Tesco has grown from being the number one supermarket chain in the UK to a powerhouse on a global stage. The company started life as a market stall in London’s East End. But it is growing rapidly internationally, with operations in 13 overseas markets. And it has expanded far beyond groceries - it is becoming one of the biggest online retailers in the UK and the country’s fastest-growing fashion retailer. Its profits in 2005 passed £2bn ($3.7bn), up from £1.1bn just four years earlier.
Sir Terry Leahy, Tesco’s chief executive of nine years, answers your questions
You and your team have made Tesco a world class organisation. I’ve been hearing today about the ethos of public service and how important this is in delivering high quality services to the public. Do you think that there’s anything the private sector can learn from the public sector experience, or is the traffic all in the other direction?
David Cameron, Conservative leader
Sir Terry Leahy: Good people are behind the success of any organisation and this is certainly the case at Tesco. We look after our people so that they can look after our customers and we do this by investing in training and benefits and by providing a safe, interesting and warm environment in which they can work.
Rewards alone do not motivate people and this is where I believe public services can take a lead. Whenever I meet frontline public servants whether in the NHS, schools or local authorities, the one thing I am always impressed with is their passion for the job they do. These are dedicated people who have strong values and a real sense of pride in their profession, despite the fact that they are often working in tough conditions.
I am incredibly lucky that Tesco staff share similar values and also work incredibly hard but some businesses lack this sense of identity and vocation and could certainly look to public services for a way forward.
To reach the top in a large conglomerate like Tesco, what is the single most important professional behaviour that a leader should exhibit and practice? And what is your definition of success, both from a personal and professional viewpoint?
Anuj Virmani, Ascot, England
Sir Terry Leahy: You need lots of luck, and the help of a lot of people!
I think the most important thing to remember is that it’s not what you do in a business that matters it’s what you cause other people to do. So concentrate on how you work in a team, and how you help others to do their job, and be prepared to lead irrespective of the particular job you are doing. At Tesco we try to have as many leaders as possible - thousands in fact - in all parts of the organisation.
Will the recent backlash against Tesco’s dominance in the UK, particularly with regard to the effect it has had on independent grocers, provide lessons for expansion in other markets - particularly India where the role of small retailers will be under scrutiny once FDI restrictions are lifted and international players can enter?
Lyndsey Anderson, London
Sir Terry Leahy: Ninety per cent of customers in the UK have a choice of at least 3 supermarkets, so I don’t believe anyone can dominate as your question suggests.
Currently Tesco is the most successful retailer, but that has not always been the case, and may not be in the future if we don’t give customers what they want. Many more people are happy with Tesco than have a problem with the business. We do listen, and engage with critics and try to improve the business as a result.
In other markets, we start with the customer and try to tailor our offer locally and we are careful to respect local communities and cultures, as well as being a good employer and bringing best retail practise to the market. In this way, we try to meet the needs not only of our customers but also communities and, indeed, the wider economy and society.
The rules prevent foreign investment in retail in India at present, but we keep this under review.
Some commentators put Tesco’s success down to your marketing skills, background and back to basics (deliver genuine customer value and you can’t fail to profit) background. How important has ‘marketing’ - as a philosophy and discipline - been in driving Tesco’s phenomenal success?
Tony Rowe, Harrogate
Sir Terry Leahy: The big change for Tesco came when we stopped being a company with a marketing department, and became a marketing company.
We put the customer right at the heart of the business and their requirements drove everything we did. It’s not too strong to say we became obsessed with customers.
Real marketing, ie understanding people’s lives and needs and responding to them with products and services, I believe lies at the heart of business success.
Sir Terry, I live in Inverness, in the North of Scotland; a city which has recently been dubbed ‘Tesco town’. In a relatively small city of approximately 75,000 people, we already have three Tesco stores, one of which is a flagship ‘Extra’ store. However, recently, there have been rumours of the development of a fourth store. How can a company, whose profits already exceed £2bn p/a justify this move?
Paul Casey, Inverness, Scotland
Sir Terry Leahy: It’s good to see that Inverness is one of the fastest growing cities in the UK. As a resident of Inverness I hope you will have seen that Tesco has stuck with the city over many years and invested when others have been reluctant to do so. There has been much written about Inverness and Tesco but the reality on the ground, as you will know, is that there is plenty of choice available with Morrisons and a number of other smaller retailers present. I believe there is also a plan to develop a store by one of the other big four supermarkets.
Tesco has brought a wider range of products at lower prices to the people of Inverness and is also a significant employer in the area.
Selling CDs and DVDs has been hugely profitable for Tesco over the last few years, but how will you compete as music and video increasingly move to internet downloads? Could Tesco.com launch their own version of iTunes or Urge - or should you partner with them?
Phil Letts, UK
Sir Terry Leahy: It’s worth saying that we have a successful CD and DVD business in our stores and it’s growing very well. Anticipating the growth on the internet, we launched our Tesco music downloads service in 2004 with half a million tracks, and we also operate a DVD rental service orderable through Tesco.com.
Why do you think that the market has been ambivalent about rating Tesco as a growth stock over the last two years? Is this a matter of high priority to address quickly, and if so what are the company’s plans in this regard?
Peter Wesley, UK
Sir Terry Leahy: The most important thing is to manage a successful business with good long-term prospects and, in time, the share price will fully reflect that. It doesn’t always respond immediately, and the market has been keen on oil and commodities lately but, provided we stick at it and communicate well with investors, I am confident the shares will respond.
Is your Japanese operation - which you say, like Taiwan, had a “challenging year” in your annual report - under review? If not, will you commit to being in the country in five years time?
Elizabeth Rigby, London
Sir Terry Leahy: We judge all countries against the same criteria, Japan is no exception.
It is early for us in Japan. We are making progress, and it is important that you commit to a country once you have entered to ensure that you give yourself every possible chance of success.
It never makes sense to limit yourself with timetables.
The Australian media has long speculated that Tesco might be interested in acquiring the retailer Coles, now that it has off-loaded its troublesome department store Myer. Does Tesco have any plans to set up in Australia, either through acquisition or in its own right?
Bernard O’Riordan, Sydney, Australia
Sir Terry Leahy: I’m always being asked where Tesco may go next, but I’m afraid the answer is always the same - I can’t comment. What I can tell you is that we wear out a lot of shoe leather looking at opportunities for growth and some come to fruition and many others don’t.
Considering the large Asian community in the UK (especially Muslims) who are strictly permitted to consume only Halal meat, wouldn’t it be profitable for Tesco to cater to its needs by selling Halal meat at their outlets?
Syed Mohammed Hussain Abedi, Croydon
Sir Terry Leahy: We try to adapt our offer to meet the profile of customers in a local area. I’m happy to say that we have opened a Halal meat store within our Slough hypermarket, and it has been a great success. We have improved the range of products for Asian customers throughout our stores, and that’s been well received. Interestingly, this has appealed to all customers, not just Asian and British Asians.
Have you read the ‘High Street Britain 2015’ report in it’s entirety and do you think it is a fair reflection of the sector? The report recommended the establishment of a ‘shops tsar’ to oversee the retail sector due to the OFT’s concentration solely on economic concerns. Is this something Tesco would support?
Saira Khatun, Manchester
Sir Terry Leahy: I believe the High Street Britain 2015 report is much too gloomy in its prognosis and underestimates the strength and capacity to innovate in our retail sector. If you look back ten years, as this report attempts to look forward ten years, you can see that intense competition has improved shopping, brought jobs and success to many new retailers as well as posing challenges to others. Some have responded very successfully, some are still struggling.
I’m certain that the next ten years will see yet more competition, more innovation, a better retail industry with more choice for customers, and many new retail businesses created, and there’ll be quite a few surprises along the way.
Tesco recently lost out to two local South Korean retailers in the auction for both Wal-Mart’s and Carrefour’s stores. How will this effect the Samsung Tesco business and did you really need those stores in order to catch up with E-mart?
Justin Barker, London
Sir Terry Leahy: The fact that Walmart and Carrefour have exited the Korean market while Samsung Tesco has a very successful joint venture there is evidence of our ability to tailor our offer to local markets. We have a rapidly growing business in Korea, and I believe it has an exciting future in a large and growing economy. We recently introduced our Express format into Seoul, and have opened smaller hypermarkets in provincial towns with good success.
Today you are urging the prime minister for tougher action on climate change. Some in industry have argued that being held to tougher emissions targets could make business less competitive. What is your response to that?
Lucy Killgren, London
Sir Terry Leahy: We have just announced a target to reduce instore energy consumption by 50 per cent over 10 years from a base of year 2000. A big reduction in emissions like this will pose many challenges for Tesco, and we will have to employ new technologies. I don’t believe it will make us less competitive because we will be conserving energy, which is an expensive business cost, and stimulating innovation in business processes.
How can Tesco and its suppliers both growth profitably with continued deflation in the grocery market? Surely it cant work?
Neal Radford, Midlands
Sir Terry Leahy: Tesco is not a victim of deflation. We have cut the cost of shopping for our customers over many years. But this doesn’t happen at the expense of suppliers because we fund price cuts through efficiencies in our own business by introducing new technology or simpler processes. Our step change programme which drives these efficiencies saves hundreds of millions of pounds a year which we invest in price cuts.
Suppliers benefit from greater volumes as we buy more to sell for less and also benefit from efficiencies in their own business. It is a profitable partnership for Tesco and our suppliers which also brings huge benefits for consumers.
Tesco has faced a lot of criticism in the last couple of years. Is there a tipping point in the UK and has it already been reached - a point where antagonism and resistance to further expansion escalates? Surely UK driven earnings growth projections must be constrained by this phenomena?
Andrew Litchfield, Managing director, Camargue Group
Sir Terry Leahy: People often question success and want to make sure that it isn’t coming at the expense of somebody else. This is natural and isn’t exclusive to Tesco, you can see it elsewhere in business but also in sport and with celebrities. The challenge for us is to engage in the debate and explain ourselves, which I think on the whole we do.
Of course some people hold strong views on Tesco but I don’t see huge resistance. Millions of customers choose to shop with us despite increasing competition and greater choice and we have just reported another record year. We have a good strategy for growth which takes us into new markets including overseas. I am certainly not complacent but providing we remain innovative and keep close to customers I believe we can continue to grow. We never forget customers have a choice of stores, and if we don’t satisfy them they will go elsewhere.
Is there any limit to Tesco’s expansion plans globally? Have you had to sell or close operations in any countries you’ve entered into?
Julian Withrington, Jersey
Sir Terry Leahy: Our international strategy is not one of planting Tesco flags around the world. We carefully research every market we enter for many years - nearly 20 years in the case of the US where we will enter next year! Things don’t always work out as we would like and where that happens we take the right decision for the business. Last year we announced an innovative store swap with Carrefour that enabled us to exit Taiwan, where we lacked sufficient scale, and boost our position in Central Europe.
Given that innovation is essential if you are to stay ahead of your competitors what mechanisms do you have in place to generate and capture new ideas, internally or externally?
Jonathan Harris, London
Sir Terry Leahy: As you say innovation is essential, in fact I would go further and say that it is the lifeblood of any business. In order to encourage innovation, you have to foster a climate that encourages risk taking and is comfortable with the occasional failure. If you don’t then people will be afraid to innovate and your business will miss out.
Everyone in an organisation can generate ideas, it is not the preserve of management. So I like to get out and talk to staff and customers every week to ask them what they think of Tesco, what they would like us to do and what they think we could do better. You would be surprised how many great and usually very practical ideas you find in this way. All of our managers from the office spend at least a week working in store every year which means that there are thousands of opportunities to exchange ideas and learn from each other.
We also talk to customers in lots of other ways, through our Clubcard, customer question times and focus groups.
So the key is to stay close to the coal face and listen to what people are telling you. But of course if you are going to listen you need to be prepared to act or at least give feedback.
How much of Tesco’s success can be attributed to the intelligent use of customer data? When so many other supermarkets have storecards and customer loyalty cards, how did Tesco gain the competitive advantage?
Jocelyn Cripps, UK
Sir Terry Leahy: Quite a lot of Tesco’s success can be attributed to the use of customer data. Of course, it is absolutely confidential, and no individual details are ever released. Learning how customers shop and what they buy helps us to understand their needs better, and we can target our resources - all of which leads to better marketing.
Sir Terry, given the upcoming American venture and the increased visibility it will give you in the US, are you giving any thought to listing Tesco’s ADRs on a US stock exchange?
Don Pugh, Roswell, GA
Sir Terry Leahy: We have no plans to change our arrangements in the US, and no plans to list on the US Stock Exchange.
I want to buy English produce at my local Tesco store, but I have to examine the labels to be able to identify it. I now buy my vegetables and meat in local shops, which is probably a good thing for the local economy, but why does Tesco label Scottish produce as Scottish, but not English produce as English? Quite frankly, I’ve started drifting away from Tesco, because I want to support producers in my own country and Tesco makes this very difficult for me.
Mrs Petch, East Yorkshire, England
Sir Terry Leahy: You are right. We have not been as good at promoting English produce as we have in Scotland, Wales and Northern Ireland. But I am pleased to say that this is changing. I recently announced a plan to open regional buying offices in England and to market our English producers better in our stores. We will do this through regional counters to showcase local products and by labelling products more prominently. In order to give smaller suppliers better access to Tesco we will also hold regional roadshows providing opportunities for suppliers to meet our buyers.
I hope we can welcome you back to Tesco soon, and that you will begin to notice the difference.
The FT would like to thank everyone who emailed questions to Sir Terry Leahy. There were many insightful and stimulating queries. Due to overwhelming interest, it has only been possible at this time for Sir Terry to answer a representative sample of questions. Please be assured that all the submissions were considered and helped inform the choice of questions that appear.
Special thanks to the following for contributions:
Hedda Bird, Henley on Thames
Waldemar Paclawski, Warsaw, Poland
Ms N Holden, Leeds
Russell Wheeler, Winchester, Hants
Ojay McDonald, Manchester
Jonathan Scott-Lee, London
Rolfe Lakin, Colchester
Christian Armstrong, Glasgow, Scotland
Seb Beloe, London
Dr Carsten Sorensen, London
Richard Mabbott, London
Bernard Doherty, Northern Ireland
Mark Cryer, Toronto
Rebecca Murphy, Westminster, London
James Parker, Sussex
Reidar Molthe, Norway
Frank Williams, Prague, Czech Republic
Hozan Shoresh, London
Patrick Ng, US
Rupert Jefferies, London
Charles Oham, London
John Bodenham, UK
Sarah Cheal, Manchester
Clive Osborne, Norfolk
Philip Heyes, Plymouth
Kolm Roche, Germany
Obi Ugochukwu, Manchester Business School
Stuart Fraser, UK
Wayne Amos, UK
Jack Brown, Isle of Man
George Howie, Watford, England
Jenny Zhao, Bath
Sean Anderson, Warwickshire
Micheal O Fiachra, Cork, Ireland
Ben Walker, Chicago, IL
Eric Marsh, Detroit
Steven Byron, Farnborough
Phil Pearson, Cambridge
Catriona Purdy, Leeds, UK
Vernon Barns, Yeovil
Stella Millington Braidford, UK