How Leahy made Tesco a global giant

Many retailers have tried to become genuine international players. Few have succeeded. And in any assessment of Sir Terry Leahy’s reign as chief executive at Tesco, his success in turning it from a UK grocer to a global giant operating in 14 countries has to be right at the top of the list of achievements.

When Leahy took charge of Tesco in February 1997, the company had just 190 stores outside the UK and operated in six countries. It had dipped its toe in the water by opening in Hungary in 1995, with Poland, the Czech Republic and Slovakia following suit in 1996 and Ireland just as he took over in 1997.

Leahy, in his previous role as marketing director, had been instrumental in the decision to open in these countries. But at the time he took over, it was still early days. Few could have foreseen that by the time he handed over the reins, the 190 stores outside the UK in 1997 could have become 2,329 at the end of February 2011.

Dramatic growth

Today, the business has expanded further in Europe with its Turkish business Kipa, but the most dramatic growth has been in Asia, where it now operates in Thailand, South Korea, Malaysia, China and Japan.

It has launched Fresh & Easy in the US and has signalled plans to move into India.

Today David Wild is the chief executive of Halfords, but at the time Leahy took over he was chief executive of Tesco’s fledgling central European businesses. He attributes Tesco’s success internationally to two factors.

The first is the choice of markets. “What Terry did was take Tesco to markets where it could take a leadership position relatively quickly - so Poland, the Czech Republic, Thailand, Korea,” says Wild. “Not the really big markets like the US and China, but growing medium-sized markets.”

The second factor, according to Wild, was the focus on needs of customers in that particular market. “It was all about the needs of local customers - we didn’t want to export the UK model,” he says. “Terry was interested in what Hungarian customers wanted and how we could meet their needs.”

The freedom given to the teams to meet local customers’ expectations is reflected in the stores in different countries. The stores look different and not just because they sometimes have different names, such as Kipa in Turkey and Tesco Lotus in Thailand. In Asia, for instance, the stores feature traditional wet markets where shoppers can interact with the vendors of fresh fish.

“Respect for the different nature of local markets has been the key to its success,” says Shore Capital analyst Clive Black. “Tesco adapts to the local market much more than, say, Walmart or Carrefour.”

When the company moved into the US, the delegation sent there to develop the Fresh & Easy project were embedded in West Coast households in order to develop an understanding of how Americans shopped.

But that flexibility given to the teams on the ground to tailor the offer was matched by the expectation that you would deliver the results. “There was a high degree of freedom but a high degree of accountability as well,” says Wild. “You had the freedom to go out and develop the business but you had to deliver what you’d promised when you came up with the plan.”

And while the offer is based on the local needs of local customers, key to the success of Tesco internationally is that behind the scenes the same highly efficient operating model and systems - known as Tesco in a Box - have been deployed in all countries it operates in.

“Tesco is market leader in shelf-ready packaging, which is just one element of how it rolls out internationally,” says Planet Retail analyst David Gray. “It’s a very lean machine, all systems were standardised. They key is to back up international growth with standardised efficiencies, then tailor the offer locally.”

The sales generated internationally have been vital in propelling Tesco’s growth. Its market capitalisation of £32bn is more than four times the size of the next biggest UK retail business Morrisons, and in some of the countries in which it operates it is now the leading retailer, such as Thailand where it has 663 stores and 6 million customers a week.

“Countries such as Korea, Thailand and Hungary are massive businesses and if taken out of the portfolio would be FTSE companies in their own right,” says Nomura analyst Nick Coulter.

Some of Tesco’s most successful concepts, such as Clubcard and Tesco Express, have been exported successfully to the overseas markets. Tesco only operates online in three markets, and expanding this number is a high priority for new chief executive Phil Clarke.

Two-way street

But it hasn’t been one-way traffic of ideas from the UK outwards. Wild points out that Tesco’s hypermarkets in central Europe pre-dated the introduction of Tesco Extra in the UK, and the results were used to shape the UK

format. When the EU was extended to Eastern European countries, Tesco UK turned to its colleagues in Poland to shape its new ranges for Poles in the UK.

Tesco’s expansion overseas has been marked by the same razor-sharp focus and rapid decision making that have been the hallmarks of the company’s success in the UK over the past 14 years, and once it has a successful foothold, it has moved quickly to consolidate its strength in its top markets.

When Tesco completed the acquisition in South Korea of 39 Homever stores for £958m in 2008 - the grocer’s biggest acquisition at the time - it moved quickly and decisively to secure the deal, and then once it was done, the IT systems were integrated into the Tesco model in just 42 days.

But while there have been spectacular successes, it hasn’t been a tale of unmitigated success. In 2005, Tesco quit the Taiwanese market in order to consolidate its position in the Czech market by doing a store swap with Carrefour.

The Japanese business has failed to make profits since Tesco moved into the market in 2003 and is going to be watched closely for signs that it can turn the corner.

And then there’s America. The growth of Fresh & Easy has been slower than anticipated, hit hard by the economic meltdown in the West Coast states where it has been established. Yet the company continues to show faith in the market, with deputy chief executive Tim Mason being based in the US.

Clarke’s view is understood to be that its ethos of quality prepared foods, in stark contrast to those available in other US supermarkets, can work - that those people who shop at Fresh & Easy really get it, but not enough do yet.

Expansion focus

The company has committed to being profitable in the US by 2013 and while there is a lot of scepticism about the concept, many believe Tesco can achieve it.

“I’m one of the few who think Fresh & Easy can be a genius concept with scale,” says Kantar director of retail insights Bryan Roberts. “There are still a few issues with the format but with some tweaks it could get to 10,000 stores and be hugely profitable. It could be the most pivotal moment in international for Tesco.”

China too is another market Tesco has barely scratched the surface of and where it is investing heavily in developing shopping centres. It’s a market Tesco sees huge potential in. And Tesco has also committed to India, via a cash and carry operation, and a joint venture to work with Tata Group subsidiary Trent on its Star Bazaar hypermarket concept.

For the time being, the focus is likely to be on expanding in existing markets rather than growing into new ones, but Roberts thinks entry into further markets is a distinct possibility too.

“No region is beyond Tesco’s remit,” he says. “There’s a lot of talk about Tesco doing something in South Africa, then Australia is ripe for Tesco to move into. Excluding western Europe, where it got its fingers burnt in France, the rest of the world is ripe for Tesco to move into.”

Overseas potential

It’s no coincidence that Clarke, the man who has spearheaded Tesco’s international growth, has been chosen to head Tesco following Leahy’s retirement.

It is also notable that he has elected to appoint a separate chief executive for the UK business beneath him, a reflection of how much time and attention overseas markets will need.

Clarke may not be spending the 180 nights abroad he was in the international job, but he’ll be more aware than anyone that the key to Tesco’s further growth lies beyond these shores.