Online shopping has transformed the supermarket sector but Tesco has made the surprise decision to shut down its Tesco Direct web platform - perhaps in a move to defend its grocery share and consolidate operations

Tesco Direct

Tesco Direct is closing down on 9 July 2018

Tesco sprung a surprise move when it announced yesterday (22 May) the web platform on which it sells everything from sofas and clothes to TVs and toys is closing down.

The decision to shut down loss-making catalogue-style website Tesco Direct puts about 500 staff at risk of redundancy.

It does not affect the website that sells groceries.

But what’s the reason behind such a shock move? Thomas Brereton, retail analyst at data and analytics company GlobalData, gives a commentary on Tesco’s decision and the challenges ahead for the retailer:

Defending its grocery share ahead of Asda and Sainsbury’s merger

Supermarket giant Tesco has put its cards on the table by announcing the planned closure of its loss-making 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.

It follows a review of the unprosperous arm of the UK-based conglomerate, with UK and ROI boss Charles Wilson announcing that there is “no route to profitability” after failing to deliver a sustainable offer as a standalone non-food business.

Retail, supermarkets, Tesco
Global Data’s graph shows retail market shares for supermarkets in 2018

And although it may seem Tesco (with revenues of £51bn for the latest financial year) has the financial influence to turn around any flailing fascia, it must first turn its attention to long-term survival in the face of intense competition from an upcoming powerhouse created by the proposed merger of Sainsbury’s – including Argos – and Asda.

‘The website will cease trading on the 9 July 2018, and will subsequently close the Fenny Lock, Milton Keynes, fulfilment centre, which handles the Tesco Direct orders – putting 500 jobs at immediate risk.

How Tesco Direct closure could make supermarket chain stronger

But despite the unfortunate job losses, it is the right move from the former Booker chief Wilson.

Tesco’s position as the UK’s leading grocer is under immediate threat from the CMA-pending Sainsbury’s-Asda entity, with the 23.4% combined share casting Tesco in a distressing shadow in the Food & Grocery (F&G) sector.

So the news – which falls on the same day as the announcement of a waste reduction initiative – is clearly Tesco taking an active role in defending its core food business.

This news certainly doesn’t forebode a substantial Tesco withdrawal from non-food markets.

The retailer had already begun to quietly shift nonfood ranges onto its site, including toys, homewares and cookware, and it seems likely to transfer more ranges across.

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.

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.

But the “phenomenally bright” Wilson – named the 2017 Sunday Times Businessperson of the Year – is the right person to lead Tesco against competitors; and this online re-positioning won’t be the last big move we see this year.’