Tesco does need to look beyond just digital sales as part of its Digital Transformation; Home Depot and Ferguson help show the way

Summary

Following Tesco’s recent quarterly results, FT Alphaville makes the case for evolution not revolution in the British retail giant’s battle for revenue and margin growth. As the traditional bricks-and-mortar retailer battles much smaller digitally native competition like Ocado, some investors are warning the company to not fixate too much on driving more digital sales as the way forward.

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Analysis

Companies that have executed well on Digital Transformation are vastly outperforming peers that have not. And companies that were well on their way prior to the pandemic have accelerated further away from peers that weren’t. This has held true for companies across all sectors, including retail, in the US and more dramatically in the UK and Europe where cyber governance leaders have outperformed laggards by +41%. But the key word is well. As we have recently highlighted, simply investing in growing a digital footprint alone is not enough. Grocers in the US like Kroger and Albertson’s are spending massively on digital with varying degrees of success. Kroger even has an expanding partnership with Ocado, one of Tesco’s market rivals named in the FT Alphaville piece.

But strong Digital Transformation, especially for traditional bricks-and-mortar businesses like Tesco, is about more than just having the most frictionless app or robust advertising platform. Because digital permeates all aspects of a company’s operations, regardless of the sector, it also means effectively leveraging technology to improve productivity and efficiency of core operations like inventory management and warehouse distribution.

Home Depot—a top-rated 5-Star company, is an example of a retailer that relies on technology to convert operational efficiencies into higher margins. Its strong financials enable it to invest sufficiently in cybersecurity as a protection against the growing downside risk of a disruptive cyber-attack. Similarly, Tesco’s UK peer, Ferguson, effectively leverages digital technology to improve its back-end operations, in addition to its investments in customer-facing e-commerce efforts.

Tesco does need to do more than chase better margins and improved sales via its digital effort. Its ability to effectively leverage technology (and protect against downside cyber risks) within its core operations will be part of the story of whether the retailer outperforms sector and FTSE peers moving forward.

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Denis Bolshakov

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