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Luxury Brand Mulberry's Profits Triple

So this week the UK’s largest retailer, Tesco, (a supermarket for my international audience) announced a poor (for them) set of financial results. What was the reason for this? Well that UK shoppers want either high end (think Waitrose or M&S) or low end (think Aldi or Lidl). Tesco’s problem? They neither distinguish on price (they are not the cheapest) nor quality (they are not the best).

I remember when I worked for a big four professional services firm asking graduate applicants for accountancy training at interview – name a successful company and tell me why they are successful. Most quoted Tesco and most could not really answer why they thought it was successful. Poor for a prospective accountant I always thought. But the point I asked them was that Michael Porter argues you can either distinguish on price or quality, not both. The recent Tesco arguments seem to be confirming this. A piece in today’s Independent extrapolates this to other markets M&S clothing, Ford and Vauxhall cars etc.

If this was true, how come Tesco was so successful for so long? I think the answer is less in traditional marketing and segmentation, not even in branding (in the snobbery sense anyway). I think it is about convenience. Tesco stores are large. They stock everything. I know when I go to a big Tesco I can get everything. I know I can shop locally at my Waitrose and get most things. I can pop to M&S and get a nice meal. If I want all types of shaving gel, pens, cleaning stuff, food bags, cat litter etc I have to go to Tesco to do it in one place. Perhaps people are moving away from doing all  of their shopping in big weekly or monthly visits, but the reality Tesco was successful because it delivered on everything you would want in one place.

Do I think Tesco will bounce back? Yes. Do I think it will be the pre-eminent retailer it was? No. Simply because as the economy recovers people do want, and can afford luxuries. A single homogenous offering is no longer valid. I also think as things become easier to manufacture safely and adequately, you can have a a cheap car and it will be effective. You can have ‘cheap’ food and it will be adequate. So I do think Tesco needs to have a think about its branding and positioning. It needs to avoid being in the middle, but it can do this within a single store offering – it can offer expensive premium things and cheap things. Why have a separate brand above the door?

The other thing I suspect driving Tesco’s numbers is simply saturation. The convenience market has, simply been filled up in the UK. Anywhere worth having a Tesco already has one. So perhaps Tesco needs to think about a portfolio of other businesses, it has phones, financial services. So why not a standalone clothing brand (not Florence of Fred!)? Why not cars? Why not own businesses in its supply chain? It could buy Co-op’s assets up for sale?

I do still believe you cannot distinguish your offering by price and quality. I have thought for some time that this strategy would unpick for Tesco, but Tesco is a resilient business and is well adept at change, so I am sure it will bounce back.

Yet the other case study of this week is Mulberry. This is the luxury bag maker. It was in the middle (expensive bags, but not Prada or Hermes). It tried to push its brand upward in price and cache and failed. It will now come back to being ‘affordable luxury’. A catastrophic strategic aim, now gone wrong, with the responsible CEO on his way too.

So what does all of this have to do with internal audit? Well these are strategic risks to businesses. Were these in the audit plan? Was the market and customer insight functions within the plan? If they were, were they profunctory conversations about data protection compliance or really getting to the heart of what customer insight should have been doing? Then the question is how the audit team related this to strategy. Is the audit team able to raise these issues without the cry of ‘you’re not experts in customer insight, what would you know?’ – who knows, perhaps the CAEs of Tesco or Mulberry may comment below!

Again, for me it prompts me to think – where was internal audit? (not the Tesco or Mulberry IA functions in particular) but IA as a profession. For if we claim to be risk based, these are the challenges we should be setting down for our management teams. We should also opine on the risk management system. Tesco’s and Mulberry’s IAs will have done I am sure, but what does this say about their views (unless they qualified on it).

We as the public will never know – but as CAEs we should ask ourselves – would our IA functions have protected our clients in this case?