A Better example - Tesco report - Do not copy PDF

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It is a better example of the Tesco report of Tesco company which only for revision please do not copy....

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Tesco PLC

Tesco PLC Business Report

xxxxxxx Management Consultant

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Context for this Report Tesco PLC, multinational retail company, started as a market stall in London in 1919 (Tesco PLC 2016a). Its expansion since then has augmented to the Tesco today seen trading in store and online in eleven countries (Appendix 1). Also dealing with banking and insurance in the United Kingdom and Republic of Ireland (Financial Times, 2016), they currently offer services both online and offline through their many stores. Tesco suffered an annual loss of £6.4 billion in 2015/16 due to writedowns on the value of their stores after the £326m accounting scandal (Ruddick and Butler 2015). This is the worst loss in Tesco history and is the highest recorded for any UK retailer, along with Cable & Wireless, Telecoms Company, in 2003 (Martin 2015). Philip Clarke seems to be the scapegoat for the trouble, even though it was clear in 2011 that he was faced with a huge challenge, which was created under Sir Terry Leahy (Felsted 2014). Loss is highly detrimental to any company, not least for one that was once classed as “Britain’s most successful retailer” (Shapland 2015) and has had knock-on effects. As a result of the issues Tesco have faced, it is vital that changes are made, which prior CEO of Unilever and current CEO of Tesco, David Lewis, appears to be prepared and enthusiastic about doing. Proven top managers like him can make all the difference to a company’s future (Amankwah-Amoah 2016, p.3391). His Unilever nickname, ‘Drastic Dave’ suits the current situation and gives hope to the company’s future (Shapland 2015). He has made changes since taking on his position with Tesco in 2014 by adhering to their strategic priority to protect and strengthen their balance sheet (Tesco PLC 2016b, p.3). To put his joining into context, a SWOT Analysis for Tesco as they move on from 2015 can be found in Appendix 2. This report will aim to analyse and evaluate the current management practices and discuss how these interlink on a national and global scale while suggesting the implications the negative aspects have on the company’s profitability. This will lead to practical suggestions throughout with final recommendations for how Tesco might regain its competitiveness over the next three years to enjoy sustainable success. It will aim to incorporate examples and comparisons with other leading retailers. The main topics of discussion are Tesco brand, culture and property while drawing on other examples. As Tesco is such a well-established company it is less likely to fail completely because of its size, “age and density” (Burger & Owens 2013 cited in Amankwah-Amoah 2016). However, this does not mean that they can remain complacent and simply hope to move with the market; they must make changes to enable change (Ribeiro Serra, Portugal Ferreira and Ribeiro de Almeida 2013, p.136), something which, when not present, is often the cause of failure for long-lived companies (Amankwah-Amoah 2016, p.3391).

People Management Tesco has three clear values: “we treat everyone how they like to be treated, no one tries harder for customers and we use our scale for good” (Appendix 3). They say their mission is “to be the champion for customers - to help everyone who shops with us enjoy a better quality of life and an easier way of living” (Tesco PLC 2015b, p1 and Tesco PLC, 2016c) by doing small actions for big change (Appendix 4). Reputation is something built over time (Gotsi and Wilson 2001, p.28) but has been tarnished in Tesco’s case as a result of the accounting scandal and a series of profit warnings (Appendix 5).

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Although ‘brand’ tends to be thought of as part of marketing, it encompasses what the consumer imagines when they think about the company (Calder, Malthouse and Maslowska 2016, p.580). Therefore, if Tesco’s management are not representing Tesco well, customers remember this and shopping habits are influenced. Given that word-of-mouth is such an important means of marketing, it is crucial to meet their needs through everyday operations, which are carried out by the people (Pauwels, Aksehirli and Lackman 2016, p.02). This is not only management but, perhaps more importantly, to the staff ‘on the ground’. Tesco could apply a bottom-up approach (Slack, Brandon-Jones and Johnston 2016, p.82) and encourage employees to give feedback on their experience and discuss improvements that could be made to create a strategic operational plan; valuing them more. In 2015/16, 78% of employees stated that Tesco is a “great place to work”, an increase from 70% in 2014/15 (Faull 2016). By having a value set and common mission, they form a clear mentality and goal for all employees (Rees and French 2016, p.138). This is culture, a shared identity which enables progress (Brewster et al 2016, p.57). Along with this, a Code of Conduct sets a minimum standard of organisational behaviour in Tesco around the globe (Appendix 6), shown in their satisfaction. The question is, where did the 78% originate, who participated in this survey and were all employees worldwide asked to contribute or did they question managers only? High satisfaction is understandable amongst managers because they are paid well and given bonuses, namely David Lewis who received a £3m bonus in 2016 (Kollewe 2016). However, if Tesco’s values and Code of Conduct are so clear then why did the scandal happen? The answer is plain. Those higher up were fighting so hard to be number one, they sacrificed following the law in an accounting scandal to appear at the top (Appendix 5). In the 2014 Annual Report, then Chairman, Sir Richard Broadbent, stated that “Being a leading retailer today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow’s leading retailer” (2014 p.01). This pressure may have driven Tesco in the wrong direction, into a desperate attempt to maintain their ranking, despite the fact they stated that customer behaviour drives them (Tesco PLC 2014, p.01). If they had asked people ‘on the ground’ for feedback and acted on it, they may have been more prepared for failure rather than covering up issues. In an interview with the BBC, former CEO Sir Terry Leahy claimed that the Tesco culture became less positive under Philip Clarke and that they needed to be more encouraging to employees to inspire their loyalty and express the positivity of working for Tesco (BBC 2015c). It is very easy to make these comments when the weight no longer falls on his shoulders. Clarke made changes to overcome the problems that Leahy left behind before they could create a stigma to his name (Amankwah-Amoah 2016, p.3392). If it is true that Tesco culture needs to improve, although David Lewis appears to be addressing it (Appendix 3 & 4), then they should consider further perks to working for them. For example, John Lewis Partnership have an employee-owned model, meaning they have shares in the business and ultimately own it (John Lewis PLC 2017). They explicitly advertise on their website that “all 88,900 Partners influence how the Partnership is run” and that “giving their Partners a voice is central to the principles of co-ownership”, which is done through their Annual Partners Survey (John Lewis PLC 2016). Not only does this incentivise hard work but creates a sense of belonging and cohesion to strengthen their brand and reputation. If Tesco believe in their employees as much as they say they do, there should be no reason to avoid offering them the status of ‘partner’, rather than simply conglomerating them with all shareholders. Tesco made a good decision in recruiting David Lewis to be CEO because he is experienced in his field and seems to be leading Tesco into the future by increasing their competitiveness with a clear mission and new initiatives, which were not as evident the year before he joined 3

(Appendix 7). They must remember their values when explaining and enforcing the most recent 1000 job cuts to ensure employees are not devalued (Ruddick 2017) because they cannot afford any more negative press.

Finance Management In any business venture, if the company is not making money, or at least breaking even, there is a problem. A way of ensuring the opportunity to break even as a minimum is by keeping the operating leverage as low as possible (Hillier et al 2014, p.284) which is what Tesco tried to do by not paying suppliers on time. Unfortunately, they had to take the penalty because “if it goes well, you get credit, if it doesn't go well, you must take responsibility” (BBC 2015a). Tesco took responsibility through Philip Clarke’s exit and through the consequences of poor fiscal management reflected in low sales. In 2015 the company’s credit rating was downgraded to ‘junk’ by rating agencies (Ruddick and Butler 2015) which restricts the company’s flexibility in the buying of property or having loans because they were viewed as high risk. In order to ameliorate their credit rating and restore their balance sheet they sold Homeplus in South Korea for £4.2bn. Another likely reason was to keep shareholders happy because they can now focus more on the UK market and save on lease costs in Korea. The downside is that they lose £150 million annual earnings (Armstrong 2015). Perhaps they have realised that spreading themselves too thinly globally is not an effective use of their time, money and reputation because they also left the US during the restructuring of their relationship with retailer Kroger (Appendix 9). As of 2016 their credit score was ‘secure’ (Fame 2016) meaning they are in a better financial position. As Tesco has fallen once, they should have a heightened awareness to signs of decline and must prove to employees, customers and business partners that they will not repeat their mistakes. From their Five-year financial (Appendix 10), it is apparent that Tesco sales fluctuated around the £70,000m mark although their profit decreased each year, with a dramatic drop in 2013 just before Philip Clarke had to take responsibility for poor management, which his predecessor left for him. Although profit reduced in the UK, it seemingly increased in Europe and Asia until 2014. This was when Tesco was blind to the efficacy of their UK stores; being their most numerous and therefore most lucrative area. They were not being properly maintained which in turn let shareholders down by not paying them final dividends (Appendix 11). Here are two problems; lack of asset maintenance which resulted in lower earnings and letting down shareholders and thus seeing a drop in share price (Appendix 12). Imagine what the true balance sheet would have looked like and how much loss the company would have experienced over the years had they been paying suppliers on time (Appendix 5). As Tesco are left with thousands of stores, they have no choice but to review them. Blackstone Real Estate follow the Buy it, Fix it, Sell it strategy (Gray 2016) and make large amounts of money by focussing on the ‘fix it’ to have a stable business or asset. They then sell for favourable prices and move on to the next venture. Tesco could use this ideology with regards to fixing their current stores in order to stabilise their assets. Once their credit rating has improved even more they could consider buying disused buildings to expand the number of UK supermarkets. It appears that in the past the company has spread itself too thinly around the world (Appendix 10) and now needs to focus on using an adaptation of a strategy that has worked for Blackstone Real Estate and one which makes financial sense. By pumping money in to improve current stores they could revamp their ‘look’ according to the location of stores. This is something that McDonald’s have done through extensive market research but one recognisable brand which does not confuse customers 4

(McDonald’s Corporation 2008, p.06). This is where all four aspects of management are forced to work together because they require finance to enable change, this change requires a marketing strategy and operational support and people to carry it all out. In turn, Tesco’s competitiveness can be regained. It sounds simple but Tesco must clarify its brand and culture amongst everyone involved in the process or it will not be successful.

Operations Management With further regards to Tesco property and locations, they have been left with no choice but to stop proceedings with the 49 sites that were in the pipeline, thus not expanding as they had hoped (Shapland 2015). This may appear to be terrible but the trend amongst supermarkets in 2015 was thus; Sainsbury’s cancelled 40 new store openings, Morrisons closed 11 stores and Asda reduced its London expansion and click-and-collect sites. It therefore looks as if there is a shift in UK supermarkets, particularly because Lidl and Aldi are looking to expand significantly between 2015 and 2020 (Key Note 2015). This could also be due to customer needs changing, given the expansion of online shopping or the desire for convenience shopping. Consequently, Tesco should focus more on their Tesco Metro or Tesco Express stores because this is what customers want. Tesco had a ‘One in Every Postcode’ plan in 2011 whereby they would set up at least one store in each zone (Wainwright 2011). By looking at successful store Booths, who are based in the North of England only (Appendix 13), it is apparent that they have researched which area of the country would be best for their stores and set up there. Their website is simple and informative, with the only option to shop online being Christmas and New Year, suggesting they are focussed on their stores but adapt accordingly during busy periods. Their branding is similar to Waitrose, giving it a feel of exclusivity. Tesco’s desire to spread itself over the whole of the UK is ambitious but imprudent. In doing this they force themselves into local communities and in essence set themselves up for a fall, or low-profit stores. In early 2015 they closed 43 of their UK stores, which not only disrupted the local community but also put 2,000 jobs at risk (BBC 2015b). If they had established a clear and decisive marketing plan with regards to ‘4th P’ of the marketing mix, ‘Place’, this number of closures would not have been and they could have avoided job losses. With reference to internationalisation, Tesco tried it but failed to simultaneously maintain the UK base to the high standard it was once known for. This was history repeating itself in that Groupe Casino’s French supermarket Carrefour tried to globalise but lost their standing in their home country, France. In 2015 they reported continued debt as a weakness in their SWOT analysis (Canadean 2016, p.21), proving the long-term damage of allowing, or ignoring, the prospect of decline. Tesco should have been aware of their potential to fail and should have learnt from their competitors’ misfortunes. They could have benefitted from it to make sure they avoided it but their “blinded management” was a clear sign of the beginnings of decline (Amankwah-Amoah 2016, p.3393-3394 and 3392). Perhaps they assumed that because they were a successful and long-lived household name they would somehow be resistant to public disappointment. An example of a company who is sensible about where they locate their stores is John Lewis. A prime example is their move from Above Bar Street, Southampton to The West Quay Shopping Centre. Their reasons for moving were that West Quay is the “heart of the city” and they wanted to be part of it (John Lewis PLC, 2014). It is argued that any large department store or supermarket can destroy the free market and communities because they are often situated away from the city centre due to cheaper land prices (Wilby 2011). John Lewis not only accommodated customers by moving to where they will find it most 5

convenient to go, but they have made the wise decision of going where they’re likely to be. Tesco should adopt this stance and take into consideration the fact that people still visiting stores instead of shopping online appreciate the quick and convenient visit. If they could fulfil customer needs, they may regain some competitiveness. In any operation, managers must work with and alongside the other three areas of business management to “ensure effective organizational performance” (Brandon- 20, p.07 and 21). This ideology should be adopted by all four areas within the Tesco business to create a more ‘together culture’ which is crucial for success.

Marketing Management “A responsive marketer finds a stated need and fills it” (Kotler et al 2016, p.308). With the rise of discount stores such as Aldi, Lidl and Poundland, Tesco face severe competition and are going to have to work harder than ever to maintain their customer base and regain their competitiveness (Key Note 2015). This meant that in 2015 they had to make cuts in certain places. Along with Asda (16.5%) and Sainsbury’s (8%), Tesco set aside 9.4% less on the marketing budget for their clothes lines to place emphasis on their main focus, groceries (Sender 2016). They then kept offering price drops on food products from 2012, resulting in £200m in cuts in 2014 (Felsted 2014). Reflecting on this decision with the Ashridge Mission Model reveals that as soon as one area is focussed on heavily, the other aspects can be forgotten or worsened (Appendix 8). In other words, if the price goes down the quality goes down, which was best illustrated by the horsemeat saga. It exposed Tesco’s flawed culture and lack of respect for values by allowing management’s personal values influence their role. They should look to Aldi’s ‘Like Brands’ for inspiration because the quality is as good as top brands but their prices remain low (The Times 100 2015). In January 2015, ex-CEO Leahy said Tesco needed to refocus on what the customer wanted (BBC 2015a) and he was right. Customers expect value for money and in 2016 Tesco adopted the discounters’ attitude by developing a simplified range of 7 New Value Brands in an attempt to take customers back from their rivals & avoid ‘top-up’ shopping elsewhere. Tesco want the British public to do monthly shops with them and this range enables this because of its price. For example, Boswell Farms beef mince costs £1.69 like in German competitor, Aldi, who produces Ashfield Farm mince (Hobbs 2016). Tesco must now avoid ruining this hard work by ensuring that no horses are harmed in the making of this beef; they have begun to build up trust and must retain it. The horsemeat scandal in 2012-2013 affected other stores too, including Aldi (Lawrence 2013), but it is likely that due to Tesco’s big reputation and the size of the business they received more backlash. It could also be because customers like the simplicity of the German competitors. Also, no real answers were ever given as to why this was allowed to happened, even though Tesco promised they would bring meat production “closer to home” (BBC 2013a). Three years later they have done so with their new value products. If they want customers to remain loyal, they must avoid the constant trust battle with them and following up on promises is a step forward. After the global recession, the British public felt let down and no longer trusted institutions (Gritten 2011, p.99), which is why it is crucial that five years later Tesco work hard to build up their brand and reputation again, due to financial errors. A competitive environment lends to a necessity to improve. Tesco have started to respond to this in certain areas. For example, although their stores are a clear example of the traditional piggly wiggly layout (Juel-Jacobsen 2015, p.65) they make slight changes according to the location. For example, a branch in Queensway, London was revamped to have a more upmarket feel 6

(Carroll 2015). However, one store is not going to change the whole brand. They should not force themselves on an environment and should be aware of what customers want by looking at successful competitors and completing market research. In 2014 it was reported that shopping trends were leaning more towards smaller stores and on average people were spending less per shop (Nielsen 2014). Therefore, not only should Tesco have been more s...