to touch products, they still like to see what they're getting, and they also want a physical store to return the product to, in a number of cases. So I think going forward, we'll see a lot more investment in this click and collect initiative, and also marketplace.
David:
OK, my final question, Natalie, is, I'd like to pick your brain about Tescos in particular. Tescos in my view, has made a number of big mistakes. One of them was going into America, the other one was Tesco Cars. Now, can you envisage Asda making these same kind of mistakes?
Natalie:
Well, I wouldn't say that the US was a mistake by Tesco.
David:
You don't?
Natalie:
I don't believe that. I know a lot of people do.
David:
It's not making money.
Natalie:
It's not making money, and they're putting it off for another year before they start making money, but I think they certainly had an impact on the market. There's been huge reaction from all of the major US traditional supermarkets. Everyone is testing these smaller formats now, Wal-Mart especially with its Wal-Mart Express concept. So I think they've recognised a gap in the market. I think the challenge that Tesco faces is that they, well – there's a little bit of a case of, poor luck and bad timing, in that they entered the market just before the recession; they entered the south-west, which was one of the hardest-hit areas. So I think, going forward, if they were to take that model into some markets, more promising markets, urban areas, places like Florida, where you have a large elderly population, where people will want to shop in a smaller format over a large scale concept, but they certainly have made mistakes with Fresh & Easy. As an American, we like to pick up our apples and fruit and veg. We don't want it pre-packaged. We want to be able to decide, we want to pick from a variety of loose veg and fruit. Self checkouts – we don't like those either. The Fresh & Easy stores are 100% self checkout. We like to have a chat with the employee as we're checking out. So I think there's still some things, but they've done a much better job about making the stores warmer and less sterile, and I do think that, in the long term, the challenge for Tesco now will be the struggle that they're facing at home will require investment, and a huge amount of investment, as we've heard. That's going to be their number one focus, is restoring the UK. That might require them to take their eye off the US business for a couple of years. I don't think shareholders will be too patient with many more years of them essentially haemorrhaging money in the US market, but I think, if they can balance the restoration of the UK business with getting the US business up and running, then I think that it does have potential for the future.
David:
But can they grow the UK market share any more than about 30%? I mean, it's almost impossible to grow beyond that, isn't it?
Natalie:
Yeah, absolutely. I think now the key focus will be getting their shoppers back in that may have defected, especially the Sainsburys. Sainsburys has been doing some fantastic things, and has really been balancing both price and quality much better than Tesco has. So I think they'll be looking to regain some shoppers that have defected, but the Tesco brand has become too stretched, and as you say, the cars and some of the other ...
David:
Tesco Banking, Tesco Finance, yeah.
Natalie:
Yeah, it's too much, I think. But banking, it generates higher margins for them. If you look at their banking division, you're talking about margins of 30% upwards; if you look at grocery retailing, 3 – 5%, so you can see the incentive, and the Tesco brand, there's some very loyal Tesco shoppers out there, thanks to Clubcard, but I think that the brand has become too stretched. I think they need to go back to their roots, which is UK and it's grocery, and I think that's something we'll see, going forward.
David:
OK, I said that was my last question – I've just thought of a last, last question for you, and that is, if you had a pound to invest, would you put a pound on Tesco, a pound on Wal-Mart, or would you go 50 pence on each?
Natalie:
Oh, the million dollar question! I would say, 50 on each – I'm going to play it safe! I think Tesco's streets ahead of Wal-Mart when it comes to multi-channel, and that's going to be really key for the future, but Wal-Mart is very well-established in a number of markets around the globe, so it's a tough one to call.
David:
I know, and again you can't deny the fact that Wal-Mart is the biggest retailer in the world.
Natalie:
Absolutely.
David:
OK, well thank you ever so much for coming in today, Natalie. Now, I have a signed copy of your book to give away in today's podcast, to a lucky listener who can answer this simple question, and the answer to this question has been given, I think, on numerous occasions during this entire podcast. So my question is: what is the name of Tesco's US supermarkets? Please email your answers to: moneytalk@fool.co.uk. Now, I have one more chore to perform, Natalie, which is to find a quote to sum up today's podcast, and today's quote comes from Sam Walton himself, who said: "Keep everybody guessing as to what your next trick is going to be – don't become too predictable." Do you think Tescos is being unpredictable at the moment, about its plans?
Natalie:
No, I don't actually.
David:
OK, thank you so much for coming in. This has been Money Talk, I have been David Kuo, and my guest has been Natalie Berg, research director at Planet Retail. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast. Until next week, happy shopping!
