When Dave Lewis became Tesco CEO in 2014, having previously run Unilever’s personal care division, he took on a business in dire condition.
Sales were falling due to a bitter price war with supermarket rivals, all of whom were also losing market share at an alarming pace to German discounters Aldi and Lidl.
Trust was at an all-time low thanks to a serious accounting error - the company was forced to admit it had overstated profits by £250m - and media stories of unfairly squeezed suppliers.
Worst of all was the realisation that the company’s glorious expansion under Terry Leahy in the 2000s had been a terrible act of hubris.
Customers were unexpectedly abandoning the vast, out-of-town hypermarkets Tesco had built in favour of smaller, more convenient stores, collapsing their real estate value and forcing Lewis to preside over one of the deepest losses in British corporate history - £6.4bn - in his first annual results in 2015. At one point, the company’s value more than halved within a year.
Lewis announced his surprise retirement today, saying that while the loved the intensity of his job, he wanted to spend more time with his family.
From where we stand right now, his five years at Tesco look like a model turnaround in very difficult conditions, for one very important reason: Lewis knew how to prioritise.
Fix the biggest problem first
Tesco was being attacked from all sides, and there was serious disagreement about how it should best fend them off. The question was essentially this: should it focus on stabilising market share or cutting costs to restore profitability?
Lewis chose the latter. His first step was to get all of the company’s problems out in the open (the logic being that from there the only way was up) and then set out to plug the holes in Tesco’s balance sheet, primarily by selling non-core businesses, such as its South Korean Homeplus chain (£4bn) and its Dobbie garden centres (£217m).
At the same time, Lewis improved the profit margin by reducing the product range and closing failing stores.
This was, for some people, counter-instinctive. How can a business turn itself around if it’s retreating? Closing stores damages morale and does nothing to entice new customers, a lack of whom was the reason the stores were failing in the first place.
Lewis, however, recognised that tackling consumer perception of Tesco products and the Tesco shopping experience would take a lot longer to fix than the company’s finances, and that no business can survive for long without the confidence of its investors or banks.
It worked. Tesco returned to the black the following year, and it was only then that Lewis started to tackle the company’s marketing challenge in earnest, with mixed results.
Put simply, the marketing problem facing Tesco and the other supermarkets of the ‘big four’ was and still is that customers perceive Aldi and Lidl as offering much better value for money. On the surface this is true - their average prices are lower than any of the big four could sustainably reach owing to their far larger product ranges.
If you look more closely though, the real genius of the German discounters is not in their cost control but in their packaging. Aldi and Lidl dress low-cost products in high-end packets, often remarkably similar to existing brands. This has led customers to believe they have a similar quality to the major supermarkets’ own brand products, which are significantly more expensive - hence the value for money perception.
It’s a unique challenge to the big four - they can’t do the same to their own low-cost products (e.g. Tesco Essentials) without undermining their mid-tier products.
Lewis tried a couple of ways to counter this. He launched Tesco’s own discount store Jack’s last year, though the first of ten such stores has since been closed. More successful was the launch of a new range of premium own-label products, most often with the word "farm" somewhat misleadingly in the name (the farms didn’t actually exist).
These were designed to compete directly with the discounters on both appeal and price, which - fake farm fatigue notwithstanding - gradually helped to improve its brand perception.
Between the 12 weeks to January 4 2015 and the 12 weeks to September 8 2019, Tesco’s market share for UK groceries has fallen from 29.1 per cent to 26.9 per cent, according to data from Kantar Worldpanel. However, this is a relatively less significant decline than Sainsbury’s, Asda or Morrisons.
Revenues rose in the last full year were £63.9bn, an increase of 18.6 per cent since 2015-16, while pre-tax profits are more than eight times higher, at £1.7bn, while shares are at a similar level to when Lewis joined.
Tesco isn’t back in a golden age then, but it is justified in saying that its turnaround is complete. The company is out of a hole that, at one time, it was unclear it would ever escape, and this is to Lewis’s credit.
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