Tesco set to reassert dominance in Britain

Retailer pulling ahead of rivals

LONDON, Dec 5, (RTRS): Two years after an accounting scandal plunged Tesco into the worst crisis in its 97-year history, the British supermarket looks set to reassert its dominance, given the edge by a transformed relationship with suppliers.

Monthly industry data shows Tesco is once again pulling ahead of rivals in Britain under a plan led by boss Dave Lewis, where lower prices and improvements in store have led to more goods being sold to more customers.

That in turn has allowed Tesco to agree better deals with suppliers, driving more price cuts and further volume growth — and consequently even better deals with suppliers.

It’s what former Unilever executive Lewis calls “the virtuous circle” and it has enabled him to target both an increase in sales and profitability.

Tesco, whose shares have risen 38 percent this year, is entering the key Christmas weeks with growing sales momentum. That could spell trouble for traditional rivals Sainsbury’s , Asda and Morrisons, as well as the German discounters Aldi and Lidl, whose sales growth has started to slow over the past year.

“Years ago we dealt with Tesco and we were just a number but I’ve really seen a change,” said Lisa Moore, senior national account manager at The Abergavenny Fine Food Co, which supplies the supermarket with goats’ cheese and party food.

She said Tesco helped it after a fire in 2015 devastated a production unit, providing technical support and advice on how to make it fit for the future.

Better

“There’s definitely a better relationship and a clear understanding of what our potential can be,” said Moore.

Her firm is now supplying more food to the supermarket this Christmas than ever before.

Despite Tesco’s strong sales growth, there are however risks ahead next year as a result of Britain’s vote in June to leave the European Union. As the country’s biggest retailer it could be hurt if higher prices caused by the Brexit hit to the value of the pound and slower jobs and wages growth eat into households’ spare income.

Reputational damage can also come from unexpected quarters. A cyber attack on Tesco’s banking arm last month, which forced a short suspension of online transactions, created a wave of bad publicity.

Tesco’s new approach to suppliers follows years of turmoil.

After decades of pre-eminence, Tesco’s sales dived in 2012 as shoppers with falling disposable incomes eschewed its huge outof-town stores in favour of closer alternatives and flocked to discounters. It remained the industry leader but its market share was significantly eroded.

It hit the bottom in 2014 when it revealed it had misstated its profits by 263 million pounds, leading to an investigation by Britain’s Serious Fraud Office. Three former Tesco executives face trial next September.

The scandal shone a light on Tesco’s dubious tactics as suppliers reported that having agreed deals they were stung by unexpected charges that had to be paid if they were to maintain their ties with Britain’s most powerful grocer.

Historically Tesco and suppliers would agree an upfront price, known as the front margin. But the scandal showed that Tesco also had no less than 24 other ways of gaining income from suppliers — the back margin.

Options

Lewis’ new commercial approach has slashed back margin options to just three — retrospective payments for achieving volume targets, payments for shelf promotions and compensation for product recalls.

Keen to avoid the mistakes and tensions of the past he has sought longer-term deals with Tesco’s 3,000 suppliers, introduced more straightforward contracts and cut out waste.

By 2020 he expects Tesco to earn between 3.5 pence and 4 pence of operating profit for every 1 pound spent by shoppers, up from 2.18 pence currently, as sales rise and costs are cut through efficiencies in stores and in its distribution network.

It earned nearly 6 pence in 2010-11 before the problems hit.

In an indication of the cultural shift being sought, Jason Tarry, Tesco’s chief product officer and a 27-year veteran of the retailer, told Reuters that those striking supplier deals were no longer referred to internally as “negotiators” — they are now “business builders”.

“What I’m looking for is, how do we build this business together?” he said. “How do we build the products and the offer for our customers together, rather than how do we concentrate on trying to get the most (money) out of each other.”

Tesco’s own data shows that while just 51 percent of its UK suppliers were happy with their engagement with the grocer in 2014, the figure had jumped to 78 percent in 2016 — “a miraculous change”, according to Lewis.

Similarly the UK Groceries Code Adjudicator, which polices the industry, found that 65 percent of those supplying Tesco said its practices had improved over the last year.

“Horizons have moved from three weeks to three years,” said Anthony Gardiner, marketing director of G’s Fresh, Tesco’s biggest supplier of lettuce, beetroot, mushrooms and onions.