In the decades following the war, Sir Jack and fellow executives built Tesco into one of the largest supermarket chains in the U.K. Yet by the late 1980s, the company was floundering. In the status-obsessed yuppie culture bred by a stock market boom, Tesco seemed hopelessly out of touch. The company provided neither the quality of goods upscale customers wanted nor the deep discounts that price-conscious buyers demanded. J Sainsbury PLC became the grocer of choice for the U.K.’s monied class. At the low end, Tesco was consistently beaten on price by supermarket discounters such as Germany’s Lidl & Schwarz Stiftung & Co. and the U.K.’s Asda Group Ltd., which is now owned by Wal-Mart and is the third-largest U.K. food retailer, after Tesco and Sainsbury.
As the marketplace changed, retail watchers wondered if the middle-market retailer’s time had passed. “They said Tesco was the meat in the sandwich, and that we’d get killed in the middle,” says David Reid, the company’s deputy chairman and head of international expansion. When investors accused Tesco of losing touch with its changing customer tastes, management didn’t retreat. Instead, it took the unusual step of conducting a massive marketing survey of its current and potential customers.
Ignoring doubters, Tesco management stuck with its belief that the company could reach both bargain hunters and premium shoppers. “We said, ‘It’s great to be in the middle, because that’s where the mass market is.’ We knew if we did a good job in the middle, we’d win,” Mr. Reid says. In 1989, Tesco began gathering data from shoppers on what they wanted from a retailer. The most common responses were lower prices, better service, more selection, and more non-food products.
Tesco carefully studied its market research and listened to what its customers said. In the early 1990s, the company began to accelerate its construction of superstores, bigger than its traditional supermarkets, to allow for greater selection at lower prices. To satisfy upper-end shoppers, it introduced organic food products. The group also launched a wide range of house-brand goods differentiated by price or quality, first under the Value brand, and later under the Finest gourmet label.
Tesco paid close attention to service, as well. “If you ask an employee where something is, they will not only tell you; they’ll take you to the spot,” says Tesco Corporate Communications Manager Ian Hutchins. A test of this claim at the company’s store in Leytonstone, a London suburb, proved Mr. Hutchins mostly correct. One worker couldn’t actually find any beach umbrellas, but he put in a good effort searching for them. Tesco also adheres to a strict rule at the checkout. If customers find more than one person in front of them in line, the company promises to open another register.
Also in the 1990s, Tesco began to experiment with new products and channels. It moved into gasoline retail, placing convenience stores by the pumps. Through a joint venture with the Bank of Scotland, Tesco also started offering a wide range of financial products, including car and pet insurance. In 1996, it launched a dot-com delivery service. Unlike the fabulously funded, now departed grocery-delivery dot-coms — Webvan, Streamline, and HomeGrocer — Tesco.com has not only endured, but become profitable. Tesco is now exporting its Web experience to the U.S., where it has formed a joint venture with Safeway Inc. to offer online grocery ordering. (See “Exporting a High-Tech Business Model,” at the end of this article.)
Under Mr. Leahy’s marketing leadership, Tesco overtook Sainsbury six years ago to become the biggest food retailer in the U.K. With its 25 percent market share — compared to 14 percent in 1997 — Tesco has put considerable distance between it and archrival Sainsbury’s 17 percent share (and Asda’s 14 percent share).