Terry Leahy was told Tesco had reached saturation point in the UK. Having developed non food, gone online and moved into services, he’s proved the doubters wrong.

When Terry Leahy took the Tesco hot seat in 1997, he faced a barrage of scepticism from the City.

It’s hard to fathom now, but brokers said the grocer had reached saturation point and questioned where growth would come from.

But 14 years later, Tesco’s pre-tax profits having ballooned from £774m to £3.2bn and the number of UK stores increased from 568 to 2,482, nothing could have been further from the truth.

Leahy - who as marketing director had been on the Tesco board since 1992 - had the foresight to anticipate what customers wanted and positioned the retailer to cater for them.

Shore Capital analyst Clive Black says: “Terry planted a few acorns. Some of them didn’t grow, some of them were vandalised, but many grew into mighty oaks.”

Tesco leapfrogged Sainsbury’s in 1995 to become the market-leading food retailer, and Leahy was determined to make the gap impossible to bridge. He was forward-thinking, surrounded himself with exceptionally bright people and turned Tesco’s UK business into a powerhouse, enabling it to diversify and push ahead internationally.

Black says two key focuses of Leahy’s leadership helped make Tesco’s UK business the force it is today - format diversification and reading the planning regime better than its competitors.

“Leahy created the one-stop shop format and [Tesco] hypermarkets replaced department stores in many areas,” says Black. “And Tesco also meticulously studied the planning laws and the Competition Commission rules to create a diverse set of formats, and enable it to move into many more markets than was previously envisaged.”

Black says those two planks “gave Tesco a platform to exceed expectations”. He says: “These two areas provided the growth and the cash flow to diversify and enable Tesco to take more risks and try new things.”

That little bit Extra

Tesco’s first Extra store opened in 1997 - the year Leahy took charge - in Pitsea in Essex and it now has about 200 of the stores. With about 30,000 sq ft of non-food space alongside a traditional food offer, the Extra stores provided customers with a one-stop shop.

“Extras transformed the face of Tesco’s UK portfolio,” says Nomura analyst Nick Coulter. “They showed that Leahy was thinking ahead about how the customer would want to shop, and the non-food space allowed it to get into so many other categories alongside its traditional food offer.”

Planet Retail analyst David Gray says: “Tesco really set the ball rolling in non-food and became the leader in diversifying a food shop into a retailer of everything from TVs, pans, toys, computers and furniture.”

The Extra format also allowed Tesco to forge ahead in non-food through own-range development. While its clothing range, F&F, still plays second fiddle to George at Asda, in several other areas it has built up a formidable offer. One example is its TV brand Technika, which is now the fifth best selling TV brand in the UK.

Leahy’s format diversification also led to its dominance in the convenience sector. Kantar Retail director of retail insights Bryan Roberts says: “Leahy unlocked a hugely lucrative part of the business with the convenience drive. Some of its convenience stores are the most profitable in the business and it also meant it could get into areas where it was previously restricted.”

Tesco was quick to buy up stores from competitors such as Safeway and KwikSave, but its big break came in 2002 when it bought T&S Stores for £377.3m. The 850-strong convenience store chain - trading under the One Stop banner - brought a network of small stores across the UK.

Then, in 2004, Tesco bought family-owned convenience store chain Adminstore - which traded under the Europa, Cullens and Harts brands - which gave it coverage across London.

“These acquisitions meant Tesco’s convenience business mushroomed,” says Black. “And at the time most of its competitors were not in a position to buy chains and develop stores so it meant Tesco could get well ahead.”

Food for thought

As it had in general merchandise categories, Tesco also led the way in private-label development in food. Value was launched in 1993, widely thought to be a response to the hard discounters entering the market.

Roberts says: “Value was seen as a tactical reaction to strangle Aldi at birth and, while it probably did help keep customers, it also helped create the first rung in a tier system that allowed shoppers of different demographics to come to Tesco.”

The top tier, Finest, was launched in 1998, which completed the span. Roberts says Finest was “inspired by Marks & Spencer” and that it broadened Tesco’s appeal to high-end customers.

The private-label success has meant that Tesco’s Finest is now the biggest brand in the UK, followed by Value, then Coca-Cola, according to Nielsen.

The expansion of the private-label business also came alongside the development of Clubcard. “You can’t underestimate the massive competitive advantage that Clubcard gives Tesco,” says Roberts.

“Other loyalty schemes don’t come near it in terms of insight, which means Tesco can tailor its offers and marketing more precisely. Global retailers are falling over themselves to work with Dunnhumby [the company that processes Tesco’s data].”

The internet also provided Tesco with another platform to sell its wares and here too, Tesco was a pioneer. Tesco.com launched in 2000, followed shortly after by Tesco Direct, selling its non-food offer online.

“Tesco soon realised that it could sell a whole hypermarket and more online and really cranked up online when everyone else was thinking that it could never work,” says Gray.

“There are some that don’t believe Tesco makes a profit from its grocery as it includes Tesco Direct, but Direct is a small part of the business so grocery must be profitable.”

Total service

Once Leahy had targeted every penny of retail spend he could think of, he widened his search for share of the wallet with a move into services. Starting with services such as insurance, credit cards and loans, Tesco harnessed the footfall in its stores and trust in its brand to extend out its offer.

After buying out RBS’s 50% stake in Tesco Personal Finance in 2008, the grocer stepped up services and is poised to launch into current accounts and mortgages.

“Services are a licence to print money,” says Roberts. He points out that the margins on services are about 25% while in retail they average at about 5%.

“The banks have also taken a hammering over the last couple of years. While Tesco may not be a loved brand by everyone, it is a trusted brand, and this area will become key to the growth of Tesco over the next few years,” he adds.

Coulter says: “Banking is another phase of growth for Tesco. It can leverage its brand and footfall, and with a third of UK consumers coming into its doors every week, it gives an immense platform to cross-sell.”

Some of Tesco’s services have also been rolled out internationally, which could also provide further growth.

Leahy’s leadership of Tesco has seen the grocer diversify into all sorts of new areas. He proved the sceptics wrong and his work in the UK laid the foundation for Tesco’s global growth.

With many of Leahy’s acorns sown, the City and other retailers will be watching how new chief executive Phil Clarke makes them turn into mighty oaks.

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