Hamish McRae: Lessons to be learnt from Tesco woes

Four out of five of the British population hasn’t shopped in a Tesco in the past six months (Photo: AFP/Getty Images)

27 October 2014

Companies can rise faster now than ever before: think of Facebook, just 10 years old, or Google, founded 16 years ago.

But they can also fall faster. Last week Microsoft announced that it would drop the name of Nokia from its Lumina mobile phones, just six months after completing the purchase of the handset business from Nokia in April — an astounding reversal for a firm that five years ago had 40% of the global smartphone market.

But the decline that touches us most directly in Britain is that of Tesco, for according to the new chief executive Dave Lewis, four out of five of the British population hasn’t shopped in a Tesco in the past six months.

In 2007 it was ranked by Fortune magazine as the world’s most admired food retailer, as well as the most admired British company. In Deloitte’s Global Powers of Retailing this year it was the second largest retailer in the world, well behind Wal-Mart but ahead of Costco and Carrefour.

This was something we were supposed to be good at: not just a nation of shopkeepers, but shopkeepers who were benefiting from being based in the fastest-growing G7 economy.

And now? Well, the past few months have been something of a car crash caught in slow-motion: profits warnings, mis-stated accounts, the loss of the finance director, later the chief executive and, just last week, the chairman. On Friday, the share price — which a year ago was more than 370p — was lower than 170p.

This is not as bad as the collapse of the banks: the company is still worth more than 40% of its value a year ago and it still seems to be making a profit, albeit a tiny one. But it is shocking nonetheless. Companies don’t suddenly implode — yet there was no warning.

True, the picture of the hapless chairman, Sir Richard Broadbent, in the latest annual report is distinctly less cheerful than the one in the report of 2013, the thin smile replaced by a poker face, but there was no inkling of the disasters to come.

We are still in the middle of the story and I expect there will be further horrors ahead. But it is not too early to try to pick out what we can learn. The obvious first, of which the most glaring of all is that company accounts should accurately reflect what has happened rather than convey a rose-tinted, fingers-crossed (shall we say, massaged?), view of a company’s business. There is no excuse for that.

It is obvious too that whenever a highly successful charismatic leader leaves a business, their successors are likely to struggle. This happens in other businesses but particularly so in retail. After the retirement of Sir Terry Leahy, chief executive from 1997 to 2011, there was going to be a problem. It was not as bad as this after those other retail geniuses, Sir John Sainsbury and Tesco’s founder Sir Jack Cohen, retired. But there was a hiatus in both cases.

Almost as obvious is that it is very hard to manage any dominant company through a period when tastes or market conditions shift. It is hard to stay huge.

Look what happened to the US automotive giants when the Japanese companies produced more reliable and more fuel-efficient cars than America’s, or now how the once-dominant Japanese electronic goods manufacturers are squeezed between cheaper basic producers in China and more sophisticated US-designed products from Apple.

Retailing here and elsewhere faces two shifts: away from the mass middle-market to low-cost discounters and upmarket specialists; and from physical stores to online. It can be done, but it is hard for a super-tanker to shift course.

Maybe we just have to accept that new companies are needed to develop a new market and that any firm which can find a winning formula will find investors beating a path to its door.

Amazon’s market capitalisation is around £80 billion; that of Aldi, the German discounter, £150 billion; Tesco’s on Friday was below £14 billion. Such is the brutality of capitalism: dish out the rewards to the winners and kick the losers when they are down.

All this has been noted. Much less attention, however, has been drawn to the way retailing has been disrupted not just by online and discounting but by deflation.

A world where prices generally go up is different from a world where they go down, as many of us have experienced when we try to sell or buy a house. Deflation hands power to the buyer, not the seller.

Retailers, in the main, have not experienced falling prices. Yes, they have dipped from time to time and the price of particular goods, including clothing and many consumer durables, has tended to fall in recent years. But food hasn’t and, anyway, it is a constant purchase, not a lumpy one, so supermarkets seemed to be insulated.

Now we are moving into a period where people are as likely to get an increase in their standard of living from lower prices as from higher wages. We cannot know how long this will continue but consumers in Japan have had that for 20 years.

Printing money and ultra-low interest rates increase asset prices but they don’t seem to increase current prices. If this low-inflation world continues, then this pressure on many more businesses, not just Tesco, has a long way to run.

Hamish McRae: Lessons to be learnt from Tesco woes

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