The decline of Tesco: how did the world beater end up in crisis?

Tesco supermarket is being squeezed by discount retailers but its crisis is being felt firmly in the North East

Tesco Extra in Saughton, Edinburgh
Tesco Extra in Saughton, Edinburgh

How has Tesco gone world beater to its current crisis? Business editor Graeme Whitfield examines what the firm’s latest rescue plan means for the North East.

It makes a profit of more than £2bn, has a presence in pretty much every town in Britain and employs more than half a million people. Yesterday it had to launch what was widely seen as a rescue plan.

Tesco is one of the biggest companies in the country and anyone who has spent time in one of its stores recently will tell you that the tills are ringing. Yet it is widely seen as being in crisis.

During the 1990s, Tesco went from being a UK supermarket into a global retail behemoth, expanding under the leadership of Sir Terry Leahy into new territories and adding not just other retail lines like books, clothing and petrol, but also financial services, telecoms and internet services.

But for the last few years it has - along with the other members of the British supermarket Big Four: Asda, Morrisons and Sainsbury’s - come under increasing pressure from discount chains Aldi and Lidl, seeing sales growth slow to its lowest level in 20 years. Profit warnings have been followed by revival plans but just as the firm’s growth had once seemed unstoppable, so, it seemed, was its decline.

Tesco/PA Wire Tesco Chief Executive Dave Lewis
Tesco Chief Executive Dave Lewis

Last year those problems developed into full-blown crisis when incoming chief executive Dave Lewis announced that the company had overstated its profits by no less than £250m. It asked auditors Deloitte to carry out an investigation into the mis-reporting but if it hoped to keep the problem in-house, it failed. Within months both the Financial Conduct Authority and the Financial Reporting Council had launched their own investigation while a number of key executives were suspended and group chairman Sir Richard Bennett announced he would be stepping down.

Yesterday, Mr Lewis outlined his big plan to turn things round at Tesco, with 43 unprofitable shops being closed down, 49 stores that had been in development being abandoned, the head office moved and the final salary pension scheme closed.

“We have some very difficult changes to make,” Mr Lewis said. “I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation.”

Those changes are already being felt in the North East. Though the identity of the stores to close has not been revealed, some will doubtless be in this region and hundreds of jobs will go. Though Tesco is not always the highest payer in the world, many of those jobs will be held by women who often benefit from flexible working and generous benefits associated with working at Tesco.

The changes are already been mulled over in Amble, Northumberland, and in Stanley and Peterlee, County Durham, where new stores that had been hoped would breath new life into struggling communities will now not go ahead.

Emily Barber Shadow Minister for the Armed Forces, Kevan Jones
Shadow Minister for the Armed Forces, Kevan Jones

North Durham MP Kevan Jones, whose constituency includes Stanley, spoke of his disappointment while Ian Hinson of Amble Town Council called it a “disaster”.

“I can not see anything else on the horizon as far as Amble is concerned now,” Coun Hinson said. “There was far too many saying ‘I go to Asda at Ashington or Asda at Blyth’.

“If you do a head count at the top of Queen Street or the other end, there is more folk in the Co-op than in Tesco. The prices were high. I would not be surprised if the bottom Tesco closes as well.

“It would have been something out of the ordinary, something new. We do not seem to be doing too badly on residential stuff but what we needed to do was increase the variety of the offer on Queen Street. It is a discouraging step in the wrong direction at the moment.

“I doubt they will sell the site and allow some other competitor to get in. It would be nice if they did but I doubt it.”

It will be small comfort to Mr Lewis, Tesco’s staff or those communities now not getting stores that Tesco is not alone in feeling the strain.

The UK supermarket sector has undergone tumultuous change in the last two years, with little in the way of good news for the middle-market Big Four.

Ian Nicholson/PA Wire Tesco headquarters in Cheshunt, Hertfordshire
Tesco headquarters in Cheshunt, Hertfordshire
 

Tesco, Asda, Sainsbury’s and Morrisons have all lost market share for the first time in a generation as customers depart in their droves for discounters Aldi and Lidl and the upmarket Waitrose and Marks & Spencer.

Gilad Simhony, chief executive of comparison website mysupermarket.co.uk, said middle-market supermarkets had struggled with the challenge of finding their niche while trying to offer low prices and quality.

He said: “The supermarket industry has definitely become more competitive over the last couple of years.

“The response from many of the supermarkets has been to tighten their brand proposition and be more precise in their offering.

“Supermarkets such as Aldi and to a certain extent Asda have focused on being the best value and cheapest products. On the other scale, retailers such as Waitrose have focused on quality.

“Those supermarkets in the middle have struggled more as they overcome the challenge of providing the lowest prices but the highest quality.

“Over the next 12 months we would expect retailers to sharpen their brand positioning as the competition to retain loyalty becomes even harder.”

Aldi and Lidl have continued to attract increasing amounts of shoppers, albeit at a slower rate, suggesting that fierce price cutting by rivals may be beginning to have an effect.

Meanwhile Waitrose has continued to outperform the under-pressure sector after figures this week showed a lift in Christmas sales.

Waitrose, Oxford Rd, Reading
Waitrose, Oxford Rd, Reading
 

David Alexander, a consultant from retail analysts Conlumino, said: “One criticism that has certainly been levelled at Tesco in the past has been its inability to simply and effectively communicate value, befuddling customers with straplines, slogans, couponing and promotional tools.

“Simple it may be, but being simple and straightforward on price and product is one of the key reasons the discounters have stolen custom from the Big Four, whose pricing strategy has often been more smoke and mirrors than clear as crystal.”

Mr Alexander said there was a “long road ahead for Tesco, not least in its efforts to rebuild consumer trust in its proposition after successive years of negative press”.

He pointed mainly to Tesco’s now slowed but formerly aggressive expansion and pricing strategies which detractors claim has forced local shops out of business.

But he said Tesco’s sheer size in the market had seen it become an “easy target”, with problems such as its involvement in the horse meat scandal and recent £263m profits overstatement all “adding to a general feeling of mistrust that doesn’t sit well with consumers”.

Mr Alexander said: “It is worth remembering though, that sometimes in crisis there lies opportunity. If today’s latest update is anything to go by, 2015 could be the year Tesco grasps the nettle and gives its faltering rivals, and perhaps even the discounters, food for thought.”

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