Strategy Lessons from the Tesco Downfall

A highlight for me and many business teachers was the superb presentation given at the Business Teacher National Conference 2011 by Sir Terry Leahy who, just weeks earlier, had retired as CEO of Tesco leaving behind a stunning record of profitable growth.

Who would have thought that less than a year later, the shares of Tesco would fall by 16% in just one day (nicknamed “Tesco Thursday”) wiping £5bn off the value of Tesco shares. The sudden downturn in Tesco’s fortunes will be a rich source of business lesson material for months, perhaps years to come.

Just before Christmas I recalled one comment in particular made by Sir Terry at the conference. He described how they responded to customer feedback by ensuring that there were never more than two people at a checkout.

I remembered this on early evening at a massive Tesco Extra store on the outskirts of York as I (and hundreds of others) tried to get their Christmas grocery shopping complete. Less than half the checkouts were manned; the queues stretched far down some aisles. The store wasn’t overwhelmed with customers - just very short-staffed. I remember thinking that “Sir Terry Leahy” would never have allowed this. Maybe that was a sign of what was to come!

There have been some excellent analytical articles over the last few days trying to get under the skin of what has gone wrong with Tesco’s strategy, particularly in the UK.

I can thoroughly recommend this one, by Zoe Wood in the Observer. It is packed full with useful insights for business teachers and students; well-written and accessible. A great starting point for a class discussion about the strategic problems and options facing Philip Clarke, the embattled Tesco CEO.

There is a great quote in he article from a leading retail analyst who sums up Tesco’s problems like this:

“Tesco…has long-standing problems around range, quality and service. It has slashed wage bills to try to preserve profits and that, like pushing prices up, is a short-term fix at the expense of future profits.”

That’s a cracking example of a good evaluation point to show students! A strategy that has focused on short-term profitability but which may be damaging in the long-term. It also seems pretty significant that the leading supermarket retailer has issues with “range, quality and service”!

Another analyst focuses in on the problems that have arisen from Tesco’s focus on improving productivity as a strategy for increasing profits:

“Over the past five years Tesco has increased the productivity of its UK store staff to record levels. The average number of full-time employees in a 40,000 sq ft superstore has fallen from 275 to 226. The slide in store standards was evident in everything from the queues at the checkouts to customers carrying their groceries home in plastic cones designed for fresh flowers because the carrier bags had run out. They probably cut too much from store budgets and service has declined”.

Another great example for students about how functional strategies link with each other. On the one hand, improving store productivity can be seen as a good way of reducing unit costs and improving profits. But what happens if this is at the expense of the customer experience?

Could another factor simply be the effect of a change in leadership? Just how important was Sir Terry Leahy to the business? One analylst concludes that:

“Terry was always going to be a hard act to follow. He was a retail genius.”

Those who were at the business conference will agree with that…