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Tesco’s dramatic fall and how to avoid it

IbyIMD+ Published 4 August 2021 in Strategy • 7 min read

Keeping the customer satisfied is key to creating a ‘super’ brand, but maintaining that success is notoriously difficult, argue Charlie Dawson Seán Meehan.

Businesses that understand what really matters to customers and then innovate on their behalf become leaders in their sectors and often beyond. They are not hemmed in by a product-based definition of what they do.  

In 30 years, Tesco went from being number three in the UK grocery market to being the third largest global retailer by doing business this way. With the same mindset, Amazon has gone from selling books to selling pretty much everything. 

We have spent seven years researching why, having mastered this elusive way of doing things, Tesco fell so spectacularly from grace. Furthermore, our research suggests that Amazon will one day go the same way. 

The way people in a business do things comes down to the unspoken shared beliefs they have about success and how it is achieved. One set of beliefs is natural: the numbers matter; and targets, incentives and punishments are the route to hitting them. Less natural is the assumption that making things better for customers will also be good for the business. Investing in more checkout staff and checkouts means shorter queues, eventually customers notice, appreciate it and come back more often. 

The success that Amazon and Tesco have enjoyed comes from having this latter mindset. From the outset Jeff Bezos was fueled by a burning ambition “to create an enduring franchise that would reinvent what it means to serve customers by unlocking the internet’s power”. Success meant growth of customer numbers and revenue, the degree to which people chose to come back and buy again.  

He could see that customers wanted a wide choice, low prices and fast delivery, and so he got the business to work relentlessly and innovatively at finding new and better ways to get these results. He kept on reinvesting. Amazon has never paid shareholders a dividend and for years the business didn’t turn a profit. Customer value came first, the rest would follow. 

These concrete actions where customers come first are examples of what we call “moments of belief”, signals to everyone involved that this is the way we do things around here.  

Bezos has not wavered in his customer-led commitment and Amazon’s expanding workforce learned from a continuous flow of moments of belief: 

Firstly, Amazon allowed other sellers to offer products on its Amazon Marketplace platform, in competition with its own offerings. 

Secondly, it decided to show all reviews, good or bad, alongside the products being sold. Knowing this could lead to loss of sales, it did it in the interest of building customer trust. 

Finally, it has used data to help customers transparently, sharing the actions of others who looked at or bought the same item, rather than a more “black box” AI-style approach making predictions based on customers’ profile. 

By insisting on customer obsession, Bezos ensures that Amazon remains as purposeful as it was at birth.  

Given the strength of these beliefs and of the organization’s performance, it’s hard to imagine what could go wrong. To help us foresee Amazon’s future, let’s look at Tesco.  

Its ethos was similar: understanding what customers value and finding new and better ways to create it. By putting customers first, it became an undisputed market leader. By 2012 Tesco had a 33% UK share; it was a grocer, general merchandiser, mobile phone network, bank and more, operating across 13 countries.  

Then, after more than 30 years of uninterrupted growth, the Tesco success story ended.  

In the UK, Tesco was being challenged by Aldi and Lidl. When you have 33% market share, any significant new competitive growth is going to hurt. Would Tesco see it early and respond with something that was better for customers? That would be the customer-led way, but by this point, the senior team was not in touch with the day-to-day reality of customers and had a great deal else on its plate.  

As the clouds gathered, and after a skiing accident that took a toll on his health, CEO Terry Leahy stood down in 2011. By then Tesco had become a large, complex organization that was heavily reliant on its home market to finance its wider development. In the face of ferocious price competition, like-for-like domestic sales were on a downward trend, slowed only by increasingly generous, targeted offers to customers and funding from suppliers. To begin with, these actions closed a small gap between expectations and actual performance, but what started as small became bigger each quarter, and before long the business was pushing like hell to make the numbers. That’s the characteristic of an inside-out business. 

In pursuit of fresh momentum, Philip Clarke, Leahy’s successor, announced a £1 billion UK store makeover in October 2012, coupled with the training and deployment of extra staff. But these investments coincided with difficulties in the international business. Group profits dropped by 12%. From Leahy’s departure to the end of 2013, the business lost seven of its nine executive board directors with a total of more than 150 years of Tesco experience (and a great deal of shared belief in the way the business had succeeded).  

In 2014, Tesco reported its first profit decline in 20 years, a  3.7% reverse in like-for-like sales in the first quarter, two profit warnings, an admission that it had overstated half-year profits by £250 million, and later that it had suspended four senior executives. The loss that year amounted to £6.4 billion pre-tax. Since then, Tesco has consolidated, regained customer trust and market share, and is posting a healthy profit. While its partial recovery is admirable, it is a shadow of its former self. To characterize Tesco’s fall as attributable to managerial hubris is flawed. Tesco’s fall shows that even when outside-in beliefs are well-established, they are never secure.  

The senior team was not in touch with the day-to-day reality of customers and had a great deal else on its plate

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