Tesco: A Lean retailer lost?

Tesco, a company that was once Lean, has been dogged by scandals and problems in recent times.

Simon Elias, longtime Business School collaborator and formerly Director of Cardiff University’s Lean Enterprise Research Centre (LERC), and Barry Evans, a Cardiff Business School academic, explore what went wrong.

Tesco has long been feted as a Lean retailer and an early exponent of structured continuous improvement outside of manufacturing. So what do its recent tribulations tell us about the nature of sustainable Lean thinking in organisations?

Of course, Tesco is not the only retailer to be suffering, as, in an apparent polarisation of retailing, those in the middle market are feeling the squeeze evidenced by job losses and Chief Executive removals at Sainsbury’s and Morrisons. Yet, Aldi and Lidl increased sales by 22.6% and 15.1% respectively.

While the UK grocery market is forecast to grow 16.3% from 2014 to 2019 (source: Institute of Grocery Distribution), key structural changes mean future growth will be driven by three principal areas: convenience, online and discounters.

Being able to anticipate market trends and changes in customer value has been central to Tesco’s success over the last two decades. It was the first major multiple to see the potential of convenience stores and online grocery sales. However, it appears not to have anticipated the growth of discounting and associated changes in the consumer value proposition.

Tesco and customer value

Tesco had an excellent track record of working tirelessly to understand and deliver what customers valued. They developed many mechanisms to understand customer wants, such as Clubcard data, customer panels and market research.

Thus they strove to keep abreast of what customers wanted (or did not want) and crucially aimed to deliver this through focused company-wide change programmes.

This delivered huge benefits, as each operation in Tesco’s distribution centres (eg store order picking, store shelf replenishment, checkout scanning of customer baskets) is repeated literally millions of times each year. A small improvement in each operation cascades through to significant bottom line gain.

Declining performance

The financial crisis of 2008 accelerated the rise of polarised custom – the discounters and high-end retailers – which ushered a return to prominence of clear value propositions rather than an overemphasis on retail theatre, such as promotions and three-for-two offers.

Internally, Tesco was too focussed on technological changes and placed too much emphasis on extended supply chains to the detriment of customer trust.

Terry Leahy warned in the late 1990’s – the years of plenty – that Tesco’s biggest enemy was complacency. Being complacent, in Lean terms, can be linked to a loss of clarity of purpose. With a high market share in a mature core home market, Tesco inevitably began to look for opportunities to diversify into other markets.

Diversification included video-on-demand, financial services, brown and white goods, mobile phones, broadband and so on, as well as substantial international expansion. All of which muddied its clarity of purpose and coloured its understanding of customer value.

The road to Lean redemption?

The arrival of Dave Lewis, Tesco’s first ever externally recruited CEO in September 2014, has seen Tesco re-focus on what the customer values: price, availability and service. It is also recruiting additional staff and has disposed of some of its technological offers.

Early indications of these changes on trading performance and share price have been positive. It is worth noting that Tesco’s financial performance is still delivering profits in excess of £1 billion – the only UK retailer to achieve this.

Summary

At some point, Tesco lost sight of the source of its growth.

Undoubtedly, the revolutionary market change driven by the financial crisis and the consequent market polarisation had a major impact that exacerbated the effect of the negative internal factors that resulted in the recent difficult years for Tesco. This is when significant changes in customer value occurred that, in fairness, were very difficult to predict.

The ability to adapt to such changes is critical to survival. This involves restating your purpose based around your core competencies, to engage customers and recapture the ability to understand value.

It looks like the new management at Tesco is returning to a customer-focused approach, getting back to basics and clarifying purpose. These, together with re-building positive behaviours, mean it has the opportunity to move in the right direction along the Lean spectrum and reconnect with its customers in delivering the value they demand.