No longer the bad guy, UK grocer set to reassert dominance at home

Source:Reuters Published: 2016/12/6 17:43:39

A tamer Tesco

In the aftermath of Tesco's worst crisis in its 97-year history, the UK supermarket chain has managed a notable turnaround. Monthly industry data show Tesco is once again pulling ahead of rivals in the UK thanks largely to its willingness to deal with its suppliers in a more straightforward manner. Once the 400-pound gorilla of British grocers, Tesco has - in the two years since an accounting scandal devastated the company's reputation - focused on building better relationships with its roughly 3,000 suppliers, rather than attempting to milk them for every pound it can. The change has resulted in better deals, driving more price cuts and further volume growth, and consequently even better deals with suppliers.

Customers shop at a Tesco store in Bristol, the UK, on November 25. Photo: CFP

Customers shop at a Tesco store in Bristol, the UK, on November 25. Photo: CFP

Two years after an accounting scandal plunged Tesco into the worst crisis in its 97-year history, the British supermarket chain looks set to reassert its dominance, given the edge by a transformed relationship with suppliers.

Monthly industry data show Tesco is once again pulling ahead of rivals in the UK under a plan led by boss Dave Lewis, where lower prices and improvements in stores have led to more goods being sold to more customers.

That in turn has allowed Tesco to agree better deals with suppliers, driving more price cuts and further volume growth, and consequently even better deals with suppliers.

It's what former Unilever ­executive Lewis calls "the virtuous circle" and it has enabled him to target an increase in both sales and profitability.

Tesco, whose shares have risen 38 percent this year, is entering the key Christmas weeks with growing sales momentum.

That could spell trouble for traditional rivals Sainsbury's, Asda and Morrisons, as well as the German discounters Aldi and Lidl, whose sales growth has started to slow in 2015.

"Years ago we dealt with Tesco, and we were just a number, but I've really seen a change," said Lisa Moore, senior national account ­manager at The Abergavenny Fine Food Co, which supplies the supermarket with goats' cheese and party food.

She said Tesco helped it after a fire in 2015 devastated a production unit, providing technical support and advice on how to make it fit for the future.

"There's definitely a better relationship and a clear understanding of what our potential can be," Moore said.

Her company is now supplying more food to the supermarket this Christmas than ever before.

Despite Tesco's strong sales growth, there are risks ahead 2017 as a result of the UK's vote in June to leave the EU.

As the country's biggest retailer, it could be hurt if higher prices caused by Brexit hit to the value of the pound, and slower jobs and wage growth eat into households' spare income.

Reputation damage can also come from unexpected quarters. A cyber attack on Tesco's banking arm in November, which forced a short suspension of online transactions, created a wave of bad publicity.

Once a villain

Tesco's new approach to suppliers follows years of turmoil.

After decades of pre-eminence, Tesco's sales dived in 2012 as shoppers with falling disposable incomes eschewed its huge out-of-town stores in favor of closer alternatives and flocked to discounters.

Tesco remained the industry leader, but its market share actually eroded.

The company hit the bottom in 2014 when it revealed it had misstated its profits by 263 million pounds ($335.15 million), leading to an investigation by the UK's Serious Fraud Office.

Three former Tesco executives will face trial in September 2017.

The scandal shone a light on Tesco's dubious tactics as suppliers reported that having agreed deals they were stung by unexpected charges that had to be paid if they were to maintain their ties with the UK's most powerful grocer.

Historically, Tesco and its ­suppliers would agree on an upfront price, known as the front margin.

But the scandal showed that Tesco also had no fewer than 24 other ways of gaining income from suppliers - the back margin.

Lewis' new commercial approach has slashed back margin options to just three: retrospective payments for achieving volume targets, payments for shelf promotions and compensation for product recalls.

A new deal

Keen to avoid the mistakes and tensions of the past, Lewis has sought longer-term deals with Tesco's 3,000 suppliers, introduced more straightforward contracts and cut out waste.

By 2020, Lewis expects Tesco to earn between 3.5 pence and 4 pence of operating profit for every 1 pound spent by shoppers, up from 2.18 pence currently, as sales rise and costs are cut through efficiencies in stores and in its distribution network.It earned nearly 6 pence in the 2010-11 period before the problems hit.

In an indication of the cultural shift being sought, Jason Tarry, Tesco's chief product officer and a 27-year veteran of the retailer, told Reuters that those striking supplier deals were no longer referred to internally as "negotiators" - they are now "business builders."

"What I'm looking for is, how do we build this business together?" he said. "How do we build the products and the offer for our customers together, rather than how do we concentrate on trying to get the most [money] out of each other."

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