Analysis: Dave Lewis is planning Tesco’s future, not just succession

Casting his mind back to the business he inherited five years ago, Lewis recalled: “I don’t think we had a strategy in September 2014.” He turned to Tesco’s UK boss and veteran of almost 30 years, Jason Tarry, to ask if he agreed.

Tarry gave a one-word answer describing Tesco’s position back then: “Survival.”

It may have garnered a few laughs from the media and other members of Tesco’s leadership team in attendance, but it was no joke. Lewis took over a Tesco that had lost sight of its purpose, alienated customers and shed sales and profitability amid the onslaught of the discounters.

But if the name of the game back then was simply to survive, Lewis has radically reshaped Tesco to allow it to thrive once more, rediscovering its identity, resetting its proposition and reconnecting to the modern consumer.

Although Lewis allowed himself time to reflect on some of the work he has overseen during a whirlwind five years at the helm of Britain’s biggest grocer, he was equally keen to emphasise that his job is not yet done.

Lewis will remain at the helm until at least April 2020 and has offered to stay on in an advisory role until the summer to help smooth the handover to his successor, Ken Murphy.

Something of a shock choice for the top job, former Walgreens Boots Alliance executive Murphy will take the reins next year – and has unbelievably big shoes to fill.

Tesco this morning reported a 6.7% uplift in statutory pre-tax profit to £494m in the first six months of its financial year and delivered on the last of its six key turnaround goals by hitting its 3.5% to 4% group margin target.

But rather than bask in the glory of what he has achieved at Tesco, Lewis has set about laying the foundations upon which Murphy will hope to build further growth in future.

Strategic investments

Amid the headline-grabbing news of Lewis’ departure, two significant strategic investments from Tesco went under the radar.

The most interesting was the acquisition of an undisclosed equity stake in Trigo – the tech business that helped Tesco create the cashless store being piloted at its Welwyn Garden City HQ.

Trigo uses ceiling-mounted cameras to create a 3D image of the shop floor, mapping the movement of shoppers and products, allowing them to pick items and walk out without queuing at a checkout in a similar vein to Amazon Go.

That, however, is where Lewis wants comparisons to its online rival to end.

“We’ve benchmarked the market in this space, and they are by far and away the best,” Lewis says of Trigo’s frictionless tech.

“Everyone goes from ‘frictionless’ to Amazon Go, but actually there’s a hell of a lot in between. And if you’ve shopped at Amazon Go – we were in the States last week and we’ve all been to Amazon Go – as a shopping experience, there’s a bit to do. It’s not something I’d want to emulate at this point in time.”

Instead, Lewis says Trigo’s technology is “much more likely” to be utilised in existing stores, where it could prove to be “really helpful to the shopping experience”.

He admits, however, that the investment represents a “long-term tech capability play” and that any rollout of those capabilities will be a considered one.

Its second investment, in foodservice operator Best Food Logistics, can make a much more immediate impact in the fast-growing catering market. Tesco has paid what Lewis describes as a “nominal” sum to snap up the loss-making business, which will enhance its Booker wholesale division.

Best supplies names such as Pret A Manger, Burger King and KFC and rakes in £1.1bn of annual sales. Lewis says the deal “gives us a national coverage of food service” and provides Tesco with the opportunity to become the market leader in that arena.

“Charles [Wilson, Booker’s boss] has a proven track record of buying businesses like this and taking them from loss-making to being profitable, and as part of the Tesco group we are pretty confident that we can do that.”

Online growth

Tesco’s ecommerce business already generates £3.2bn in annual sales, accounting for almost 40% of the online grocery market, but Lewis believes there is plenty more headroom to go at.

The grocer’s online sales increased 7.4% in the first half of this year and Lewis insists the division now returns a “nice” profit contribution, having been stuck in the red when he took the helm.

Tesco has changed its product mix under Lewis, axing the Tesco Direct electricals and general merchandise ecommerce platform, but has also invested in improving pick rates in stores and in a new online grocery transport planning algorithm, which has saved its fleet of vans more than 11.2 million miles in the past year.

But Lewis says: “If we want to get to a place where we increase our online business going forward, then we will have to start improving and increasing our capacity.”

As a result, Tesco will open at least 25 “urban fulfilment centres” over the next three years, the first three of which are slated to become operational by next summer.

The fully automated warehouse spaces will be installed in existing supermarkets, taking up 10,000-15,000 sq ft of excess space.

Tesco’s online business makes up around 8% of its UK sales, but the additional capacity would provide the scope to reach 15% and become a £6bn-plus business.

Store expansion

Despite that big online play, Lewis and Tesco still foresee room for growth in the bricks-and-mortar operations, particularly in its smaller Express stores.

The grocer’s discount Jack’s format may not have set the world alight – Lewis says only four of its 10 locations are beating sales targets – but Tesco has taken learnings from that concept to help it lower the cost of building an Express store by 33%.

Tesco has also tweaked the product mix in those smaller formats to improve margins and, in a 20-store trial, reduced operating costs by around 20% after introducing a new operating model.

Following those pilots, Tesco now plans to open 150 Express stores across the UK during the next three years and Lewis says they will pay back the capital invested “in less than three years”.

“We have a very good presence in the UK, better than anyone else, but our penetration in UK households is 85%. That means there are 15% of households in the UK that don’t use a Tesco store,” Lewis says.

“If we are selective about where we pick them, there are still very good places for us to have stores in the UK, but the important thing is I want them to pay back in less than three years. We now have a model that does that – hence, we can kickstart that investment.”

Tesco has also made headway in its international markets. In Poland, a business that has been hampered by excess store space and changes to Sunday trading laws, the grocer has so far looked at 2.7m sq ft of selling space, downsizing stores and exiting 17 locations to strip out 800,000 sq ft of selling space altogether. It has also refitted 1.2m sq ft of space and repurposed a further 700,000 sq ft.

Ranges have become more focused on food, with SKU counts in its largest ‘compact hypermarkets’ slashed from 41,000 to between 11,000 and 13,000. As a result, Lewis says Tesco’s Polish division will ultimately go from a £2bn business making a loss, to a £1bn business with a profit margin of around 3%.

In Asia, Tesco plans to open 750 small stores over the next three years, the first 50 of which will be open by the end of its 2019/20 financial year.

Clubcard Plus

Lewis describes Tesco’s Clubcard loyalty scheme as a “very, very important asset” that he is determined to leverage further to build “lifetime” value for its customers.

“We know that when people have different touchpoints with the Tesco business – the bank, mobile, as well as grocery and fuel – they increase their spend with us in their grocery shop,” Lewis says.

As a result, Tesco is bringing those divisions closer together through its new Clubcard Plus subscription proposition, which will launch later this year.

New and existing Clubcard holders – 19 million households across the UK already have one – will be able to subscribe to Clubcard Plus for £7.99 a month. The service offers shoppers 10% off two ‘big shops’ in-store every month, and 10% off Tesco’s own brands, such as F&F, Go Cook and Fox & Ivy, all year round.

Clubcard Plus members will also receive double data on their pay monthly Tesco Mobile deals and get a Tesco Bank credit card with no foreign exchange fees on overseas purchases.

A trial among 74,000 Tesco employees drove an average increase of £8.68 in weekly grocery spending, but Lewis is coy when asked what success might look like for the subscription service.

“The objective is loyalty. We don’t have an objective for sign-ups,” he insists. “We have two or three different scenarios for how we think it might be adopted, but we don’t know; we won’t know until we do it.

“For us, it’s about how do we build lifetime customer value by enhancing loyalty – and the big-basket shop is the thing that customers always talk to us about.”

The man who saved Tesco?

It is thanks to Lewis’ efforts and strategic vision that Tesco still has so many customers to talk to. Having spent the best part of a 75-minute press conference focusing on the future, it is perhaps fitting that the final question relates to his legacy.

Lewis is not a fan of his ‘Drastic Dave’ moniker, so is he more comfortable with the new label he received today: ‘the man who saved Tesco’?

“Definitely not,” he asserts. “There are 450,000 people [in Tesco]. Let’s be clear: I didn’t serve a customer last week, I didn’t meet a buyer last week, I didn’t drive a truck last week – 450,000 people have turned around this business.”

There is no doubt that Murphy will be taking the helm of a business that has the momentum and confidence of those 450,000 people onside. He will certainly need it if he is to fill the void Lewis undoubtedly leaves behind and turn his vision of Tesco’s future into reality.