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Tesco's Extreme Makeover: A Phenomenal Tale of Turnaround Success

Published: May 15, 2012 in Knowledge@Australian School of Business
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The early '90s was not a good time for UK grocery chain Tesco. Sales were falling, profit growth was slowing, the share price was depressed and discount food retailers from continental Europe were beginning to enter the UK market. After a cost-cutting program things became even worse as competitors grew stronger. Drastic measures would be required to save the organisation in this most cut-throat of industries. But Tesco transformed itself.

TESCO, Building a Global Retail Brand Through Sustainable Marketing, a paper by Simon Knox, an emeritus professor at Cranfield University's School of Management in the UK, notes that since the turnaround program Tesco has "transformed itself into a diverse international business with 65% of its selling space outside the UK. With 472,000 employees and 4811 stores worldwide, year-on-year sales have grown by over 6% in 2010. In the last six years alone, sales have more than doubled to £62.5bn, generating profits in excess of £3.39bn before tax and positioning Tesco as the third-largest supermarket group in the world."

Expansion has involved entering new markets in central and eastern Europe, as well as China, India and the US. Store numbers have doubled and, in the UK, Tesco has more than 30% of the grocery market, Knox says, making it the market leader. What caused this turnaround was a stunning example of stakeholder management and targeted brand marketing.

"The real change agent was the Tesco Clubcard that they introduced in 1995," says Knox, a recent international visitor to the Australian School of Business. "Tesco had developed a range of own-label products, begun in-depth market research with shoppers, improved in-store facilities – from bakeries and meat counters to baby change rooms – and rolled out a first-class training program that empowered all staff to look after customers the way they thought best. So a customer-centric culture was taking hold, but the Clubcard was the jewel in the crown, although many felt it was doomed."

Knox reports that in a statement to the press the chairman of competing grocery retail chain Sainsbury's, David Sainsbury, openly ridiculed the Clubcard scheme, saying: "It will cost at least £10 million just to administer. That's wasted money that brings no benefits at all to customers. We have no plans to go down that route."

The Clubcard would offer just 1% discount, which Sainsbury believed was of insufficient value to the consumer. The card also accrued points towards benefits for customers. But the real value wasn't in the discount and benefits, it was in the data made available by the Clubcard.

Tesco Serves An Ace

A group of people within Tesco, including retail, divisional and regional managers, said they would like to be part of the Clubcard strategy development and put together a team to trial it, reports Knox. "Tesco is very good at trialling, learning, adapting, then trialling again and moving forward. They adopted the Clubcard across a small number of stores and there was an immediate uplift in sales and commitment from customers. Suddenly everybody wanted to be part of the new regime. It moved from piloting and learning to a full-scale change management instrument, which has since been extremely successful. Six months later Sainsbury's started playing catch-up by introducing their own card."

Much of the success came from the wealth of information, constantly updated and refreshed as shoppers made purchases, about the supermarket chain's customer base. "Operational benefits – such as refined stock selection, display and staffing levels – could be derived from the data, but the primary purpose of the data gathering was to facilitate future micro-marketing activities," wrote Knox. "It would allow Tesco to gather detailed information about individual consumers' buying habits, while maintaining feedback channels through which the company could communicate directly with its customers to build loyalty."

One of the issues facing Tesco was how to manage all the data generated by Clubcard. To come to grips with that, a specialist marketing data analysis consultancy, dunnhumby, was brought in. "By the end of March 1995, over five million people had joined the Clubcard scheme and Tesco recorded a 7% increase in sales," Knox notes. "Independent retail analysts AGB confirmed the impact of Clubcard on sales when they announced that Tesco had surged ahead of Sainsbury's for the first time to become Britain's leading retailer of packaged goods; a market position it has enjoyed every year since. One year after Clubcard's introduction, the company also launched the Clubcard Magazine, produced in five different versions to suit different lifestyle segments."

At the beginning of the new decade, Tesco began to further segment its customers, introducing a Baby Club in 2001, for mums with young children, as well as a Wine Club, a Healthy Living Club for organic shoppers and a Kids Club. Membership of all specialist clubs boomed as shoppers in specific groups connected and benefited from an increase in information being offered to them via targeted magazines and websites, as well as the ever-present club-specific discounts.

Once the customer focus strategies were well in play, management turned its attention to creating a line of smaller 'Metro' stores, focussed on supply chain, including stock management and planning systems, began collaborating in a mutually beneficial way with their suppliers and moved into new retail services such as online grocery shopping, financial services, Tesco-branded mobile phone services and home broadband services. This was all possible thanks to the company's ability to tap into the wants and needs of its customers via the data offered by the Clubcard. The obsessive customer focus was now embedded in the company culture. And once the UK market was dominated, expansion offshore began. Tesco has now moved into Europe, India, Asia (including Japan and China) and the US. Since its transformation, Tesco's footprint is as diverse as its product line.

How To Manage A Turnaround

Chris Styles, deputy dean of the Australian School of Business and director of the Australian Graduate School of Management, was working for fast moving consumer goods manufacturer Procter & Gamble in London in the 1990s. His position in the sales and marketing department meant he communicated with the retail chain on a regular basis.

"Sainbury's was king, and the organisation acted like it," recalls Styles. "But being the leader can mean that you get comfortable. It can often mean that you stop experimenting, you believe all of your old assumptions are still correct and you stop innovating. Tesco didn't copycat the leader, as so many organisations tend to do. Instead it played a different game. It challenged the assumptions in the industry – that profit was only about own-brand labels and profit per square metre, and instead they decided that customer data was the way to find growth. Those other things were important, but customer data would prove to be the key to market domination."

It's these assumptions within an industry that can make or break a business, Styles says. Innovation means constantly challenging assumptions. Those looking for growth should build a business model around new truths, rather than copying the leader. "Look outside your industry to bring in ideas about what is relevant to yours," Styles suggests. "Unpick the current business model and experiment, fail, learn, then experiment again. Come up with hypotheses and test them. If you draw two inter-connecting circles (in one circle are the current market leader's modus operandi and in the other are the rising competitors' ideas of what works), the area in the middle is what everyone in the industry believes and acts upon, and as the industry becomes more mature that shared area gets bigger. This leads to strategic convergence. You need to work outside of this area to find competitive advantage."

The Tesco example is a good one because of the company's size and visibility within the market. But organisations of all shapes and sizes within every market consider, or should consider, implementing turnaround plans. Michael Fingland, managing director of Vantage Performance, has been the architect of numerous such plans for companies in fields as diverse as retail, manufacturing, engineering, transport logistics and mining services.

"Quite a few mining services businesses [are] getting into strife, which surprises many people," Fingland says. "In such a fast-growing sector, they outgrow their finance structures or their people structures and need operational adjustments and controls."

An effective turnaround requires the right platform, capital structure, people, expertise, and also the right approach to culture, particularly stakeholder management, according to Fingland. "When we look at a turnaround we say it's about 25% financial restructuring, 25% operational and 50% stakeholder management. That's where most management teams or advisers that try turnarounds get it wrong – they don't put enough emphasis on the stakeholder management side and that is the most critical element."

When you walk into an ailing organisation it's fairly clear where the problems lie, Fingland says. Often meaningful strategic decisions have not been made for quite a while and the business is controlling the management team, rather than the other way around.

Fingland claims it's relatively easy to draw a line back to the moment that the rot started. "Typically the issues have begun two to three years' earlier and as the team and conditions deteriorate it starts to show as high staff turnover and low productivity, and eventually it turns up in the numbers," he says. "Often there are cultural issues that weren't dealt with by management. To manage a turnaround you've actually got to spend a good amount of effort on stakeholder management – staff, creditors, customers etc – to identify what contributed to the decline in productivity and morale. Only once you have identified it can you address it."

Three Steps to Success?

Most successful turnarounds follow a three-step process, observes Fingland. The first is a strategic review or diagnosis, which can take from two to eight weeks. In this structured part of the process all key issues must be identified and for each issue, options and recommendations must be discussed before the development of a 100-day plan. This period is about getting to the root of the problem and assessing management's ability to change. "It's one thing coming up with all of the initiatives, but is there sufficient skill inside the management team to execute all that is involved?" Fingland asks.

"The second stage, the implementation phase, is different on every occasion. You might have the initial 100-day plan mapped out with key initiatives, but often the order in which you start executing will change as the processes are implemented. Delays happen on a certain project so resources must be reallocated, for instance." The X factor in turnarounds is being able to read what's needed and where. "It's essential to keep a finger on the pulse during the implementation phase by constantly discussing traction with the management team, financiers, shareholders and staff. You must keep all stakeholders moving in the same direction and that continuous process of interaction tells you when you need to slow something down or ramp something up. That's where skill and experience comes into it."

Most turnarounds take about 18 months to two years, Fingland says. Once successful, the third phase begins. "What must follow is a risk/reward discussion around how much of the enterprise value is going to increase from here versus what could be achieved through a sale or a merger with somebody else or some sort of acquisition. The third phase can often be a sale. The decision comes down to pure value on investment."

Fitting the Tesco case study into this model is simple – identification of issues and assessment of the problems led to a need to create a new, customer-centric culture. With the implementation of that culture came benefits, some expected and some a surprise. The outstanding benefit was the incredible value of the data offered by the new Tesco Clubcard. And, once the turnaround was complete, the decision was to expand internationally in addition to looking for further opportunities in the UK.

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