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Tesco: on why it's closing its Tesco Direct operations

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Tesco says cost of its standalone general merchandise operation is unsustainable
Tesco says cost of its standalone general merchandise operation is unsustainable

In closing its Tesco Direct business this week, the UK’s largest supermarket has effectively said that it’s just not possible for it to run the standalone non-food business in a sustainable – and profitable – way.

 

It is also likely that it is also girding its loins to take on the proposed merged Sainsbury’s-Asda in a full on grocery war.

 

It said, as it announced Tesco Direct would stop trading on July 9, that the high costs of fulfilment and online marketing were too great a challenge. The retailer is to close the fulfilment centre at Fenny Lock that handles orders for Tesco Direct and about 500 staff are now at risk of redundancy. Tesco says its priority is to support staff and external partners set to be affected by the change.

 

So what’s Tesco’s solution to the challenge of selling general merchandise? Tesco says it still plans to sell non-food products, but to do so via its stores and online via a single platform, tesco.com. Customers can already buy toys, homewares and cookwares via that site and other ranges will be added over time, as appropriate.

 

Uniform embroidery and Tesco Mobile products, currently offered via Tesco Direct, will continue to be available via tesco.com. The ambition is to create “a simpler online experience” for the 100,000 customers that, on average, use the grocery home shopping service each day.

 

Charles Wilson, chief executive of Tesco UK and Republic of Ireland, said: “We want to offer our customers the ability to buy groceries and non-food products in one place and that’s why we are focusing our investment into one online platform.

 

“This decision has been a very difficult one to make, but it is an essential step towards establishing a more sustainable non-food offer and growing our business for the future.”

 

Analysts have been quick to link the move to the recently announced proposed merger of Sainsbury’s and Asda. According to Thomas Brereton, Retail Analyst at GlobalData, ‘‘Supermarket giant Tesco has put its cards on the table by announcing the planned closure of its lossmaking non-food website, Tesco Direct, in an effort to streamline operations and rid it of uncompetitive product lines as it prepares to increase investment into one online platform. The recent news of Sainsbury’s and ASDA’s proposed merger would not only create a market-leading grocer, but a powerful force across markets including clothing and general merchandise – and the closure of Tesco Direct will help prepare Tesco for the competitive road ahead."


Tesco is an Elite retailer in IRUK Top500 research.

 

Our view: M-Retailing editor Paul Skeldon on the Amazon factor

Increasing competition from Amazon and other online retailers is playing havoc with UK retail and Tesco’s move is another blow for ‘old retail’, coming hot on the heels of M&S prioritising store closures as it speeds up its digital transformation programme.

 

The problem lies with Amazon, but only because it offers what consumers want, and the other retailers are failing to be able to do that.

 

“If you think of buying children’s toys, gadgets, books or electrical goods, what’s the first place you think of? Probably Amazon - not the high street shops that specialise in providing these products,” says Phoebe Griffits, an analyst from KIS Financial. “This is because Amazon offer an easy online ordering process, super-fast delivery, lots of choice and prices that are usually cheaper than anywhere else. This is great for your Christmas shopping, but not so great for the UK economy when we are ploughing our money into a company that sends most of its profits abroad.”

 

Amazon is also poised to enter the grocery market in the UK and this, coupled with the proposed Sainsbury’s-Asda merger has all helped to make up Tesco’s mind to, for now, retrench.

 

"With the threat of the proposed Sainsbury’s and ASDA merger, the almost frightening growth of the discounters, and growing speculation that the ever-looming Amazon might soon pounce on the UK grocery market, Tesco should rightfully be concerned about defending its market position," says GlobalData’s Brereton. "However, this does provide Tesco an opportunity to “clear out the cobwebs” in certain product lines and will particularly be looking at reducing – or eliminating – third party selling."

 

Vendors too have been quick to suggest how they can help. Terry Hunter, UK Managing Director, Astound Commerce asserts that retailers are going to have to face some hard truths.

 

“Retailers of all sizes need to follow Tesco’s lead and adopt an effective roadmap for future profitability – and focus investment and resources into the areas which will best achieve their goals,” he says. “Tesco has realised that it cannot successfully compete with the likes of Amazon and so has cut back its e-commerce costs. Many other retailers need to take stock of their digital assets and invest in improvements and upgrades to increase efficiencies before the peak trading periods of Black Friday and Christmas arrive.”

 

 

 

Image courtesy of Tesco

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