After a decade pushing its non-food business, Tesco, Britain’s biggest retailer is changing and a conspicuous focus on fresh produce greets shoppers at its newly styled superstores.
Tesco remains the market leader in Britain
“Customers were saying they felt we didn’t have the right products in our shop,” said Kiran Sudan, store manager at the recently refurbished Kensington superstore in west London, whose catchment area is a multi-cultural mishmash of affluent dwellings and social housing.
Floor space for general merchandise, such as electrical items, has been cut by over two thirds at her store, part of Tesco’s fresh food drive, which has introduced an additional 2,000 grocery lines and a recognition that the future of non-food retail is largely online.
So far around 400 of Tesco’s 3,000-plus British stores have been refreshed with wider aisles, warmer natural colours, wood cladding and an array of fresh food counters.
In her 30 years at Tesco, Sudan has witnessed phenomenal success under Terry Leahy, chief executive from 1997 to 2011, when double digit yearly profit growth was the norm and the recent stumble under his successor Phil Clarke.
Founded by Jack Cohen in 1919 as a group of east London market stalls, Tesco, which now turns over £65 billion and employs more than half a million people worldwide, was one of Britain’s most consistent companies in terms of earnings growth, until it issued its first profit warning in over 20 years in January last year.
The breakneck expansion model couldn’t keep delivering.
“We’ve run too hot for too long,” Clarke acknowledged.
For Mark Pooley, store manager at the Tesco Metro convenience store on Tooley Street, near London Bridge, Clarke’s words were a turning point.
“Someone saying, ‘We realise this needs to change, and we will do something about it’ created a positive feeling in the business,” he said.
Last April, Clarke, who began his Tesco career aged 14, stacking shelves in a store managed by his father, launched a billion pound plan to reverse years of under-investment in existing British stores and stem a steady loss of market share to rivals like Wal-Mart’s, Asda and Sainsbury.
Tesco, the world’s third-largest retailer after Wal-Mart and Carrefour, remains the market leader in Britain, which accounts for over 60 per cent of group revenue and profit, but its grocery share has slipped to 29 per cent from a peak of over 31 per cent in 2007.
Its 3.6 million square metres of floor space still accounts for one in every £10 spent in British shops, but it is switching from a space-hungry, expansionary business to one focused on making the most of existing stores, improving returns on investment and better cash generation.
In January, Clarke said Tesco was “back on form” in Britain, with underlying sales growth of 1.8 per cent for the six weeks to January 5, its highest in three years.
Though it has stepped up investment in existing British stores and online, overall group capital expenditure is falling.
The key driver of this is 38 per cent less space opening in Britain in 2012-2013 than in 2011-12.
For a decade, its average capital expenditure was about 6.5 per cent of sales, but now it is targeting less than five per cent and an increase in return on capital employed (Roce) from 13.3 per cent in 2011-2012 to 14.6 per cent by 2014-2015.
All this means Tesco will have more free cash, which could mean higher dividends and share buybacks a few years down the track. Analysts at Deutsche Bank reckon Tesco could return £1.6 billion (€1.8 billion) per annum from 2016.
“This business is still generating huge amounts of capital.
“If they are not using that, it’s much better in our hands than in theirs,” said Charles Heenan, investment director at Tesco shareholder Kennox.
With the turnaround a year old next week, about 8,000 new staff have been recruited and trained, and existing staff retrained. Own-brand food products have been re-launched, promotions have become more personalised and a new price-comparison initiative has been introduced.
Clarke has also accelerated investment online, rolling out Click & Collect services to about 1,400 stores, where customers can use their PCs, tablets and smartphones to order from a range of 200,000 non-food product lines for pick-up in store.