Ex-Tesco boss Terry Leahy says Woolworths must put shoppers before shareholders

Sue Mitchell
May 20, 2015
The Age
Former Tesco chief executive Sir Terry Leahy says Woolworths may have to put the interests of customers ahead of shareholders and forgo earnings growth to win back loyalty, but should not attempt to compete on price alone with discounter Aldi.
Leahy, who presided over 14 years of sales and profit growth at Tesco, turning it into the largest and most profitable retailer in the UK and the second largest in the world, has given the thumbs-up to Woolworths’ plan to regain market share lost to Coles and Aldi by investing cost savings into lower prices, service and innovation.
“It seems to be the right approach – maintain the things they’re known for and that customers like, but offer it at a better price. They’re reassuring customers you don’t need to look elsewhere, you can stay with us,” Leahy told The Australian Financial Review in an exclusive interview ahead of his address at RetailTECH X, a retail technology expo in Melbourne, on Wednesday.
“It’s a mistake any business makes when competing with discounters, they try to behave like a discounter.”: Terry Leahy’s advice to Woolworths.
“It’s a mistake any business makes when competing with discounters, they try to behave like a discounter.”: Terry Leahy’s advice to Woolworths. Photo: Louie Douvis
“Even if it does result in a slowdown in earnings or a pause in growth, it could be a good long-term investment if it maintains the loyalty of those customers,” he said.
Leahy said food and grocery retailers sometimes had to put the interests of customers before those of shareholders, to protect their long-term future.
“You balance the interest of the customer and the shareholder but you can’t always maintain that balance,” he said. “Maybe for Woolworths they have to favour the customer to rebuild and connect with the customer and improve sales momentum, from which they reward the shareholders.”
Not just price slashing
Investing hundreds of millions of dollars into reducing grocery prices was “OK” if it was part of a strategy to reaffirm a retailer’s offer to consumers and re-establish its competitive strengths.
“You have to be a bit careful. It’s not just a desperate move to slash prices because the overall offer isn’t appealing – that can be a mistake,” Leahy said.
But mainstream food retailers such as Woolworths and Coles needed to resist pressure to match discounters such as Aldi and Lidl on price.
“It’s a mistake any business makes when competing with discounters – they try to behave like a discounter, they play to their weaknesses rather than their strengths,” he said. “In recessions or slower economic times it’s tough for middle-market operators, but the economic cycle turns and if you capture customers through the difficult period, it may be you have to lower some prices, [but] when they feel better off they’ll spend it in your stores.”
Tesco’s rise under Leahy
Leahy was chief executive of Tesco from 1997 to 2011, when the retailer’s sales rose fivefold to almost £70 billion ($137 billion) from £13 billion, and profit more than doubled to £3.8 billion. The supermarket chain’s market share rose to 30 per cent from 20 per cent in that period as Tesco took sales from rivals such as Sainsbury, expanded overseas, moved into financial services and new formats, and established the Clubcard, still regarded as the world’s most powerful customer loyalty program.
A year after Leahy’s departure, Tesco issued the first of a series of profit downgrades and wrote off its failed £3 billion investment in the US. Last month it reported losses of £6.4 billion, its worst results in 100 years.
After largely keeping his silence for three years, Leahy raised eyebrows in January by criticising the performance of Tesco and its leadership under his successor, Philip Clarke, saying the retailer had eroded customer trust by losing its reputation for price leadership.
“I, like any shareholder, am disappointed at how things have run over the last few years,” the 59-year-old Liverpudlian said.
Tesco now ‘disconnected’
“Tesco has become disconnected from the customer and hasn’t perhaps responded and evolved to meet the challenges of a long recession,” he said. “My sense is [new CEO Dave Lewis] is doing the right things to connect with customers.”
Leahy said there was “a risk” that the Australian grocery market could head down the same path as in the UK, where the four major players have been embroiled in a margin-crunching price war in an attempt to regain market share lost to Aldi and Lidl.
“There’s always that risk,” he said. “But Australia hasn’t faced the same depth of recession [as the UK]. The outlook for Australia in the medium term, there are some concerns, but the longer-term outlook is good [and] there aren’t as many competitors in the market as there are in the UK.
“There are those risks but provided the mainstream retailers learn their lessons and respond, they should be OK.”
Tesco’s fall from grace highlighted the importance of analysing data to better understand customer needs, and putting the customer at the centre of all decisions, even in the boardroom.
Data should drive decisions
“All businesses still struggle to know how to get the best out of big data,” said Leahy, who starting stacking shelves at Tesco in the 1970s while studying at university. “One of the keys is to change the decision-making structure in organisations, to ensure the data drives every decision made in the business.
“The problem most organisations have is they have the data but they have old-style organisations, the data gets trapped down in sales and customer services and market research – it doesn’t drive the discussions at the boardroom table,” he said.
“To some extent, the mix of talent needs to change at board level. They need more data-savvy people and it may be time for the accountants to move over and get some data scientists in charge. And the marketing people need to acquire more skills and become more numerate than literate.
“What the data should be is the voice of the customer into the organisation,” said Leahy, who has invested in several e-commerce and software start-ups since retiring from Tesco. “It needs to become the most powerful voice, more powerful than finance or sales.”