Tuesday, 6 October 2009

Tesco - making a lot from little things

Today the UK retail multinational Tesco announced half year results which exceeded the expectations of the City. The company's Chief Executive, Sir Terry Leahy proclaimed that the British economy was over the worst of the recession, perhaps missing the point that people are likely to turn to a low cost retailer such as Tesco during a recession. Tesco made a profit of £1.41bn on a turnover of £30.4bn; sales in the UK grew by 2.8%. The company has also created 6,500 jobs this year so far. The company has also successfully expanded globally from its UK base, firstly in emerging economies in central and eastern Europe, then in Asian countries; attempts to enter more developed economies such as the US have as yet been less successful.

Tesco's present record may be very impressive, but it is easy to forget that in the 1970s the company was the sick man of the British high street. Tesco's founder Sir Jack Cohen had expanded the company from its origins as a market stall in 1919 (all good retail stories start with a market stall) into a bulk-buying chain of grocers, and then after post-war rationing was abolished in 1954 into supermarkets. At this point supermarkets were new and exciting to consumers; Cohen became famous for a 'pile it high, sell it cheap' philosophy, expanding the company rapidly via new store openings and frequent acquisitions. The low margins on basic goods could easily be recouped by selling them on a mass scale; a chain of 900 stores, all in the UK was established. By the late 1970s however the company was struggling; more sophisticated retailers such as Sainsbury's and Marks and Spencer were attracting increasingly affluent consumers who had begun to shop on quality rather than price. Tesco found that many of its stores, inherited from a mixed bag of owners, were too small and poorly designed, while the company was not even using its market power fully to institute central buying with the benefits in pushing supplier prices down.

The company bounced back under Managing Director Ian MacLaurin, whose initiative 'Operation Checkout' in 1977 saw Tesco institute central purchasing and introduce new price cuts, forcing Sainsburys to cut its prices in retaliation. This was followed by an aggressive modernisation campaign to reduce the company's downmarket image, with 500 stores being closed and others expanded, with lighting improved and isles widened. Own brand products were also introduced for the first time, gradually being adjusted into a range of their own to appeal to customers of all income levels. By the mid-1990s Tesco had become the UK's largest supermarket chain, successfully expanding into Scotland and Northern Ireland ahead of rivals Sainsbury's. Now the company is aiming to purchase one of the UK's nationalised banks, perhaps Northern Rock or the Royal Bank of Scotland (a once unthinkable possibility - Tesco Personal Finance was originally a joint venture with RBS), to add to its rapidly growing banking arm. As Tesco diversifies further, both geographically and in range of products offered, in order to satisfy stock market expectations of growth, will it again reach a stage where it over-expands based around a narrow business model and becomes unmanageable?

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About Me

London, United Kingdom
I'm Lecturer in Management at The York Management School, at The University of York, UK. I teach strategic management to undergraduate and masters students, as well as running the masters dissertation module. My research focuses on business and management history.