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Magazine

Tesco’s dramatic fall and how to avoid it

Published 4 August 2021 in Magazine • 7 min read

Keeping the customer satisfied is key to creating a ‘super’ brand, but maintaining that success is notoriously difficult, argue Charlie Dawson Seán Meehan.

Businesses that understand what really matters to customers and then innovate on their behalf become leaders in their sectors and often beyond. They are not hemmed in by a product-based definition of what they do.  

In 30 years, Tesco went from being number three in the UK grocery market to being the third largest global retailer by doing business this way. With the same mindset, Amazon has gone from selling books to selling pretty much everything. 

We have spent seven years researching why, having mastered this elusive way of doing things, Tesco fell so spectacularly from grace. Furthermore, our research suggests that Amazon will one day go the same way. 

The way people in a business do things comes down to the unspoken shared beliefs they have about success and how it is achieved. One set of beliefs is natural: the numbers matter; and targets, incentives and punishments are the route to hitting them. Less natural is the assumption that making things better for customers will also be good for the business. Investing in more checkout staff and checkouts means shorter queues, eventually customers notice, appreciate it and come back more often. 

The success that Amazon and Tesco have enjoyed comes from having this latter mindset. From the outset Jeff Bezos was fueled by a burning ambition “to create an enduring franchise that would reinvent what it means to serve customers by unlocking the internet’s power”. Success meant growth of customer numbers and revenue, the degree to which people chose to come back and buy again.  

He could see that customers wanted a wide choice, low prices and fast delivery, and so he got the business to work relentlessly and innovatively at finding new and better ways to get these results. He kept on reinvesting. Amazon has never paid shareholders a dividend and for years the business didn’t turn a profit. Customer value came first, the rest would follow. 

These concrete actions where customers come first are examples of what we call “moments of belief”, signals to everyone involved that this is the way we do things around here.  

Bezos has not wavered in his customer-led commitment and Amazon’s expanding workforce learned from a continuous flow of moments of belief: 

Firstly, Amazon allowed other sellers to offer products on its Amazon Marketplace platform, in competition with its own offerings. 

Secondly, it decided to show all reviews, good or bad, alongside the products being sold. Knowing this could lead to loss of sales, it did it in the interest of building customer trust. 

Finally, it has used data to help customers transparently, sharing the actions of others who looked at or bought the same item, rather than a more “black box” AI-style approach making predictions based on customers’ profile. 

By insisting on customer obsession, Bezos ensures that Amazon remains as purposeful as it was at birth.  

Given the strength of these beliefs and of the organization’s performance, it’s hard to imagine what could go wrong. To help us foresee Amazon’s future, let’s look at Tesco.  

Its ethos was similar: understanding what customers value and finding new and better ways to create it. By putting customers first, it became an undisputed market leader. By 2012 Tesco had a 33% UK share; it was a grocer, general merchandiser, mobile phone network, bank and more, operating across 13 countries.  

Then, after more than 30 years of uninterrupted growth, the Tesco success story ended.  

In the UK, Tesco was being challenged by Aldi and Lidl. When you have 33% market share, any significant new competitive growth is going to hurt. Would Tesco see it early and respond with something that was better for customers? That would be the customer-led way, but by this point, the senior team was not in touch with the day-to-day reality of customers and had a great deal else on its plate.  

As the clouds gathered, and after a skiing accident that took a toll on his health, CEO Terry Leahy stood down in 2011. By then Tesco had become a large, complex organization that was heavily reliant on its home market to finance its wider development. In the face of ferocious price competition, like-for-like domestic sales were on a downward trend, slowed only by increasingly generous, targeted offers to customers and funding from suppliers. To begin with, these actions closed a small gap between expectations and actual performance, but what started as small became bigger each quarter, and before long the business was pushing like hell to make the numbers. That’s the characteristic of an inside-out business. 

In pursuit of fresh momentum, Philip Clarke, Leahy’s successor, announced a £1 billion UK store makeover in October 2012, coupled with the training and deployment of extra staff. But these investments coincided with difficulties in the international business. Group profits dropped by 12%. From Leahy’s departure to the end of 2013, the business lost seven of its nine executive board directors with a total of more than 150 years of Tesco experience (and a great deal of shared belief in the way the business had succeeded).  

In 2014, Tesco reported its first profit decline in 20 years, a  3.7% reverse in like-for-like sales in the first quarter, two profit warnings, an admission that it had overstated half-year profits by £250 million, and later that it had suspended four senior executives. The loss that year amounted to £6.4 billion pre-tax. Since then, Tesco has consolidated, regained customer trust and market share, and is posting a healthy profit. While its partial recovery is admirable, it is a shadow of its former self. To characterize Tesco’s fall as attributable to managerial hubris is flawed. Tesco’s fall shows that even when outside-in beliefs are well-established, they are never secure.  

The senior team was not in touch with the day-to-day reality of customers and had a great deal else on its plate

Customer-led companies that endure understand that their unusual beliefs matter and they make this clearthrough their actions.  

Bezos talks about the vitality of “day one” and the dangers of “day two”. When he talks of day one, he means outside-in (Tesco at it best) and day two, inside-out (Tesco in decline). As he noted in his famous 2016 letter to shareholders: “Day two is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always day one.” 

Protecting the outside-in belief system is a leader’s most important responsibility. A company’s shared beliefs are constantly under attack from three different quarters: 

1 The inside, as common sense and the natural way of seeing the world from behind an office desk every day attempt to reassert themselves.  

2 The outside, as people who haven’t been part of the journey get into positions to apply control – they bring conventional, skeptical doubt and risk aversion into the mix.  

3 The competition, as it keeps on improving and eventually throws up something better than the model used by whoever is market leader. 

They can combine, too – the first two factors take the edge off a company’s customer-led zeal, prompting a defensive, protectionist response to the third, in place of previously confident customer innovation. This is what happened in the case of Tesco. 

To resist the constant threat to their beliefs, we found leaders of outside-in businesses doing three things: 

First, paying close conscious attention to the prevailing belief system as the critical success factor in the business. 

Second, ensuring a continual flow of “moments of belief”, like continual small rocket boosts to maintain orbit despite the gravitational pull of inside-out forces. They can be small and local or larger and more widely visible, but each one is counter intuitive when viewed through a  onventional inside-out lens.   

Third, being boldest when challenged most and when it matters most. When a competitor or a new disruptor creates a better way of solving a customer’s problem want, then the response needs to be to change the business model – at considerable pain, cost and risk, acting like a challenger – not to defend the status quo. 

Staying customer-led clearly requires work and the company board must play its role. Leadership changes present a risk. This is when the board must make and support appointments that protect outside-in beliefs.  

Amazon’s board has announced that Bezos will step away from being CEO to become executive chairman (see Page 49). He will be replaced by Andy Jassy, who has lived the Amazon shared beliefs since he joined in 1997.  He has the responsibility of continuing and emphasizing the well-established “day one”. This looks to us to be as well conceived as such an adjustment can be. It avoids the risks associated with bringing in an outsider.  

 Bezos agrees that outside-in shared beliefs are not natural. As he told the US program 60 Minutes in 2013: ”  Companies come and go. And the companies that are the shiniest and most important of any era, you wait a few decades and they’re gone.” One day all customer-led businesses will become conventional at best and fail at worst.  

Perhaps counterintuitively, by having this honest view of Amazon’s eventual demise, we believe that the business has created the best possible conditions to avoid it. 

Authors

Charlie Dawson 

Founder of The Foundation

Charlie Dawson is the founder of The Foundation, a London-based consultancy that helps organizations create customer-led success.  

Seán Meehan

Martin Hilti Professor of Marketing and Change Management at IMD

Seán Meehan is the Martin Hilti Professor of Marketing and Change Management at IMD. Their book, The Customer Copernicus, is available from Routledge

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