‘Tesco could have gone under’: how Dave Lewis saved the firm from disaster | Business
When Dave Lewis took the helm of Tesco five years ago he whisked his 15 most senior managers off to a remote holiday cottage in Norfolk. There, the assembled executives were forced to step out of the executive bubble and get back to basics: shopping for food and cooking for themselves.
It was the autumn of 2014 and the retail giant was in crisis. Its dominance of the British grocery landscape had come to a messy end as it was forced to confront the scale of the shopper exodus from its supermarkets, where the prices had risen and standards had fallen.
The grocer had a mountain of debt after years of empire building under celebrated former leader Sir Terry Leahy, but the discovery of a gaping black hole in its accounts was a severe blow for what had been one of corporate Britain’s biggest success stories.
Fast forward to 2019 and Lewis’s declaration last week that he had finished the turnaround job he set out to do: the business was once again on “firm foundations” with a “sustainable” growth plan.
Profits are rising, the £22bn debt pile he inherited has almost halved and £1.6bn of costs have been carved out of the retailer. The former Unilever executive has also tackled its reputation for aggressive dealings with suppliers, and agreed to pay a £129m fine over the accounting scandal.
The Tesco brand “is stronger and customer satisfaction is the highest it has been for many years”, he said.
Expressing a desire to travel to Bhutan and spend more time with his family, Lewis said the job had been “all consuming” and it was time to “pass the baton” to a new leader – in this case Ken Murphy, an Irish businessman who has spent much of his career working for health and beauty retailer Boots.
The 2014 executive trip to Norfolk is an example of Lewis’s back-to-basics approach. He used it to force his top managers – many of whom were used to crisscrossing the globe on the company’s now long-gone corporate jets – to confront the day-to-day reality of food shopping like an ordinary customer.
More importantly, it focused minds on how Tesco’s prices and products compared with those of rivals such as Aldi and Lidl. “I think if you’re in our business and you’re not spending all of your time looking at the quality and the presentation and the taste of the food and the products you serve – what are you doing?” Lewis said at the time.
The City was caught off guard by Lewis’s desire to walk away next year, but Shore Capital analyst Clive Black said he deserves to be celebrated as the “bloke that saved Tesco”.
“In terms of what Dave Lewis came into, it is mission accomplished,” said Black. “People forget what a shitshow it was when he arrived. There was no credible chairman or non-executives, and colleagues were about to be prosecuted by the Serious Fraud Office. The business was in turmoil. Tesco could have gone under.”
Lewis’s first set of annual results in 2015 was indeed a horror show: the company crashed to a £6.4bn loss, he axed thousands of head-office jobs – including the retailer’s famously austere Cheshunt headquarters in Hertfordshire – and closed more than 40 loss-making stores.
In the 1990s and 2000s, the big supermarket chains had been engaged in a “space race” – competing to see who could open the most stores. Under Leahy that race was won emphatically by Tesco as it added small convenience stores and huge department-store-style Extras.
But the 2015 loss reflected a towering £7bn of one-off costs, including £4.7bn relating to a revaluation of its store estate.
Despite Lewis’s overhaul, Tesco’s UK market share continues to drift downwards as the German discounters continue their rapacious expansion. This trend makes Lewis’s decision to move into wholesaling – with the £3.7bn take over of cash-and-carry group Booker – look far smarter than Sainsbury’s unsuccessful attempt to merge with Asda, which was blocked by the competition watchdog.
“The big four are competing for a smaller slice of the food market,” said TCC Global analyst Bryan Roberts, who pointed to a prediction that in the long term the discounters would command a quarter of the UK grocery market. “There has been a structural shift into the discount channel that is not going away. It is about coming up with the best self-defence strategy.”
One of most successful decisions made by Lewis, who has a background in marketing, was to replace Tesco’s cheapest own-label products with generic “farm” brands and ersatz ranges – such as Bay Fishmongers, Ms Molly’s desserts and Butcher’s Choice – that stood up to comparison with discounters’ products.
He also abandoned the Leahy-era ambition of becoming a one-stop-shop, quitting unprofitable sectors like electricals, closing its clothing and homewares website Tesco Direct and selling the Dobbies garden centre chain.
“The Tesco business is much leaner, more efficient and has regained its focus on the shopper and delivering value to them,” said Roberts. “There are fewer bells and whistles in the stores, but availability and service levels have improved.” He added that the UK operation was “pretty sorted”, but pointed to a chequered overseas picture. “Poland is still a bit of a shambles – Tesco has a fair bit of work to do there.”
One senior grocery industry executive said Lewis had done a good job of stabilising Tesco but questioned the long-term vision for the business, particularly its overseas operation, given the sale of its successful South Korean business and Kipa in Turkey.
“Dave didn’t pretend he was a retailer,” they said. “He beefed up marketing and allowed the Tesco machine, which had been abused but was still there, to carry on. He allowed those people to do their jobs. But if you look at the international business, they haven’t bought anything or grown anything. It’s on hold.”
Despite Lewis’s efforts, Tesco’s share price still isn’t much to shout about. It recovered from the accounting scandal nadir but, at around 237p, is a long way off the £4-plus seen at the beginning of the decade.
“This market has changed fundamentally over the past 20 years,” continued the executive. “Supermarkets have thin margins and a heavy capital [requirement] – and it’s an intensely competitive business. That’s great for consumers but hard for shareholders. I don’t know what is next for Tesco. Maybe Dave Lewis doesn’t either, and that is why he’s going.”
Dave’s great deeds
Acts on a warning from a whistleblower concerned that supplier payments are being mishandled, which had triggered a Serious Fraud Office investigation.
Reports a £6.4bn loss after booking £7bn of one-off costs relating to a head office job cull and writedowns on store values.
Sells the South Korean chain Homeplus for £4bn – the biggest in a series of asset disposals.
Replaces Tesco’s Everyday Value “basics” range with “farm” brands, later introducing “exclusively at” labels such as Bay Fishmongers and Ms Molly’s.
Strikes a £3.7bn deal to buy Booker, the cash-and-carry giant behind the Londis and Budgens convenience store chains.
Agrees to pay a £235m fine to settle investigations by the Serious Fraud Office and Financial Conduct Authority into the 2014 accounting scandal.