Tesco’s chief executive has called himself “a new boy to retailing” who has had “quite a year” trying to both understand and tackle the challenges faced by the sector.
Profitability in retail has dropped significantly and the supermarkets are experiencing an unprecedented period of food deflation. As Dave Lewis, chief executive at Tesco, says, that’s great news for customers – but harder for a business trying to invest.
In his speech to the CBI’s annual conference, he was quick of the mark in highlighting the importance of the retail industry to the UK’s economy. “It’s little wonder that we have been referred to as a nation of shopkeepers,” he said, as rattled off statistics, which included that fact that the sector contributes to over 5 per cent of GDP and employs 3 million people.
But Lewis then issued a calm, but stern, warning that the industry was facing a “potentially lethal cocktail” of challenges: the growth of digital, discount retailers and convenience, and the “addition of more structural cost at a time of historically low profitability”.
“In the UK, digital retailing has doubled over the last five years to become a £10bn business,” he said about the first. “As a business, we expect continued growth, but the challenge for us is how to make our online business of tomorrow as profitable as our offline business yesterday.”
He added the shift would have more impact on society than many realised: with digital operations having less of a community footprint, fewer employees and a lower tax contribution. He also warned the pace of that change would quicken if the tax system didn’t catch up soon.
“That should be a dilemma for the Exchequer,” he said.
Changing shopper habits
Although the rise of discount supermarkets, such as Aldi and Lidl, has also affected the industry’s profitability, Lewis said it was their job to respond to the shift in consumer habits. The bigger challenge, he said, was that Tesco and its main competitors didn’t see it coming.
“Between 2007 and 2014, [the industry] added around 35msq ft. The market didn’t grow. Inevitably it couldn’t go on,” he explained. “In January this year we called a halt. It was painful – colleagues and communities were affected as we closed stores and decided to halt construction on others.”
Other competitors followed – but Lewis pointed out it wasn’t just the big four. “More independent shops were closed than opened in the first six months of this year.”
He added: “As the first CEO in Tesco’s history to be criticised for not opening a shop or for closing some existing stores I can tell you that this trend you are seeing is no longer down to us.”
Although he said some of the challenges were of Tesco’s “own making” as it tried to cling onto an unsustainable business model, Lewis said that supermarket profitability had sunk from 5 per cent to 2 per cent in five years, while food inflation has fallen from 4 per cent two years ago, to -2.4 per cent. That made the double burden of business rates and the national living wage hard to reconcile with retail growth, he said.
“Over last five years property values have fallen, profits are down but business rates are up. Quietly but dramatically,” he continued. He said business rates accounted for more than 25 per cent of Tesco’s operational costs – up 35 per cent in the past five years. “That’s an enormous pressure.”
Calling for urgent reform, he continued: “It’s now three times the OECD average. For every £1 we pay in corporation tax large UK retailers pay £2.31 in rates.”
On the national living wage, he joined the growing chorus warning of unintended consequences.
He emphasised that Tesco’s people were its greatest asset. “Their quality, unrelenting commitment and passion for doing the right thing are at the heart of our business turnaround,” he said.
He outlined that Tesco’s pay package was already above the new voluntary living wage rate, and by monetising benefits for those based outside London, pay levels sit at £8.80 per hour. He also highlighted new benefits on offer including a 5 per cent turnaround bonus and the opportunity to invest in the business, as well as the pension scheme and discounts.
“Our concern is that there is pressure to increase base pay at the expense of benefits and we don’t think this is the answer,” he said. “Benefits are hugely important to our colleagues. Valuable too. Our colleagues say they value different things at different stages in their lives and at Tesco this is what we are trying to accommodate.
“We need a fuller debate aimed at doing the right thing for the people in our industry without imposing more cost without providing individual benefit or business return.”
Answering the challenge
Lewis made it clear that collaboration was Tesco’s main strategy for addressing the challenges and opportunities it faces. “We are looking to co-operate with partners as we chart our course in the journey to turning our business around.”
He added: “I suppose that is where I’d aspire to get to with the government. Based on more consultation, collaboration and co-operation. Getting this right has huge consequences for the retail industry but also for the wider economy.”
And on this he wasn’t talking just about tax and regulation – although he urged the industry and the government to sit down at the highest level and consult on the policy changes affecting the industry. “We can solve problems together. We can forge partnerships which drive progress on health, training and skills.”
On the latter, he said: “We can do the heavy lifting from no skills to some skills. To continue offering crucial flexibility to enable mums and older workers to return to work in large numbers. Let’s not constrain ourselves after a decade of progress creating 5,000 jobs for the long-term unemployed in locations from Corby to Woolwich through our Regeneration Partnership scheme. Or to choke the progress that created 9,500 apprenticeships between 2012 and 2014.
“Employers like us can be innovators on tough agendas,” he said.
But – in a return to his message of unintended consequence – he warned that the apprenticeship levy “wipes out the equivalent of our whole training budget.”
Lewis said any vision for growth – whether for Tesco, the retail industry or the economy – had to be based on mutual benefit and shared risk, between employers and their employees, businesses and their suppliers and between business and the government. “An era of extraordinary change needs a new level of collaboration,” he said.
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