The Decline Of A Supermarket King

Sir Terry Leahy ran the Tesco supermarket chain until 2010 and transformed it into a retail giant both in Britain and other parts of the world.  Today, Tesco issued a quarterly report showing an astonishing 4% drop in sales for its core British market - the worst in 40 years.  So what went wrong?  More importantly, what lessons can other retailers learn about how not to do it?  The roots of its failure ironically sprouted from its success.  Tesco dreamed of global expansion - an empire upon which the sun never set.

In America, they launched a chain of supermarkets under the "Fresh and Easy"  brand name.  But American shoppers never warmed up to the transplanted British model and last year Tesco sold out at a huge loss.  Then it tried to conquer China and Turkey - again with huge losses.  With so many resources and so much energy spent in the "colonies", the company took its eye off its core business - the home market consumer.  It didn't reinvest or innovate or change to ward off the competition from German discount rivals Aldi and Lidl.

These discount supermarkets had 2 advantages over the big boys, like Tesco.  First, the 2008-9 recession changed consumer shopping habits..Everyone wanted more for less, so they stocked up at the discounters and bought the odd treat at the more expensive outlets.  The second advantage was economies of scale.  Tesco stocks about 30,000 items, Aldi and Lidl stock 2,000.  They don't spend money on marketing or loyalty cards or other frills - they go for the best quality at the best wholesale cost - and pass the savings on to their customers at the lowest retail prices.  Simple but effective.

When the downward spiral begins, it's very difficult to stop.  Once the corporate vision was lost, most of the top management team assembled by Sir Terry left Tesco.  Internet shopping has put pressure on the high-overhead supermarket box stores.  High-end rivals like Marks and Spencer and Waitrose are poaching the more affluent Tesco loyalists.

Sir Terry Leahy, one of the greatest retailers of this century, had a maxim:  "one eye on the consumer, the other on the competition".  Tesco seems to have taken its eyes off both.  Can it retake the throne?

Stay tuned.