December 17, 2015

Chairman John Allan talks and walks Tesco

John Allan, Tesco Chairman (photo: Mark Mackenzie)
John Allan: "We are working hard to find a way to stunt the growth of the German discounters or to slow it considerably" (photo: Mark Mackenzie)
John Allan is so polite and pleasant that one can hardly believe he is a retailer. He certainly differs in tone and style from numerous former denizens of the Tesco C-suite, including caustic ex-CEO Phil Clarke and Clarke's dour predecessor Terry Leahy

Presumably Allan's unassuming way is a throwback to his earlier days in logistics, a cut-throat industry, but one where managers even manage to talk appreciatively about their competitors.

At any rate, John Allan needs every ounce of his tact and diplomacy in his current role as Chairman. In fact, it was hard to know when he left Dixons for troubled Tesco last year whether to congratulate the man on one of the most prestigious jobs in UK retailing, or to commiserate because it is also the hottest seat in the industry.

But if the UK's leading food retailer by sales was looking for a steady hand at the tiller, after having been rocked by a supplier payments and balance sheet scandal, then it could not have made a better choice. At the time, his appointment was criticised by some City analysts because they felt that Tesco needed something more home-grown to effect a turnaround.

Given that company veterans presided over last year's accounting fiasco and a host of other woes, this would have been like giving a drunk more of the same at the bar and expecting him to become sober.

The recent emissions scandal at VW, where the German automaker refused to call in outsiders and has lurched from one crisis to another ever since, underlines the wisdom of making a clean break at the helm of Tesco in the persons of Allan and former Unilever manager Dave Lewis as CEO.

In a gesture which surely underlines his street cred as a hands-on retailer, Allan (67) suggested that the interview was held while touring a Tesco branch. Fascinatingly, Allan resisted the all too frequent temptation of choosing a new outlet or prototype that would have been thoroughly unrepresentative of the company as a whole.

In fact, the Tesco superstore in Dunton Road, Southwark, London SE1, built in 1994 and managed today by Darren Jeffries, looks fairly typical of the Tesco stable, but at 38,000ft² (3,530m²) is large enough to cover most of the company's food offer with a little bit of general merchandise to boot.

So John Allan, CBE, could do the honours like a field marshal who knows that the customer is won or lost every day on the battleground of the shop floor.

"Focussing on the customer"

John Allan, Tesco Chairman (photo: Mark Mackenzie)
John Allan: Explaining Tesco's new strategy in the staff training room (photo: Mark Mackenzie)
Mr Allan, we wanted to discuss the turnaround at Tesco, but regrettably we must also ask as journalists whether Tesco's Christmas season sales have been affected by the recent terrorist attacks in Paris?

Obviously we feel for the people of Paris. London has also experienced terrorist outrages in the past. Experience has shown that customers go back to shopping as usual very rapidly afterwards. This is partly because they don't want the terrorists to feel that they have achieved anything.

British shoppers are also fairly pragmatic, and we hope that people will continue to live normally in the face of these occasional dreadful happenings. At the end of the day, of course, life still has to go on.

What measures have you taken to protect customers and staff, and have you informed them about these?

We as a company are alive to the issue and take whatever security precautions we can. We cooperate closely with the authorities, but obviously you will appreciate that we can't go into detail. Also, we haven't made any specific announcements because we don't want people to be alarmed any more than they are already.

Returning to the original subject of this interview, how much governance change has Tesco made since the discovery of past accounting irregularities, and how can you reassure investors that these won’t happen again?

Clearly, everyone is immensely focussed on the issues which led to the overstatement of profits in previous years. It has been easier to make a new start because we have recruited a top team from outside. These include CEO Dave Lewis, CFO Alan Stewart, the new Chairman of our Audit Committee Byron Grote, and myself.

We've also changed our auditors from PwC to Deloitte. Parallel to this, a number of investigatory authorities are looking into the matter.

How long do you expect the cloud of the official investigation and class action law suits to hang over Tesco?

It would be impossible to give you a date. We are not in control of the principal investigations being conducted by the Serious Fraud Office and have no timetable. It will be when they decide it is appropriate, but this issue could take some time.

What reassured you personally as Chairman that the final strategy chosen for the turnaround of the business was the right one?

I think it was the principle that we were focussing again on the customer because Tesco's standing with our customers may have been dented, but it was never broken. It was also the willingness of the new management team to take tough decisions in order to restore Tesco's leading position in the trade.

With respect, the phrase 'focussing on the customer' has often been used and misused by other retailers. Could you give an instance of what that means for customers in terms of their daily shop at Tesco?

We're working hard on availability so that the products are always there at any time of the day, regardless of whether our customers shop with us at 9 a.m. or 6 p.m. This has obviously also involved putting more labour into the stores to fill shelves.

John Allan, Tesco Chairman (photo: Mark Mackenzie)
Clarity of presentation: "Narrowing the assortment somewhat will make it easier for customers to find what they want" (photo: Mark Mackenzie)
Why have you rationalised your ranges by around 15 per cent?

We want Tesco to continue to have a broad assortment in comparison with most of our competitors, but arguably it was too broad in the recent past. Narrowing the assortment somewhat will make it easier for customers to find what they want in the store and for staff to refill the shelves.

It is also in the interests of our suppliers who will probably be able to increase their sales per running metre of shelf space.

How is Tesco improving its strained relationship with suppliers?

We are working very hard to improve our standing with our suppliers. So there has been a lot of emphasis on rebuilding relationships with them. We have changed our payment terms so that they are absolutely transparent and fair.

Presumably you mean the changes Tesco has made in the way it accounts for commercial income?

Yes, I think that we are well-advanced in ensuring that our people understand just how they should account for commercial income and that they don't get ahead of themselves. For example, we have simplified the number of ways in which our buyers can obtain income from suppliers by 75 per cent.

Money off the invoice price remains, of course, highly acceptable! By making the process simpler, we also reduce the possibilities of either accidental or deliberate overstatement.

John Allan, Tesco Chairman (photo: Mark Mackenzie)
"We've now brought our prices down to a level where we were able to introduce a brand guarantee in our stores" (photo: Mark Mackenzie)
Have you sharpened your prices?

Yes, we have now brought them down to a level where we were able to introduce a brand guarantee in our stores only a few weeks ago. So if you shop with us, a computer at the till automatically determines whether you could have bought the item concerned more cheaply at any of our major supermarket competitors, i.e., Asda, Sainsbury's or Morrisons.

If there is any difference, our computer will calculate this automatically and deduct it immediately from your bill.

What are you doing to rebuild your balance sheet?

We have taken decisive action on a number of fronts. We have cut the dividend, although hopefully not for too long, and we have been pulling in our belts as regards capital expenditure. So we won't spend more than £1bn a year for the next year or two.

Does Tesco need a rights issue?

We have always said never say never, but I think shareholders have stuck with us and been patient, and a rights issue would bear quite heavily upon them. I therefore think they would expect us to use every means available to generate cash and to reduce debt before so doing. We would only go for a rights issue if the circumstances really required it, but we don’t believe that we are even remotely at that point yet.

You have also reduced costs…

Yes, for instance, we quickly took more than a third out of our office overheads and have even moved our headquarters from Cheshunt to Welwyn Garden City. We have closed our expensive defined-benefit staff pension scheme and have replaced it with what we think is still a rather good pension scheme, but one which will be less expensive.

Will Tesco's turnaround require further job cuts?

This may not be a very satisfactory answer, but you can never say never because one can't rule out anything long-term. Although we have no current plans to make any further job reductions, we must remain competitive.

Tesco's overall indebtedness, including the pension fund shortfall, is still far higher than market cap and net assets on the balance sheet. Doesn't this mean that major creditors such as bond holders are now in de facto control of Tesco?

No, I don't think so at all. The level of debt is higher than we would ideally want, but it's manageable. We are working to bring it down and believe that over the course of the next two or three years we will be able to reduce it to a level that we are entirely comfortable with.

A lot of our debt is in two areas, i.e., lease costs for our stores and pension liabilities, which we are under contract to fund over a number of years.

Both are issues which time will take care of. Obviously, lease costs will come down longer-term as will the pension deficit because we’ve closed the scheme. Our actual trading debt is much, much smaller, and we believe that we can manage this down further because the business is now generating cash at quite a satisfactory level.

If Tesco continues to lose sales and market share on its home market, won't you have to make another downward adjustment on the value of your property portfolio?

Not that we are aware of at present as we took quite a major write-down of property at the end of the last financial year. Obviously, one should never say never because you have to look at this regularly at the end of each year, but at the moment there are no plans to take any further material write-downs.

John Allan, Tesco Chairman (photo: Mark Mackenzie)
"All of the major retail chains, including Tesco, have too many large stores that are hard to trade from" (photo: Mark Mackenzie)
Is Tesco over-spaced in the UK? Does it need to close 300 or more stores, as some analysts have suggested?

I think in general, and I wouldn't want to be drawn on numbers, all of the major retail chains, including Tesco, have too many large stores which are hard to trade from. I also suspect that it is going to be one of the longest issues for the industry to solve due to the nature of property leases which are often quite long.

We're working our way through this problem, and there are many different ways it could be dealt with. There is certainly no single silver bullet.

Currently, we are involved in quite a lot of what we call "re-purposing", which is making surplus space available to other retailers. We have done this recently with a number of fashion brands from the Arcadia Group, including versions of Dorothy Perkins, Burtons and Evans outlets in select Tesco stores across the country.

You sold Homeplus in South Korea this September. Aren't such sell-offs a double-edged sword in that they reduce indebtedness but sacrifice your most profitable trading divisions?

That, of course, is always the dilemma. This is the reason why we have said that we have no plans at present to reduce the geographic footprint of Tesco further now that the Korean deal has been completed. We continue to look at every business we've got however in terms of whether it is sensible to retain them or not.

So at some point we may choose to sell some other businesses, but we have no plans to part with anything more at present.

But can Tesco really afford to keep losing money in Central & Eastern Europe?

We are certainly not planning to lose money there! We have a strong management team in what is now a unified Central European business. Its members are committed to a strong plan that aims to improve profitability, and we think there is every chance that they will be able to show what they can do.

John Allan, Tesco Chairman (photo: Mark Mackenzie)
Exit: "There has been a substantial reduction in Tesco's geographical portfolio and thus our overseas exposure" (photo: Mark Mackenzie)
So international activities are strategically essential in your point of view?

I wouldn't use a word like 'essential', because at the end of the day, what is essential? I think our team in Central Europe deserves to be given an opportunity to show what they can do with the business, and that’s exactly what we are doing at the moment.

We've now left the US, Japan as well as Korea and have turned our operations in China into an investment through our partnership with a very strong, state-owned entity.

So there has been a substantial reduction in Tesco's geographical portfolio and thus our overseas exposure. We think that we've now got our footprint right in Central Europe and South-East Asia. Obviously, we will continue to review this as time goes on, but we have no plans to reduce it further.

Would you say in retrospect that one of the main reasons for Tesco's recent problems was that past management took its eye off the ball in the UK because of its determination to internationalise?

I don't want to be critical of the past because I wasn't around to observe it very closely. What I can say is that we are not going to take our eye off the ball in the future.

Why do you now combine your UK results with those of Ireland? On past Tesco balance sheets these were lumped together with your operations in Central Europe because it was argued that Ireland was also in the euro. Now you combine Irish operations with the UK. Aren't your accountants just tweaking UK figures?

No, that's not the reason at all. The new organisation that Dave Lewis put in place gave combined responsibility for the UK and Ireland to a management team led by Matt Davies.

International reporting standards require that one reports in the same way as one is organised. So, as Ireland is now managed by the same team that manages the UK, we now report in that way.

This is not at all unusual. So the old way reflected the former organisation. There was no intention to enhance the UK results or to obscure the Irish ones.

Most people expect hard discount to continue to grow for several more years in the UK. How can Tesco stabilise, when Aldi and Lidl are currently growing at over 17 per cent a year, and indebtedness ties one hand behind your back in the current price war?

I admit that it's not a particularly exciting scenario. Aldi and Lidl have done a good job in the UK and a number of other markets, and we're very alive to the challenge that they represent. We are therefore working hard to find a way to stunt their growth or to slow it considerably. I think that, if you watch this space, you'll see Tesco's plans to do this unfold over the next year or two.

But we've got nothing that we would like to talk about at the moment or that is sufficiently public that we would make an announcement about it. One of the principles of our new CEO, which I think a very good one, is that doing is more important than talking. So we'd rather try our solution out and see if it works, and then if it does, we’ll make an announcement about it.

And if it doesn't?

Then we'll simply try something else.

Could it be by rebooting and extending your price fighter own label under the 'Value' brand?

You'll have to watch this space. I'm not going to be drawn on precisely what we are going to do. I am only prepared to say that we recognise the threat the discounters pose and that we are determined to do something about it.

We are now in the Christmas season when online sales boom. But most food retailers find that online home delivery is loss-making at the operational level. What is your view on the long-term profitability of the channel?

We believe it is capable of becoming satisfactorily profitable in the long-term. We have a very substantial grocery home delivery business with a mid-40 percent share in the UK, which is the most developed market in home delivery. So we are also the largest online grocer in Europe by some way. We think we do this both well and efficiently, but of course we could do it even more efficiently.

At the end of the day, we have to face the fact that quite a large number of customers want to buy online, and we are determined to find a way of being able to continue providing that service.

Are you worried about the threat of Amazon in the UK?

They are a very substantial organisation, and we won't underestimate them. So you can imagine that we are watching them closely.

Tesco has long been criticised by online security bloggers for weak, cheap and out-of-date security systems. It was also obliged to close down thousands of Clubcard accounts last year which had been compromised. How sure are you that Tesco won't be the next Talk Talk or Target?

I think there is not a single business in the world that could sit here complacently and say that it was absolutely impervious to hackers because businesses are under assault from hackers all the time. We are working very hard to ensure that we have good defences that will enable us both to resist hacking and also to pick up any successful attempts very quickly.

One last question looking forward to next year, what is Tesco's stance on Brexit?

We are studiously neutral because we have over ten million customers a week and they will all form their own view. Equally, as the UK's largest private sector employer we have around a third of a million staff who are fully entitled to form their own views on the pros and cons.

But surely you have an opinion of your own?

Having also worked in Germany, I am instinctively pro-European. But I must stress that this is a purely personal opinion, and business must go on whatever the outcome of the referendum.

Would a Brexit hurt Tesco?

As a supermarket chain we are probably at the lower end of impact, if there were to be a change in the UK's status.

Lebensmittel Zeitung with digital sister (photo: LZ)
Our German B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Sag niemals nie' by international editor Mike Dawson on pages 21 & 22 of Lebensmittel Zeitung, no. 51, 18.12.2015

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