Food retailers have to change: Tesco CEO

Posted by Daniel Palmer on 30th January 2009

The CEO of the UK’s largest retailer has told of the need for food retailers to adapt and update to ensure they can relate to the ever-changing consumer.

Sir Terry Leahy, the boss of Tesco, noted that the principles of sound business, however, remained the same. “In a recession, the temptation for any business is to think that the rules of the game have changed. They have not. The consumer is still sovereign,” he told the City Food Lecture overnight. “Let me quote von Mises again: consumers “are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They care not a whit for past merit. As soon as something is offered to them they like better or that is cheaper, they desert their old purveyors.”

“Retailers need to heed that warning,” he added. “In a recession, striving for consumers’ satisfaction has to dictate everything each of us does. Retailers need to earn customers’ loyalty, not take it for granted. We have to go on creating value every day – tomorrow, next week, next month. If not, customers can change where they shop in an instant.”

Consumer behaviour could change on a whim, Sir Terry said, and inflexible, stubborn businesses could suffer as a result. “(Consumer) behaviour changes far faster than any organisation. They don’t need to have a Board meeting, issue a statement to the Stock Exchange, or pass a resolution at an AGM. They simply walk into a store, and starting shopping,” he contended. “That’s why successful retailers are those who change fast to reflect consumers’ whims and fancies. And in a recession, the ability to change fast is more important than ever.”

Leahy, on the basis of his experience of the 90/91 recession and 1997 Asian economic crisis, made three observations about the current crisis.

Supermarket aisle - shopping trolley

“First, with unemployment rising, and people concerned about their incomes falling, obviously the pressure is on price more than ever. For example, we are now Britain’s Biggest Discounter – the clearest possible demonstration of our strategy to follow consumers. Sales in our discount and value ranges are up by 65 per cent on the year,” he noted. “Now, a quarter of all our customers’ shopping baskets and trolleys include something from this range – which shows that customers see this range as offering great value.”

Tesco has made a major commitment to a ‘discounter’ private label range since the UK economy began to deteriorate on the basis of research suggesting that price was now the primary consumer purchase driver. The company is adamant that price will the most important factor in consumer decision-making for the next couple of years.

Leahy’s second observation was regarding a drop in food commodity prices, with the retail boss currently asking suppliers to reduce their prices.

“Commodity prices are down over 50 per cent from their peak, and the price of a barrel of oil is down by about a hundred dollars from the giddy height it reached last year. These lower prices need to be fed into the supply chain, and passed on to consumers who are under growing financial pressure,” he said. “We want to ensure that all our suppliers understand this, which is why we are going to great lengths to talk to them about the new pressures that consumers are under. This adjustment affects our entire industry. It will be difficult for some, but it is critical if consumers are to be given what they want. Think of the alternative: keeping prices as they are, and hoping against hope that consumers on tight incomes will buy our goods.”

While Leahy and Tesco remain intent on a low price focus amidst the threat of discount grocers, his third observation related to climate change, healthy eating and local produce – which he believes will remain at the forefront of shoppers’ minds. “Some say that in a recession all these things are luxuries, or that consumers no longer care about protecting the environment, eating healthily or buying local goods. All that matters is saving money. This is a misleading argument,” he warned. “Consumers’ underlying values, fears and aspirations do not change in a recession. Their wish to protect the environment, to have a healthy diet, and to eat fresh, local produce has not diminished. They simply want more help in meeting their aspirations. That means we need to make our offer more affordable.”

“The point is simple: we have to change,” he concluded.