Between the late 1990s and 2007, when the shares hit a record high and former chief executive officer Terry Leahy was knighted, Tesco was considered a titan of British corporate success. Its biggest challenge was convincing critics that its 31 per cent share of the grocery market wasn’t strangling smaller shops.
Tesco’s dominance at home gave it the misplaced confidence at its peak to try to crack the US, as Leahy looked beyond Europe for growth. Yet, the company now stands accused of hubris after it was forced to abandon that venture last year and, last week, a probe of its accounting practices was announced. It also faces an assault from all sides at home from cheaper German rivals Aldi and Lidl and the upscale Waitrose chain.
Tesco’s fall from grace underscores a series of managerial missteps that has undermined investor confidence, noted Bloomberg.com, best illustrated by the 60 per cent decline in the stock from the record. In this latest incident, the company said it overstated profit guidance by £250m and suspended four senior executives.
In the wake of the recession, Tesco didn’t react to competitors cutting prices, instead counting on consumers to start spending more once the economy recovered. Meanwhile, it tried to squeeze costs by not investing in stores, diverting resources to support its international endeavours. That is when customers really fell out of love with Tesco, said Neil Saunders, managing director at consumer research company Conlumino.
“It really was the basics,” he said. “It was pricey, there was bad service because there were not enough staff in the stores, the stores looked tired and dirty, and often they didn’t have what customers were looking for.”
New management spent £1bn trying to remedy that by remaking stores, adding children’s playgrounds, artisan bakeries and Zumba dance classes to lure back customers, as well as investing in technology and online sales.
Yet the extra spending did nothing to stem the flow of bad news. “There was certainly hubris on the part of the last management team, when it turned its focus away from being a food retailer and wanting to become Amazon,” said one analyst.
Tesco had its worst sales decline in more than two decades this year, when revenue dropped 4.5 per cent in the 12 weeks ended 14 September, and market share fell 1.4 percentage points to 28.8 per cent. Meanwhile, Aldi and Lidl maintained record shares of 4.8 per cent and 3.5 per cent, respectively.