The Max Attacks: Why I'd fire Tesco's new boss
Its share price has fallen to its lowest since 2005 and customers are losing faith - has Tesco run out of steam?
Each month, we grant LBC Radio presenter and finance doyenne James Max the power to fire the businessperson he’s least impressed by. So why has the UK’s biggest retail behemoth incurred his wrath?
Do you know who Philip Clarke is? Probably not. So if I fire him for underperformance you won’t care. Right?
You’ll certainly know the company he works for and also you’ll have heard of his predecessor. The very fact that he has remained largely anonymous is perhaps symptomatic of a leadership style that is, in my view, failing his company, his shareholders, his staff and indeed his customers.
Philip Clarke is the Group Chief Executive of Tesco. He took over from Sir Terry Leahy who had a highly successful 14-year tenure at the top in April 2011. Year on year, Sir Terry grew market share, instituted a successful international growth plan and total returns for shareholders edged up to 12.7 per cent. Not bad when you consider what has been happening to markets, retailers and the world economy.
It’s a massive company with over 490,000 employees, 5,300 stores in 14 different markets. This isn’t just a UK company. It’s a massive and profitable international operation. Indeed it’s not just a supermarket. It sells everything from household goods to banking services, mobile telephones to clothes and DVDs, insurance and banking to petrol, soup to nuts. It’s a retailing behemoth that actually does quite well, given the lack of focus.
However, it’s not doing as well as it should be. Since Mr Clarke took over, the share price has dropped by a quarter from over £4 a share to just over £3, UK market share (its largest market) has fallen to the worst level since 2005. Profits are down and, worst of all, public perception of the company seems to have taken a hammering too.
So where did it all go wrong?
Under the “every little helps” strapline, Tesco became aggressive on pricing. But the campaign was launched in 1992. That bubble has burst and the idea is tired. Whilst it led the way in pricing strategy and IT development, consumers now expect their supermarket to provide a range of good deals. Technology allows us to compare prices. Even the upmarket chains (such as Waitrose and M&S) have realised that pricing isn’t the only important component to success. Recent research for The Sunday Times found that for every price Tesco reduced in Clarke’s “Big Price Drop” campaign, two others rose.
Then there was the debacle over the supermarket’s plans to join the government’s flagship work experience scheme, again under Clarke’s leadership. Personally, I don’t have a problem with asking people to undertake free work experience for a short period before taking up a full time position. Try before you buy, if you like.
However that sort of placement should only really apply to better paid positions or jobs where a rarefied skill set or particular motivation is required. Whilst of course a worker at Tesco will need to learn new skills, this was an absolute and total PR disaster. Any businessperson worth their job could have realised how this would be spun. Big company takes on people and gets the taxpayer to pay for their profits. And so on. It was a strategic error.
As is Tesco’s continuing advertising campaign. When it first launched, the idea of celebs endorsing what they did was new. It was fresh and it was very nice to hear a range of well-known household names telling us “every little helps”. Now that’s a boring idea, and one that has been hijacked. Tesco hasn’t evolved while its competitors went down one of either two routes. For route number one, the big names taken on by supermarkets actually DO something for the consumer: notably Jamie Oliver at Sainsbury’s or Heston and Delia at Waitrose. New products, recipe ideas and so on.
The other route was simply being cheaper. On everything. Welcome Aldi, Lidl and even Asda.
In these difficult economic times, we don’t care that a celebrity is normal like us and shops around looking for the best prices. We know that they, like us, go to the supermarket that is convenient and sells the goods they want. We care that when we get to the shop we will be treated well, won’t be ripped off, will have the things we want to buy at fair and reasonable prices and that the staff may actually be able to communicate with us in a way we can understand. It’s not hard, is it?
Meanwhile, every time Tesco makes a mistake, it has to come out louder and stronger with a revised proposal, which ends up costing more. Like the “20,000 new jobs!” Tesco just announced, as if that will repair the damage done last week. It won’t. After the failure of their Christmas campaign, it has had to announce bigger price drops to win back customers lost to its competitors or to the internet. Sorry, the horse has bolted and the stable door is flapping in the wind.
Looking back at the company’s history, much of the success in recent years results from decisions taken in the 1990s. The Tesco Clubcard, Metro stores, “value” and “finest” ranges, and indeed the mission to push abroad. Looking overseas, the mission to enter eastern Europe and the Far East have worked well, yet many of the initiatives launched by the now Group Chief Executive remain as loss-making parts of the business. For example Tesco launched its Fresh & Easy stores in the US five years ago under Clark’s leadership. The move hasn’t been a successful one so far and the group can only hope to break even in the US market by next year.
Looking overseas, the mission to enter eastern Europe and the Far East have worked well. Yet one has to wonder how rewards and remuneration tie into the performance of the company. The base salary is in line with other big firms. Mr Clarke is on just over £1.1m, which is slightly less than his predecessor’s £1.4m. Yet it’s the shares, cash, benefits and pension that add up. Even before he was promoted, his total pay for 2010/11 was over £2.2m. I suspect that whilst he may not earn as much as Sir Terry managed in his final years (over £4.2m), rewards for failure appear to be as prevalent as in any state owned bank.
Of course, I understand that Tesco turns over billions of pounds. It is a highly successful business and extremely well regarded as a cornerstone of the successful element of our retail heritage. With nearly 30 per cent UK market share, and still making massive profits some might argue that I have misjudged the company’s senior management and their abilities. But like a football club that also has a vast amount of money and likes the colour blue, you can have all the money in the world but if you get the management decisions wrong, you won’t be taking home any trophies.
Goodbye Mr Clarke. You are not the special one.
James Max presents Weekend Breakfast every Saturday and Sunday mornings on London’s Biggest Conversation, LBC 97.3 FM. He is a qualified surveyor and worked in property and finance for 15 years. After working for one of the country’s leading property advisory firms, he completed healthy stints in investment banking and private equity, before becoming a candidate on The Apprentice, which launched a career in broadcast media. Visit JamesMax.co.uk.