Thursday, 2 January 2014

Comment: What Tesco Can Learn From The Samwer Brothers

A few weeks ago Tesco, Britain's largest retailer by a long long way, made a surprising move.

Struggling to make ends meet at home in the face of a tidal wave of competition and retreating or retrenching in several of its overseas markets, the retailer agreed a deal that finally put it on the world ecommerce map.

While its home grown internet business Tesco Direct has failed to advance in the past five years, its new internet chief Robin Terrell went half a world away to take a stake in Rocket Internet's Lazada.

The business is small fry in Tesco terms. Last year it made $13.5 million revenue. By comparison, Tesco is the third biggest retailer in the world after France's Carrefour and Wal-Mart, the world's largest.

It was the first move by Tesco in a long time that didn't smack of deck-chair shuffling. It has spent the last two years trying to stem a slide in profits after seriously over-stretching itself globally and at home - a contraction that could be blamed both on the recession but just as much on management's blind self belief in its own right to succeed.

At the least, let's say, it took its eye off the ball. At the worst, it lost that sense of paranoia and had replaced it with a sense of arrogance.

It was paranoia that kept it on its toes and saw it beat Sainsbury's to within an inch of its life in the 1990s. By the last decade it had set about decimating the high street after stockpiling out of town hypermarkets and launching Tesco Direct that appeared back in 2006 about to seize the retail sector in a pincer movement.

If the phrase 'disruption' had been in common usage back then, Tesco's then chief executive Sir Terry Leahy would have loved it.

With everything from banking, pawnbroking and used cars on the menu the Tesco juggernaut appeared to be at full speed. But, in fact, it was overheating. looking back it almost seemed as if it was investing lots of money in projects that it appeared only half concerned would succeed.

One area that it did seem to be winning was the online food delivery business. It remains the UK's biggest with a 48.5 per cent market share. Even bigger than its 30-or-so per cent of the off-line food market where it is currently facing extreme competition from Germany's Aldi and Lidl, and the UK's home grown Waitrose supermarket.

We'll leave aside, for the moment, our concerns over the profitability of the internet-age food delivery model (pre-minimum wage 'Hovis' delivery boys on bicycles are cheap; but in store 'pickers' doing customers shopping for them and Sprinter vans full of petrol are a little more costly).

But its Tesco Direct non-food business - designed to wipe home goods giant Argos from existence - has become an unprofitable problem. Taking out Argos was a good idea for a business that had become obsessed with finding ways to grow market share.

The problem was Tesco simply wasn't thinking big enough. Tesco should have been far more concerned about Amazon rather than the slow-moving target of Argos.

So, while even the most commercially challenged of people were beginning to understand that the new frontier of retail was online, Tesco's own online business was still focused on destroying the high street.

The juggernaut was beginning to look more like a dinosaur and one that is only now trying to haul itself into the 21st century.

By comparison Rocket Internet has many of the qualities Tesco used to have. It is an expert imitator and has a knack of finding the right staff and the right partners. Moreover, its understands the new world of retailing and commerce like Tesco understood retailing back in the 1990s.

Disruption is the name of the game and it all began in Silicon Valley 15 years ago. During two visits to California back in 1998 first Oliver Samwer and then with his two brothers Alexander and Marc.

The brothers began absorbing the culture like a trio of sponges. First Oliver secured face time with CEOs as he completed his MBA dissertation. Then the brothers got jobs at companies they saw as pace-steers - offering to work for nothing.

Their first success was setting up eBay imitator Alando in January 1999 which was bought by eBay as it entered the German market five months later. The brothers have repeated the trick many times - adapting big ideas to local cultures.

They've been accused of being a 'clone factory' for other people's business strategies. But there's nothing the brothers have done that they wouldn't be the first to admit themselves - and probably a lot more. They have developed a reputation for parking tanks on lawns - and forcing firms to buy-out their local businesses just to get them out of the way.

But Rocket Internet has fast become an industry leader and those that dismiss them as merely printing carbon copies of ideas dreamt up by their betters risk deluding themselves.

The recent slump at design etailer Fab.com is widely attributed to the energy, perhaps even hubris, it expended taking out Rocket Internet's Bamerang.

Fast is the name of the game at Rocket Internet - and the brothers would stake their reputation on it. Tesco's dithering over the fate of its US chain Fresh & Easy (perhaps in part over some misplaced loyalty to former management, some might argue) would not have been something the more ruthless Samwer brothers would have indulged themselves over.

The morality of Oliver's decisiveness has been questioned - such as when he fired 400 staff from his Turkish operation - but the financial benefits haven't.

You could argue that Tesco is too far down the road as a corporation to adapt to new social and business norms that the Samwers take for granted. It is, after all, a grocer at heart and hypermarkets could not be further from the fleet of foot attitude of the internet if they tried. 

How many people in Silicon Valley do we think sit around worrying what Tesco is up to next?

So, could Zalando help change their minds?

There is no doubt Tesco is now finally rubbing shoulders with the big boys, in global internet terms anyway. (Or should that be the bad boys?) Lazada is just one of 75 businesses backed by Rocket worldwide with a combined turnover of $3 billion.

Those include fashion etailers in South America (Dafiti), Russia and the CIS (Lamoda), Southeast Asia (Zalora), Europe (Zalando) and other businesses from food delivery to a peer-to-peer landing platform.

Lazada was founded in 2012 to replicate what Rocket is aiming to achieve in fashion elsewhere with general merchandise across Malaysia, Thailand, Indonesia, Vietnam and the Philippines. Despite the fact that Tesco already has online non-food operations in Malaysia and Thailand, Zalando already holds the number one spot in each of the five markets.

It's often said that there is no point being number three in international markets - you need to be number one or a fierce number two. Samwer doesn't even think that is a good enough benchmark.

Lazada means business. It has raised serious money in what Tesco might once have considered to be a small market where non-food online sales would be a nice add on to the main food business. It raised $100 million back in June and another $250 million last month. 

Tesco has invested 'tens of millions' of pounds in the latest round alongside Kinnevik, serial ecommerce investor and Rocket Internet shareholder, and Verlinvest.

There's no question Tesco's executives lucky enough to be involved will learn a lot. The question is how much can they take from Oliver Samwer and his brothers business tactics and feed them back into an organisation which is creaking under the weight of its own legacy.

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