Magazine article The Spectator

It's Unthinkable, but Tesco Is Heading for Trouble

Magazine article The Spectator

It's Unthinkable, but Tesco Is Heading for Trouble

Article excerpt

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 unrelenting 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. …

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