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Unexpected crisis in the bagging area: leadership spotlight on Tesco

September 29, 2014

Tesco is reeling from one of the worst weeks in its history after a whistle blower in the company’s accounting team alerted new boss Dave Lewis to a £250m shortfall in the retailer’s expected half-year profits. The shortfall was caused by Tesco booking income from deals with suppliers earlier than it should, at the same time as pushing back costs. Tesco shares fell 16% last week as the City reacted to the crisis.

Tesco has said it will provide details about what the investigation uncovers in its interim results on October 23, which have been delayed by three weeks, following the discovery of the shortfall. The statement is Tesco’s third profit warning in a matter of weeks as it battles against falling sales. Shares in the company are now at the lowest for 11 years.

The company said the shortfall related to the ‘accelerated recognition of commercial income and delayed accrual of costs’. It is understood to be connected to how and when Tesco pays suppliers for their products, and how suppliers fund promotions and the positioning of their products within a supermarket.

No wonder, therefore, that virtually all the City was, in the words of one analyst, left ‘flabbergasted’. They knew that the company was in trouble but they hadn’t realised that it had fallen this low. The sum now in doubt – £250m – is close to a quarter of the profit reported during the period in question.

More than £1bn was wiped off the stock market value of Britain’s grocery retailers on Tuesday last week after new data revealed their sales are growing at the slowest rate on record. The slowdown has been caused by food price inflation collapsing. For the first time on record, the average basket of everyday goods in a British supermarket is the same price as a year ago. This is because of falling commodity prices and a price war among the leading supermarkets.

Figures showed that Tesco sales fell by 4.5% in the last 12 weeks and 5% in the last four weeks, making it the worst performing food retailer in Britain. Tesco’s sales are now falling at the three times the rate of Morrison, which was previously the laggard, while discounters Aldi and Lidl continue to grow their market share.

Sainsbury’s sales are now falling faster, during the 12 weeks, Sainsbury’s market share fell from 16.6% to 16.2% on the back of a 1.8% fall in sales, while Morrisons sales declined by 1.3%, reducing its market share to 10.9%. However, figures for the last four weeks were even worse for Sainsbury’s, with its sales falling 4.2pc. Analysts at Barclays said the performance of the retailer in the last four weeks was its weakest in more than a decade.

The best performer of the ‘Big Four’ was Asda, which grew sales by 0.8% to protect its position as the second biggest grocery retailer behind Tesco. Asda’s market share stands at 17.4%, up from 17.3% a year ago, while Tesco’s market share has fallen from 30.2% to 28.8%.

With the ‘Big Four’ struggling to grow sales, the discounters Aldi and Lidl continued their rapid growth. Aldi sales rose by 29.1% during the 12 weeks, with Lidl up 17.7%. Waitrose also grew its sales by 4.5%.

Consumers are currently benefiting from intense price competition between the grocers. For the first time ever we’ve seen the average basket of everyday goods bought today costing exactly the same as it did a year ago. Some staple groceries such as vegetables, milk and bread prices are actually falling as the big retailers all compete for a bigger slice of shoppers’ wallets.

Tesco is now facing the same crisis that hit Marks & Spencer and is battling to stop the downfall and the loss of its position as the industry number one. There is more than a whiff of Marks & Spencer about Tesco. M&S was once the UK’s biggest retailer, shoppers knew what it stood for. But it became complacent. M&S managers failed to recognise the impact that cheaper operators such as Matalan, and then Primark, would have on the M&S business. They simply thought their shoppers would be loyal. There were problems with international expansion, and boardroom infighting. Today M&S is still vast, but no one considers it a leader.

Tesco is arguably even more troubled than these companies were when they embarked on their fightbacks. Tesco only owns two in three of its stores after selling off property to raise funds, and is also lumbered with a £2.6bn pension deficit. Tesco’s industry leading profit margin was always held up as the reason why it was in a robust position to recover. Now however the fundamentals behind that margin are in serious doubt, but Tesco still has to maintain its pension scheme – which costs £574m a year – and £16bn of lease commitments.

Tesco’s stumble exposed deep problems with its strategy – issues such as failing to spot the sea change in consumer shopping habits which has been underway for more than five years – the move away from big weekly shops at vast out-of-town stores to more regular, smaller basket shopping at high street discounters such as Aldi and Lidl.

Tesco, of course, was the first of the big grocers to develop a convenience store concept – Express – putting the brand back on the high street. But its prices are way out of kilter with its discount rivals. As a result Tesco is estimated to have lost 1m shoppers visits a week over the past year – worth £25m through the tills – to its discount rivals. In a £175bn a year market, those are massive losses.

Naturally, it wasn’t supposed to be like this. When Sir Terry Leahy passed the leadership baton to Philip Clarke last year, the succession planning was described as ‘perfection’ and investors sat back for another decade of financial success. But the chain’s Christmas sales were the worst in decades and Clarke said Tesco needed to sort out basics like fresh food, product ranges, customer service and staffing levels.

Tesco has also been hurt by stronger competition. After periods in the wilderness, both Sainsbury’s and Morrisons are once again forces to be reckoned with, and even its smallest rivals – Waitrose and the discounters Aldi and Lidl – are setting the pace on growth. Another problem may be that customers do not necessarily connect emotionally with the Tesco brand, its stripped-down communications and focus on the money promise (discounts) does not resonate powerfully enough.

How wrong Clarke was when he boasted of inheriting a ‘golden legacy’ from Leahy back in 2011. Clarke was forced to come up with a £1bn programme to fix the core UK estate – hiring more shop staff and improving ranges, quality and stores, and pull the plug on the entire US misadventure which eventually cost £1.7bn.

Paradoxically, bad news is also good news for Dave Lewis who joined as CEO a few weeks ago. He will now have even more authority to overhaul Tesco as quickly as possible, but all the problems are his, in no particular order: stop losing customers to the discounters; re-establish Tesco’s Price credentials; tackle the ramifications of the structural change underway in food shopping; reassess Tesco’s marketing and brand message – what does it stand for now?; decide which, if any, overseas markets Tesco must abandon; build a new top team of executives.

So as the new leader, how does Lewis face this crisis? He’ll need skills tailored to an environment of urgency, high stakes and uncertainty – he’ll have to keep the people in a stats that creates enough discomfort to induce change but so much that they fight, flee or freeze. Fundamentally, he’ll have to foster adaption, helping develop the net practices, culture and processes that will enable the organisation to recover and thrive.

As he looks at the turmoil he’s inherited, here are a few thoughts as to how Lewis will approach his challenge:

Seeing things for what they are. Strong crisis leaders live on the front end of reality. They recognise events and their significance and do not shy away from the consequences of what they see. Intellectual integrity is a key component of their thinking, they think of what is best for the organisation, not their own personal gain.

Strategy and detail They are able to see the big picture, they can see all of the moving parts and understand what is cause and what is effect. They get below the high-level view and dig deep into detail without being mired in it. They quickly develop a very detailed knowledge of the issues. This ability further enhances their capacity to view the problem realistically.

Multiple options When they have identified the problems, they are willing to consider multiple approaches to how these may be addressed. Initially, they engage others in brainstorming potential solutions without judgment, even though they may have a preferred solution in mind. They are confident enough to know and accept that their way may not be the best way.

Decisiveness Taking ownership of the solution means being decisive. When they feel they have listened to the best advice they are willing to make a decision. Strong leaders will use a combination of real-time data along with their ‘gut instinct’, the wisdom built on years of experience. When they make that decision they know they need to sell it to key stakeholders and work tirelessly to ensure organisational resistance does not block the effectiveness of the decision.

Collaboration Strong leaders take ownership of the problem, they understand, however, that a long-term solution requires the input and involvement of many stakeholders. They identify those individuals and work together towards a solution that most support and most can live with.

Listen to unpopular advice Unsuccessful leaders listen only to those who agree with them and often encourage one-dimensional thinking. The successful crisis leader seeks out individuals who have a different perspective on an issue. They include individuals with whom they may not agree and whose advice may be contrary to that of their closest advisers.

Calm, courageous and positive They feel a sense of urgency and remain even tempered. They recognise that an organisation, and in this case investors and customers, are watching them and know that how they present themselves will provide non verbal signals to the audience. They will deliver bad news when they need to and do it in a way that avoids panic and provides a realistic level of hope for the future. Above all, they are courageous enough to make decisions they believe to be the right ones, regardless of whether they are the more popular ones.

Take risk in the face of risk Crises often bring the leader face-to-face with a set of situations they have not previously seen. There are questions to which they do not know the answers. Gathering contrarian viewpoints from individuals with whom they might not agree, but respect, likely means they may create solutions not previously tried, and outcomes of which may be unknown. If it is the best solution, however, the strong leader is prepared to take the calculated risk.

Curiosity is a key feature of leadership. Curiosity leads to insight that leads to decisions that make a difference. That restlessness and constant desire to learn and improve is the consistent theme amongst all of the great crisis leaders.

80% rule Leaders certainly want to make the right set of decisions. Strong leaders understand they will not always have all of the information they might like. They know that making an imperfect decision can often be better than making no decision at all. Even if the decision needs to be “fine tuned” for implementation they are comfortable making it.

Composure is key Poise is central to leadership. A ship needs a captain who will not wilt under pressure, who oozes a calm authority in a crisis. Sir Clive Woodward is often quoted around his T-CUP (Thinking Clearly Under Pressure) theory. It is a common theme seen throughout sport, military and business that poise under pressure and composure in crisis is a fundamental skill mastered by the greatest leaders.

Thinking on your feet when faced with unexpected challenges, anyone can innovate once, all it takes is a good idea, some hard work, sufficient resources, and a little bit of luck. However, Lewis will need to do it time and time again, challenging his assumptions with the changes in circumstances he encounters.

Ask the right questions Questions open you up to new ideas and possibilities. Too often, however, we get stuck in the past by focusing on the problem rather than the solution. Instead, ask future looking questions: What does the new Tesco business look like? What problems is it solving for our customers? How is it bringing new value to the marketplace? Lewis will have to ask himself the right questions, before even thinking about solutions.

Will Lewis ‘hunker down’ or ‘press reset’? Will he be both optimistic and realistic? This will create a healthy tension that keeps optimism from turning into denial and realism from devolving into cynicism. Will he reach out to confidants, and find sanctuaries where he can reflect on events and regain perspectives?

Whatever, our thoughts, Lewis will have to bring his emotional self to Tesco, effective displays of emotion will let the people know that although the situation is fraught, it is capable of a turnaround. This is a tightrope, to carry everyone with him whilst making unpopular decisions.

Finally, Lewis can’t lose himself in the role, it may be a defining single endeavour for him personally, but he must breathe, be visible and hold small town hall meetings to get the tough questions on the table – the questions that are being thought, but not voiced.  Tackling the tough questions directly, transparently and effectively make all the difference in a crisis.

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