From trader to retailer to leader
Tesco’s unlikely origin was as a market stall selling war-surplus groceries like golden syrup and fish stock in London’s East End at the end of the First World War. It opened its first store in 1931, went public in 1947, then over the next three decades enjoyed success driven by the opportunism and entrepreneurial flair of founder Jack Cohen and his handpicked team of hard-driving store managers. The business reflected this - it was a highly successful, decentralised retailer with a motley collection of 800 stores.
Ian MacLaurin, Tesco’s first external CEO, was ambitious and began whipping the company into a shape where it could measure itself against ‘real’ retailers such as Marks & Spencer and Sainsbury’s, the choice of the middle classes. At that time, they were in a different league to the scrappy upstart.
Tesco made a lot of progress through the late 1970s and 1980s by benchmarking Sainsbury’s, closing the gap between the two. Operation Checkout in 1977 was an almost overnight refit and rebranding of the Tesco estate, improving products, reducing prices and exercising control. It was financed by scrapping Green Shield Stamps, a loyalty scheme dear to Cohen’s heart, but by that time, less valued by customers. A huge success, Operation
Checkout laid the groundwork for a series of mutually reinforcing reforms, anchored in the recruitment of a cadre of bright young executives, among them Terry Leahy and Tim Mason, who, as ‘the class of ‘82,’ would embody the ambitions of the new upwardly mobile Tesco. Half the existing stores were judged sub-standard and closed. MacLaurin instituted weekly store visits for the board, followed by discussing what had been seen and tweaking strategy accordingly.
The rule of thumb for decisions became ‘better, simpler, cheaper’ - shorthand for better for customers, simpler for staff, or cheaper for Tesco - and it always had to be at least one of the first two, never just ‘cheaper for Tesco.’ From 1987 to 1990, Tesco’s turnover rose 50%, profitability doubled, the operating margin touched 6% and floor space grew by 10% a year.
Tesco’s Moments of Belief fuel growth
Clubcard and Tesco.com were particularly important Moments of Belief for Tesco, the former paving the way for entry into financial services. Conceived as a way of thanking existing customers for their loyalty, Clubcard encouraged them to spend more and brought in a flood of new shoppers (no fewer than 20 million in 2001 alone). The payoff from the hefty upfront investment of £100 million, though, came not from the promotional incentives, but indirectly from the customer insights that the card data yielded. The value was clear from the very first pilot, when dunnhumby’s Clive Humby walked the Tesco board through 16 different shopping baskets showing the 16 segments of Tesco shoppers identified in their data. At the end of the presentation, there was a deathly hush until MacLaurin broke the silence with words that have gone down in the company’s history:
I’ve learned more about my customers in the last 30 minutes than I
have in the last 30 years.7
The customer insights drawn from Clubcard gave rise to a stream of further innovations and Moments of Belief, including a new approach to segmentation with Tesco’s Finest launched to sit alongside its standard and Value own brands. It was clear from the data that there was a significant group of existing customers that visited Waitrose and M&S for special treats and were prepared to pay more for premium products. Tesco’s Finest brand was introduced in 1998 and by 2009 it was bigger than Coca-Cola in terms of UK sales.8
Another Moment of Belief came with Tesco’s ethnic food range, World Foods. Its launch emerged through an analysis of Clubcard data from a store in a British town with a large proportion of ethnic minorities, which showed many shoppers weren’t buying the expected staples from Tesco; instead, they were purchasing large sacks of rice and loose bunches of herbs from local markets. Tesco built a superstore in the area in 200S, which offered 800 different products designed to appeal to specific minority ethnic groups, up from ISO in the previous store. It had a halal butcher and newspapers in Arabic, Urdu, Punjabi and Bengali. Subsequent analysis revealed that not only had the target group’s share of spend increased, but also the upscale white shoppers accounted for a quarter of the store’s World Food sales.9 By creating something of value for its ethnic shoppers, Tesco had also created value for other customers and for the business.
Clubcard created a more systematic way to be customer-led, ensuring the retailer stayed rooted to the idea of creating value for customers first. Other Moments of Belief and innovations flowing from Clubcard’s insights included 24-hour opening, the Healthy Living range, Organics and ‘Free- From’ - a range free from allergens such as gluten and wheat. When ‘Free- From’ first launched with high expectations in 2003, initial sales were disappointing. However, an analysis of Clubcard customer data revealed that the pioneering range was attracting new shoppers into Tesco and that they bought a great deal more than just the Free-From range. The business case was not product-led - predicated on just the sales of the Free-From products - it was customer-led based on the benefits of attracting more customers and their spend across all categories.
As this demonstrates, being customer-led isn’t simply about being nice to customers - it’s about making the business tangibly better for customers. This is why being customer-led matters. As CEO Sir Terry Leahy put it:
What creates loyalty is how much we understand your life and what we do about it that helps your life. You could just use the data to make customers do what you want them to do, and use it as a tool to sell more things to them. We never wanted to do that. Our competitors had all the details of what their customers bought too, but if you don’t have the vision as a retailer that you are doing this to understand customers better, and deepen that relationship, you’re always going to wonder why you’re making the effort.'0
The 1996 launch of Tesco.com, the group’s online shopping service, was another important Moment of Belief. Obvious as it seems now, at that time, computers were bulky, slow and expensive and only a minority of UK households possessed one. But Tesco went for it in a big way, choosing to distribute from stores with staff picking products from the same shelves as customers rather than building dedicated and more efficient internet shopping warehouses. Tesco.com became another giant success, the group’s online presence sealing its surge to industry leadership. Leahy and Mason, at launch deputy chief executive and marketing director respectively, had no doubts from the start:
The idea was utterly compelling to us ... we had no choice but to do all we could to make it possible, to overcome the well-known obstacles and make a profitable business. [It would] make life easier for customers.1’
Tesco.com wasn’t just a way for customers to shop online. It was a way to pay £5 to save hours each week driving to a store, walking around the physical shop, selecting each item, putting it in a trolley, unloading it at the checkout, re-packing it, paying and driving home. Thanks to Clubcard, even the very first time a Tesco shopper used the online service it had their weekly shopping list, making it swift to get what was needed. Such a dramatic benefit meant it was an excellent way for Tesco to secure an even greater share of these shoppers’ spend.
Tesco moved fast because it saw these benefits and felt a burning desire to be first. Its approach - picking from stores - meant it could expand to cover the country at pace.
By the late 1990s, Leahy and Mason had graduated to the C-suite, with MacLaurin as chairman, and together they set about deepening, broadening and internationalising the business and the outside-in culture that had led to its success.
To succeed, the leadership would have to find ways to spread true customer-led belief. Beyond the signals of Moments of Belief, they went about this by explicitly and repeatedly articulating the business’s values, which were unusually expressed as short sentences - ‘No one tries harder for customers,’ and ‘Treat people as you want to be treated.’ This was done in workshops, presentations and frequently in conversations of all kinds throughout the 14 years of Leahy’s tenure as CEO.
Tesco also developed its own version of Kaplan and Norton’s balanced scorecard as an organisation-wide ‘steering wheel’ to ensure that the customer remained first among equals in terms of management priorities, with a dedicated customer plan and customer key performance indicators (KPIs), such as whether customers could get what they want or how long they had to queue, with performance tracked and reviewed accordingly. Further, to ensure managers experienced the implications of their decisions on the shop floor, every year 3,000 of them spent a week at the front end, serving customers, filling shelves, working in the store’s back office and manning customer-service desks.
Top management knew that what makes all the difference to the outlook of ‘head office’ people is first-hand human experience - ‘immersion’ in the outside world, standing in customers’ shoes, looking back in. When business leaders speak directly to customers and learn viscerally what they really think and feel, they ‘get it’ - they are decisively reminded what really matters to their customers and why. They see with fresh eyes where their firm, products and services come in the complex hierarchy of the customer’s life (low down!).
With culture and management systems aligned behind the customer, Tesco was confident it could apply the same principles to domains beyond food. Financial services would be a natural starting point. The company could apply useful insights from Clubcard and offer a credit card that provided many of the same benefits but taken further. Tesco Personal Finance, complete with the Tesco credit card, was launched in 1997, initially as a joint venture with the Royal Bank of Scotland.
Tesco subsequently secured a banking licence in its own right; by 2020 Tesco Bank had 5.3 million customer accounts with over £7.7 billion in savings accounts.12 Another notable success has been Tesco Mobile run in partnership with 02, a telco that has its own customer-led story to tell, one that we’ll be exploring further in Chapter 5.
The outside-in perspective is an uncommon ivay to see the world
What we are describing through Tesco’s story is an uncommon way to see the world. Being customer-led is about outside-in beliefs, and these beliefs are not natural. The typical perspective is shaped by colleagues who are distant from customers, limited by assumptions that what’s sold is what customers want, constrained because these views are hardly ever challenged. This is an inside-out perspective, and it is the prevalent view. It stands in contrast to being customer-led.
At an individual level, it can be difficult to think outside-in, but it’s not because the information isn’t available - there is usually far more customer insight, market analysis, trend forecasting and the like than anyone in an organisation can deal with. The problem is that the information doesn’t have the impact it needs to prompt uncomfortable or inconvenient decisions.
At an organisational level, it is harder still. Shared inside-out beliefs are often ‘obvious.’ You want to sell more? Set higher sales targets, reward people generously for hitting them, shout at them if they don’t (or worse, as in the infamous case of Wells Fargo). The thing is it works ... for a while. Until the pushing from the business starts to lose alignment with customer demand. That’s where scandals come from; mis-selling, misleading, high pressure sales and, taken to extremes, the destruction of business trust and collapse.
Outside-in beliefs on the other hand are unnatural and uncommon in business. Outside-in ideas are clearly valuable to the customer, but while the costs to the business are certain, the benefits are not, and the costs tend to be immediate with the business benefits coming further down the line.
As we’ve already shown, while many companies believe they are customer-led, their actions say otherwise. What people believe collectively about the nature of business success and the way it is achieved is the nub of the issue. The shared but unspoken beliefs across a group determine how they act at every level from top to bottom, from the vastness of international supply chains to how salespeople interact with customers and everyday conversations over a cup of coffee.
There are also visible cultural cues, but an organisation’s overt character and purpose, why it says it exists and how it says it behaves, its stated purpose, values, vision, brand promises and the like, are often not what tells you what is truly believed.
The shared beliefs of the organisation, its discourse, are the truest reflection of ‘what really matters around here.’ Moments of Belief like Tesco’s One-in-Front demonstrate for real that an outside-in approach to business is being taken and works.