In this specially extended web version, Adam Leyland talks to Dave Lewis about his first months in the job, and what’s next for Britain’s biggest supermarket
It’s been an eventful six months for Dave Lewis. The new CEO of Tesco uses words like “difficult”, “disappointing”, “dramatic”, “different”. And if he hesitates to use the word “drastic”, it’s clearly on the tip of his tongue.
But it’s been “rich” and “rewarding” too, Lewis tells me, in his first exclusive interview since he was appointed. And the moment of truth was not when he realised Tesco had overstated its profits by at least £250m. It was Christmas trading.
The results were better than expected. “Which was gratifying,” recalls Lewis. “But what was really important was seeing a team of people acting in a way I recognised from the Tesco I had worked with years before. People who were really good at what they did. And were running the business in the way they knew how to run the business and the way they wanted to run the business. What surprised people was the speed of the change but it was down to the fact we were letting people go back to what it was they were good at in the first place.”
The decision by Lewis, on his appointment to the role last September, to recruit 6,500 shop floor staff, to focus on availability and service - and to ignore initially concerns about Tesco’s lack of competitiveness on price - immediately marked Lewis out as a free thinker. Someone who was not going to be influenced by the consensus view.
But it also demonstrated his ability to listen.
It turns out the insight behind this apparently counter-intuitive move was Tesco store managers: acting covertly (in his capacity as chairman of Unilever’s global personal care business) after his first interview for the job, Lewis visited seven or eight stores on his way back from a meeting in York, and walked the floor. And what he learned was that Tesco was being run back to front. “I noticed a real difference versus five years earlier. Customers were telling me that availability was a problem. So I asked store managers: ‘Why is availability so poor?’ And the answer was: ‘We’ve got a waste target. And I’m so busy managing my waste target I’m not satisfying my customers.’”
Listening is proving equally important as Lewis has shifted the focus from those initial months of “trading the business”, to the “transformation” phase that started in January, and which is now touching every bit of the business.
“The ultimate aim is to understand our suppliers’ business models”
Dave Lewis, CEO, Tesco
As part of a massive cost-cutting exercise, involving the loss of thousands of jobs, Lewis is currently reorganising Tesco around three pillars: customer, product and channel. “Historically they’ve been run separately but I want the brand and the customer experience to be consistent across the estate,” he explains. “So now those people will work together. That’s the simplification and that’s where the job reductions come from.”
On the product side, that means new commercial director Jason Tarry and his team will also have responsibility for stock control, space, range, merchandising, as well as price and promotion.
“So he has complete responsibility for the provision of those categories to the stores. There’s no longer vertical, inter-departmental functions,” Lewis adds.
Categories have also been rationalised. “We’ll end up with nine big category leaders, with very much bigger, broader jobs, with fuller responsibilities than their predecessors.”
Reporting in to Tarry will be eight business leaders - responsible for GM; F+F; fresh food and commodities; packaged; supply chain; strategy and operations; product quality; and international. Lewis has also brought UK and group commercial functions back together.
For suppliers the ramifications are also significant. One of the most important areas of focus has been range reviews, with Lewis looking to simplify the selection, and re-establish customer-focused category management. In other words, listening to what the customer wants.
Lewis promises “significant range resets across the categories, led by Jason and his team, based on the guidance I’ve given them.”
Boston Consulting Group has also been brought in “to help re-establish the process and give a perspective to the approach I want,” he adds.
But contrary to earlier reports he’s not in a particular hurry. And again, that’s because Lewis wants to listen.
“It will take us 18 months [to complete the range reviews]. If I take everything out of cycle, the risk is that I make the process more complicated than it needs to be, and therefore less effective. And it’s very important I involve customers in those reviews,” he adds.
As a result, Lewis has been accompanying Tarry on supplier meetings every Friday. It’s been invaluable, he says.
“I’m conscious there are parts of the supply chain I don’t have experience of. So I’ve walked the supply chain from sheep farming through abattoirs through food processors. The ultimate aim is to understand the business model of my supplier partners well enough to explore how we can work as partners. To make the totality greater.
“But the great thing is you get time to spend time understanding their businesses, and what it’s like to work with Tesco. It’s been fascinating. And it’s a statement of intent that we want it to be different.”
Lewis has also held a number of briefings with the CEOs of its leading suppliers. This week, it was the turn of 50 smaller suppliers to attend. But the purpose was not just to inform.
“We wanted to share a point of view of what we were thinking, but also to be all ears in terms of what the experience is like working with us, what works and what doesn’t. And we’ve made a number of key changes as a result.”
The first is in the controversial area of commercial income. Tesco’s use of so-called ‘back margin’ was another example of its back to front thinking. “At some point Tesco stopped listening to its customers. The manifestation of that here is we stopped growing.
“The one thing [Sir] Terry [Leahy] and his team did was the growth. That 12-14 years of relentless volume growth drove operational leverage. It got you a profitability that was above the industry average. Fantastic. And everybody involved - suppliers, customers, Tesco won in that model. So happy days.
“When you don’t grow, then you start doing things to your business that further exacerbate the problem. You end up over-proliferating the range. Commercial income becomes more important than customer choice. You dive for the line. You cut things to meet a margin number. And end up with no service in store. So it’s a vicious spiral in which the customer loses out, volumes decline. And in trying to close the gap, that’s when back margin exploded.”
The solution identified by Lewis is to focus on ‘front margin’. Which puts the emphasis on achieving the best up-front price for the customer. But Lewis hasn’t scrapped commercial income altogether. He’s simply sought to strip it back. Dramatically.
“At the moment, there are 24 ways of negotiating elements of back margin. This year we move to five. But by 2017 it will be three: volume, prominent positioning, and compensation payments in the event of recall issues.”
He’s encouraged by the response. “I haven’t found a supplier yet who isn’t willing to have an engagement about more front margin, and who doesn’t prefer that to having a complicated, 24-layer conversation around back margin.”
Tesco is now sitting down with its suppliers with real-life evidence from its successful January trial - “in which we took 364 skus and invested our own money to reduce the price by 25% and saw significant volume uplift that paid for the move” - to figure out how to structure this approach on a collective basis.
At the same time, Lewis has introduced “a much simpler way of operating for our people”.
“We’ve rewritten the rules around commercial income, and trained everyone. We’re talking about having 12 countries and some 24,000 people completely trained in that way of working. We’ve written a new Code of Conduct a month ago. And we trained everybody, every manager around that. We also relaunched a self-learning tutorial around GSCOP. So it’s very clear what we expect of our people. Much simpler.”
So what does Lewis make of the decision by the the Groceries Code Adjudicator to launch an enquiry?
“Disappointed” is his diplomatic reply. Lewis is “a big supporter” of the Adjudicator, he says. And as part of his investigation into the trading scandal, in addition to the Deloitte report, he requested a separate report on GSCOP. “It identified there were some things, as a knock-on from the Deloitte investigation, that we were unhappy about in terms of the Code.
”So we went to her, we shared that with her, we were open, we gave them that info. We also told them exactly what we were doing about it in terms of rewriting, retraining. So then to launch an enquiry based on information we had given, I was disappointed.
“But we’ll completely cooperate,” he adds. “We’ll deal with it openly and transparently and with the values we hold dear.”
Tesco will also look to address payment terms. Lewis actually believes Tesco is much maligned in this area. “It’s one of the most talked about, and least well understood areas of our business. We currently average 37 days. In comparison to other places I’ve seen, it’s significantly shorter.”
That said, Lewis acknowledges some issues with Tesco’s payment of smaller suppliers. While 99% of bills to large suppliers are paid to this schedule, it’s 94.7% in the case of smaller suppliers. That’s not a question of Tesco taking advantage of its smaller suppliers, he insists. “It’s down to our own internal organisation. On 1:20 we’ve got a problem, and it’s not good enough, so we are setting up a new helpline.
“If you’ve got a problem, a price query, an invoice that’s gone missing, you can phone the helpline, and the UK product team will solve your problem in 48 hours. I want the noise from the 5% that fall over because of admin issues out of the way.”
That’s not the only initiative Lewis is introducing to help smaller businesses. Tesco has pledged any supplier with sales of less than £100,000 will be paid within 14 days.
It’s part of a move to create greater transparency about what the trading terms are. It will be different by category and by size, Lewis explains. But it also recognises that small suppliers are not set up the same way as scaled manufacturing suppliers.
Another initiative to prevent abuse of Tesco’s position is a ‘Supplier Protector Line’. “So if there were anybody in our supply base who thought someone in Tesco had behaved inappropriately, in any way, there’s now the same protector line for suppliers as there is for colleagues.”
A new Supplier Network has also been established, in which suppliers can connect and share experiences and gain insights.
A final new initiative introduced two months ago saw a new supplier-facing capability put into Tarry’s commercial team in the UK to ensure that data is right first time. “It’s reduced the error rate by 95% in two months,” says Lewis.
“Ultimately, customers still want choice, but they want it simple to navigate.
Dave Lewis, CEO, Tesco
Level playing field
Collectively, these moves will not only simplify trading negotiations, says Lewis. They will reset the tone and tenor, leading to vastly improved relations. “Negotiation will always be part of this business. Aggression is not.”
Lewis also believes the changes introduced will create a more level playing field when it comes to small suppliers.
But what about the range resets? Surely it will be smaller suppliers that are axed? Not at all, says Lewis.
“Will some people lose range? Of course. If we find that in the range there’s a [product] with a small amount of customer appeal and to satisfy that small customer appeal we’re adding complexity… We’ll take it out. But the size of the supplier won’t be a factor in that decision.
“Propositions that are unique, innovations that customers value, with a good economic equation, that’s what we’re interested in.
“And large suppliers who have used innovation to close business plans, and therefore put range on shelves that we’ve supported, and it hasn’t sold, it’s going to go.”
Not a discounter
Lewis also plays down fears that Tesco’s range reset will be extreme.
“Are we going to become a discounter? Not at all. One of Tesco’s great advantages in the past was that we were able to operate with 2.5x to 3x the range intensity of anyone else because we were operationally brilliant. And the operational model behind that is still one of our greatest sources of competitive advantage.
“The problem comes when you go from 3x to 4x. It breaks the model. It becomes too much. You make it very complicated for everyone. So when I say cutting the range I mean from 4x to 3x. We will still offer a huge amount of choice to satisfy middle, top and bottom. Our positioning is to keep that choice and availability, to ensure it’s rich and choiceful, but to be very, very customer relevant.”
“Ultimately, customers still want choice, but they want it simple to navigate. They say: ‘Don’t make it hard for us. And if you can translate that into simple, good, everyday pricing, that’s what we want.’”
So how low does Tesco need to go on price to compete with the discounters? Can we expect further price cuts?
Lewis insists the discounters are not the focus of the transformation. “You need to understand I’m not thinking about them,” he claims. “I am a very competitive guy, you know that, but at the moment I’m focused on making Tesco better tomorrow than it is today. It’s not an anti-discounter strategy.
“I think we understand why the dynamics are the way they are. There are some things we can do that will change those dynamics. Those are commercially sensitive.
“But customers will tell me what I need to be. And actually they’re not telling me I need to be a discounter.”
So does he have a plan? And what’s he going to do with those big sheds of his?
“Oh we have a plan,” says Lewis, with a teasing smile. “I’m just not going to tell you what it is. There will be no big reveal.”
And not simply for reasons of commercial sensitivity, either. Lewis has been “gobsmacked by how [the old regime] were saying what it was [they] were going to do way before [they] did it” - and believes actions speak louder than words.
“Talk is cheap,” he adds. “I’ll find out whether our shopper strategy is working by what our shoppers do in stores.”
You can be in no doubt he’ll be watching - and listening - hard.
A different challenge
Why did you leave Unilever?
I needed a different challenge. I still have the scrap of paper I wrote it down on. It had to be a turnaround. It had to be difficult strategically, lots of choices, quite complicated, to test you intellectually. It had to involve brands. And people leadership. And I wanted to be the front man for a business in terms of the City and the media. So when the offer comes, I looked at the piece of paper and it ticked all five boxes.
What was it about Tesco that appealed?
I knew the business well. I ran customer for Unilever globally and had called on them in every country apart from Korea. And I had a lot of respect. But clearly it was a business that had lost its way a little bit.
Did you know what you were letting yourself in for, and did you have a plan?
No. I didn’t have a plan. It was clear there was a lot of pressure, but there’s no way you can test that from the outside. So I talked to the guys on my arrival, and in fairness some provision had been made to reduce pressure on commercial income going forward. But three weeks later we get the report, and that was the point at which you say: ‘Good Lord’, this is not just pressure, this has manifested itself over two to three years.
So, six months in, are you enjoying it?
It’s been really full. Really rich. Some of it wouldn’t have been what you would have expected or wanted. But the quality of people and quality of contact has been great, particularly in the context.