It’s unthinkable, but Tesco is heading for trouble
Judi Bevan says the supermarket group shares many of the faults that afflicted Marks & Spencer a decade ago Tesco is heading for a fall. Improbable though this may sound after this week’s results showing half-year pre-tax profits storming through the £1 billion barrier for the first time, the omens are clear. Tesco is a sensationally successful company. Since it overtook J. Sainsbury in 1995 to become Britain’s leading supermarket group, the chief executive Sir Terry Leahy has transformed it into a global player operating in 12 countries and more product areas than you can shake a stick at. Annual sales are heading towards £40 billion. Yet, I repeat, Tesco is heading for a fall. In business, as in politics, the unthinkable often happens.
Take Marks & Spencer in 1996 when it was at the peak of its powers and the second largest retailer in the world after Wal-Mart. Nobody believed that this much-loved national institution with a long record of unbroken profits could ever stumble. Expressed in dollar terms, M&S’s market value was then $24 billion, compared with Tesco’s $13.2 billion and Wal-Mart’s $52 billion. Ten years later, Wal-Mart is still number one at $200 billion; Marks & Spencer is worth a paltry $16.6 billion and has slid to number 32 in the world league, but Tesco has become Britain’s über retailer and, at $47 billion, is ranked third in the world after the French hypermarket group, Carrefour.
There are striking similarities between Marks & Spencer in 1996 and Tesco today. Here are a few. Tesco has a dominant market share in the grocery industry in the way that M&S had in clothing; Tesco has a huge board of directors — 15 in all — just as M&S did in 1996; Tesco has higher profit margins than its competitors, just as M&S did in 1996. All the executive directors at M&S were ‘lifers’ apart from finance director Keith Oates, who had come from outside; today all Tesco’s executive directors have been with the company for more than 20 years with the exception of the finance director, Andrew Higginson, who joined nine years ago, and Lucy Neville-Rolfe, who came in from government ten years ago. Lastly, in 1996 Marks & Spencer had enjoyed a terrific run for the previous five years, pushing profits up by 60 per cent. Tesco has done even better, more than doubling profits since 2001.
At Marks & Spencer the effect of unre lenting success bred a culture of arrogance and complacency. When profits began to collapse in 1998 and then halved to £628 million in 1999, most people both inside and outside the company were shocked almost to disbelief: such an event was deemed unthinkable.
Nobody could accuse Tesco of complacency — one mark of its success has been its ability to adapt to change. But it is frequently accused of arrogance. Although Leahy and, to a lesser extent, his executive directors cultivate an air of ordinariness, they are not immune to the lure of power that sales of £38 billion a year bring. For the lesser mortals running the buying fiefdoms throughout the world, men and women who are fawned upon wherever they go, that power is intoxicating.
There are simply too many tales of buyers behaving badly for them to be regarded as aberrations, or the inevitable whingeing of small suppliers. Tesco buyers have become ruthless in waging psychological warfare; not only do they drive hard bargains with everyone from property developers to small farmers and local councils, but Tesco staff at many levels have a reputation for sheer nastiness.
Sir Terry tends to wave these accusations aside, protesting that the company works ‘in partnership’ with suppliers — nowadays through regional buying offices. But as with many big organisations, there is a feeling that the message is not getting through from bridge to engine room. Sixty per cent of us visit Tesco at least once a month, yet the company is actively loathed in many quarters.
Companies can stay at the top of their game with a culture of arrogance for a long time — as was the case with Marks & Spencer. They cannot stay there without lead ership. The single most important mistake that Marks & Spencer made was to bungle the succession. In the mid-1990s Sir Richard Greenbury — who was then chairman and chief executive — and his board failed to anoint the next leader from within. Instead they dithered, letting four hopefuls fight it out for the top job, a solution which bred discontent and infighting. Eventually, under pressure from investors, Sir Richard agreed to split his dual role and cede the chief executive title to a man he believed he could dominate. In the event, he could not, and nor was the man up to the job. Result — disaster.
Tesco has a similar problem with succession, but it is even more acute because of the earlypeaking careers of those at the top. Ironically, the problem has been exacerbated by the brilliant succession planning of former chairman Lord MacLaurin, who put Leahy on the board in the mid-1990s, made him chief executive in February 1997 and then left him to it by retiring at 60. After nearly a decade of astonishing achievement, Sir Terry Leahy is still only 50 and the average age of his executive directors is just 46. None of them is minded to give up the big salary, chauffeur-driven cars and luxurious golfing weeks with suppliers, let alone the huge kudos that goes with being a director of Britain’s number one retailer. None of them can countenance relinquishing power. The result is sclerosis at the top. Any ambitious divisional director looking up at that cheery band cannot see an entry point for at least ten years. There is no succession plan. Hence, in the past two years, there have been defections of senior managers to Asda, Sainsbury’s, Boots and, most recently, Somerfield. It may not yet be a full-scale brain drain, but it is certainly the beginnings of one.
Ten years is a long time for the same team — even a winning team — to work together at full tilt without losing motivation or falling out. There are already signs that they are beginning to make mistakes. Aware that he was running out of marketplace in British food retailing, Leahy’s strategy has been to diversify both internationally and by product area. The last year has seen him launch more initiatives than Tony Blair — Tesco Direct, cheap computer software and moves to pacify environmentalists, to name just three. Though admirable in some ways, dashing off in all directions brings with it the added risk of fighting too many wars on too many fronts. Overseas, Tesco is running into the same issues of market dominance that it has here. The new government in Thailand, Tesco’s third-largest overseas market, has threatened to halt all further development.
Investors have done well out of Tesco: since the stock market hit bottom on 11 March 2003, total return from the shares has risen by 145 per cent compared with 115 per cent for the FTSE. My belief is that they will not fare as well in the next three years.
A revised edition of The Rise and Fall of Marks & Spencer by Judi Bevan will be published by Profile Books in March.
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