Tesco’s Sir Terry Leahy doesn’t do zagging. He’s a zigger. But he zigs harder, faster, smarter, cheaper, more comprehensively and more aggressively than arguably anyone else in business. Ever. When the consumer wants local or Fairtrade, or cheaper toasters, or c-stores, or organic veg boxes, or recyclable packaging, or reduced-salt ready meals, Tesco is there. It’s not always the first, but it’s always listening, always adapting its offer.
Some of the latest unoriginal ideas Tesco has adopted in the past year have included loft lagging, an iTunes rival, a directory service, C&C wholesale, and a c-store chain in the US. This season’s unoriginal idea is a new range of 350 'discount brands', with names like Country Store (frozen), Oak Lane (ketchup), Sun Sip (cola). And reinventing itself as “Britain’s Biggest Discounter”, Sir Terry shows himself, once again, to be Britain’s biggest chameleon, taking Tesco where his customers tell him in the same way he has done ever since, as marketing director, he launched Clubcard in 1995.
“There’s no use trying to make shoppers spend more,” he says of the downturn, “or hoping the market will return to the way it was in 2006/07. If food prices have shot up, you change the way you shop. The mistake retailers make is wishing that wouldn’t happen. We’ve got to stay close to shoppers. As they change, we change. So we have pushed on with resetting the offer while keeping a tight control on costs.”
The discount line was originally developed for Central Europe, where “discount brands” are now more familiar (though in the 80s, before Tesco launched its pioneering own-label strategy of Value, Standard and Finest, these discount brands were a regular feature of British retail). Sir Terry has brought them back to address a shopper need, he says. While some brand and retail experts have questioned the offer’s clarity, he is convinced it will bring back shoppers who left. “They never wanted to leave. Our message is ‘you don’t have to shop anywhere else’,” he says.
The move also addresses the threat provided by Aldi, Lidl and Netto as well as certain larger multiples referred to by Sir Terry as “retailers with a strong price image”.
“Net net,” says Sir Terry, “we have gained customers. And truly price-sensitive shoppers know Tesco is cheapest. But for middle-class shoppers, going on superficial impressions, it’s natural to shop about. And I suppose it helps that the press gives the discounters so much publicity.”
Name: Sir Terry Leahy Job: CEO, Tesco Age: 52 Status: Married to Alison, a doctor, and has three teenage children.
Education: St Edwards College, Liverpool; BSc in management sciences from UMIST.
Career highlights: Knighted for services to food retailing in 2002. Member of the Prime Minister’s Business Council.
Other non-execs: None (but director on the Liverpool Vision Regeneration Board)
Any interests besides football? Reading, theatre, architecture and playing spor.
The last book you read? Young Stalin.
The last play you saw? An outstanding RSC production of A Midsummer Night’s Dream.
Your favourite building? Getty Museum in LA.
Surprising fact: Originally joined The Co-op as a management trainee. Moved to London to be with partner (now wife), Alison, when she was studying medicine. Briefly stacked shelves at a Tesco supermarket, before taking up a full-time role with Tesco.
With as yet unconfirmed rumours that Aldi is selling real estate in Germany to pay for a big push in the UK, he insists he’s not overreacting. “Most ordinary people have heard of Aldi and Lidl,” he says. “There’s no harm reminding them.”
So is he scared of Aldi? “We’re not scared of anyone. Where does being scared get you?” The only thing keeping him awake at night, he adds, is jet lag. “Aldi and Lidl don’t like competing with Tesco. We know that from ex-employees we’ve recruited.” And he adds, in a typical deadpan, with more than 1,100 discount brands, “we’re already bigger than Aldi”. Miaow.
Tesco in Central Europe
Not that size is necessarily important to Sir Terry. Hungary, one Central European country where discount brands are doing well, has proved in another way to be an effective testbed for Tesco’s change of tack, he says. Though a minnow by comparison with the UK, “the economy in Hungary has been in trouble for three years but we’ve worked hard on the offer and on keeping costs low and that’s a good template”, he says – before adding that with a strong new store-opening programme Hungary will expand its sales area by more than 10% in the second half.
Again, that’s typical Tesco, typical Sir Terry. He will take good ideas and adapt them wherever he sees fit. When Costco arrived in Britain in 1993, despite its size, he not only took the threat seriously; he saw a chance to learn. Close observation revealed small shopkeepers were stocking up there. This prompted Tesco to look at how the convenience sector was doing. Supplementing its observation with Clubcard information, it concluded that shoppers wanted a more convenient shop but a different offer to the typical one then available. The result, a year later, was Tesco Express.
This learning has since informed Tesco’s thinking in a number of countries, and as a format, Express has arguably been the unsung hero of Tesco’s expansion. While others (notably Asda/Wal-Mart) shun convenience, Express is now in nine countries, with sales up 52% year-on-year and 5% like-for-like. As well as 880 in the UK, there are more than 300 in Thailand, with a further 250 set to open in the second half worldwide. A success by any measure.
But with the economy in apparent meltdown and consumers switching to ambient and cheaper food, is Sir Terry not worried some of the progress that’s been made in improving diets will be lost? He believes Tesco can achieve the same aim as shoppers change. The single-biggest category of the new discount brands is Market Value produce. Along with Daisy household cleaning, it’s been the best performer.
“We sold 3.5 million tomatoes in the first week and 150,000 iceberg lettuces,” he says. Organic sales are flat, he admits, but a 25% reduction in prices aims to “help those who still very much want to buy organic”.
And Sir Terry also believes the reformulation programme of the past three years, to reduce salt, fat and sugar, will provide a lasting legacy. So why are there no front-of-pack GDA labels on the new discount brands, I ask. They will come soon, he says, and all products are sourced to the same standard as Tesco brands.
Nor is Tesco about to abandon its green initiatives. Shoppers may be cutting corners, but with the chain’s energy bills up £70m year-on-year (£10m more than the set-up costs for Fresh & Easy), “we’ve invested a further £100m in energy-saving refrigeration. The high price has accelerated investment in-store, in refrigeration and distribution”.
Tesco’s work with The Carbon Trust is also rolling out. An initial 20 products have been extended to 100 with a goal of a global standard. “It’s a huge undertaking, like product costing or nutritional analysis, but we’re making best headway.” Sir Terry believes we’ve got to run the economy on a fifth of current carbon levels. How? As important as technological advance, he says, will be “small but important changes in behaviour”. “Take detergent. If you reduce the wash temperature and don’t use a dryer, it’s a big change.”
Upbeat in the downturn
Given the cooling of the world economy, where next for Tesco? While “progress is going to be slowed down”, Sir Terry refuses to be drawn into speculation about the severity of the downturn except to say that “at the moment, we are not seeing [the same] conditions as in 1991-92, [when] interest rates were at 15%.”
Rejecting, angrily, suggestions that Tesco is profiteering from price inflation – “It just isn’t true” – Sir Terry says Tesco has identified £450m in cost savings in the UK business, adding that Tesco will pass on £600m in price cuts to shoppers this year. With concerns about the impact of the credit crunch also on the cashflow of small and local suppliers, Sir Terry believes these are “proper businesses run by grown-up adults”, before adding that “it’s not in Tesco’s interest to lose its supply base”.
“All these things are a judgement. We have to do a whole range of things to protect our business for the future,” he adds. Sir Terry even seems to have been energised by the downturn. “It keeps you closer to the customer and to the business,” he says. “And it’s healthy to pit your wits, be it sport or cards or business.”
There is plenty to be positive about, too. UK sales are up 9.7% to £20.1bn. And like-for-like sales were up 3.7%. And, while noting non-food sales are down from last year’s 8% growth, they are still up 4%, with the new Acer dual-core laptop for sale at a record low of £349, selling at one a minute. Tesco.com sales and profits are up 20%. And the number of telecoms centres will rise to 40 by Christmas. Dobbies garden centres are also promising, he says, with sales up 12% despite the poor summer. “We wanted to be in gardening for a long time but wanted the best.”
New store openings are also earmarked to increase floorspace by a further two million sq ft in the UK in the next 12 months. But with scope for retail growth limited in the UK by its sheer dominance and by increasing regulation – Tesco is appealing the Competition Commission recommendations – an increasing portion of Tesco’s sales, and Sir Terry’s time, is likely to be spent elsewhere.
International sales were up 12.6% to £8bn and international space will increase by 25%. And during a downturn there are bargains for Tesco, too. Acquiring the remaining 50% stake in Tesco Personal Finance, the RBS joint venture, in July for £1bn, there have been suggestions Tesco overpaid. Sir Terry dismisses them.
“You don’t buy good assets cheaply," he says. "And it’s a timely move with current market consolidation.”
He also thinks a deal to buy 36 Homever stores in Korea for £1bn is a snip. “It works out at £30m per store. If we had built them ourselves, it would have cost £60m. With TPF and Korea and the new-space pipeline, there’s quite a bit to digest but we’re excited. The downturn has enabled that. It’s a terrific opportunity to create value.”
Sir Terry is also excited by India – a good example of Tesco’s flexibility. “Where Wal-Mart launches store after store in the same one-dimensional way,” says Greg Lawless at Blue Oar Securities. “Tesco is endlessly flexible. India is just the latest example.” Others may cite the bureaucracy or dodgy roads or appalling rail infrastructure as reasons to steer clear but Tesco has done its homework. “C&C is a big market and will allow us to build a modern supply chain, the building blocks of a retail business, which we will then be involved in indirectly via franchising,” says Sir Terry.
In the meantime, there’s the small matter of Tesco’s launch into the US. Flak followed the launch, but Tesco reports average store sales of $11 per sq ft, well above the US average of $8.50, Sir Terry notes. With a slight tweak at the start of the year to the look of the stores (“it was a bit sterile”), the latest stores are opening with sales of $13 per sq ft, he notes. Fresh & Easy has also introduced new brands, such as Hansen soft drinks, in response to customer feedback. But with own label accounting for three quarters of all sales, it’s a resounding rebuttal to criticism of the central concept.
A further 200 own-brand lines will be launched this year and the total number of stores will rise to 180, though hundreds more could be run from its DC kitchens. Of course, Tesco was not the first chain to sell fresh produce in the US. It wasn’t the first to sell own label. It wasn’t the first with ready meals.
But Tesco has taken a little bit of this and a little bit of that, adapted it with the help of research, and – hey presto – looks to have found another winning formula. The chameleon has come to America. And it’s settling in very nicely.
They call it the marzipan layer. At least they do in other companies. The thin layer of strong management talent in retail that hides a multitude of ordinariness. But at Tesco, no matter how many times a senior exec leaves, there always seems to be another on the conveyor belt.
“There’s tremendous strength in depth at Tesco,” says Sir Terry. So what’s the secret? “The business is relatively successful. People are proud to work here, they are given early authority, we have good values, and it pays relatively well,” he says. “Because there has never been an officer class, progress is accelerated. There is no glass ceiling, everyone starts at the bottom. So success is based on talent, hard work, and the ability to lead people.”
And, like a good football coach, he says, “Tesco pushes people, but not to breaking point”. With the City itself at breaking point, will Tesco be able to attract the high-calibre execs who, according to popular myth, abandoned retail in the late 1980s? Sir Terry doesn’t want them.
“Retailing has never been well paid," he admits. "It’s hard physical and intellectual work. People who come through do it because they like it. It’s a noble industry. You are providing ordinary people with the essentials to get through the week. In every community you must learn to treat people with respect, give them self-esteem, give them things they can afford. It teaches you about service, respect. These are great qualities to learn.”