Fresh horizons uneasily scanned
By Elizabeth Rigby
Published: September 19 2010 19:54 | Last updated: September 19 2010 19:54
Diffident manner, plain wristwatch, no cufflinks: Sir Terry Leahy hardly gives the impression of being one of Britain’s most powerful businessmen and one of the top three in his industry worldwide.
Inside Tesco
FT interactive: how the UK retailer has dominated its domestic market and grown overseas
Instead, the Tesco chief executive blends seamlessly into the background of the group’s head office in a drab commuter town just north of London. Like his dress and demeanour, the boxy Cheshunt base in Hertfordshire belies what the working-class Liverpudlian has achieved in nearly 14 years at the helm – a period in which he has transformed a struggling domestic supermarket chain into an assertive world-class brand.
In a nation of shopkeepers, Tesco is the most popular store. It will sell you fruit and vegetables, school uniforms, car insurance, gardening tools, a sofa or an iPhone. Its name has become a byword for giving consumers what they want – when the UK opened up the legal industry to outsiders, the resulting arrangement was quickly dubbed “Tesco law”; education reforms now being debated envisage the establishment of “Tesco schools”.
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Nearly one in three British households buy their groceries there every week; almost 300,000 work for the company – making Tesco Britain’s biggest employer after the state.
Such reach brings influence. The fate of a budding novelist, the health of the nation, the wealth of its farmers all depend in part on whether Sir Terry and his team choose to stock a certain book on Tesco’s shelves, to reduce the salt and fat levels in its own-brand ready meals or seek better margins from suppliers. He can alter the face of a town centre by deciding where to put his shops. “He really does have the power to change people’s lives,” says Andrew Simms of the New Economics Foundation, an independent think-tank.
Tesco’s success has earned Sir Terry a reputation as the most potent retailer of his generation, a master strategist who has outsmarted rivals with a combination of single-mindedness, clinical attention to detail and a combative – some say pugnacious, others ruthless – attitude to those who cross him.
But in six months he will retire. His departure, which wiped £750m ($1.2bn, €900m) off the grocer’s market value when it was announced, comes at a crucial juncture. The relationship between company and man has not been lost on the City of London; it leaves many wondering whether Tesco can continue a trajectory that during the Leahy era has more than tripled both revenues and profits.
At home, Tesco has reached saturation point in its core grocery business. The group is “more challenged today than it has been in many years”, reckons Dave McCarthy, an analyst at Evolution who turned bearish on the group last year after a decade and a half. He says it is hard to see how Tesco will be able to continue with its plans to open more than 2m sq ft of new space each year without “significant cannibalisation” of its existing stores. Meanwhile, the competition is stronger now than it has been in 15 years. “There is no soft underbelly to help feed Tesco’s accelerating opening programme.”
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Instead the group is now seeking to prosper from huge, but unrealised, opportunities in general merchandise as well as banking and telecommunications – not traditionally a grocer’s expertise. It has also looked beyond Britain – with mixed results. In Asia the group has scored notable successes with South Korea and Thailand. It is seen as frontrunner to snaffle Carrefour’s operations in Thailand, Malaysia and Singapore. In the US, however, its much-vaunted Fresh & Easy convenience chain has underperformed, raising questions about whether Tesco will become the latest in a long line of British businesses whose American adventure has ended in disappointment.
Elsewhere, in central Europe and pockets of Asia, Tesco has to deliver improved returns if it wants to convince investors that its expansionary strategy is the right one. These are the tasks confronting Philip Clarke, a fellow Liverpudlian and Tesco lifer, who takes over in March.
A textbook turnround
None of this would have been imaginable 18 years ago when Sir Terry was promoted to the board as marketing director. “Tesco was a struggling high street chain in the 70s and 80s – it was finished when Ian [MacLaurin] took over,” recalls the man who had joined the group aged just 23, starting as a marketing official before going on to run the fresh foods side.
“A brand consultant came in the early 1980s – I remember the meeting. He said the only thing you can do is change the name of the business, because you’ll never ever appeal broadly when you are called Tesco.”
The executives ignored that advice (though the Tesco brand name would in future years not always travel with the group in ventures abroad). They opted instead to change the company itself. The resulting turnround has become a textbook example of how to run a grocer. Sir Terry’s tactics have been replicated around the industry and written up as a Harvard Business Review case study. His approach was simple but effective: know your customers and improve the stores.
With poky shops and a mantra from founder Jack “Slasher” Cohen to “pile it high, sell it cheap”, Tesco was downmarket compared with the sleek J Sainsbury of middle England. Lord MacLaurin, then chief executive, did not want to change Tesco’s name but he knew he had to change what it meant to consumers.
The bold move was to expand beyond town centre locations and build larger supermarkets in suburbia. It was a huge gamble. What if British shoppers did not like out-of-town stores? Financial institutions were concerned enough to refuse funding and Lord MacLaurin was forced to sell some of the smaller city centre shops to pay for the expansion.
Tesco also needed a stronger identity, says Sir Terry. “I remember a Times commentary, which said ‘if you want quality, shop at Sainsbury, if you want price, go to the discounters: who needs Tesco?’ It sort of summed up the strategic dilemma of being stuck in the middle.”
As Lord MacLaurin worked on the store estate, Sir Terry set about improving the shopping experience. In 1993, Tesco introduced a no-frills value line, followed by a “one in front” drive to cut queues – now standard practice in the industry. Then in 1995 came the marketing man’s masterstroke – the Clubcard, a customer loyalty programme that gave it a mass of data to mine about how people shop. It could not only analyse consumer habits but spot gaps in what it offered. As a result, Tesco has come to know more about Britons than they do themselves.
“In the wine department, we could see that people were trading up to stuff Tesco didn’t stock,” says Clive Humby, co-founder of Dunnhumby, which analyses Clubcard data. “At Christmas, people wanted to buy ‘posh’ wine; those who usually bought cheap wine went from spending £2.99 a bottle to £5.99 a bottle – but where were the people who should have been trading up from £5.99 to £7.99? They were at Oddbins” – opting for the specialist chain “because Tesco didn’t have a full enough range”.
By 1995, Tesco had edged past Sainsbury to become Britain’s largest grocer. Sir Terry, by now the heir apparent, set out his strategy to ensure it stayed top of the pile. His plan was straightforward. Tesco would expand further in the UK, grow internationally, develop non-food sales and move into the retail end of services such as telecommunications and banking.
The long battle to win ascendancy over Sainsbury instilled into Sir Terry and his contemporaries a dogged determination to succeed. “You think you’re failing and you’re prepared to do anything not to fail, so you take more risk and you innovate more,” he says. “Then you say ‘I don’t want to fail again’ and what’s the best way of not failing? It’s succeeding; it’s actually being the best.” Attack is the best form of defence, he adds. “So what looks like ambition was really about building a defendable business.”
That persistence has played to great effect in the UK, where Tesco commands nearly twice the market share of either Sainsbury or the Walmart-owned Asda, its other nearest competitor. But the mindset remains: “Act as if you are number two” is one of Sir Terry’s favourite mottos, reflected too in a lifelong support of Everton, the underdog team of his home city.
Fight over a footprint
It was in Liverpool that he was born in 1956 into a family of Irish immigrants. The son of a nurse and a greyhound trainer, his formative years were shaped by the impecunious community around him, the Roman Catholic church and the grammar school – St Edward’s in Liverpool – that gave him a way out.
The third of four brothers, he was the only one who achieved that education, going on to graduate from the University of Manchester Institute of Science and Technology. Transcending his roots has given Sir Terry a single-mindedness that both scares and impresses people he meets. He is not a charismatic leader but his devotion to Tesco inspires commitment from others. “I’m quite loyal,” Sir Terry acknowledges. “One religion, one football team, one wife, one firm.”
Tesco in focus
He is not particularly personable – it is hard to get him to smile – and he does not do small talk. A leader who is respected and feared rather than liked, he is described by former colleagues as intellectually intimidating and aloof. “He is hard on his own people,” says one former executive. “He does it because he thinks it is right for Tesco. He is ruthless about firing people if they underperform and it creates a lot of fear and insecurity.”
But alongside his intellect is a common touch that can endear him to people. “When he is out and about with staff and customers he is more relaxed and is more open,” says Ken McMeikan, chief executive of Greggs, the baker, who worked at Tesco for 14 years. “Staff really enjoy spending time with him. From the outside looking in you don’t see that – you don’t get that picture of him.”
He has a restlessness about him to that helps keep Tesco on top. Each year the group produces a customer research plan for all its markets. “They are very good at selecting the right things for the consumer and getting ahead of everyone else,” says a former Tesco executive. These plans have guided a host of initiatives – from the 2008 UK launch of a branded version of its Tesco Value products, to getting just-picked pak choi on to the shelves in Shanghai – where, with five outlets opened in the past six months, Tesco now has 93 stores.
Tesco has also outmanoeuvred the competition on space. It has been building a land bank of intended sites ever since Lord MacLaurin’s reign. This has allowed it to open more space than any other grocer over the past decade. At 33m sq ft, the group now has twice the UK store footprint of its two nearest competitors combined. It rates as the biggest property developer in Europe, with a portfolio of nearly £35bn, and the stores are still coming. This financial year it will open another 2.4m sq ft of space in Britain. Sir Terry approves every site.
But success has also brought problems: its expansion has been punctuated by discontent. Farmers and small suppliers complain the chain is too big and powerful; local shopkeepers say the arrival of Tesco strangles their business. The intelligentsia worry that Tesco is turning Britain into a monotonous land of red-white-and-blue shop fronts. According to Friends of the Earth, 300 communities dotted around the country are fighting to keep Tesco out of their town.
An investigation by the government’s Competition Commission into the supermarket sector four years ago was used by rivals to try to halt the market leader’s growth by imploring the authorities to tackle its land bank. “Personally, I was thrown by it,” admits Sir Terry. “If you take the theme that I’ve been going with, which is ‘don’t fail, find success’, and then you’re being attacked for being successful, it throws you.”
Ultimately, Tesco won the antitrust authority’s broad support. The regulator was never going to punish the retailer merely for developing a better pipeline of stores than its competitors. But in a “community plan” launched in response to the public backlash, he pledged to improve the group’s record on the environment, health and local neighbourhoods. To make sure that was more than just greenwash, the plan was made part of employees’ performance targets.
“It has had a big impact,” says Lucy Neville-Rolfe, the board director in charge of the scheme. “New stores emit 29 per cent less CO² than in 2006. Hundreds of community champions now raise record sums for charity, get customers physically active and rekindle local volunteering.”
Accolades and anxiety
Having acted to allay the disquiet, and then steered his group relatively unscathed through a recession, Sir Terry decided it was time to go. Why now? Tesco watchers are baffled. He is leaving three years before his pension pot starts paying out and is turning his back on a big chunk of a bonus scheme that, based on Fresh & Easy’s performance, could give him up to 2.5m shares – worth more than £10m – in the coming four years.
He says he took the decision just after Christmas and never saw 2014 as his exit year, even if everyone else – including his board colleagues – did. “Whilst you plan for the business long-term, you plan for yourself barely one year at a time, because you just don’t know how things will go.”
But those within and around the business have been searching for hidden motives. Some think his wife Alison, who is a GP, was keen for Sir Terry to quit. He had a nasty skiing accident a couple of years ago, which left him in intensive care with a punctured lung, while he also suffered a detached retina last year. Others wonder whether he felt less inclined to stay as it became less likely that his Fresh & Easy share award would pay out; after all, the US chain has been lossmaking since its 2007 launch.
Both factors he bats away. The money has “not affected” him and he “made a full recovery” from his accident. “I have been skiing since.”
At the same time, “these jobs are pretty demanding and I was aware of the fact you’ve always got to be on top form, on top of your game and that may not last forever”, he adds when asked whether the injury prompted a reassessment of his life. “You’re not always as creative or have the energy. What you mustn’t do is stay in the job because you can. No, a number of things came together at the right time.”
He leaves having just been celebrated by the Harvard Business Review as one of the world’s 20 best chief executives. Not only are such accolades rarely bestowed on lowly, low-margin grocers but they also make it all the harder an act for Mr Clarke to follow. Determined to move the group forward, Sir Terry has had to take more risks, be that trying to become a high street bank or taking on Walmart in its own backyard.
As the departing leader privately admits, he has made a big bet on the US – and is leaving with his American dream still unrealised. What was meant to be its defining moment could instead become Sir Terry’s biggest mistake. One of Tesco’s top 10 shareholders says simply: “He has left the issue hanging.”
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